Author Topic: one (investing) question at a time  (Read 73961 times)

scrubbyfish

  • Guest
one (investing) question at a time
« on: December 06, 2014, 12:25:06 PM »
Over the past year + of trying, I've been unable to locate an "investing for dummies"-type manual dumbed down enough for my needs, so I'm going to try this! I will ask one question at a time, and hope for an extremely simple answer. When I think I understand it, I will ask a subsequent question in this very same thread. Hopefully some of you learned people will jump in!

Question: Is the S&P500 100% stocks?

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: one (investing) question at a time
« Reply #1 on: December 06, 2014, 12:35:26 PM »


Question: Is the S&P500 100% stocks?


Yes.

http://ca.spindices.com/indices/equity/sp-500

The S&P 500® is widely regarded as the best single gauge of large cap U.S. equities.  There is over USD 5.14 trillion benchmarked to the index, with index assets comprising approximately USD 1.6 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: one (investing) question at a time
« Reply #2 on: December 06, 2014, 12:36:49 PM »

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #3 on: December 06, 2014, 12:43:19 PM »
Thank you, Heckler! (I am doing lots of poking through CCP site, but my knowledge has only gotten so far. Also, CCP's Dan said my situation is more complex than the model portfolios will work for, which is what has me pressing further.)

Question 2: Comparing lines

Attached is a graph showing how one of my accounts is performing in the last month or so, and in comparison with the S&P500. Is one of the factors in the discrepancy between the S&P500 line and my line that mine is about 40% bonds and the S&P500 is 100% stocks? i.e., If I don't have 100% of my money in stocks, I should not be using the S&P500 as my benchmark, and should be using only the Composite line as my benchmark, is that right?

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: one (investing) question at a time
« Reply #4 on: December 06, 2014, 12:55:50 PM »
50% correct.

Your 40/60 account will never perform the same as S&P or TSX composite, which are both 100% equity

http://en.m.wikipedia.org/wiki/S%26P/TSX_Composite_Index


I suggest you learn about asset allocation and asset classes


http://en.m.wikipedia.org/wiki/Asset_allocation
« Last Edit: December 06, 2014, 01:14:07 PM by Heckler »

MDM

  • Walrus Stache
  • *******
  • Posts: 9791
Re: one (investing) question at a time
« Reply #5 on: December 06, 2014, 12:56:17 PM »
Is one of the factors in the discrepancy between the S&P500 line and my line that mine is about 40% bonds and the S&P500 is 100% stocks?
Yes.

Quote
i.e., If I don't have 100% of my money in stocks, I should not be using the S&P500 as my benchmark, and should be using only the Composite line as my benchmark, is that right?
First need to know "Benchmark for what?".  With a definition of benchmark as "a standard or point of reference against which things may be compared or assessed", possibilities for comparison include
  - your portfolio vs. the S&P 500
  - your portfolio of specific funds with a particular asset allocation vs. a portfolio of different funds with the same overall asset allocation
  - Etc.

In other words, what would you like to compare and what will you do with the results of the comparison?

Sorry to answer a question with a question - I think I know where you are going with this but would like to be sure....

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #6 on: December 06, 2014, 01:08:40 PM »
Wow. This is very exciting to me! I am in tears of happiness and excitement that I may have found a way for me to understand this stuff.

Thank you, both!

So, "equity" is the same as "stocks".
And both S&P and TSX composite are 100% stocks/equity, so neither are valuable for comparing my line with.

Benchmark... This is what got my brain hurting today, and led me to start this thread. I have drafted most of an Investment Policy Statement, as recommended by matchewed on another thread, and that has been extremely helpful already. The process suggested having a benchmark for making investment decisions... and the rabbit hole of investment language began again. But THEN it dawned on me that my chart line looks awful because it compares apples with oranges, which is a relief. I have no intention of having 100% of my savings in stocks, so I can ignore that line. Yes, I can improve my line by moving from high-fee accounts to low-fee accounts, but I must not compare my line with those of 100% stocks, since 100% stocks is not what I'm doing or aiming to do.

Right now, I don't feel a need to determine an investing benchmark. I just needed to confirm that the S&P500 (and, as it turns out, the Composite) line is and should not be it. i.e., The chart is not saying my life is a disaster ;)

Now I will have a little brain break, as my son's teacher calls my son's autism-related pauses. When I know my next question, I will post again, and we'll see if you folks or whomever else is available to answer! Thanks again!!

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: one (investing) question at a time
« Reply #7 on: December 06, 2014, 01:25:25 PM »
Your head will pop if you try to track and compare daily return.  I'm manually tracking monthly returns an that's  turned into half a full time job!


You're right that you must compare apples to apples. Or go buy more oranges.  ;)

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: one (investing) question at a time
« Reply #8 on: December 06, 2014, 01:29:42 PM »
i.e., If I don't have 100% of my money in stocks, I should not be using the S&P500 as my benchmark, and should be using only the Composite line as my benchmark, is that right?

You could compare you're US stocks/equity to the S&P, just as you could compare your Canadian stocks to the TSX composite during the same time period. That will tell you if you should buy a S&P index fund instead of your US stocks/mutual fund/equity.

Dodge

  • Pencil Stache
  • ****
  • Posts: 790
Re: one (investing) question at a time
« Reply #9 on: December 06, 2014, 01:34:56 PM »
Thank you, Heckler! (I am doing lots of poking through CCP site, but my knowledge has only gotten so far. Also, CCP's Dan said my situation is more complex than the model portfolios will work for, which is what has me pressing further.)

