We are at the beginning of the year and I hope you had a great Holiday Season! It’s time for me to get back to work and start the year with our traditional Best Stock Picks For 2012 Contest. So before we get to my stock picks for this year, let’s take a look back at what happened in 2011.

The Perfect Proof that Gambling is Not Investing

Since the goal of this friendly competition is to finish first and we only have 4 stocks to pick, some of us (including me!) took some important risks. These risks were not calculated as we are not investing real money into them and there is not much to lose (besides the fact that my ego hurts!).

So if you think that you can pick any stock for your portfolio based on what you read on a few blogs (besides what is written on The Dividend Guy Blog ) and what you see on TV, you are dead wrong. Investing is far from gambling and I have a great proof; take a look at my stock picks:

HUZ – 13.02%

RIM – 74.51%

POT – 19.66%

CVX + 20.28% (including dividends)

I actually took 3 guesses in 2011; 1 with a commodity (betting on the fact that silver will follow the price of gold), 1 with a techno stock (betting on the fact that RIM had gone through the worst and was ready to kick ass in 2011) and 1 on an eventual rumor of merger or acquisition (betting on the fact that the first hostile bid for Potash was only the beginning).

Well, I got it wrong 3 times out of 3 and this is why my stock picks sucked in 2011!

Here are the full results:

Dividend Growth Investor +15.36%

Million Dollar Journey +3.12%

Intelligent Speculator -4.90%

Money Smarts Blog -9.55%

Where Does All My Money Go -17.04%

My Traders Journal -19.00%

The Financial Blogger -21.73% (bravo!)

Wild Investor -33.34%

Beating The Index -44.08%

And we got beaten by 3 TFB commenters!

Yup, that’s right! Last year, I’ve asked you to participate in this contest and Steve Zussino (+17.83%), Robert @ The College Investor (+20.29%) and JT McGee (+34.50%) beat all of us! Here are the results from all the readers:

JTMcGee	34.50%
Robert @ The College Investor	20.29%
Steve Zussino	17.83%
Passive Income Earner	2.09%
Lionel	1.88%
Craig	-2.54%
101 Centavos	-9.25%
Kevin @ Thousandaire.com	-9.86%
Financial Cents	-15.16%
Jaymus (RealizedReturns)	-18.44%
SustainablePF	-29.77%
Sean	-37.67%
Financial Uproar	-43.07%
DanP	-45.78%
Moloko	-47.64%
Stock Glory	-52.77%
kildozer	-61.81%
Millionvester	-69.02%

Congratulation to JT McGee with a +34.50% Result! I’ll send him a $100 Amazon Gift Card!!

Now back to the Best Stock Picks for 2012

We all agreed to start the very same contest again this year with the very same rules:

4 stocks picked at the beginning of the year

Could be CAN or US

No trades allowed

Dividends count in the yield calculation

This year, I’ll use a different approach as I will pick stocks that I own or that I have analyzed carefully. I’m doing this for 2 reasons:

a)      I’m not good at guessing (obviously!)

b)      In a highly volatile environment, strong companies will perform better

My Top Stocks for 2012:

National Bank – TSE: NA

I know I can’t really go wrong with any Canadian bank but I think that NA will outperform its peers in 2012. One of the main reasons is that the company is almost done spending hundreds of millions in new software for its branches. We will start seeing productivity gains that will boost both commercial and individual banking results. Their recent acquisitions (Wellington West, the brokerage segment of Montrusco Bolton & HSBC) will also bring in additional income in 2012.

5N Plus – TSE:VNP

This Montreal based company is the leader in speciality metal and chemical products found in the manufacturing of solar panel, smartphones and tablets. They also produce rare earth metals such as tellurium, cadmium and zinc. In 2011, they posted record results after acquiring MCP a company way bigger than them. The stock price hasn’t followed the great results due to global economic uncertainties. Sooner or later, investors will realize that VNP should not be trading at a P/E ratio of 9!

INTEL – NASDAQ:INTC

Intel has proven its stability by showing strong financial results in 2011. With a dividend yield of 3.50% and a low P/E ratio, INTC will certainly do well in 2012. Intel is the leader in its industry and has the biggest R&D budget to make sure they stay ahead of the competition.

