Investing as a Canadian - Differences

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Investing as a Canadian - Differences

Postby af895 » Mon May 07, 2012 9:33 pm

Hey all. Being a Canuck, I'm faced with some investing challenges. I thought I'd throw a few out there.

I came to be Bogleheaded before I knew what a Boglehead was - Dan Bortolotti at Canadian Couch Potato got me started: http://canadiancouchpotato.com/model-portfolios/

As a Canadian, one of the challenges of investing Boglehead style is many of the tools available to US investors aren't available here. Another challenge is that what is available goes under different names.

Examples:
A 401k plan in the USA is similar to our RRSP (Registered Retirement Savings Plan) - we put pre-tax dollars in and it's taxed at your marginal tax rate at the time of withdrawal.

A Roth IRA is similar to our TFSA (Tax Free Savings Account) - we put after-tax dollars into a TFSA. It's a much newer type of plan though, unfortunately, so the contribution limit isn't very high. ($5,000 per year, cumulative, since the plan started in 2009 - we're up to a $20,000 contribution room in 2012, $25,000 for 2013 and so forth; there's talk of upping that to $10,000 per year if the feds balance their budget)

TIPS (Treasury Inflation Protected Securities) are similar to Canadian RRBs (Real Return Bonds). I know very little about these other than reading about TIPS in "The Bogleheads' Guide to Investing."

Sadly, Vanguard Mutual Funds don't appear to be available here in Canada. I use the Canadian Couch Potato model and invest in TD e-Series Index Mutual Funds (low MERs, 90-day early redemption penalty of 2%, no DSC, no commissions - there's nothing nefarious on the surface) but I have concerns there may be hidden fees buried in those.

I recall reading on the forum something about Vanguard returning 100% of the interest profit to the fund where other companies skim that. (I may be mis-quoting... I have the exact quote bookmarked at work and will edit tomorrow)

So! Hi from a Canuck. Any other Canucks here?

EDIT - I found the reference. Thanks Mal.
mal wrote:Two index funds may track the same index but one of them only samples a small portion whereas the other invests in all investable securities listed in the index. The former will have a lower transaction cost but the latter is more diversified. And returns will be different. The fund’s performance should roughly equal the index minus the expense ratio. Any further gap warrants investigation, as tracking error can be a result of poor sampling or excessive trading costs.

Another thing to inquire about is soft dollars policy. Soft dollars equates to inflated trading costs per trade which can affect returns.

Another thing to consider with funds is securities lending policies. This can increase the return of the fund relative to the benchmark (index minus ER minus trading costs plus lending revenue). Does the fund have a policy to return 100% of lending revenue to the fund? Vanguard does, whereas BGI (iShares) returns 50% and pocket the rest for themselves.
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Re: Investing as a Canadian - Differences

Postby Peculiar_Investor » Mon May 07, 2012 9:42 pm

CJOttawa wrote:Any other Canucks here?

There are Canucks here. Much of the Bogleheads philosophy can be applied north of the border. If you haven't found them already, you might also want to check out the "sister sites", Financial Webring Forum • Index page and our wiki, aka finiki.
CJOttawa wrote:Canadian RRBs (Real Return Bonds). I know very little about these other than reading about TIPS in "The Bogleheads' Guide to Investing."

How about Financial Webring Forum • View topic - Real Return Bonds or Real Return Bonds - finiki
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Re: Investing as a Canadian - Differences

Postby centrifuge41 » Mon May 07, 2012 9:43 pm

Hey CJOttawa,

I lived in Ottawa for a few years way back when. I'm a Canuck but I've been living in the US for quite a while now.
I think you've come upon one of the best sources of information for Canadians. the Couch Potato portfolios are solid. Likewise you've found the lowest cost mutual funds in Canada, the e series funds at TD Waterhouse. I believe that the only way to achieve lower cost is to research some ETFs.