Question 2: Comparing lines

Attached is a graph showing how one of my accounts is performing in the last month or so, and in comparison with the S&P500. Is one of the factors in the discrepancy between the S&P500 line and my line that mine is about 40% bonds and the S&P500 is 100% stocks? i.e., If I don't have 100% of my money in stocks, I should not be using the S&P500 as my benchmark, and should be using only the Composite line as my benchmark, is that right?

Which specific funds are you invested in?

GGNoob

  • Pencil Stache
  • ****
  • Posts: 725
  • Age: 32
  • Location: Colorado
Re: one (investing) question at a time
« Reply #10 on: December 06, 2014, 01:53:10 PM »
This might be a good book to read: The Boglehead's Guide to Investing (2nd edition)

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #11 on: December 06, 2014, 01:55:49 PM »
Which specific funds are you invested in?

Dodge: No idea (yet)! I don't know what anything means, etc. So what I'll do next is consider what my next question even is, and come back with that when it fully forms. I do know that, once I figure enough out to even be able to do so, I'll be moving from whatever my money is in now to low-fee options.

This might be a good book to read: The Boglehead's Guide to Investing (2nd edition)

Logan T: Thank you! I will look for that book. I know I haven't come across it yet, and Boglehead is what was promoting the Investment Policy Statement that got me going (in a good way).

deborah

  • Walrus Stache
  • *******
  • Posts: 9123
  • Location: Australia or another awesome area
Re: one (investing) question at a time
« Reply #12 on: December 06, 2014, 02:06:09 PM »
S&P 500 - US 100% stocks
S&P TSX Composite - Canadian 100% Stocks

Your line - probably a balanced account with bonds and TSX stocks

Benchmark index - if Vanguard had a 100% TSX Large Caps index, this is what it would look like (Large Caps are the biggest companies - largest capitalised). S&P 500 is the 500 Largest Capitalised companies in the US.
« Last Edit: December 06, 2014, 02:09:12 PM by deborah »

GardenFun

  • Bristles
  • ***
  • Posts: 459
  • Location: Packers Hell - they're everywhere!
Re: one (investing) question at a time
« Reply #13 on: December 06, 2014, 02:14:19 PM »
If your money is in a balanced fund (i.e. one mutual fund that invests in both stocks and bonds), one options is to use the Vanguard Wellington Composite Index as your comparison fund.

Go on the Vanguard website and look up Vanguard Wellington Fund.  Ticker symbol is VWELX.  It is currently 66% stocks, 34% bonds.  On this fund, they also list the "Wellington Composite Index" rate of return which is calculated using 65% S&P500 Index and 35% Lehman U.S. Long Credit AA or Better Bond Index. 

samuck

  • 5 O'Clock Shadow
  • *
  • Posts: 51
Re: one (investing) question at a time
« Reply #14 on: December 06, 2014, 03:34:05 PM »
Try this crash course on investing. It was very helpful to me and is easy to understand: http://www.mustachianpost.com/files/0008/ynab_investing_course.pdf

GreenPen

  • Stubble
  • **
  • Posts: 107
Re: one (investing) question at a time
« Reply #15 on: December 06, 2014, 03:40:44 PM »
This might be a good book to read: The Boglehead's Guide to Investing (2nd edition)

+1

I would also recommend clicking around on the Bogleheads wiki, starting perhaps with their investment philosophy page.

Dodge

  • Pencil Stache
  • ****
  • Posts: 790
Re: one (investing) question at a time
« Reply #16 on: December 06, 2014, 03:42:48 PM »
Which specific funds are you invested in?

Dodge: No idea (yet)! I don't know what anything means, etc. So what I'll do next is consider what my next question even is, and come back with that when it fully forms. I do know that, once I figure enough out to even be able to do so, I'll be moving from whatever my money is in now to low-fee options.

This might be a good book to read: The Boglehead's Guide to Investing (2nd edition)

Logan T: Thank you! I will look for that book. I know I haven't come across it yet, and Boglehead is what was promoting the Investment Policy Statement that got me going (in a good way).

I recommend watching the Boglehead Video series:

http://www.bogleheads.org/wiki/Video:Bogleheads®_investment_philosophy

The guy is over the top, but the information is spot-on, and I think it's the easiest introduction to this stuff.  Once you find out what you're invested in, feel free to make a post here if you have any questions about it :)

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1347
Re: one (investing) question at a time
« Reply #17 on: December 06, 2014, 05:00:58 PM »
Moneygeek is another video series I've just started watching.  Ep. 1 and 2 have been good so far.

https://www.youtube.com/watch?v=xMkzF3bawvY

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #18 on: December 06, 2014, 07:51:17 PM »
Thanks, everyone! Library doesn't have the Bogleheads book, so I'll look for it in eBook. I'm also going to check out all of the other resources you've pointed to.

Sometimes I'm directed to a "beginners" guide, then find myself completely lost before the end of its second sentence. Often I Google a phrase, concept, or word and find so many more words that (a) I still don't know the answer to my little question, and (b) I am more confused than ever. Hence this thread. So, I'm going to check all those out, and post here as needed. Some of the stuff you guys have told me here already just made my jaw drop, because something that confused me for so long became entirely understandable when I got to present my question the way it is in my head and get a really simple, straightforward answer. Gems.

