Mutual Funds

This one is a touchy subject. In my first job after graduating from university, I worked for the investment management arm of one of Canada's large banks as a performance analyst. This firm managed about $30 billion of assets, and I was responsible for calculating their monthly, quarterly and annual performance, which involved talking to the fund managers and analysts on a regular basis. I therefore knew quite well what they did, why, and how well their funds performed. The truth is, all these intelligent people, with the MBAs and fancy analysis couldn't beat their benchmark index most of the time. This means that if you had just invested in a passive, index fund (meaning a fund that simply tracks a broad index like that S&P 500 or the TSX), you would have done better.

Most banks will try to sell you mutual funds. Not just any mutual funds - THEIR mutual funds. Why? Because they charge a high management fee. Most normal funds charge around the 2% range. Think about that for a second. If your mutual fund generates a yearly return of 7%, you only get 5% after they deduct their fee. And they get this fee regardless of how well your fund does. If your fund loses 3% in a year, your actual performance after fees is -5%. Sucks, doesn't it?

So, next time your financial adviser suggests one of his bank's mutual funds, you should ask some questions. Make sure the management fee isn't too high.

If you're looking at mutual funds, I would suggest sticking to index funds (i.e passive funds that simply try to mimic an index). They tend to do better over the long term, and their management fees are usually quite low, well beneath 1%. Even better, look at passive, index ETFs (exchange-traded funds). Some have management fees as low as 0.15%. This means you get to keep more of your money.

Bottom line? Banks push their own mutual funds because they make more money off of them, and your adviser is probably going to get a higher commission by investing YOUR money in a high-fee mutual fund than in a low-cost index ETF.

If you need more advice or tips, feel free to ask questions in the comments section, or fire me an email. I'm happy to help people save their money and give the banks less.

Pensions driving up the cost of electricity? I don't think so

So, according to several people/reports, the cost of the pensions at the four provincial hydro agencies are responsible for driving up electricity rates. To the tune of $480 million in 2013 (that was the total pension contribution by those agencies). A lot of money to be sure. But to put that in perspective, we probably spent around $728 million buying wind power in 2013 (wind production was 5.2TWh in 2013, and the average price paid to wind producers is estimated to be around $140/MWh). You know, wind power which typically is produced when you least need it? At really, really high prices? That is then sold to Quebec and New York at prices much less than what it cost to produce?

So in a sense, wind power is a much bigger factor in rising hydro rates than those pesky pensions. Especially given that it rarely is being produced when it is needed, and is often displacing hydro power.

The Toronto Star published the following article today:

http://www.thestar.com/business/economy/2014/08/15/nuclear_funds_power_opg_profit_increase.html

That's an interesting article. You see that OPG's average price for the power it produces is less than HALF of what all the other private producers get (5.1 cents/KWh vs 10.7 cents/KWh). Yes, HALF. What that means folks, is that even after accounting for those "expensive" pensions, your provincially-owned generator is still HALF as expensive as all the other (private) sources of power in this province. 

Now, you could say that if OPG was less generous with its employees, and cut its pensions costs, it might receive 4.9 cents /KWh, rather than the 5.1 cents it got. So yes, it is true that those pension costs are causing the overall rates to be higher. But when other private producers get an average of 10.7 cents/KWh, you can see how the pension costs (and indeed, ALL costs at OPG) are a drop in the bucket in terms of overall hydro rates.

So what is the bottom line in all this? What you should take away from this is that while you may be envious (even outraged) that those employees at the hydro agencies get nice pensions, they really don't have that big of an impact on hydro rates. Heck, even when those pensions are factored in, provincially-generated power is still HALF the cost of privately-generated power. 

Hudak Blows It - Again

So, one week into the election campaign and Tim Hudak has already blown it. Sad, I was going to vote PC this time around (because the Liberals are just so bad – they lie, cheat, steal, and have doubled the debt with NOTHING to show for it). But when a party leader thinks that announcing massive service cuts and layoffs is the way to win an election – it’s a sign he isn’t fit to lead.

I personally agree that the provincial government is bloated, and that we have way too many services we can’t afford. But you don’t go and make cutting everything your party’s platform. This is Ontario, not Alberta. People don’t like far-left or far-right policies and ideas. They like nice, centrist things. Until the PCs learn that, they’ll never get voted in.

Wind Power 2.0

So, there's close to 1GW of additional wind generation due to come online in Ontario by the end of the year.

Lovely. We don't know what to do with the wind generation we currently have, and more is being built.

Oh, did you know the new wind power contracts give the system operator the ability to dispatch (turn off) wind generation if it isn't needed? However, the wind generators will still get paid for this wind power they could have produced. They just won't produce it. But they'll get paid anyway.

Aren't you, the rate payer, delighted? You now have the privilege of paying wind producers not to produce power.

Thank you, Liberal Party of Ontario!

Why hydro rates are high - Part 1

So, on the morning of May 2nd, Ontario was generating about 1,000 MW of wind power. Producers are paid around $150/MWh ($0.15/kWh) for wind. At the same time, this power was being exported out of the province at an average price of around $0.015/kWh. Guess who picks up the tab for the difference? That's right - you, the rate payer. It's called the Global Adjustment.

