Chances are that if you own an RRSP, you hold at least a few foreign shares. Why? Because first of all, diversification is an important part of any portfolio. Canada has been performing incredibly well at all levels for a good decade now and odds are that this cannot continue like this forever. Most Canadian investors hold a significant portion of their portfolio in American and also foreign (especially emerging markets) companies.  Most research has been very clear about the numerous benefits, both in terms of higher returns and diminished risk.So what exactly is the problem then?  In this era of cheap trading, most brokers charge less than  $20 for executing a stock trade. The problem is that there is more involved than commission here. If you own shares of a US company on a US market from a $CAD account, you will end up paying an exchange rate in order to execute the USD transaction. The spreads on such trades are incredibly high, often about 2%. Let’s put that in perspective for a minute. Let’s say you keep each position on average for 2 years, that means you are paying 2% of costs every year (2% to open the trade + 2% to close).  Remember hearing about the power of compounding? If you end up paying an additional 2% in fees every year, these will accumulate very quickly. Of course, you will rarely notice because these fees are not written anywhere.  If you invested $20,000 for 30 years paying 2% per year, that would add up to $16,300!!!!!  Incredible isn’t it? How can they get away with that? Because consumers generally do not care. They prefer shopping for the lowest commission rate and will usually not even bother to ask about forex spreads (the actual cost you are incurring).  Don’t believe me?  Try buying a US stock and selling it right away. You will see that in addition to the fixed rate commission you will have paid a fee of over 3% in “exchange rate costs”.  Are there any solutions?  Thankfully, there are a few things you can do to diminish these costs, here are a few:

- If the stock is traded in Canada, trade it here. Buying and selling Research in Motion or Potash in Canada for your $CAD account will save you tons of money

- if you are looking for indices traded as ETFs, many are now traded in Canada and you end up getting the conversion done by iShares or others. If you are buying for a long period of time, it might not be worth it because you will be paying management fees annually. But as a short term investment? Absolutely!

- Canadian Capitalist had discussed a strategy that might be liked by more advanced investors although it has to be used for fairly significant amounts and will not really work for RRSPs (at least not done exactly as suggested).

- Open a USD RRSP: This is by far my favourite method because USD investments will be bought and sold in US dollars so apart from the initial cost, you will not be paying such fees.  So you completely avoid the compounding effect. On the previous $20,000 example, the cost would be close to 2% of the initial 20K and the same thing at your retirement (hopefully on much more than 20K). Now unfortunately many brokers do not offer USD RRSPs but most are working on it. QuestTrade is probably the one we recommend that offers this valued option.So my question to you is: Are you aware of these costs and if so how are you dealing with them?

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As announced last Tuesday, The Bank of Canada had increased its interest rate by .25%. While this is not catastrophic (it’s even good news to finally signal the exit  from this recession!), the rise in interest rates also comes with the fear of having inflation take over. As an investor, how do interest rates and inflation affect your investments?

Well while inflation will negate (or neccessitate) part of your yield (we have no control over it!), the increase in interest rates will negatively affect the market value of your bonds and will also influence your other asset classes.

Stock market: always a winner

When there is an increase in interest rates, this is usually a good sign for the stock market. At first, nobody on the Street (Bay or Wall Street for that matter) will be happy to see the interest rates on the rise. In fact, the markets will probably react negatively on speculation about a change in interest rates. However, if the rate go up, this means that the economy is doing well. Therefore, companies will show improved results and this is when the stock markets will star as the darlings at the dance.

As stocks grow faster than inflation, having a good portion of your money invested in the market remains the right thing to do.

Gold… not good..

As gold is known to be the perfect place for investors when they are afraid of the market, this is probably one of the worst places to invest your money when the investors regain confidence in the markets.

Historical stats show 2 things about gold:

#1 It demonsrates high volatility

#2 It doesn’t outperform inflation

This is why I am not a big fan of gold. I would rather buy gold mining companies or have a resources mutual fund (or ETF) that regroups companies working in the gold industry than buying the metal directly.

Money Market: get rid of it!

If there are people still parked in the money markets, they are really missing a great story. For those waiting for the big comeback of high short-term interest rates hear this: it’s not on the radar for at least another year. Therefore, the worst place to stash your money is definitely in the money market! When you think that ING is giving 1.2% right now… it doesn’t even cover inflation (and I am not even talk about after tax yield!).