S&P 500 - US 100% stocks
S&P TSX Composite - Canadian 100% Stocks

Your line - probably a balanced account with bonds and TSX stocks

Benchmark index - if Vanguard had a 100% TSX Large Caps index, this is what it would look like (Large Caps are the biggest companies - largest capitalised). S&P 500 is the 500 Largest Capitalised companies in the US.

This was heaven for me to read. I bolded the parts that were new info to me, and things I'd wondered.

deborah

  • Walrus Stache
  • *******
  • Posts: 9123
  • Location: Australia or another awesome area
Re: one (investing) question at a time
« Reply #19 on: December 06, 2014, 08:35:56 PM »
TSX stands for Toronto Stock exchange (the Australian Stock Exchange is the ASX, and the main one in the US is the NASDAQ) - many countries have their own stock exchanges where their own companies stocks are sold.  Standard and Poors are a company who publishes financial research and analysis on stocks and bonds including which companies in each stock exchange have the highest capitalisation. That is why it is the S&P 500. Others, including the stock exchanges themselves also work this out. For example the top (biggest companies) 200 in Australia are the ASX 200.

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #20 on: December 07, 2014, 08:47:09 AM »
Question 3: Do I move money from higher-fee to lower-fee options now, and then sort out the tax efficiencies, etc, or do I determine the ultimate portfolio before moving anything at all?

More info:

I essentially have three investment accounts at this point, two "registered", one not. All are being moved from high-fee accounts to low-fee.

One higher-fee account is:
BMO Mo High Income II
BMO Mo Market
BMO BND

I will be moving to the Canadian Couch Potato model as much as possible, but it says you have to know how to make accounts tax efficient, not be in EFTs if this-and-that, etc. http://canadiancouchpotato.com/model-portfolios/

Do I move the money from these BMO things to ETFs now, and then sort out the optimal allocations, tax efficiencies, etc, or do I determine the ultimate portfolio before moving anything at all?

GardenFun

  • Bristles
  • ***
  • Posts: 459
  • Location: Packers Hell - they're everywhere!
Re: one (investing) question at a time
« Reply #21 on: December 07, 2014, 09:54:23 AM »
Question 3: Do I move money from higher-fee to lower-fee options now, and then sort out the tax efficiencies, etc, or do I determine the ultimate portfolio before moving anything at all?

More info:

I essentially have three investment accounts at this point, two "registered", one not. All are being moved from high-fee accounts to low-fee.

One higher-fee account is:
BMO Mo High Income II
BMO Mo Market
BMO BND

I will be moving to the Canadian Couch Potato model as much as possible, but it says you have to know how to make accounts tax efficient, not be in EFTs if this-and-that, etc. http://canadiancouchpotato.com/model-portfolios/

Do I move the money from these BMO things to ETFs now, and then sort out the optimal allocations, tax efficiencies, etc, or do I determine the ultimate portfolio before moving anything at all?

I googled what a registered Canadian account means and it appears to be the same as the US version of a Traditional IRA.  That being said, in the US we can move IRA funds from one IRA account to another IRA account without any tax penalty.  You want it to be a direct transfer, i.e. you never have the money in your hands or your personal bank account.  No checks should be sent to you personally during this process.  But you should have a portfolio plan in place before moving it.  The transfer paperwork can be a PITA to repeat multiple times. 

Any helpful Canadians available to confirm this also applies to registered accounts?  :-)

As far as the non-registered account, there will be tax implications.  I don't know enough about Canadian tax law to be helpful there. 

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #22 on: December 07, 2014, 10:09:55 AM »
...you should have a portfolio plan in place before moving it.  The transfer paperwork can be a PITA to repeat multiple times.

Ah! Transfer paperwork! Got it. Excellent point.

re: taxes, I'm not worried so much about paying any -I don't have enough income from any source yet to pay any and am asking the Canadian taxation aspect of things here http://forum.mrmoneymustache.com/ask-a-mustachian/can%27eh%27dian-tax-you-have-questions-i-have-answers/msg475969/#msg475969- so here I'm wondering more about...hmmm... how to word my question to make better sense... okay, how about:

Canadian Couch Potato says:
Quote
All the [CCP model] portfolios are suitable for tax-sheltered accounts. However, investors managing multiple accounts (RRSPs, TFSAs and non-registered accounts) need to consider proper asset location to maximize tax-efficiency. For example, if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether and consider substituting a ladder of GICs.

I am a person "managing multiple accounts (RRSPs, TFSAs and non-registered accounts)", so apparently am supposed to "consider proper asset location to maximize tax-efficiency." And I may be a person that has "no choice but to hold fixed income in a non-registered account" so may need to "avoid bond ETFs altogether".

I'm worried it will take me another 2-4 months to figure out the above, so am wondering if I just move from the higher-fee BMO funds to ETFs now, and sort everything else out later.
« Last Edit: December 07, 2014, 10:22:43 AM by scrubbyfish »

GardenFun

  • Bristles
  • ***
  • Posts: 459
  • Location: Packers Hell - they're everywhere!
Re: one (investing) question at a time
« Reply #23 on: December 07, 2014, 11:39:02 AM »

Canadian Couch Potato says:
Quote
All the [CCP model] portfolios are suitable for tax-sheltered accounts. However, investors managing multiple accounts (RRSPs, TFSAs and non-registered accounts) need to consider proper asset location to maximize tax-efficiency. For example, if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether and consider substituting a ladder of GICs.