Chevron – NYSE: CVX

The price of oil is not slowing down in my opinion and this is why I’m coming back to the only stock that served me well in 2011! Chevron is highly stable and will continue to generate great profits in 2012. A little push on the oil barrel and we should see the stock up by another 10% this year .

Here are the other best stock pick contestants:

Wild Investor

Million Dollar Journey

Dividend Growth Investor

My Traders Journal

Intelligent Speculator

Dividend Mantra

Passive Income Earner

Where Does All My Money Go

Beating The Index

Do you want to join in?

We had to say good bye to Mike Holman from Money Smart Blog this year and we are welcoming 2 newcomers: Dividend Mantra and Passive Income Earner. I’d also like to do the same contest with TFB readers (regardless if you have a blog or not). So if you include your 4 stock picks in the comment, I will be following your picks and the best performer will win a prize in early 2013. How about that?

You don’t have enough yet?

If you are looking for more stocks to buy in 2012, I can tell you that you will find great ideas in The Dividend Growth Index, and my 29 Dividend Stock Picks for 2012 are 2 other projects I started with my Dividend Blog. Please make sure that you do additional research before trading any of these stocks. They are not recommendations.

Disclaimer: I hold NA, INTC, CVX & VNP in my RRSP portfolio.

The Market is down seriously and so are my picks . Nonetheless, it’s time for another update on everybody’s performance. Believe it or not, there are 2 bloggers that are positive! Crazy isn’t?

RIM

If you ask me, I think it’s over for RIM. I took a serious beating in my own portfolio, sold it at $44. I thought they were able to compete with their Blackberry but it seems that the customers have decided otherwise. While I am still a Blackberry fan (nothing can type faster!), I must admit that it might be my last phone with them too… sometimes, you take guesses and are wrong. RIM is one of the bets I lost! I just hope that it won’t go down further by the end of the year. I promise I won’t pick it next year .

HUZ

Silver was doing well until the recent September debacle when it followed gold in the dive. Then again, I would not hold silver in my portfolio but this is the kind of stock that can help you win a 1 year contest. I think we have room for a jump before the end of the year. Let’s keep our fingers cross!

POT

I’m pretty happy with Potash to be honest. While it is off slightly, it is still in a pretty good position to finish the year strong. If the plan to save European countries is strong enough and news from emerging markets are encouraging, we can easily see Potash going back up and showing a positive gain in 2012.

CVX

Aaahhh… a good old dividend paying stock! Honestly, I’m not surprised to see CVX being my best stock this year. I would not have bet on this stock at the beginning of the year as I was expecting to be my defensive pick in a bull market. But things evolved differently and Chevron played exactly its role! The dividend payout makes it a pick that is positive as of today. No wonder I switched my portfolio towards a dividend investing strategy this year ;-D.

Now on to the big guys… Kuddos to Intellingent Speculator and Dividend Growth Investor for being positive! Here are all the results:

Dividend Growth Investor 3.39%

Intelligent Speculator 3.19%

Million Dollar Journey -5.98%

Money Smarts Blog -13.14%

Where Does All My Money Go -18.12%

The Financial Blogger -20.31%

My Traders Journal -35.82%

Wild Investor -37.26%

Beating The Index -45.07%

And all the picks:

IS	KMB US EQUITY	16.3%
IS	PEP US EQUITY	-3.1%
IS	CTRP US EQUITY	-20.5%
IS	AMZN US EQUITY	20.1%
TFB	HUZ CT EQUITY	-3.7%
TFB	RIM CT EQUITY	-63.2%
TFB	CVX US EQUITY	3.8%
TFB	POT US EQUITY	-16.0%
WI	WHR US EQUITY	-42.7%
WI	JPM US EQUITY	-28.1%
WI	PZE US EQUITY	-46.9%
WI	SLB US EQUITY	-27.8%
MDJ	V US EQUITY	22.5%
MDJ	RY CT EQUITY	-5.6%
MDJ	HSE CT EQUITY	-11.7%
MDJ	ECA CT EQUITY	-29.2%
WDA	F US EQUITY	-42.4%
WDA	SVR-U CN EQUITY	0.9%
WDA	CM CN EQUITY	-3.1%
WDA	VWO US EQUITY	-25.6%
MSB	CGL CN EQUITY	-13.2%
MSB	CGL CN EQUITY	-13.2%
MSB	CGL CN EQUITY	-13.2%
MSB	CGL CN EQUITY	-13.2%
BTI	SKW CN Equity	-59.4%
BTI	ARN CN Equity	-21.8%
BTI	BWD CN Equity	-55.0%
BTI	REL CN Equity	-39.7%
MTJ	SSO US EQUITY	-20.6%
MTJ	UWM US EQUITY	-36.2%
MTJ	MVV US EQUITY	-29.5%
MTJ	EET US EQUITY	-48.7%
DGI	JNJ US EQUITY	5.7%
DGI	PG US EQUITY	0.6%
DGI	PM US EQUITY	10.0%
DGI	PEP US EQUITY	-3.1%

Unless you have been living under a rock since 2008, you already know that: The USA has a debt problem. Okay, so far, nothing very shocking here as half of the planet has a debt problem! However, the USA debt addiction reached critical mass last week with the need to increase their debt limit. On top of this, Standard & Poors dropped their credit rating from the historic and prestigious AAA to AA+ (which is one grade lower). What the hell does the USA credit rating change have to do with anything in your life? I guess you are asking yourselves the question even more if you are Canadian. Well, regardless if you are American or Canadian, the USA is helping you become richer by fooling around with its credit rating. Here’s how:

The Case of Interest Rates

Since the end of 2008, borrowing rates have been at their lowest since I was born (1981 for the most curious of you!). The interest rate has been cut down to the minimum in order to let both consumers and companies breathe and avoid a bigger financial collapse. Having such low interest rates is good for most consumers as;

a)      It lowers their mortgage payments (and enables the smartest, who kept their original payment amount, to pay more capital at the same time)

b)      It creates huge opportunities for those who want to leverage.

As European countries are struggling with their debts and the Americans can’t restart their huge capitalist engine, interest rates should stay at low levels for another year. This means that it gives you the opportunity to use these low interest rates to your advantage. If you look at my net worth statement, I have personally decided to not pay my debts and focus my cash flow on asset creation. I didn’t borrow more money to leverage per se, but I am voluntarily ignoring my debts to focus on adding more assets. Once the interest rates rise again, I’ll probably change my strategy as I will be making more money (from my assets) and be in a better position to clear my debts.

Opportunity on the stock market

I don’t know if you have followed the market for the past 2 months but it is going down week after week. The main concern (for the past 18 months) is again the debt level of many countries, especially the US of A. On the other hand, there are plenty of great companies that have published strong financial results over the same period.

This is what tells me that investing right now is a great idea. If you have missed the gigantic 2009 stock market rebound, you can certainly make a few bucks from the next rebound. When will it happen? I don’t know. All I know is that when you can buy successful companies with strong balance sheets paying high yield dividends, it’s like Christmas during summer time!

Opportunity with real estate

Then again, if both interest rates are low and the stock market is down, chances are that you can also find great deals in real estate. I wouldn’t look North of the Border for this one as the Canadian housing market is not in a bubble according to me. However, many people can’t afford to pay for their homes in the States (since 2007!). So buying a piece of land or a vacation property might be the good timing at the moment.

Opportunity to create a business

If you can create a business and survive the present economic times, your business will skyrocket once the economy gets back on its feet! Tough times are always the best time to start a new business since you will be up and running when the lights come back on.

You can benefit from low interest rates and the fact that people want to get rid of their house/land/condo. Why don’t you become their savior? Many people got rich during the last real estate crisis.

