Archive for January, 2010

Your Turn: Opening an US Dollar Self-Directed RRSP Account with QTrade

January 12, 2010


QTrade (a reader shares his experience with the broker here), which consistently earns top honours in Globe and Mail’s annual discount broker rankings, is now offering US-dollar self-directed RRSP accounts. These accounts would allow investors holding US-dollar assets in their RRSP accounts to avoid currency conversion fees when buying and selling (for brokers that don’t allow “wash trading”) and to keep the dividend received from US-listed holdings in US dollars. Regular reader Gene sent the following note on why he is considering switching to QTrade and I’m publishing it with permission below as it might of interest to many of you.

I just contacted Qtrade about their new US$ RSP account. The Customer Service Representative wrote back that it operates much like a US$ investment account — all dividends are paid in US$ and you can hold and trade in US dollars in the RRSP account. The main drawback is that it costs $50US annually, which I understand is charged every February for the following year. If you open the account in mid-year, they prorate the fee based on the the portion of the year the account will be open. So, presumably, if you open an account in June, you will be charged about US$25 in July.

Transferring US stocks to the USD RSP account is a two-step process. First, stocks are transferred to a C$ RSP, then the client contacts Qtrade and asks for the US stocks to be “journaled” (broker jargon for moved) to the US$ RSP. Once a US stock is held in the US$ RSP, dividend payments from the stock will be placed in the same account in US dollars, saving you the currency exchange fee.

I’m considering switching from TD Waterhouse to take advantage of 1) US trades settling in US dollars, 2) keep dividends in US$, 3) Qtrade’s good reputation, and as a bonus 4) Transfer fees are reimbursed for accounts transferred to Qtrade before March 31st (up to $125 plus taxes if the account transferred has a balance of at least $10,000).

My take: Given that you are transferring out of TD Waterhouse and QTrade charges a $50 US annual admin fee, you’ll see cost savings only when your USD holdings exceed a certain threshold. Assuming a 2.5% one-way conversion fee (anyone notice how discount brokers seem to have bumped up foreign exchange conversion charges), a 2% dividend yield and assuming all dividends are reinvested in the same securities, you’ll see savings only if your USD holdings exceed $50,000. However, investors transferring out of a broker that doesn’t offer wash trading could potentially see substantial savings because they avoid the foreign exchange hit that comes from buying and selling US-listed securities in a self-directed RRSP account. Thank you for your note, Gene.

Book Review: Winning the Loser’s Game

January 12, 2010

[Front Cover of Winning the Loser's Game by Charles Ellis]

Charles Ellis is a Wall Street legend and Winning the Loser’s Game ranks as one of the classics of investing. I read an earlier edition many years back and when McGraw Hill offered to send a review copy of the fifth edition of the book, I jumped at the chance to re-read and review the book. And I’m glad I did because this book does contain, as the subtitle suggests, “timeless strategies for successful investing”.

Mr. Ellis famously likens investing to a game of amateur tennis, which is typically not won by the player who tries to hit winning shots. Instead, the player who makes the least number of unforced errors usually ends up in the winning column. Therefore, the amateur tennis player should eschew the fancy shots and concentrate her game on simply landing most of her shots in her opponent’s court. Likewise, an investor should focus her energies, not on potentially winning strategies such as timing the markets or picking the right stocks, but on defensive strategies such as cutting costs, paying attention to taxes and sticking to a well-thought out plan.

As you might expect from a director at Vanguard, Mr. Ellis is an ardent proponent of index investing. He points out that the much-maligned mutual fund manager finds it so difficult to beat the benchmarks because the market is dominated by institutional investors who are equally smart, equally hard-working and backed by equally good research and resources. If all Mr. Ellis had to offer was indexing and a caution against trying to beat the market, you can obtain it elsewhere in books by John Bogle and Burton Malkiel. The key message in the book, in my opinion, is Mr. Ellis’ recommendation that all investors develop a carefully considered investment policy and commit it to writing:

The principal reason you should articulate your long-term investment policies explicitly and in writing is to protect your portfolio from yourself — helping you adhere to long-term policy when Mr. Market makes current markets most distressing and your long-term investment policy suddenly seems most seriously in doubt.

Quite correctly, the author says that the responsibility of crafting an investment policy rests with the investor; it’s far too important to be delegated entirely to a financial advisor. But that’s not all there is to the book. Every page drips with wisdom gathered from a lifetime of experience in the investment trenches. I did have some minor quibbles, including an entire Appendix running more than 30 pages on Serving on an Investment Committee. If you are interested in another opinion, Michael James recently reviewed this book and found that Mr. Ellis “provides consistently solid investing information from beginning to end”.

The book is published by McGraw Hill and is available on for $23.79.

Lost Decade? Depends on who you ask

January 11, 2010


Many investors are referring to the poor returns in the past 10 years as the “lost decade”. But, as you can see below, with six out of eight asset classes showing positive returns in the past ten years, whether the decade was lost or not depends on who you ask. Without a doubt, Canadian investors have earned poor returns in US and EAFE equities. The poor returns in these markets were compounded by the appreciation in the Canadian dollar and if you take inflation into account, the real returns are even worse.

Cash: 3.17%
Short Canadian Bonds: 5.74%
Real-Return Bonds: 8.92%
TSX Composite: 5.61%
S&P 500: -4.04%
MSCI EAFE: -1.59%
MSCI Emerging Markets: 6.68%
Canadian REITs*: 6.1%
Inflation*: 2.2%

Unless you started the past decade as an aggressive investor with a high exposure to US and EAFE stocks, you earned real returns that, albeit modest, are positive. Even the Sleepy Portfolio, which has a 45% combined allocation to US and EAFE markets, managed to return 2.4% over the past ten years (assuming yearly rebalancing). But very few investors tend to put all their money to work precisely at the start of 2000 and stop investing thereafter. An investor adding the same amount to the Sleepy Portfolio at the start of every year from 2000 to 2009 would have earned 3.6% on their investments (computed by the internal rate of return method). Compared to the roaring 1980s and 1990s, these numbers are rather modest but a 1.4% real return is still better than nothing.

* – Approximate 10-year annualized returns