If you desire to have any bond funds or balanced fund, you want to keep them in the registered accounts.  Here's why:

Example 1:  A bond fund makes a return of 5% in 2014. 
- 4% of the 5% was dividend payments to the fund owner.
- 1% due to capital gains (i.e. the price of the mutual fund increased from the original purchase price). 
- If your fund returns $1,000, $800 will be paid in dividends.  The remaining $200 will be due to capital gains. 
- In a non-registered account, you will pay taxes on the $800.  Doesn't matter if you actual received checks or if you reinvested the shares.  You pay taxes on dividends.  But if this is in a registered account, you do not pay taxes on this amount.  All income from a registered account is taxed as ordinary income when sold, typically years later during retirement.
- In a non-registered account, you do not pay taxes on the $200 of capital gains until you sell the fund shares.  In a registered account, this fund increase will be taxes as ordinary income, when the shared are redeemed in retirement.

Example 2:  A stock fund makes a return of 10% in 2014.
- 2% of the 10% was dividend payments to the fund owner.
- 8% was due to capital gains. 
- If your fund returns $2000, $400 will be paid in dividends.  The remaining $1600 due to capital gains.
- Therefore, you only have to pay taxes on the $400, vs. $800 in the bond example. 

For our net worth, 10% of our money is in bond funds.  But that 10% is 100% allocated in registered accounts. 

deborah

  • Walrus Stache
  • *******
  • Posts: 9123
  • Location: Australia or another awesome area
Re: one (investing) question at a time
« Reply #24 on: December 07, 2014, 01:07:34 PM »
I suggest you take the time before moving your accounts. The difference in fees is not enough to worry about over 2 to 4 months. How much difference in fees is there - 1%? That's 0.3% in 4 months or 0.15% in 2 months. Overhead costs to transfer (if you get it wrong and want to transfer again) would easily wipe out any difference in fees.

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #25 on: December 07, 2014, 03:18:31 PM »
I suggest you take the time before moving your accounts. The difference in fees is not enough to worry about over 2 to 4 months. How much difference in fees is there - 1%? That's 0.3% in 4 months or 0.15% in 2 months. Overhead costs to transfer (if you get it wrong and want to transfer again) would easily wipe out any difference in fees.

The bulk is moving from "somewhere between 3.0 and 4.5% per year in fees for the funds and insurance", or "an average of 2% or more per year, plus an additional fee of 5% of the guaranteed value" to 0.44% fees.

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #26 on: December 07, 2014, 04:50:21 PM »
If you desire to have any bond funds or balanced fund, you want to keep them in the registered accounts.  Here's why:

GardenFun: Thank you very much for that nice, clean, simple breakdown/example. That is very, very helpful, making much sense of yet another thing I had not been able to grasp from websites, etc.

If my work income + investment returns come to less than my starting taxable point, is this matter then moot?
« Last Edit: December 07, 2014, 05:48:06 PM by scrubbyfish »

Workinghard

  • Pencil Stache
  • ****
  • Posts: 637
Re: one (investing) question at a time
« Reply #27 on: December 07, 2014, 05:19:31 PM »
Thanks for this thread,  Scrubbyfish.  I'm sure I will learn a lot too!

For quite a while, I have been copying and pasting different threads and information and saving it. However I recently decided I need to start printing them out, putting them in sheet protectors, and organizing my information into different sections. I need to read things over and over again for it to sink in plus I need to be able to review it for reference. Maybe I should start a "one (retirement) question at a time" thread. Lol

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #28 on: December 07, 2014, 05:55:49 PM »
Hey, workinghard! Thank you that I am not alone in this struggle! Your process sounds very similar to mine. I find that no matter how many times I read something, I won't necessarily be able to grasp it until I can ask the one key question that is blocking my understanding. It feels very weird to have my brainblocks feel like they're physically bursting into nothingness as one word or phrase gets sorted out. These guys explain it to me, my jaw drops, and I physically lean back at my computer in absolute wonder. One concept after another, that I've been working desperately around, is entirely resolved upon learning that I was mis-reading or misinterpreting just one word, argh.

Your thread idea sounds great! :)

Al1961

  • Stubble
  • **
  • Posts: 225
  • Age: 58
  • Location: Alberta - B.C.
  • Dad of a husky Husky
Re: one (investing) question at a time
« Reply #29 on: December 07, 2014, 06:30:18 PM »

If my work income + investment returns come to less than my starting taxable point, is this matter then moot?

Yes, it is a moot point if your overall income position is not subject to tax.






scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #30 on: December 07, 2014, 08:46:11 PM »
Thanks , Al1961!

Question 4: Fixed income, "hold fixed income", etc (see below)


Background: I have read these three statements:
  • "Fixed-income investors receive set, regular payments [from their investments]..."
  • "The most common type of fixed-income security is the bond; bonds are issued by federal governments, local municipalities or major corporations."
  • "...if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether..."
The first two left me wondering if all bonds result in fixed-income. The latter is from the Canadian Couch Potato Model Portfolios page, and I've been struggling with investment planning based on what I now think may have been a misunderstanding on my part of what this means. So...

My situation:
I have some registered accounts, but insufficient room in them to hold the entirety of my savings/investments.
Thus, a considerable percentage of my investments must sit in non-registered accounts.
For safety -a counterpoint to stocks- I plan to have bonds as part of my portfolio.
I do not need or want my invested funds to give me payments (I only want them to increase in value over the longterm).