Seizing the opportunity is like surfing:

Are you too afraid to jump at any of these opportunities? You would rather wait until things calm down a little and “wait for the better timing”. Remember this: seizing the opportunity is like grabbing the perfect wave when surfing: if you are sitting on the beach waiting for the perfect wave, chances are that you will see it happen in front of you but you will be 200 feet away and won’t be able to jump on it. On the other hand, the surfer dude who is already in the water, battling with small waves and being crushed once in a while will have a much better shot for the perfect wave.
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I know, you told me already from my previous 2011 best stock pick update; I should have sold RIM! I actually did it in my portfolio, but this stock picking contest doesn’t allow you to make trades during the year. In fact, it’s pretty basic. We all picked 4 stocks at the beginning of the year and then we try our best to smile throughout the contest.

Without RIM in my portfolio, I would be among the leaders… but it’s easy to say that and others could take off their worst pick as well . However, having a stock plunge by almost 50% in your 4 stock investment portfolio is pretty hard to swallow .

Highly Speculative Choices

This year, I chose 4 highly speculative picks. I thought I would place either very high or low in the overall rankings. Mike from Money Smart Blog actually did the same thing last year betting on the drop of the price of gold… well he finished where I should be finishing this year! Hahaha!

RIM was my baby until not so long ago but I knew this stock would rock it up and down during the year. I just didn’t expect to see such poor results!

CVX will, naturally, follow the price of oil pretty closely. Since the commodity is on a downtrend for the past month or so, so is the stock! I don’t mind since it’s paying a healthy dividend and the price is still up more than 8% this year. It was also a great fit in my own portfolio (I do own shares of CVX).

I also bet on the rise of the Silver Surfer . However, speculation has brought down the stock to a “normal” return (while I was up more than 50% at one point this year!). Here again, it could also gain or lose 20% during the next 6 months J.

Finally, Potash was picked on the same assumptions: there should be some speculation around it. The stock is up slightly but if rumors of mergers or acquisitions arise again, it could fire its way to the top in a few months!

As you can see, this portfolio is not… a real portfolio! This looks more like gambling than investing… but that’s the purpose of this game .

Here are the results so far; congrats to Intelligent Speculator (from our original contest) and JT McGee (from our readers) who are ruling this competition for the moment:

Intelligent Speculator 9.35%

Dividend Growth Investor 8.89%

My Traders Journal 8.67%

Million Dollar Journey 8.06%

Where Does All My Money Go -1.01%

The Financial Blogger -3.74%

Money Smart Blog -5.72%

Wild Investor -7.69%

Beating the Index -12.01%

Entry	Result
JTMcGee	23.43%
Robert @ The College Investor	14.41%
Craig	9.59%
Lionel	5.93%
Financial Cents	2.50%
Jaymus (RealizedReturns)	-0.20%
Passive Income Earner	-0.39%
Steve Zussino	-1.80%
Kevin @ Thousandaire.com	-2.39%
SustainablePF	-16.27%
101 Centavos	-17.88%
Sean	-20.08%
DanP	-22.87%
Millionvester	-24.44%
Moloko	-29.53%
Stock Glory	-29.73%
Financial Uproar	-44.22%
kildozer	-44.58%

**Since this post is getting a lot of visits this morning, I wanted to share with you my most recent investing website: What is Dividend – Dividend Investing Made Easy. You will all the information you need to start your investing journey with dividend stocks. The site is almost finished but I wanted to start sharing what has been done so far (more info on dividend calculators and dividend investing strategy to be added in April**

It’s already been 3 months since I picked my 4 best stock picks for 2011. The rules were simple, each blogger makes 4 stock picks (on the American or Canadian stock market) and we hold them until December 31^st. On this blog, I have decided to add a little challenge asking readers  to beat our stock picks. Therefore, you will find not only the bloggers’ rankings but our readers’ rankings as well (this should be more than enough to give you some trading ideas ). Here we go with my 2011 stock picks:

HUZ – So far So Good!

I decided to bet on Silver for my first pick as I wanted to play on the difference between the price of gold and the price of silver. I am not a big fan of commodities in my investment portfolio. However, when it comes down to a stock picking competition, commodities can push your overall return to a whole new level… this is exactly what HUZ is doing right now

RIM – I just can’t let it go!