You are also right about the RRSP and TFSA and how they are analogous to a 401k and a Roth IRA respectively. I believe there's a few differences: the RRSP you'd contribute directly with a brokerage. No company involvement. The TFSA allows for withdrawal of everything funded into it anytime, but it makes sense to use it to hold long-term money in a high expected return asset class. I'm not too familiar with RRBs, so no extra information here.

Keep up the learnings! If you want to speak with one of the most knowledgeable Canucks on the board, go ahead and PM Bylo Selhi :)
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Re: Investing as a Canadian - Differences

Postby Peculiar_Investor » Mon May 07, 2012 9:56 pm

There are some Canadian nuances to the TFSA, specifically treatment of income received under tax treaties. Specifically for US dividends, within an RRSP there is no US tax withheld. Unfortunately the US tax treaty does not treat a TFSA is the same manner, so there is US tax withheld.

Is the OP aware of Vanguard Canada - Home? Vanguard has recently come to Canada, with a limited roster at this time.
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Re: Investing as a Canadian - Differences

Postby tekenn » Mon May 07, 2012 10:16 pm

DFA is in Canada as well
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Re: Investing as a Canadian - Differences

Postby Random Poster » Mon May 07, 2012 10:27 pm

CJOttawa wrote:Sadly, Vanguard Mutual Funds don't appear to be available here in Canada.


I thought that I read in the G&M (or elsewhere) that Vanguard was coming to Canada? Perhaps by 2013?
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Re: Investing as a Canadian - Differences

Postby tekenn » Mon May 07, 2012 10:36 pm

Vanguard ETFs....no mutual funds
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Re: Investing as a Canadian - Differences

Postby Bylo Selhi » Tue May 08, 2012 8:29 am

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Re: Investing as a Canadian - Differences

Postby LadyGeek » Tue May 22, 2012 9:00 pm

CJOttawa is requesting here that we include Canadian equivalences in the Bogleheads® investing start-up kit wiki page. (The reference is back to this thread.)

Our sister Canadian site's wiki, finiki, has a page on Canadian-US Investing Differences - finiki, which would address the OP's questions. The Bogleheads wiki could link to this page. First, are any corrections needed for the finiki page?

Next, finiki recently added a tutorial page to help new investors: Getting Started - finiki, comments are welcome here and in the Financial Webring Forum thread: finiki: Getting Started

In the referenced thread, CJOttawa also wrote:Dan Bortolotti runs the "Canadian Couch Potato" blog and site. His strategies are very much in line with Boglehead investing.
His model portfolios are right here: http://canadiancouchpotato.com/model-portfolios/ That might be a linkable addition, as would his comparison of Canadian Index ETF versus Index Mutual fund, here: http://canadiancouchpotato.com/2010/06/ ... s-or-etfs/

As for the "Canadian Couch Potato" to the wiki, which could go in: Lazy Portfolios, I propose an expansion of The Couch Potato Portfolios and link to that page from the Bogleheads wiki.

Several posters in this thread, including myself, edit both the Bogleheads' wiki and finiki , so these changes can happen.
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Re: Investing as a Canadian - Differences

Postby af895 » Tue May 22, 2012 9:06 pm

Thanks LadyGeek! Much obliged. :)

p.s. I love that your QR code is your username.
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Re: Investing as a Canadian - Differences

Postby Shakespeare » Tue May 22, 2012 9:15 pm

I am the principal author of the finiki page on Canadian-US Investing Differences - finiki and will be happy to incorporate changes, I will also link to this thread.
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Re: Investing as a Canadian - Differences

Postby af895 » Tue May 22, 2012 9:23 pm

Shakespeare wrote:I am the principal author of the finiki page on Canadian-US Investing Differences - finiki and will be happy to incorporate changes, I will also link to this thread.


...and thank you sir. :)
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Re: Investing as a Canadian - Differences

Postby Shakespeare » Tue May 22, 2012 9:40 pm

finiki discusses the 'couch potato' portfolios only briefly in the section on simple portfolios.
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Re: Investing as a Canadian - Differences

Postby LadyGeek » Tue May 22, 2012 10:25 pm

That's why I was wondering if it made sense to add CJOttawa's links there, or create a new page for "Lazy Portfolios", e.g. 2-fund, 3-fund, and couch potatoes.