The Questions

1. Do all bonds unavoidably result in fixed-income? Or are these two things connected only if I pursue bonds that specifically offer fixed-income payments?

2. What does it mean to "hold fixed income"? Does it mean to hold bonds that provide their returns in the form of fixed income payments? Or something else?

deborah

  • Walrus Stache
  • *******
  • Posts: 9123
  • Location: Australia or another awesome area
Re: one (investing) question at a time
« Reply #31 on: December 07, 2014, 09:50:19 PM »
"Hold" in this instance means "own".

In Australia we have something called insurance bonds. I think you would have them in Canada too. Here, they are recommended for people who want to accumulate money for a child for University, because in Australia after 10 years the interest becomes tax free, and in Australia, interest on investments for children gets taxed at a very high rate. But this is not Canada. Check out what sorts of accounts there are for investing for children for University, because they might be similar to what you want.

ClaycordJCA

  • Stubble
  • **
  • Posts: 112
  • Location: SF Bay Area
Re: one (investing) question at a time
« Reply #32 on: December 07, 2014, 09:51:58 PM »
A bond is, in essence, a promissory note.  In buying the bond, you are making a loan. The issuer promises to pay interest for the duration of the bond. When the bond reaches maturity, the issuer returns the principal it borrowed. The interest rate on the bond can vary depending on the quality of the issuer (e.g. U.S. Gov't bonds pay less than distressed company) and duration (longer duration typically have higher rates).  Bonds can be bought and sold like stocks. Bond prices fall when interest rates rise and rise when the rate falls - people will pay more for bonds with higher yields. However, you are not buying equity in a company when buying a bond, just return of  the bond's face value and the income stream.

Investors often devote a portion of their portfolios to bonds because they are less volatile as stocks and often bond prices will rise when stock prices fall and fall when stocks rise. People often increase bond holdings as their horizon's diminish because of the lower volatility.  Imagine retiring with your entire portfolio in stocks and then have the stock market fall by 40%. Having a portion of our portfolio in bonds helps me sleep at night.

deborah

  • Walrus Stache
  • *******
  • Posts: 9123
  • Location: Australia or another awesome area
Re: one (investing) question at a time
« Reply #33 on: December 07, 2014, 09:59:55 PM »
A bond is, in essence, a promissory note.  In buying the bond, you are making a loan. The issuer promises to pay interest for the duration of the bond.
This is why they are fixed income investments - the interest paid is the income.

MDM

  • Walrus Stache
  • *******
  • Posts: 9791
Re: one (investing) question at a time
« Reply #34 on: December 07, 2014, 10:00:30 PM »
Q1a. Do all bonds unavoidably result in fixed-income?
Q1b. Or are these two things connected only if I pursue bonds that specifically offer fixed-income payments?
A1a.  Yes.  When you buy a bond, you are buying a promise to pay you back a specific amount of money. 
A1b.  All bonds offer fixed income payments.  See http://www.investopedia.com/terms/b/bond.asp.  Most bonds pay back on a regular basis (quaterly, annually, etc.), although some wait until the end of the bond life: see http://www.investopedia.com/terms/z/zero-couponbond.asp.

Quote
2. What does it mean to "hold fixed income"? Does it mean to hold bonds that provide their returns in the form of fixed income payments? Or something else?
Yes. The term "hold fixed income" could be replaced by "hold bonds" (as deborah said, "Hold" in this instance means "own") and mean the same thing.

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #35 on: December 07, 2014, 10:05:43 PM »
You. Folks. ROCK.

Thank you again. It is WONDERFUL to be understanding these things, and this is only possible because you folks are taking the time to reply so patiently and clearly. I will see what comes up next, but in the meantime, happy brainburst thus many thanks.

deborah

  • Walrus Stache
  • *******
  • Posts: 9123
  • Location: Australia or another awesome area
Re: one (investing) question at a time
« Reply #36 on: December 07, 2014, 10:09:33 PM »
The more I look at this thread, the more I think you need a "Glossary of terms for the beginning investor" rather than a beginners guide to investing. http://www.nasdaq.com/investing/glossary/ might be a good one for you as it is put out by NASDAQ (the US stockmarket people)

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #37 on: December 07, 2014, 10:32:12 PM »
...I think you need a "Glossary of terms for the beginning investor" rather than a beginners guide to investing. http://www.nasdaq.com/investing/glossary/ might be a good one for you...

deborah: Yes, something like that! Though I tried the link, typed in "fixed income" and it gave me: Fixed income equivalent: Also called a busted convertible. Convertible security that is trading like a straight security because the optioned common stock is trading well below the conversion price....

which hurt...

...so I tried "bond" and it said: Bonds are debt and are issued for a period of more than one year. The US government, local governments, water districts, companies and many other types of institutions sell bonds. When an investor buys bonds, he or she is lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time. Interest-bearing bonds pay interest periodically....

which wouldn't have helped me understand that, yes, bond = fixed income. It's always a very specific piece like the latter that I need to be able to keep moving forward, and to unfreeze from my "deer in headlights" position.

deborah

  • Walrus Stache
  • *******
  • Posts: 9123
  • Location: Australia or another awesome area
Re: one (investing) question at a time
« Reply #38 on: December 07, 2014, 10:33:22 PM »
Oh well! At least it had a definition for Hold.