I currently hold RIM in my retirement investment account and I still think it’s a good stock. I was obviously wrong last year yet I still have faith in this “falling knife”. I was actually right until March when things went sour. The playbook is taking its sweet time to arrive in stores and their latest quarter was quite disappointing. I still have hopes for RIM as it doesn’t need much to get back on its feet. We have seen what kind of progress this stock can have within 12 months in the past. Some analysts still see it over $75 by the end of the year…

CVX – Commodities are definitely good for me!

Instead of making a play on oil, I decided to pick a great dividend payer and oil company; Chevron. This stock is definitely on a great up trend (thx to the rising price of oil!). I think this will be a great stock to hold throughout the year (I do have it in my personal portfolio as well).

POT – Waiting for the volcano to burst!

When I picked Potash, I thought that this would be the joker. I am expecting rumors of a possible merger or acquisition in 2011. Several companies have their eyes on Potash and the simple rumors should be enough to push the stock to a higher level. In the meantime, the stock doesn’t hurt my return so it’s all good .

So with a total yield of 12.41%, I rank #1 YEAH BABY!. Let’s take a look at where are the others (you can click on their name to get their latest update on their stock picks):

The Financial Blogger	12.41%
Million Dollar Journey	12.16%
My Traders Journal	11.77%
Where Does All My Money Go	5.13%
Beating the Index	3.08%
Intelligent Speculator	1.66%
Dividend Growth Investor	1.43%
Wild Investor	0.28%
Money Smarts Blog	-1.17%

And now who’s the best performing reader so far?

Jaymus (RealizedReturns)	-2.03%
Craig	8.16%
Lionel	4.47%
Passive Income Earner	3.95%
DanP	4.68%
SustainablePF	-1.10%
Steve Zussino	7.84%
Stock Glory	-29.04%
Financial Uproar	-23.08%
Financial Cents	6.94%
Robert @ The College Investor	8.70%
101 Centavos	-9.09%
kildozer	-26.05%
Moloko	-13.20%
Kevin @ Thousandaire.com	2.89%
Sean	-5.98%
Millionvester	-3.69%
JTMcGee	14.86%

Congrats to all participant! JT is the leader for now!

Quantitative Easing in short

In a simple terms; quantitative easing can be describe as a central bank buying back their bonds in order to inject money into the market. Since investors receive money from their bonds, they have to invest it elsewhere. This creates enough liquidity to “make the capitalism motor run”. The FED is already at its second round of quantitative easing (QE2 was announced back in fall 2010). They will be injecting $75G per month up to $600G. Until recently, we thought this would be the last quantitative easing measure required… until Japan’s earthquake.

Quantitative Easing & The Impact on Your Investments

So now that the FED is printing more greenbacks, what’s in it for you? Regardless if you are Canadian or American, there will be an impact on your investment portfolio. You can probably feel the impact if you look back at the month of November and December 2010. If you have a part of your portfolio invested in the market, I bet it did great .

Quantitative Easing has such a positive effect on the stock market because it comforts investors with the fact that Governments won’t let the economy down. The market knows that no matter what is happening with the economy, there will be money available. This encourages investors to keep on investing.

Long term effect of Quantitative Easing

This is the tricky part. We are not quite sure of the long term impact of QEs. On one hand, some people fear that it will generate too much inflation. On the other, some people think that the capitalist system will regulate itself as it always has (a bit too simple, isn’t?). In the end, the FED didn’t have many options (once the rates were down and the economy was still slow). Therefore, instead of doing nothing and watching the train hit a brick wall, they have decided to switch directions and add more fuel to see where the train will be headed. This is also the reason why the FED did QE2 over several months instead of injecting $600G in one shot.

Looking for more Quantitative Easing Measures

As Japan runs into another recession (not that the economy was already thriving!), more quantitative easing measures should be applied. The first move will obviously be the Japanese Government. In fact, they have already announced they will inject money into their economy. If the slowdown is too important and affects the global economy, I would bet on a QE3 from the FED in the summer of 2011. Let’s just hope that this doesn’t happen, I’m not too excited about “unknown long term results solution” !

