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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Oh my, oh my, oh my! While I did well back in 2009 with my stock picks, I can’t say that my crystal ball was clear enough for this year’s contest! I thought it would be fun (and obviously that it would give me an additional edge) to take more risk. I was well aware that I could be wrong on 1 or 2 picks but I thought of taking 4 stocks that could make a home run… bad idea!

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!

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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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While it wasn’t a big surprise, I was still hoping that the Canadian Prime Rate would stay at 0.75% for a little bit longer than this. Unfortunately for me and my line of credit, the Bank of Canada has decided to raise the Canadian Prime Rate at 1.00% (which means that your line of credit will reach 3% at best tomorrow morning!).

Mr. Carney also said that further move on the Canadian Prime Rate will not only be directed by the Canadian economy and current low inflation but also according to the world’s economic situation, leaving him more room for a pause in October.

In fact, if interest rate goes up to quickly, this will push the Canadian Dollar to a higher level (at parity or over parity) and would probably have negative effect on the Canadian economy. On the other side, this is with no surprises that we will reach a 3-4% level in a few years as it is considered to be a neutral rate. Having a 1% rate is considered to be a great stimulus for the economy.

My final thought: stay variable but pay down your debts faster!

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