Plan:
- Add a link (with short description) to finiki's Getting Started from the the wiki's Getting Started page
- Add a link (with short description) to Canadian-US Investing Differences - finiki from the Bogleheads® investing start-up kit
- Add a link (with short description) to finiki's Simple Portfolios from Lazy Portfolios (pending outcome of Simple portfolios rework.)

The idea is that finiki has the full support of the Financial Webring Forum. Like the US, you need to understand taxes and available funds. Also, Vanguard has very limited investment choices in Canada. Canadian investments are best left to the experts. You still need to diversify...

CJOttawa wrote:p.s. I love that your QR code is your username.

Thanks!
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Re: Investing as a Canadian - Differences

Postby Shakespeare » Tue May 22, 2012 11:24 pm

The Canadian equivalent of a simple US two-part portfolio - that is, Canadian stocks and bonds - would be poorly diversified because the Canadian stock market itself is poorly diversified.
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Re: Investing as a Canadian - Differences

Postby Valuethinker » Wed May 23, 2012 4:30 am

Shakespeare wrote:The Canadian equivalent of a simple US two-part portfolio - that is, Canadian stocks and bonds - would be poorly diversified because the Canadian stock market itself is poorly diversified.


Roughly speaking 80% of Canadian index is either natural resources (oil & gas + mining, primarily the former) or financials?

The practical result is that if you have say $100k in TSX60, I think you are something like $5500 in Royal Bank of Canada. And the Chartered Banks together something like $30k (I'd have to check my numbers)?

One bank, with global investment banking exposure.

You have practically no drug companies, no technology (given where RIM is right now, Nortel before it went bust was at one point 17% of the market).

The fact that the Canadian banking sector has 'dodged the bullet' of the world financial crisis (so far!) has probably meant Canadians are just not as aware of the risks of their concentrated portfolios as they should be. That plus the natural resources boom.
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Re: Investing as a Canadian - Differences

Postby af895 » Wed May 23, 2012 7:33 am

Valuethinker wrote:
Shakespeare wrote:The Canadian equivalent of a simple US two-part portfolio - that is, Canadian stocks and bonds - would be poorly diversified because the Canadian stock market itself is poorly diversified.


Roughly speaking 80% of Canadian index is either natural resources (oil & gas + mining, primarily the former) or financials?

The practical result is that if you have say $100k in TSX60, I think you are something like $5500 in Royal Bank of Canada. And the Chartered Banks together something like $30k (I'd have to check my numbers)?

One bank, with global investment banking exposure.

You have practically no drug companies, no technology (given where RIM is right now, Nortel before it went bust was at one point 17% of the market).

The fact that the Canadian banking sector has 'dodged the bullet' of the world financial crisis (so far!) has probably meant Canadians are just not as aware of the risks of their concentrated portfolios as they should be. That plus the natural resources boom.


The numbers are slightly different when looking at the TSX-Composite index instead of the TSX60 but not by much.

I suspect as you do most Canadians aren't aware of the sector concentration of the Canadian market. Most Canadians likely aren't familiar with index investing or strategic asset allocation either; even my smart father still picks stocks. (I need to buy him a copy of "The Little Book of Common Sense Investing").

One reason I'd like to see the Canadian Couch Potato (CCP) portfolio links added to a page or pages on the Boglehead wiki is that I suspect some Canadians will get their first exposure to index investing through Bogleheads - the books, the wiki, or the forum.