Bonds; real rate interest bonds are the solution

If you want to stay in a secure investment area, I suggest you use your track investment apps to find real rate interest bonds. You can also use the investment services from your bank to establish a bond ladder so you will be covered against interest rate increases.

The problem if you don’t have a bond ladder is that you will always be tempted to play the interest rate markets. Trying to determine when it is the “right time” to invest and freeze all your money into a “good” rate. Don’t be a rate rat; invest intelligently.

And if you really don’t want to bother about interest rates and inflation, just go with real rate interest bonds that will track inflation. By keeping them to maturity, you will also avoid losing value due to an interest rate increase

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While the PIGS (Portugal, Ireland, Greece, Spain) are creating a big mess on the stock market (creating a mess; isn’t that what pigs are good at anyways, right?), the price of gold is soaring. While I still think that gold is not the perfect place to put your money over the long term, there is still a good opportunity for speculation.  You can invest in gold different ways without actually buying the  physical bars or certificates

Gold Stocks

We Canadians are lucky  since we have several great gold producers available on our stock market. Buying gold producers is another way to benefit from the price of gold but also to count on solid management instead of pure speculation on the metal. However, you may consider selling gold producer once the price of gold has reach a peak.

Since gold producers will protect themselves against important gold price movements (through options and futures), you benefit from an additional protection if gold prices were to tumble.

Here are a few stock picks that could be interesting if you are looking for a promising gold producer (note: this is not a recommendation, just a stock trading idea ).

• Capital Gold TSE – CGC
• Semafo TSE – SMF
• Eldorado Gold TSE – ELD
• Alamos Gold TSE – AGI

Mutual funds

Another interesting way to diversify your risk while betting on gold is to buy gold oriented mutual funds. You will then benefit from the expertise and the knowledge from a team of portfolio managers who are looking at the price of gold on a daily basis. They may have a better chance to trade the right companies and also protect yourself from bigger losses if gold goes backwards:

• BMG BullionFund
• Sprott Gold Bar
• Dynamic Strategic Gold

ETF

You don’t really want to hedge your risk and you definitely want to make a play on gold? Then you should buy ETFs. They offer great liquidity and your trading fees are much smaller than if you buy gold bars . Here are 2 well known gold ETFs that you can trade:

• Horizon BetaBro HBU
• Claymore Gold Bullion CGL.UN

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I swear to God, some people walk into a bank thinking it is a McDonald’s!

A colleague of mine walked into my office the other day with her eyes so big they were ready to pop out of their sockets.

“Have you seen this? ING is offering 3% (annualized rate) for the next 3 months on an RRSP contribution! This is way more than what we offer!” she said, panicked by the thought of losing accounts to the big orange online monster.

“So what?” I replied almost as interested by her announcement as I was when they said there were going to add a bus line on Sunday morning.

“How can I compete with this? The Bank won’t budge on their GIC rates and we are so far away from this offer!” she insisted (that’s it, I think her eyes dropped from her head and started some break dancing on my desk).

“Do you know that if your client invests $5,000 for 3 months at a 3% rate (annualized) he will make about $35? How can you not compete with a huge profit of $35? What is your client going to do in 3 months since he will only retire in 30 years?”. I knew the answer: he will transform himself into another rat (i.e. rate shopper!). But the key is that he won’t get much from jumpin’ from one rate to another (especially with the marvellous rates we have in the industry!).

Unfortunately, some people prefer to see financial advisors as trustworthy as mechanics or politicians. Therefore, they prefer to trust themselves and invest in something they understand. 3%. That, they understand. They don’t figure it’s only for 3 months and that they won’t do much after this period. They understand the 3% concept and they are happy with it.

The key point is not to manipulate our clients and make them invest in something else. The point is to help them understand that they are losing their time and most importantly their money chasing ridiculous rates for 3 months when they won’t be touching this money for the next 30 years.