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #39 on: December 07, 2014, 10:35:53 PM »
Question 5: Is this what it means to allocate for tax-efficiency?

So, I think I'm understanding a bit more now. The page http://canadiancouchpotato.com/model-portfolios/ says:
"...if you have no choice but to hold fixed income in a non-registered account, you should avoid bond ETFs altogether and consider substituting a ladder of GICs."

That was making me very anxious, but now I think maybe it works like this:

Assuming income from work + investments combines to a taxable rate, and
I have $1000 to invest, and
I have $350 of room in Registered accounts, and
I want to have my money as 60% stocks and 40% bonds,
then I should...
Put $350 in ETF bonds into the Registered accounts, and
Put $50 in bonds into a ladder of GICs, and
Put $600 into ETF stocks in non-registered accounts.

Do I have this right so far? (My real numbers are awesomer than $1000. I'm just trying to keep it simple for me.)

MDM

  • Walrus Stache
  • *******
  • Posts: 9791
Re: one (investing) question at a time
« Reply #40 on: December 07, 2014, 10:47:34 PM »
Do I have this right so far?
Almost exactly.

The only wrinkle: "Put $50 in bonds into a ladder of GICs."  In other words, take out the "in bonds" and you have it exactly.  See http://canadiancouchpotato.com/2013/03/06/why-gics-beat-bond-etfs-in-taxable-accounts/ for the details if interested.

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #41 on: December 08, 2014, 12:10:48 AM »
Thanks, MDM! Another brainburst. Delish.

deborah: In my next exercise, exploring my BMO accounts, I noticed the word "Glossary" so clicked on it. Very helpful indeed! BMO has a very simple, clean, concise glossary. So, good tip!

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #42 on: December 08, 2014, 12:19:07 AM »
Question #6: Understanding a Portfolio Statement

I have several accounts.
One is a Registered Disability Savings Plan for my son.
I saw a statement lying out...and with this thread so far, I thought I might be able to finally explore it. So I did.
I Googled each of its three parts, clicked around, took notes, did math (which I learned on this forum!), and here's what I've got:

BMO Monthly High Income Fund II
Currently $30,357
Represents 68% of the total account
95.3% of it is in stocks
4.8% is cash
This fund's holdings include Canada's big banks, Telus, real estate, energy, etc.
The Management Expense Ratio is 2.32%
It can sit in any of Canada's registered accounts and non-registered accounts.

Questions:
Why do the parts of the asset allocation not have to add up to 100%? Does the bank just round the numbers up?

BMO Money Market Fund
Currently $4919
Represents 11% of the account
99.8% is cash
.2% is "other"
This fund's holdings include Wells Fargo, General Electric, RBC, etc
The MER is 1.06%
It can sit in any of Canada's registered accounts and non-registered accounts.

Reading about it here led me to believe it is bonds, because it referred to: preserving the value, providing a high level of liquidity, and investing primarily in [things] issued by governments and corporations in Canada, including treasury bills, bankers' acceptances, and commercial paper.

Questions:
Are those indeed bonds? i.e., What is "money market"?
If so, are these simply bonds that are optimal for money that may need to be withdrawn sooner vs later?
How can an investment be "cash"? What does that mean?
What might "other" be?

BMO Bond Fund
$9083
21% of total account
[No asset allocation pie chart.]
Holdings are government of Canada, provinces of Canada.
MER is 1.60%
It can sit in any of Canada's registered accounts and non-registered accounts.

Questions:
Am I understanding the following correctly?
  • If the latter two are both bonds, that means that inside this RDSP, I have 32% of total money in bonds, and 68% in stocks (a.k.a. equity).
  • We want any bonds to be inside Registered accounts, so this is fine on that count.
  • If I really wanted it to be 60% stocks/40% bonds, I would simply take $3702 from the first account (Monthly High Income) and move it to the third account (Bond Fund), possibly to the second account (Money Market) if that is indeed bonds, too.

This is BY FAR the furthest I have ever gotten reading a statement, and believing I'm largely understanding it. Something is starting to click!!

deborah

  • Walrus Stache
  • *******
  • Posts: 9123
  • Location: Australia or another awesome area
Re: one (investing) question at a time
« Reply #43 on: December 08, 2014, 12:42:44 AM »
They seem to be rounding to 2 decimal places - this is normal.

Money Market - buying and selling currency - for instance today the US $ and the Canadian$ are both worth exactly the same amount. I may buy $100 US for $100Can , and then tomorrow the US$ is worth $1.50 Can, so I trade my US$ for Can$ and have made $50Can. (I don't think this would work because something tells me that the Canadian $ might be pegged to the $US, meaning they are always worth the same amount.) Definitely NOT bonds.



MDM

  • Walrus Stache
  • *******
  • Posts: 9791
Re: one (investing) question at a time
« Reply #44 on: December 08, 2014, 12:43:56 AM »
95.3% of it is in stocks
4.8% is cash
Questions:
Why do the parts of the asset allocation not have to add up to 100%? Does the bank just round the numbers up?
They probably rounded the numbers to the nearest 0.1%.  If the actual numbers are 95.25% and 4.75%, those numbers add to 100%.  But when rounded individually to 95.3% and 4.8% and those add to 100.1%.