Limiting exposure to the Canadian equity market to 20% or less of one's portfolio is illustrated on CCP.
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Re: Investing as a Canadian - Differences

Postby Stryker » Wed May 23, 2012 8:53 am

I would think that most Canadians who invest directly in the TSX know about the lack of sector diversification. I most certainly learned the dangers of over diversification in any single sector after what happened early in this century with Technology and Telecom, and then a few years later with the crisis that hit the Financial sector even in Canada, just not as bad as elsewhere.
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Re: Investing as a Canadian - Differences

Postby Valuethinker » Wed May 23, 2012 9:13 am

Stryker wrote:I would think that most Canadians who invest directly in the TSX know about the lack of sector diversification. I most certainly learned the dangers of over diversification in any single sector after what happened early in this century with Technology and Telecom, and then a few years later with the crisis that hit the Financial sector even in Canada, just not as bad as elsewhere.



Different generation but an older generation has been conditioned 'you own the banks and you are OK'.

I think most people don't really understand ETFs, they just own them. And I believe all the data shows that Canadians' equity investments are wildly undiversified-- home country bias.

At best, most might have as much in USA and foreign (stocks) as they do in Canadian. Implying a 10 times (ish) overweighting in the Canadian index (if Canada is 5% of the world index).
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Re: Investing as a Canadian - Differences

Postby Shakespeare » Wed May 23, 2012 12:22 pm

I have added the Canadian Couch Potato link to Portfolio Design and Construction - finiki. Since that particular article is a 'top down' article on portfolio design, I will not give a detailed discussion of the "Canadian Couch Potato", which could be in a separate article.
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Re: Investing as a Canadian - Differences

Postby Barry Barnitz » Wed May 23, 2012 2:12 pm

Hi:

I have added a section to our wiki page on Lazy Portfolios devoted to Canadian couch potato portfolios. I have produced charts and a table in a google spreadsheet.

The portfolios are derived from the Canadian Couch Potato website.

Lazy Portfolios - Bogleheads

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Re: Investing as a Canadian - Differences

Postby Shakespeare » Wed May 23, 2012 2:31 pm

That link has been added to finiki.

Why are there two "Canadian Dividend Equity"s in "Yield Hungry"? I see that it is two ETFs, but shouldn't some indication be made in the pie chart?
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Re: Investing as a Canadian - Differences

Postby Barry Barnitz » Wed May 23, 2012 3:03 pm

Shakespeare wrote:That link has been added to finiki.

Why are there two "Canadian Dividend Equity"s in "Yield Hungry"? I see that it is two ETFs, but shouldn't some indication be made in the pie chart?


I added "growth" and "yield" as descriptions of the ETF dividend strategies.

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Re: Investing as a Canadian - Differences

Postby Shakespeare » Wed May 23, 2012 3:12 pm

Thank you.
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Re: Investing as a Canadian - Differences

Postby LadyGeek » Wed May 23, 2012 4:56 pm

Stryker wrote:I would think that most Canadians who invest directly in the TSX know about the lack of sector diversification. I most certainly learned the dangers of over diversification in any single sector after what happened early in this century with Technology and Telecom, and then a few years later with the crisis that hit the Financial sector even in Canada, just not as bad as elsewhere.

I disagree, and think that this a very important point. Sector diversification of the TSX is mentioned in Canadian-US Investing Differences - finiki:

finiki wrote:The Canadian stock market is far less diversified than the US market, and is highly dependent on just three sectors:[1] financials; energy (oil and gas); and materials (gold and mining). Therefore, an investor who purchases only Canadian securities may have insufficient sector diversification.

The US-focused Bogleheads' wiki teaches new investors that they should own the "entire US market" which is composed of large, mid, and small caps. You rarely see discussions about sector diversification. That's not the case for the TSX. I'm thinking that new investors of Canadian equities need a similar education, with a focus on the incomplete sector diversification of the TSX.

This is clearly discussed in The Two-Component Portfolio. Would it help to elevate these concerns to the start of the section (under "Simple Portfolios", just above The FPX Indexes), thereby giving a greater emphasis to new investors?
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Re: Investing as a Canadian - Differences

Postby brad_g » Wed May 23, 2012 5:17 pm

LadyGeek wrote:
Stryker wrote:I would think that most Canadians who invest directly in the TSX know about the lack of sector diversification. I most certainly learned the dangers of over diversification in any single sector after what happened early in this century with Technology and Telecom, and then a few years later with the crisis that hit the Financial sector even in Canada, just not as bad as elsewhere.

