The Transparent RRSP: Managing Doubts

Action taken the week of May 22
  • I reviewed my holdings in both my RRSP and TFSA. I am considering buying more shares of TransAlta Corp. (TA.TO) next week because I like the monthly chart.

A Glance at the Market

XIC may

The XIC ETF price history charts on freestockcharts.com

As you can see on the weekly chart, there has been mostly selling in May, which is consistent with the saying, “Sell in May and go away.” It would take more buying than all the selling that’s gone on all May for the market to trade above that. If the selling continues to consistently happen, even in small amounts, we’ll start to move lower.


When I’m in Doubt I Stay Out

I’ve been going over my portfolio and considering each stock that I bought and sold over the last year. First, I listed my primary and secondary financial goals for each one. If I had sold the stock or some of the shares, I made note of why I made the sale. Then I looked at the price history charts for each stock on my list and considered whether the stock’s performance was still in line with my intentions and goals.

Of course, my ultimate financial goal is to make money in any stock that I invest in. The major distinctions between each of them are determined by how I want to make money (dividends? capital gains? both?) and when (in the next few months? in a few years? in decades?). It was interesting to see how many of my holdings were initially intended for a swing trade after which I ended up wanting to keep them for much longer. This tends to be a pattern with me.

I’ll often buy a stock with this thought process: Let’s see how this performs. If it’s good, I’m keeping it. I might sell some and keep the rest. I might buy more the next time it has a good setup. If it’s a dud (a stock that sees zero action despite the market or its sector), then I’ll opt to sell it at break even or for a small profit and move on.

Selling at a loss is almost never an option for me. This only happens if, for whatever number of reasons, it becomes obvious beyond any doubt that the stock appears to be worth significantly less. I then have to ask myself if I’m willing to hold until that lower point and then wait for its recovery. If it does recover, at what price will it likely recover to before it goes up – or down – again? I rarely have to address the prospect of selling at a loss. This is not because I’m a decent stock picker. It’s because after years of trading, I saw that most of the stocks I sold at a loss ended up doing well weeks, months, or years after I bought them and sold them.

This basically means that it doesn’t matter if a stock has a good chart or not. It also doesn’t matter if you can time the market. More time in the market surpasses any well-timed entry. For a chart reader like myself, admitting this an act of hypocrisy! The price history chart is merely a tool that helps me understand the bigger picture.

Once I decide to invest, I rely on my ability to be patient. I believe strongly that patience is the key factor to growing a strong portfolio. Getting in and out of stocks frequently can really mess with your mind and potential to do really well. I learned that the biggest threat to patience is doubt. Doubt can be very powerful if you don’t trust the market, the world of investing, and yourself.

Whenever doubt starts to creep into my thoughts, I remind myself this: There is a finite amount of money and this puts a limit to the value that we place on things. Collective optimism makes things go up, but not forever. Collective pessimism leads to fear and this makes investors sell, but only until that fear exhausts itself. Humans are generally optimistic, and this is reflected in the overall market’s tendency to go up. I can’t always time everyone’s optimism or predict the end of all pessimism. If I get into a stock during its early signs of new optimism, it’s easier for me to exercise patience, even if it takes a while before market consensus helps the stock take off.

The main reason why I look at charts is because I can’t wait around until some analyst goes on TV to talk about a security that has been doing well already. While many investors might feel more confident in making investment decisions by waiting for an expert to give his or her opinion, it’s often too late for me at that point. I am more likely to act on doubtful thoughts if I know I got into a stock later rather than early on. I end up self-sabotaging my efforts by looking only for factors that confirm my doubts and fears. I’ve done this enough to know not to listen to such counter-productive thoughts. I’ve learned to trust my process and to stick with the strategies that give me the most confidence. Now, I only buy – and sell, even at a loss – when I’m confident in the factors contributing to the decision. I’m not afraid to make mistakes, but I don’t and won’t act on doubt.

 

 

The Transparent RRSP: Post #13

No action was taken the week of March 20

This week felt like my own personal spring break. I’ve just been waiting for the market to pull back. When the market is uninspiring, I’m uninspired to do much in that department. When this happens, most stock charts look unpromising to me. Being patient can be boring; it is, however, a necessary virtue for a trader to have.