Quote
Questions:
Are those indeed bonds? i.e., What is "money market"?
If so, are these simply bonds that are optimal for money that may need to be withdrawn sooner vs later?
How can an investment be "cash"? What does that mean?
What might "other" be?
See http://www.preservearticles.com/201012281814/difference-between-money-market-and-capital-market.html, http://en.wikipedia.org/wiki/Money_market, and http://www.investopedia.com/terms/m/moneymarket.asp,  for the long answers.  Examples of "other" can be found in those links.

One can think of a money market account as a savings account.  You put cash into a savings account, and that is indeed an investment.  They typically (at least for the past several years) are safer than bonds but pay even less interest than bonds.


Quote
Questions:
Am I understanding the following correctly?
  • If the latter two are both bonds, that means that inside this RDSP, I have 32% of total money in bonds, and 68% in stocks (a.k.a. equity).
  • We want any bonds to be inside Registered accounts, so this is fine on that count.
  • If I really wanted it to be 60% stocks/40% bonds, I would simply take $3702 from the first account (Monthly High Income) and move it to the third account (Bond Fund), possibly to the second account (Money Market) if that is indeed bonds, too.
It's actually 68% * 95.3% = 64.8% in stocks, 11% + 68% * 4.8% = 14.2% in cash (I'm ignoring the 0.2% "other"), and 21% in bonds.  This is even more conservative than 60% stocks / 40% bonds.  That doesn't mean it is better or worse.  And yes, if you wanted your son's account to be no more than 60% stocks you could move money from the 1st account to one of the other two.

deborah

  • Walrus Stache
  • *******
  • Posts: 9123
  • Location: Australia or another awesome area
Re: one (investing) question at a time
« Reply #45 on: December 08, 2014, 01:07:49 AM »
Sorry, currency trading is part of the money market, but it is much more than that. I once did some work for the largest merchant bank in Australia, and all they did all day was buy and sell currency, but I guess it was really buying and selling things like Treasury bills and that sort of thing. Currency was a major part of their trading because Australia (like Canada) is a small player in this, and the company they where part of needed non-Australian currency a lot.

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1050
  • Age: 47
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: one (investing) question at a time
« Reply #46 on: December 08, 2014, 08:07:51 AM »
scrubbyfish, I just read this whole thread after answering on the CPA CB one's. Now, I got more info, I still have to ask you more details for us to help.

Dont make any move to fast because the ammounts involved are not big enough for you to rush and mess things arround. I mean, for a total of less than 50k over 3 accounts*, you can pay more in transaction fees than your 2% actual MER (150$/2 months)

I dont understand you have "no choice but to invest in a taxed account" ?

Are you Canadian? Do you know about TFSA? TFSA only can hold 31,000$ for any Canadian who was 18+ back to 2009 (and 36,500$ by 2015 jan. 1st). 44k - 31k = 13k I cannot believe your RDSP and RSSP room is less than 13K !?!?

Come back with more info for us to help

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1050
  • Age: 47
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: one (investing) question at a time
« Reply #47 on: December 08, 2014, 09:00:57 AM »
You gave the funds split with complete BMO names, MER etc but now, match this with the accounts

RDSP (??$ BMO Mothly High Income Fund II, ??$ BMO Money Market Fund, ??$ BMO Bond Fund
RSSP (??$ BMO Mothly High Income Fund II, ??$ BMO Money Market Fund, ??$ BMO Bond Fund
TFSA (??$ BMO Mothly High Income Fund II, ??$ BMO Money Market Fund, ??$ BMO Bond Fund

Because the RDSP is money you manage for someone esle, the 40/60 slit is the best thing to do.

For the others (RSSP and TFSA) unless you are in a very special situation, why would you want this kind of AA? The typical 40/60 split is for average Joe, not for a Mustachian. I dont want to start over the bond/stock debate but come on, if you are Mustachian, good at math and want you $$ to work for you, your AA should be closer to 75-90% stocks than 60%! Stocks are paying 2% dividends on average these days, about what you can expect from bonds net return (after inflation, taxes, MER etc).

Stocks are REAL ownership of corporations, they provide capital appreciation over time. Many are worried about up and down of the market price and reffer this as "risk". It should be compared whith "your neigtbor yelling your farm value over the fence", NOISE. Dont pay attention, fuck that "better sleep at night" and lets roll !

We are Mustachian, one day we will fligth together over the Grand Cayon, do the Stock Market worry that kind of people?

Last thing that make me clueless about your situation, you say disability tax break increase the ammount for the no-tax hit point. Normaly, tax hit at 15k in Canada, so this break is HUGE or your income is damn low?

scrubbyfish

  • Guest
Re: one (investing) question at a time
« Reply #48 on: December 08, 2014, 10:41:29 AM »
Hi Le Barbu,

Thanks for the comments, ideas, and thoughts!

I do have very unique circumstances, and I'll present some of those below as responses to your specific queries.

I haven't presented the "bigger picture" yet, but we'll be getting there. When I jump straight to the end point ("I have this money, what do I do with it?"), the responses include a lot of language and concepts that I have no familiarity with, which leaves me entirely lost, thus handing my money off to bankers and salespeople that do weird things with it.

In this thread, I'm very intentionally noting the points in a given research phrase where my brain stops, asking about that stop-point, resolving it, and moving to the next.

This said, I'm happy you are here to help me, too! And am responding below to give some of the details that are perplexing you.
 