Now is the time to think about your investment portfolio… It’s RRSP Time! Sooner or later, your financial advisor will call you to make an appointment for your RRSP contribution. But more importantly, you may be solicited by another bank or you may be not satisfied with your investment. However, you have a big problem; you have mutual funds penalty fees! So the question you keep asking yourself is;

Should I sell my funds and pay the penalty fees? Or Should I keep my investment portfolio as is?

This is always a tough question to answer. Why? Because if you answer sell, you’ll have less money in your pocket and nobody likes that!

The point of having deferred sales charges (DSCs) on Mutual Funds

You may ignore it and that’s a shame for your financial advisor, but you might have deferred sales charges on your mutual funds. What is this? This is a “penalty fee” if you sell your mutual fund and leave before X number of years. It can be 2 or 3 or your nightmare can go up to 7 years (any Investors Group clients around?).

Deferred sales charges exist because financial advisors want to get paid. When you think about it, it makes sense. You don’t pay your financial advisor for advice and this guy needs to pay his bills as would anyone else. As a general rule of thumb, you can expect an independent financial advisor to receive between 3 and 4% commission on an investment. Therefore, if you invest 100K with your advisor in mutual funds, he will make between 3 and 4K.

The problem is that the funds will generally have a 2 – 3% management fee (MERs). Since we have to pay people to manage your money on top of the advisor, you can understand that there is not enough revenue generated by the MERs to pay everyone. This is why the mutual fund company pays the advisor upfront for the “future” revenue generated by the investment. If you leave before everybody has made their money, you have to pay the bill. This is why you have deferred sales charges.

Want To Get Rid Of Your Deferred Sales Charges? But Don’t Want To Pay The Price?

The problem with deferred sales charge funds is that they usually have high MERs on top of that. You may have read that mutual funds MERs make them less attractive than Vanguard ETFs or other investment products. I would say that depending on your level of financial knowledge, mutual funds can be a good pick. However, it doesn’t mean that you have to pay deferred sales charges and high MERs!

The problem is that the penalty fee linked to selling your funds should be enough to discourage you from switching funds. However, you must make your calculations first if your want to know if you should do it or wait. Here’s what you need to take into consideration:

#1 Your current asset allocation (is it optimized? Balanced? Properly diversified? According to your investor profile?)

#2 Your relationship with your financial advisor (if the guy does an amazing job, keeps you up to date, shows you the latest products and strategies that fit your needs, it may worth it to pay a higher MER until the deferred sales charge has been eliminated.)

#3 The Deferred Sales Charge Amount (you might have an approximate idea but if you want to go further, you must know the real number. You need to know how much and for how many years you are stuck with them (most of them have regressive fees))

#4 Your Current Management Fees (you also need to know how much you pay in management fees annually to know how much you could save if you transfer)

#5 What you can get elsewhere (switching out your mutual funds is one thing but you need to know which kind of investment strategy you are swithching to)

#6 Look at point #1 to #4 with another advisor (analyze your future portfolio with the same standards to know if you are making the right move or not).

An example on switching out and paying your deferred sales charges

I have this case from a while ago:

-$200,000 invested in 1 single dividend fund at 2.50% MERs with $8,700 in deferred sales charges with 4 years left.

- The current asset allocation did not fit anymore (the client has a balanced profile and has no investments in US and international markets)

- The relationship with the advisor was ok but not more than that

- We could build a balanced portfolio with an MER of 1.50%, no deferred sales charges and a much better diversification.

- Therefore, by switching immediately, the client was saving $2,000 per year (which is 2.50% – 1.50% MERs * $200K). The client was also winning in terms of asset allocation and potential return. In this case, the client decided to go ahead and transfer. However, it’s not always the best move to make. It’s a case by case decision.

Another way to save on MERs

If you manage your portfolio by yourself with a brokerage account and you have some mutual funds, you might be paying too much in MERs for nothing. I found that Questrade is offering to reimburse a part of the fees! In fact, they offer to reimburse the trailer fees paid to them. Here’s more info from their site:

“Most mutual funds pay the trailer fee directly to the brokerage where your funds are invested. You will never see the trailer fee deducted from your account because it is typically embedded in the fund’s MER (Management Expense Ratio). The average trailer fee is about 1%. The specifics of the fees charged by a fund are detailed in the charges and fees section of the simplified prospectus.

