A Comment -- General Comments From an Expert (A Commentary)

ETF’s. We are at the point now where we have saturated the market. To his mind, the best products are the plain-vanilla that tracks the major benchmark or sector or a major part of the world. The more esoteric things such as leverage, covered calls, the very niche type of things, etc. are not at all necessary for building a good quality diversified portfolio.

Does the Cdn income tax department allow the 50% capital gain reduction for gold bullion ETFs or gold producing companies? A capital gain is a capital gain no matter what so the answer is Yes.

Budgeting. How does a relatively low income person budget most effectively to manage their resources well? You put the big rocks in first. There are certain things that are going to be set expenses such as mortgage/rent payments and these should be no more than a 3^rd of your total income. From that, you have taxes and food. Those are things that you have to do. If there is discretionary money left over, you put a little bit aside for a rainy day fund. If you still have money left over, that is when you can start investing.

What are the risk factors of ETFs? An investment advisor said they where riskier than Mutual Funds. For the most part, mutual funds and ETFs are both going to be following what they are benchmarked against. Their risk profiles are going to be very similar.

Is there an easy way to understand how to convert a self-directed LRIF into a self-directed RRIF? An LRIF is a locked in retirement income fund and a RRIF is just a regular retirement income fund. Not sure if this an easy way for understanding but you can move up to half of the money from a LRIF into a RRIF.

What are the pros and cons of a TFSA in a stock portfolio? If you think you’re going to be getting capital gains, then TFSA is great because whatever capital gains you earn in a TFSA do not attract any tax when you withdraw the money. The con is, relative to an investment account, if you put stocks into a TFSA and they drop in value, you lose the opportunity to claim the capital loss and, if you have capital gains elsewhere in your portfolio, you will not be able to apply those losses against this.

Interest rates. We had science-fiction low interest rates. A 1.6% 10 year trend grew yield. Now getting back to a more reasonable level. On an absolute basis, it is still extremely low. Wouldn’t be jumping on the bandwagon and selling your REITs, utilities and pipelines. They still offer good income value here. He values them on the comparison to a 10 year bond yield. He would rather have a good dividend stock paying 4% that will show dividend growth over the next 10 years, then buy a 10 year Canada bond for 2.4%.

Resource stocks. A lot of the slowdown has to do with China. Resources are basically driven by the build out we have seen in the past couple of decades in China. The massive infrastructure build that is ongoing was the driver for the commodity prices. Now seeing the baton being passed on to the US whose economy is starting to do well. You also have the geopolitical tensions globally which also have an impact on commodity prices, as we have seen today with oil over $100 a barrel. For Investors who have a lot of commodity stocks, he would recommend hanging on. We just can’t have a rally in the general markets without the commodities participating. At some point, investments will shift into the typical areas such as precious metals and energy. Resource stocks are pretty cheap right now and people would do well to pick them up.

Markets. Thinks we go back to lower interest rates in the future. Interest rates two months ago were including the crash of ‘08/’09. Now growth is happening and now we have to ask what is the normalized rate of interest. In the US we should have at least 1% short term and 4% long term, so this is going back to normalization. In Canada we should have 2% short term and 3.5% long term because we have a much better deficit profile. It is still going to take 2-3 years of excessive growth in US and Canada because there is so much over capacity. He has never thought inflation was a problem. One of the major ingredients of inflations is wage inflation and that is not happening. Thinks the summer will flat line and then go up in the fall.

Markets. He is not finding much value in North America. With the prospect of rising interest rates, tapering of stimulus and slowing growth in the BRIC countries. He is finding better value in Europe and Japan. Right now he wants no part of gold. His view is that gold has further to fall. He is not bullish on commodities either.

US. There have been some positive economic surprises. Most of the regional PMI’s (Purchasing Managers Index) that have come out lately have been not just above expectations, but above the highest estimates. Regarding US economic growth, there was a sense for a little while that people would start to fear the Fed would start to take the punch bowl away but then we saw the market recover when people started to think that maybe it would not be that soon. If the economy is in a self-sustaining reasonable growth mode and rates go up only because of that, maybe it is not so terrible. When there is growth in the economy and things are going well, small and mid-cap companies do quite well. In a rising market they tend to outperform the broader indexes. He looks for growth, first and to him growth means revenue growth above and beyond the economy. Also, looks for strong economics in a business, so whatever that growth rate is, does it have high margins and high ROC and does the management team make allocation decisions that make sense to him. In a reasonably good economy, with the way things are going, especially in the US, he expects to see good things out of some of the industrials, some of the regional banks and technology companies.

Markets. Mostly, he has been looking to sell a few things. He rarely buys at this time of year. This is a good time to take some winners off, maybe some tax losers but he can’t remember the last time he bought in May, June or July because markets generally do not do well. Also, psychologically it gives him a break from the Buying process. At least 75% of his buying is in November and December because it is Tax Loss season. Research is ongoing all the time.

How do you handle the declining Cdn$ when dealing with US stocks? He has the highest weighting on the US side that he has ever had. It’s up about 70% because he wasn’t worried about the currency risks. He wasn’t predicting that the Cdn$ was going to come down but wasn’t worried about the US$. Since then the Cdn$ has come down so it has helped his portfolio. Thinks the US still has a way to go.

Gold. Doesn’t seem obvious to him which way it is going to go. Hasn’t done a screen on Canadian companies for a couple of months but will be doing this in the next couple of weeks. A number of gold, silver and commodity firms could come on his screen and he could then send to the company for information.

Tourism. This time of year stocks like West Jet (WJA-T) and Starwood Hotels (HOT-N) seem to be ascending (?). Is it better to invest in overseas companies like Cathay Pacific, etc. in the wintertime? Great question. He likes to look for annual patterns for stocks, when is the best time of year to buy and to sell. This kind of marketing timing is very, very important. In terms of tourism stocks, he has no idea but it’s something that he would love to know.