Dont make any move to fast because the ammounts involved are not big enough for you to rush and mess things arround. I mean, for a total of less than 50k over 3 accounts*, you can pay more in transaction fees than your 2% actual MER (150$/2 months)

The account I have broken out here so far has only $43,000, yes. However, I have two other accounts, one worth less, one worth more.
In any case, I won't be moving anything immediately, per the advice here.

I dont understand you have "no choice but to invest in a taxed account" ?

This is per provincial disability support payments. It gets complicated -even the bankers' heads spin!

Federal and provincial disability designations offer supports, but also have specific rules that we have to work within. Provincial disability supports allow us to have savings in an RDSP, an RESP or a trust, and not in an RRSP, a TFSA, or any other type of account.

Provincial disability supports can provide my son and I with up to $6000/yr if we honour their banking requirements, and that is more valuable to us than avoiding tax via the TFSA, for example.

Are you Canadian? Do you know about TFSA? TFSA only can hold 31,000$ for any Canadian who was 18+ back to 2009 (and 36,500$ by 2015 jan. 1st). 44k - 31k = 13k I cannot believe your RDSP and RSSP room is less than 13K !?!?

Yes, Canadian.

My TFSA room is the same as for all Canadians, of course, but if I put money in a TFSA, I cannot access provincial disability support.
There is one possible option regarding this, and TD Bank is looking into it: The provincial disability program will allow us to have money in a TFSA Trust. Currently, only VanCity and RBC are set up for this, but TD is looking into whether they can and will. If they can't/won't, I could go with VanCity or RBC, though, for $31000 of the money.

RRSP, I have $54,000 in room, but if I use it, we are ineligible for the $6000/yr. (I would also then have no liquid funds with which to infuse the RDSPs, thus would lose out on the government matches.)

So, what I'm saying in this thread is that while as a Canadian I technically have all sorts of room in an (unused) RRSP and TFSA, I as a Canadian with disabilities and very low-income don't have room in the Registered accounts that are permitted by the provincial disability support program.

You gave the funds split with complete BMO names, MER etc but now, match this with the accounts

RDSP (??$ BMO Mothly High Income Fund II, ??$ BMO Money Market Fund, ??$ BMO Bond Fund
RSSP (??$ BMO Mothly High Income Fund II, ??$ BMO Money Market Fund, ??$ BMO Bond Fund
TFSA (??$ BMO Mothly High Income Fund II, ??$ BMO Money Market Fund, ??$ BMO Bond Fund

The info I gave is the dollar amounts, asset allocations, etc, for my son's RDSP.

For the others (RSSP and TFSA) unless you are in a very special situation, why would you want this kind of AA?

Yes, we are in a very special situation...
BUT, I don't want this kind of Asset Allocation. I handed everything over to a banker, and she apparently wanted this Asset Allocation, lol.
I'm now in a process of learning all this stuff, so that I can make better decisions with all our money.

The typical 40/60 split is for average Joe, not for a Mustachian.

It's also for people who have never had and may never have the earning power to start over should financials go to crap, and/or continuously add to their portfolio every month over many years. My son and I both have disabilities, I was in severe poverty for a long time, homeless for stretches, etc. So, I'm being cautious that we don't over-risk the money I did manage to bring in (via house sale and two good work projects).

I dont want to start over the bond/stock debate but come on, if you are Mustachian, good at math and want you $$ to work for you, your AA should be closer to 75-90% stocks than 60%! Stocks are paying 2% dividends on average these days, about what you can expect from bonds net return (after inflation, taxes, MER etc).

For what it's worth, I'm not good at math. I have a diagnosed disability in math (and other things) :)

However, yes, I have every intention of bringing the investments far more in line with Mustachian principles, which is what this thread (and others) are intended to do. This one is just breaking it down so that I can understand it.

At some point, the thread will reflect the bigger picture. I'm just not there yet.

Last thing that make me clueless about your situation, you say disability tax break increase the ammount for the no-tax hit point. Normaly, tax hit at 15k in Canada, so this break is HUGE or your income is damn low?

Here I'm not sure which amount you're referring to (I had put a number in here, but took it out when I realized it might be wrong), so I'll go over my error, too, in case you saw that and are referencing that.

Until yesterday, I thought our specific tax credits (personal, single parent = child-equivalent-to-spouse, disability tax credit for me, disability tax credit for my son) had the stated numerical value, so I thought we don't get taxed on our first $40,000(ish).

Yesterday I learned that my understanding was wrong. Now I understand that the DTC credit is stated to be $7000+ for each of us, but that it's actually only 15% of this. So, now I'm figuring our pre-tax room is actually around [$11000 basic personal amount + $1600 DTC + $1600 DTC=] $14200. (Now I'm wondering if it's actually this plus another $11000 basic personal amount for my kid, but I'll bring that to the tax thread.)

And yes, our income is damn low :)

Le Barbu

  • Handlebar Stache
  • *****
  • Posts: 1050
  • Age: 47
  • Location: Québec
  • I really didn’t say everything I said - Y. B.
Re: one (investing) question at a time
« Reply #49 on: December 08, 2014, 11:31:19 AM »
Crystal clear that your situation IS special.

Can you use your 2013 taxes to make projections for 2014 and 2015? Take your Federal Notice of Assessment (blue form you get usualy in may or june, 2-3 pages) It tell how much federal and provincial taxes you really paid. If 2014 is close (income etc) the Assessment will be helpful.

You may not be good at math but there is a bunch of math cracks arround here and will be blessed to help your step by step process.

keep in touch!