The best part? At the same time, we were spilling water at our hydro plants (to accommodate the wind generation). This water could have been used to generate power at a rate of $0.033/kWh.

Good times.

Stocks

How about stocks, individual stocks? Short answer: maybe. Long answer; individual stocks can do quite well, assuming you are good at picking stocks. I would only recommend this if you have enough money to invest that you can diversify your holdings enough to eliminate as much risk as possible. In other words, if you have enough money that you can invest a meaningful amount in, say, 30+ stocks, go for it. Or, if you already have a well-diversified and balanced portfolio invested in mutual funds, and want to try picking a few stocks with a small amount of your total portfolio (say, 10%). Otherwise, it's just too risky. Imagine that you've invested all your money in 5 companies, and one goes bankrupt - you've just lost 20% of your savings. Ouch. On the other hand, if you've invested in 30+ companies and two of them go broke, you've only lost a bit less than 7% of your savings (assuming you invested an equal amount in each company). Or, if you only invested 10% of your savings in individual stocks, and half of them go bankrupt, you've only lost 5% of your savings. All in all, individual stocks can do just fine, as long as you make sure you're well-diversified, know a lot about the companies you've picked, and make sure that your savings can handle it if one or two of your picks ends up being a dud.

That being said, for the common mortal who doesn't have that much money to invest, nor time to thoroughly research each company, I would still suggest the approach I recommend to pretty much everybody: passive index investing in low-cost mutual funds or exchange-traded funds (ETFs). I'll touch upon those in another post.

Bonds - A Worthwhile Investment?

Should you invest in bonds? Short answer: not right now. Long answer: bonds seems attractive. Bonds issued by a government, or a high-quality, well-performing corporation are quite secure and provide guaranteed cash flow. However, bond prices (their value) falls when interest rates rise. Why, you ask? Because if you own a bond that pays 3% interest, then rates rise to 4%, people will not want to buy your bond at face value (the amount you paid for it when it was issued) because they can now get new bonds that pay higher interest. If you invested $100 in a bond at 3% interest, you get $3 per year. New bonds now pay $4 per year interest on that same $100 investment. So, in order to get people to buy your bond (assuming you want to sell it), you have to sell it at a discount. In this example, you'd have to sell it for $75 ( 3/75 = 4%), since at that price level, investors would be getting the same 4% return as if they'd bought one of the new bonds. And as we're currently in an environment where interest rates are at an all-time low, they can only go up. So bonds can only perform worse than they have been lately.

All this being said, bonds can be used to stabilize a portfolio. Assuming you hold a bond to maturity, you have a (nearly) guaranteed set of cash flows and principal. You may only get 3% interest on it, but you're sure to get this 3% per year and recoup your investment when the bond matures (assuming its a government bond or high-quality corporate bond). Less risk = less investment return.

I personally wouldn't be investing in bonds right now, unless you can get a high-quality bond that pays 5% or more per year, and you intend to hold it until it matures.

Tax Free Savings Accounts

It has come to my attention that not many people are aware of all the features of the TFSA. Most people think it's just a savings account that happens to be tax free. This is costing people a lot of money.

A huge part of the problem is in the name. It should have been called the Tax Free Savings Plan, or the Registered Savings Plan. Adding the word "account" just confuses people. The TFSA is similar to the RRSP in many ways, the major one being that any investments held within it grow tax free. You will never pay any tax on any investment gains, dividends, interest or other forms of gains on the investments held within your TFSA. However, unlike the RRSP, there is no tax deduction. With the RRSP, you pay income tax when you withdraw the money from your RRSP in retirement (hence why the government gives you a tax refund if you contribute to an RRSP). With the TFSA, you pay tax right away (meaning the money you invest in your TFSA is after-tax money, since it comes from your take-home pay). The benefit is that you will never pay any form of tax ever again. No tax on investment gains, no income tax on TFSA withdrawals.

Pretty much any investment that is eligible for an RRSP is also eligible for your TFSA. Stocks, bonds, GICs, mutual funds, ETFs, and others. So don't waste this valuable tax advantage by putting your annual TFSA contribution in a plain old savings account. Invest like you normally would.

So here's a point-form description:

1) TFSA investments grow tax free (like an RRSP)
2) Your TFSA contributions are not tax deductible (unlike an RRSP). However, this means that since you've already paid the income tax on the money you invested, you will never again pay any form of income tax on anything to do with your TFSA (unlike the RRSP, where your withdrawals are taxed later on)
3) The annual contribution limit is $5,500 per year (contribution room that isn't utilized carries forward)
4) If you withdraw money from your TFSA, you can only re-contribute it the following year
5) TFSA is just a term like RRSP - meaning that the TFSA is a registered account(s) where you can hold all sorts of investments
6) Think of the TFSA as a Tax Free Savings Plan - not calling it an Account will make it easier to remember that it can hold all sorts of investments
7) Money withdrawn from your TFSA in retirement is not considered income - unlike the RRSP. This means that income-tested government benefits (such as Old Age Security payments) will not be affected. If you withdraw $80,000 a year from your RRSP, the government will tax you on that income and start clawing back your OAS payments. If you withdraw $80,000 from your TFSA, you will not only owe no income tax at all, but your OAS payments will not be affected.