In recent years the number of ETFs in the market has increased considerably.  People are investing in them, but do they really understand what it is that they are buyiing into?  As I sit down with prospects, I find that the answer to that question is mostly "No".

What is an ETF? An ETF is basically an open-ended mutual fund, in the sense that it is a basket of securities purchased by the ETF sponsoring financial institution.  The basket is divided into ETF units, and each unit is representative of the basket, in the same manner that mutual fund units are representative of the investment positions of the mutual fund.

Image: stockvault.net

If you listen to Warren Buffett then the best holding period for stocks is forever.  Plan to invest in them early.  Plan to use only the dividend income for consumption.  Plan to leave them in your estate.  You could go a step further and leave them in a trust!

The problem with most of us these days is that we start too late, and therefore we have no choice but to consume our savings.  If we left our investments alone for the most part, they would grow to a size that would be able to accomodate consumption and still grow.  It's all in the percentage growth versus the percentage consumed. 

As I work with my clients I find that sometimes having to change financial advisors or investment advisors is the hardest thing for them to do.  Mostly because they are emotionally invested in the relationship or scared that they might end up making a mistake.  However, there are situations where a changes is warranted.  I find that most people pay attention to it when they are approaching retirement or already retired.  Here are a few red flags that get missed most of the times.

1.       Your advisor hasn’t called you in over 3 months, and you haven’t had a face-to-face meeting in over 12 months.


a.       Your advisor is too busy for you.  Like doctors, advisors like to grow their clientele, and many times they over extend themselves.
b.      They have more important clients compared to you and you are probably getting B, C, or D grade service from them.
c.       Perhaps your advisor is going through a major life event – it may be your turn to pick up the phone and find out.

How would you rate your advisor on service, on being there when you need them, on making you feel that they are actively taking care of your financial needs.  Rate your advisor on a scale of 1 to 10.  Ten being excellent. ________

Investorline is the Bank of Montreal's on-line trading platform.  Having your accounts on this platform gives you access to BMO's research - the same research that it's advisors use in order to make portfolio decisions and advise clients - of course mixed with their own experience of the markets (which is really what you buy when you hire an advisor).

Recently, (which means I don't know exactly when) BMO launched an additional service on it's Investorline platform: Advice Direct, which is a fee based service enabling on-line investors to talk to a human being presumably qualified to offer advice.  An excellent marketing strategy, and very forward thinking of the Bank, but will it do the job?

I bet you’ve noticed the prices at the pump! It’s pretty crazy.  Two days ago I heard an analyst on 680 News saying that there was no reason for gas prices to have escalated at the pump.  He’s got me all fired up – I don’t believe the guy knows what’s going on in the world.

Crude oil prices have been moving up silently for the past few weeks, the sudden jump is because of a few reasons that won’t be going away in a hurry.  Here they are:

The TFSA is probably the most under-utilized investment tool that I have ever come across.  The trouble with these accounts is that they are called "savings accounts".  Really they should be called "investment accounts".  Ninety nine percent of the people I sit down with think that they should put their saving in a TFSA and earn whatever the bank decides to pay as interest, when really the most aggressive investment positions should be going into these accounts.

The TFSA operated pretty much in the same manner as an RRSP except that it doesn’t have the tax break attached to it.  So you contribute to a TFSA with after tax dollars.  You contribute to an RRSP with before tax dollars and these dollars become exempt from taxation.

RBC, Canada's largest bank, agreed to buy the Shoppers Optimum credit-card portfolio from Bank of America Corp. - this will considerably increase the size of it's existing MasterCard Inc. portfolio.  The deal will involve a co-branding pact with Shoppers Drug Mart Corp., Canada’s biggest pharmacy chain. The portfolio’s size and price have not been released to the public.  Three years ago Royal Bank agreed to introduce a co-branded MasterCard with WestJet Airlines Ltd. as the bank's first MasterCard credit-card offering in Canada. The latest card, named RBC Shoppers Optimum MasterCard, has no annual fees and allows users to earn reward points on purchases. 

What is the significance of this deal?  For RBC, increased profitability in the future.  Where do banks make money? on their credit operations of course.  And they charge the highest rates of interest on credit cards especially the co-branded ones.  So if you were going to pick which bank shares to buy, RBC would be a good one. The second one to watch out for is BMO.  BMO has an aggressive growth objective, and the positions that the bank has taken in overseas markets are good short to medium term - not so sure about the long term.  TD as always is the most aggressive in terms of it's growth objectives and it's openess and speed to act on strategies - this is a strength that the other banks cannot match.  Now you know which bank stocks I favor!

As for Shopper's Drug Mart, it is smart to offer a credit card.  Credit cards build loyal customers, and of course help the company's bottom line.  It will be interesting to see what happens to drug retailing with more American companies expanding their retail operations in Canada, such as Walmart, Target, and Costco.

Those who agree that Facebook IPO was overvalued, please raise your hands.  That’s everyone in the room!

Facebook is an example of a share that sold more based on its emotional value than its actual value as an investment.  Many who bought the stock bought it because they used Facebook and had an emotional attachment to owning a piece of it.