Each investor should have a plan. He should know how much he invests, where he invests and (most importantly) why he does it this way. If you are investing without knowing the answers to those 3 questions, you are not investing in the right way. Then, you are in serious trouble and I hope you are putting a lot of money aside because you won’t make it to retirement…

Notice that I didn’t talk about how much you will make. This question is useless as nobody knows the real answer. However, if you stay invested during the next 30 years, you should be making around 4 to 6% depending on your investor profile. In any case, it will be better than investing in GIC’s!

I have living examples to prove it: I had looked at one of my clients who invested his money in an investment strategy back in 2004. As of the end of 2009, he was making an annualized return of 5.13% (with a balanced fund). While he was making more than any 5 year GIC back in 2004 (they were giving about 4.50% to 4.75%), it was also tax efficient and liquid at any time. In addition to that, we have to mention that his portfolio went through the worst investing period of all time. Therefore, I am ready to bet that he will be making much more than 5% annualized rate at the end of 2010 while the other individual will have to renew his money at 3% for 3 months…and then… 3% for the next 5 years?

Next time you see an investment promotion, don’t ask yourself if it’s a good deal or not, ask yourself if it fits your investing strategy or not

image source: Beau B

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As I mentioned yesterday in my 2009 Best Stock Picks article, the same fellow bloggers and I have decided to pursue our stock pick competition in 2010. Although I finished 4^th with my stock picks last year, I am willing to take more risk this time around and aim for the top 2! Nonetheless, I was very satisfied with my 2009 stock picks since I finished with a considerable return of 44% even with a defensive stock (JNJ) on hand. I do think that 2010 will be a great year for the stock market since there is a lot of room for growth and there is still a lot of hesitation from investors as well.

2010 Best Stock Picks Contest

The rule of our contest is fairly simple: each Blogger will pick 4 stocks they think they will overperform through 2010. We can pick any stock, ETF, etc in the Canadian or American Stock Markets. In order to make it fair, we also include the dividend yield of our stock picks (because it is part of the investor’s yield anyways). This is a friendly competition, so you won’t see any stock picking recommendations here. You are more than welcome to comment and add your analysis of those stocks as we probably picked them for some reason

So here are my choices for the 2010 best stock picks contest:

Research In Motion (TSE: RIM, $71.03 )

This is a half rational, half emotional stock pick as I really like my Blackberry Nonetheless, I think that RIM stock has been unjustifiably pummelled by financial analysts since the company has announced lower results than expected. Financial analysts are also afraid of Apple’s attack on RIM’s market with the iPhone. I would say that the Blackberry and the iPhone are 2 really cool intelligent phones but they are nowhere close to be comparable competition. They actually don’t serve the same purpose! In addition to that, the recent strong earnings and the agreement to enter China will soon affect the investors decisions and restore their trust in this stock. I think we should get pretty good 2010 results for RIM!

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Manulife Financial (TSE: MFC, $19.33 )

Another of my investing ideas for 2010 is to go with Canadian insurance companies. Why? Simply because they took a hard hit in 2008 (as Canadian Banks did) but they didn’t come back as strong as Canadian Banks. I think that Manulife had its share of problems with their involvement in the US. However, if they are able to boune back with strong numbers in 2010, it won’t take long for them to gain investors’ trust again. Plus, its dividend (almost 3%) makes it a great investment idea for your portfolio in 2010.

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Goldman Sachs (NYSE:GS, $168.84 )

I am leaning towards financials again for my 3^rd best stock pick for 2010. If the economy starts picking up in Stateside (which will  happen eventually), Goldman Sachs will definitely be poised to benefit from the economic revival. Financials that survived the credit crunch should be in a good position for 2010. The idea behind this investment is based on planning on an economic rebound in the States. I hope I am right on this one… if not, this pick could be the worst one of my portfolio in 2010

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Vanguard Emerging Market ETF (NYSE: VWO, $41.00 )

My last investment idea for 2010 is to invest in emerging markets. Nothing really innovative here but I am not picking stocks to be creative, I am picking stocks that I think will be the best performing ones in 2010 . Since US consumers may still have a hard time in 2010, I preferred to play safe and look towards countries that enjoyed great economic growth in 2009.

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So here are the other participants and their investment ideas for 2010:

*Disclaimer: this is a friendly competition among bloggers. There are no recommendations done in those posts. One must do his own due diligence before trading on the stock markets.

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