With Mutual Fund Maximizer, you get back your trailer fees.
Questrade’s Mutual Fund Maximizer will put a stop to the unlimited fees charged by mutual fund companies by reimbursing trailer fees back to you.”

So you could build your portfolio and pay less simply by switching over to Questrade. RRSP season is the best time to review your portfolio. If you have mutual funds in it, you are probably paying too much right now. Take a look at your portfolio before making your RRSP contribution In addition to reimbursing the trailer fees, Questrade is also offering $50 in free trades if you open your account now….and you could win a $5000 pro trader course!

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I know that people usually enjoy investing as others do. In general, people like following what other people do. But this is how bubbles are created. And “people” don’t seem to learn from their mistakes, this has been repeated over and over again. While the same “people” are very concerned about a housing bubble in Canada, they don’t mind as much about the craziness about gold investment. So maybe I am stupid, but I don’t think that investing massively in gold is a good thing. What if there is a gold bubble?

Why gold is going up so fast?

The price of Gold is increasing so fast for many reasons, to make it simple, here are some of the majors reasons:

- People are afraid by the HUGE debt in the USA and therefore prefer gold to the US dollar

- China has too many US dollars, so they hedge their position by purchasing gold

- Same thing in India, they seem to like gold too

- The price of gold is going up while the interest rates of CDs and bonds are going down

- For a weird reason (weird because gold has similar volatility as the stock market), people trust the value of gold

- Then, the smart guys on Wall Street are speculating on the price of gold

Buy why gold would be different than other bubbles?

I don’t get it. In order to have a bubble you need;

- something going up pretty fast

- something going up pretty fast for no sound reason

- something going up pretty fast because mister and mrs everybody is buying it

- something going up pretty fast because it is pushed by speculators

Then… is it possible to have a gold bubble? I am not the type of guy to scream from the rooftop that the end of the world is near. I am actually more the type of guy that wants to make money while people are running the other way. However, I think that we have several ingredients that were put together to make a great gold bubble soup. And I can smell it from my kitchen!

Oil anyone?

Just before the crash of 2008, we read study after study written by the most prolific economists and PhDs telling us how the price of oil would skyrocket due to its rarity. It was common to cross mister and mrs everybody telling you that they had bought an oil company shares or an oil related ETFs because the price of the barrel will soon hit $200…. 2 years later, I’m still waiting… and most of the “people” lost a huge load of money (because they probably sold when the barrel hit $35 back in December 2008)…

Why gold would be different?

This is the caveat with all bubbles; this time, it is different. Let me laugh and spill coffee on my laptop for a moment… okay, I’m done. Really?  Gold is different? Can someone tell me ‘cause I don’t get it .

If you want to read more about gold, Intelligent Speculator has a very interesting 2 parts series on the price of gold:

- Why gold could go up

- Why gold could go down

What is your take? Gold to go up or burst the bubble?

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Here are the results so far:

Research in Motion (TSE: RIM) -27.08%

All right, investors are worried because major companies (such as JP Morgan) are switching from the BlackBerry to the iPhone. Investors are worried because RIM is having a hard time getting more individuals on board (while they continue to lose corporate accounts). Investors are also worried because the iPad is phenomenal and RIM has yet to hit the market with its new blackpad. Finally, I think investors are worried because RIM is becoming more and more reactive and has forgotten that they were the leader in the smartphone industry not so long ago. Presently, I have the feeling that they are just looking at what Apple does and are trying to copy it. I still hold RIM in my personal portfolio but I seriously doubt it will come back this year…

Manulife (TSE: MFC) -31.07%

I thought Manulife was over with the bad news when we started in 2010. I guess I should be more careful when I try to catch a falling knife! Manulife keeps on announcing bad news after more bad news. I still think it can bounce back (I wouldn’t if I hadn’t picked yet.. hahaha!)  but lets just say that I wouldn’t buy any shares in a real portfolio right now. The only thing is that it currently offer a 4% dividend yield

Goldman Sachs (NYSE: GS) -14.10%

Goldman Sachs has had its share of problems in 2010 but I think they are ready to bounce back. If I am lucky enough and they deliver strong results by the end of the year, I might see this stock going a little bit higher and cancel my loss from my first 2 picks L.

