COLUMN: Ask the Money Lady – Taking over my PRT

Dear Money Lady,

We currently have an advisor who in the last few years has become more reactive than proactive/transactional – here’s an example: “Hi, financial advisor can you please put money into my RRSP”…. “Okay, done” “Hi, can you change the monthly amount going into my TFSA” .… “Okay, done”.… “Can you send us a profile of our current financial position” .… “Okay, here you are…” I can do a better job than this now that I am retired – don’t you think? Noah.

Dear Noah, I agree – however communication is the key, have you had a chat with your advisor about it?

Many newly retired Canadians want to take over their investment portfolio. They now have more time, and want to save on investment fees. I would advise you to do your homework before you get started. Let me give you some advice about the most popular investment vehicles used in the markets today: Mutual Funds (MF), Exchange Traded Funds (ETF) and Dividend Large-Cap Stock.

Let’s start with MFs and ETFs. Both are managed funds that hold a basket of individual securities and bonds giving you a tonne of diversification. So why choose one over the other? Basically, the difference is in the management, liquidity and cost. Most ETFs are passively managed to a particular index, while mutual funds are more actively managed by a fund manager. ETFs are traded like stock and have high liquidity, the price changes throughout the day and you can effectively trade them at any time. MFs are different – you can only trade them once at the end of day for market price. ETFs tend to be less expensive however you want to consider not just the trading costs or commissions, but also the width of the bid/ask spreads, the operating expense ratio and any discounts or premiums to the NAV. With mutual funds this should be a longer play so liquidity shouldn’t be an issue. The sale of mutual funds can trigger capital gains, so make sure you fully understand not just the MER (management expense ratio fees) but also trailer fees and load fees. Getting slapped with a DSC (deferred service charge) when you cash out is definitely no fun.

Dividend investing is another great way to profit off your new stock picks. You could take the dividend as cash, or you could use a DRIP – dividend reinvestment plan. Either way, you will want it. Yes you want the capital appreciation of the stock, but you also want the regular income from the dividend payment. Dividend stocks tend to have lower volatility and appeal to the mainstream investor looking for lower risk. To really make this strategy work, stick to those companies that have a long history of dividend payouts – so 25 years or more. Here’s an example: Procter and Gamble have increased their dividend and paid out every year for the last 50 years. And Chevron has been paying out a dividend for the last 35 years. DRIPs are great to use with a dollar-cost averaging strategies for long term investors. When you’re picking your dividend stock, choose companies that have high EPS metrics so that your companies of choice demonstrate a history of earnings and will potentially increase their dividend. High earning per share, which is the number you get from dividing the company’s net income by the outstanding shares, means the company is more profitable. You should also check out dividend aristocrats in ETFs and MFs.

Here’s a word of causion Noah: It’s very tempting to jump into the market and begin trading before you’re really ready. You will want to develop a disciplined trading style that you can replicate over and over again. And you also need to prove to yourself that this new style can generate consistent risk adjusted returns over the long run. Virtual trading accounts duplicate real market activity and can help you build up your advantage or change your strategy as needed. Here’s one of the first rules you should adopt: never risk more than five percent of your account on a single trade. This should be a non-negotiable target. Let me tell you why: if you lose 25 percent of your capital – you’ll need to earn a 38 percent return on the investment to get it back. AND if you lose 75 percent of your capital – you’ll need a 400 percent return to get it back – and we all know that’s impossible.

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Christine Ibbotson is a Canadian finance writer, radio host & YouTuber. For more advice check out her YouTube channel: ASK THE MONEY LADY – Your Canadian Finance Coach.