I disagree, and think that this a very important point. Sector diversification of the TSX is mentioned in Canadian-US Investing Differences - finiki:

finiki wrote:The Canadian stock market is far less diversified than the US market, and is highly dependent on just three sectors:[1] financials; energy (oil and gas); and materials (gold and mining). Therefore, an investor who purchases only Canadian securities may have insufficient sector diversification.

The US-focused Bogleheads' wiki teaches new investors that they should own the "entire US market" which is composed of large, mid, and small caps. You rarely see discussions about sector diversification. That's not the case for the TSX. I'm thinking that new investors of Canadian equities need a similar education, with a focus on the incomplete sector diversification of the TSX.

This is clearly discussed in The Two-Component Portfolio. Would it help to elevate these concerns to the start of the section (under "Simple Portfolios", just above The FPX Indexes), thereby giving a greater emphasis to new investors?


I agree, but in counterpoint it's worth noting that TSX Composite and S&P 500 returns for any lenthy period of time have been very close. Ditto for volatility and other metrics. Eg. http://www.theglobeandmail.com/globe-investor/average-annual-returns-sp-500-vs-sptsx/article2065974/page1/

Also there are tax incentives for owning Canadian equities in the form of the Dividend Tax Credit.

Also... owning foreign equities (from the Canadian investor point of view) involves taking on currency risk, or paying to hedge it away.

All of which suggests some overweighting of Canadian equities for Canadian investors. Common AA in Canada gives equal weight to Canadian, US and International equities. My guess is that reducing the Canadian allocation would yield little benefit.
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Re: Investing as a Canadian - Differences

Postby Shakespeare » Wed May 23, 2012 5:28 pm

See Portfolio Design and Construction - finiki for a brief new section.
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Re: Investing as a Canadian - Differences

Postby Stryker » Wed May 23, 2012 5:43 pm

I manage to get around the lack of sector diversification on the TSX market by using an equal weight portfolio for seven sectors in individual Canadian dividend growth stocks in the portfolio. The three sectors I'm missing (Healthcare, Materials and Technology) I can obtain to some extent and getting overlap, from my further investment in an equal allocation to the ETF's VCE, VTI, and VEA.
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Re: Investing as a Canadian - Differences

Postby LadyGeek » Wed May 23, 2012 6:26 pm

brad_g wrote:I agree, but in counterpoint it's worth noting that TSX Composite and S&P 500 returns for any lenthy period of time have been very close. Ditto for volatility and other metrics. Eg. http://www.theglobeandmail.com/globe-investor/average-annual-returns-sp-500-vs-sptsx/article2065974/page1/

The historical statistics support that over a longer period of time. I'm the principal author of Risk and return - finiki, which shows the rationale for diversification using Canadian securities. Figure 2 shows the performance from 1970 - 2011, which is longer than the 1991 - 2010 comparison in your referenced article. Compare to the US histograms here: Risk and Return - Bogleheads.

Shakespeare wrote:See Portfolio Design and Construction - finiki for a brief new section.

That's exactly what I was looking for, thanks. New investors won't have any problem understanding the composition of TSX and will know what to do. Should the title be "Sector diversification?"

Stryker wrote:I manage to get around the lack of sector diversification on the TSX market by using an equal weight portfolio for seven sectors in individual Canadian dividend growth stocks in the portfolio. The three sectors I'm missing (Healthcare, Materials and Technology) I can obtain to some extent and getting overlap, from my further investment in an equal allocation to the ETF's VCE, VTI, and VEA.

Check your last URL, I think you mean: VEA
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Re: Investing as a Canadian - Differences

Postby Stryker » Wed May 23, 2012 6:43 pm

LadyGeek wrote:

Check your last URL, I think you mean: VEA


Thanks. Link corrected.
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Re: Investing as a Canadian - Differences

Postby Shakespeare » Wed May 23, 2012 6:58 pm

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