Vanguard Emerging Market ETF (NYSE: VWO) 11.27%

Can’t be bad everywhere, right? The emerging market showed some strength and this pick is now up by about 10%. This is a small consolation (I rather like Mike @ Money Smarts Blog picks with bear leveraged gold ETF ), but at least, I have one stock showing green on my sheet!

Here are the results from the stock picking contest of 2010: big winner so far: Dividend Growth Investor!

Intelligent Speculator	-7.86%
The Financial Blogger	-15.24%
Wild Investor	8.35%
Million Dollar Journey	-10.46%
Where Does All My Money Go	-2.90%
Four Pillars	-27.07%
Zach Stocks	0.84%
My Traders Journal	-1.31%
Dividend Growth Investor	21.34%
Bryan	0.49%
Chris	0.40%
Matt	-1.76%
1stMillion	-9.30%

Funny enough, it seems that we cannot escape risk; the market is hyper volatile, and bonds are threatened by interest rate hikes. So how can you protect yourself from bond values dropping?

As you may know, bond values can go down. When?  In exactly the situation we are facing; when interest rates rise, bond values drop. When you think about it, it is quite easy to understand. If interest rates increase, new bond issues need to offer a higher interest rate to match the new reality. Therefore, old bonds with lower interest rates attract a lesser price from investors whom will sell them to buy the higher interest rate bonds. Since everybody would like to sell their low interest paying bonds, the bond values decrease.

So if you have a lot of bonds in your portfolio, here are a few tips to consider to make sure that you are somewhat protected against a bond collapse:

Long term bonds

Long term bonds will be the bonds with the highest risk upon an interest rate change. Why? Because they will offer a lesser interest rate for a very long period. This is why investors will be less likely to give a great value to long term bonds. So if you have them in your portfolio, make sure you don’t need to sell them. Keep your long term bonds to maturity, this is the only solution to keep your yield safe.

Gov Bonds

I would avoid government bonds for the moment. Why? Simply because they don’t pay much! If you are absolutely looking for safe investment, consider provincial or municipal bonds that will offer a better invest return while offering a similar level of security to government bonds.

In fact, the only government bonds I would consider would be the real rate investment bonds that protect the investor against inflation. Since the Canadian interest rate is greatly influenced by inflation, you should maintain an “interesting” yield on those bonds.

Junk Bonds

This is the type of bonds that is less likely to lose the most value if the interest rate rises. Why? Because corporations will have to offer a much higher interest rate to issue more bonds. There is always a spread between government bonds and junk bonds and the spread can increase when there is a panic in the bond market. So if investors think that bond values will drop due to increases in interest rates, they may panic and request a much higher premium for junk bonds.

If you plan on having junk bonds in your portfolio, make sure that you follow the issuer because you may get stuck with it for a while!

Bond Funds

Some say that you should get rid of your bond funds when we expect a drop in the value. I’m not part of them . I would rather ask my financial advisor what is the duration of my bond portfolio and how I am at risk with the bonds held in my funds. Ask about the bond managers strategy as well.

A good bond manager has already decreased the portfolio duration (selling long term bonds to buy more short term bonds) to make sure that the bond fund doesn’t drop drastically.

Mortgage funds could be another great opportunity. They are more likely replicating the same movement of bond funds (because mortgages look like bonds in their structure) but they are less volatile due to their smaller duration. Mortgage funds often hold government bonds and provincial bonds as well.

Dividend and Preferred Shares

Tired of dealing with bonds and their potential collapse? You can always turn towards dividend stocks and preferred shares . While they are riskier than bonds, they offer a somewhat steady payment through dividends which are less taxed. We are writing on The Dividend Guy Blog if you are interested in dividend stock picking.

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