Get attached that way to an investment is the best way to lose money in the stock market – lesson learned – but now what?

Facebook took steps Tuesday to reassure investors and employees worried about its plummeting stock price. Facebook says that Chief Executive Mark Zuckerberg won't sell any stock in the company for a year, and that two of its directors, Marc Andreessen and Donald Graham -- have no plans to sell their personal holdings either.  In a regulatory filing Facebook detailed how it will essentially buy back 101 million shares when it issues previously restricted stock units to its staff in October.

At recent prices, it would spend roughly US$1.9 billion in cash to keep those shares off the market. Together, the steps are meant to effectively reduce the amount of Facebook stock in the hands of the general public.  As lock-up periods on the stock expire the stock price is dropping, and the love affair is coming to an end.

I believe that the share price will drop well below the company’s real value and will then rise again to a level that is truly reflective of it’s value.  If you’re really looking to invest in Facebook rather than own it for emotional reasons, you might want to buy at share prices below $15.

If you already own Facebook stock and are taking a hit on it, you can do two things: short the stock from now into November is a good time, or buy more of the stock at prices below $15, and average down your purchase price.  If you have a three to five year time horizon on the stock and you can average down, the stock will go back up to $38 and beyond.  Lastly, if you don’t want to take a risk on either of these strategies, hand tight you will get your money back with profits in less than three years, and make a killing if you’re willing to risk a five year time horizon.

A lot of times things happen in the market because the majority sentiment makes them happen.  Imagine this scenario:

A young artist is happy that his art is beginning to sell.  He has just been commissioned to do a portrait for the Mayor on the 3rd anniversary of his office.  He and his girlfriend go out for dinner to celebrate; they start talking about how soon they will be able to qualify for a mortgage and buy a house.  As they're walking toward the restaurant they look at the news stands with large headlines about how things are bad in Europe, China isn't picking up and the US unemployment numbers are still too high to signal a recovery.  They start feeling worried.  Maybe they should wait a bit about getting the house, if the recession hits his income will surely be affected as people cut down on artwork first.  

They get to the restaurant and are still talking, and they decide to be more careful with the money they have. The restaurant owner comes by smiling: "Congratulations! I hear you are doing a painting for the Mayor" he says, "are you celebrating with some champagne this evening?" The couple look at each other and pass a knowing glance.  The young artist turns to the restaurant owner and says "we hear that things are pretty bad in the economy, and there might be another recession coming soon, so we've decided to cut down on spending; we will just have a glass of wine each to celebrate".  

The restaurant owner hears this and starts feeling uncomfortable.  He goes to his office and calls his broker, "cancel that order I placed to buy those shares I wanted.  I hear that things are pretty bad and we are heading to another recession, I want to keep as much cash in hand as possible, and don't want to risk losing money again", then he calls his wife and says "honey, I think we should cancel that trip we were going to take this year, I hear things are pretty bad in the economy we should conserve our resources and ride this out".  His wife is disappointed and she calls the travel agency to cancel - you got it the message spreads like a virus.  

In the final transmission, the Mayor calls the young artist and cancels the commissioning of the portrait.  He says "sorry young man, I hear things are likely to get rough, we will talk about this portrait when things are better". The young artist hangs up the phone in despair and turns to his girlfriend "remember what we were talking about? It's starting to happen already; that was the Mayor, he just canceled the portrait".

See how we contribute to the downward spiral?  In the same way we also contribute to the upward spiral.  Feeling better about how things are is the first step towards recovery and then the manifestation of it follows.

Whenever there is uncertainty about the economic future of the economy investors turn to gold as a safe haven and a store of value.  The present day is no different. 
Is the world going to return to the gold standard?  There isn’t enough gold in the world, in the ground or processed for that to happen.  However, that being said the economy is certainly in a state of disease.  The debt game has caught up with it, and there really is no way out of it but to start paying it down.
The problem as I see it is that it is as much a personal responsibility for each individual of the world economy as it is for the governments of the world.  We are not doing our share, but without it the governments can’t really make a difference.
Coming back to the argument about gold.  Certainly, it is a good hedge to be invested in gold for part of your money, if this is wealth you wish to preserve.  If your objective is to obtain an income for life, gold may not be adequate, as it is not an income generating asset.  It can only provide you with capital appreciation, which may not be sufficient.
If the bond market collapse transpires, there will not be any liquidity in the market, so even if you owned gold you will not be able to sell it or transact in it.
I believe that the other asset that will survive economic upheaval is real estate. I recommend having income generating real estate as a necessary part of an investment portfolio.
Given the fact that stock markets move on the basis of emotion rather than logic, there will still be opportunities in the market to make money.  New technologies that are a part of the Industrial Revolution are a good investment, as is energy and healthcare.
    Disclaimer: MoneyCoach and the managers of the site Investment Opinion.net take no responsibility for the actions of any visitors to this site.  All information on this site is representative of the perspective of the contributing authors and may not reflect facts. All visitors are cautioned to obtain qualified financial advice from licensed individuals.


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