In my freed up time, I managed to catch up on some of my reading. JP and I typically have a number of books, magazines, and articles littered around our house. Depending on where I end up sitting, I pick up and read whatever happens to be right next to me. 

The last couple of weeks, I found myself focussing on three of the twenty or so items within my lazy reach. I’ve been reading Felix Martin’s Money: The Unauthorized Biography, Michael Lewis’ first hit book, Liar’s Poker, and Joseph Nocera’s, “The Ga-Ga Years,” an old article that was published in Esquire magazine in 1988. Interestingly, at one point this week, I found the subject matter of all three works intersecting at the topics of bonds, money market funds, and beating the market. To boot, they were all referencing the same point in financial history’s timeline: the years leading up to the stock market crash of 1987. I am not a fast reader, but by golly do I wish I could just read it all in one sitting right now. I just find people’s different experiences and ideas on money fascinating.

I have a very loosely formed concept of money that’s been evolving since I started working and saving it. While I can’t say that my understanding is advanced by any stretch, I can say that it’s deepening the more I learn about it and invest it. Money is one of those human inventions – a “social technology” as Martin calls it – that is fluid instead of concrete in its nature. Different forms of it, whether as a currency, a security, a financial product, or a means of exchange, can and will go up and down in value. As I spent more time watching the markets, it became increasingly apparent to me that these fluctuations are created by us. We get optimistic about the promise of growth or the next big opportunity. People pump money towards potential. As more people buy in, prices go up, cash runs low, and perceptions start shifting; as people start to cash out, fear of losing runs high. It’s amazing to think how the general agreement of our feelings about something has the power to change the market value of our investment accounts.

Beating the market is what every investor or fund manager wants to achieve. I’ve done it. I’ve also been horribly beaten by it. I learned that the best way to not get beaten by it is to sit patiently and wait out any fear or pessimism until optimism sets in again. Until then, I’ll just keep reading about the rise and fall of others instead of letting history repeat itself with me. 

 

 

What is the RRSP?

I’m being transparent when I say that I’d been searching all week for good stocks that would make good candidates for the Transparent RRSP Challenge…and I found nothing that really made me want to take action. I have this is saying that has helped me throughout my trading career: When in doubt, stay out. 

It’s hard not to feel some regret if something that I checked out looked like a mediocre setup and ended up working out. I learned the hard way that if I always took action on so-so setups, I would lose more in the end. For your retirement account, you want to make decisions with a bit more care.

Waiting a while for the next good opportunity is totally fine and normal. You don’t always need to buy and sell stocks. In fact, doing that too much will really add up in commission fees. Until then, I will just keep looking for stocks, building a watch list of potential candidates, and watching the sectors and markets.


I actually know people considered middle-aged who haven’t yet opened their first RRSP account. This year’s March 1 deadline to claim a tax deduction won’t have any meaning to them. Not only could they be building their retirement fund, they could also be getting back a bigger tax return if they deducted their RRSP contribution amount from their income.

If you don’t have an RRSP anymore or haven’t opened one yet, please don’t be embarrassed. The only shame would be to never take advantage of these wonderful registered investment accounts as they have so many benefits that will save you money and help you keep more of your earnings.

Below is an excerpt from Loonie to Toonie about investment accounts, specifically the RRSP and TFSA. Please have a read or forward this to anyone you think would benefit from learning about registered accounts. All the terms in bold are defined in the Financial Terminology page.


INVESTMENT ACCOUNTS

When you first open a bank account, you’re usually given two choices of either a savings account or a chequing account for standard day-to-day banking transactions. Investing is a longer-term strategy which is not intended for regular banking activity, so you will need to have a separate investment account as a place for you to deposit your investment money, hold your gains, transact your investments, and track your portfolio’s performance. Investment accounts are either registered or non-registered. You may open these up at any financial institution.

Accounts that are linked to registered plans with the federal government come with tax advantages to encourage saving and investing. There is a limit to the amount you can invest towards registered plans, since beneficial taxation can only go so far. A non-registered account is not in a registered plan with the government and does not offer any tax advantage. You should be primarily investing in registered accounts, but once you’re at or near your registered plan limits, then it makes sense to invest the rest in a non-registered account which has no investment limit.

There are different types of registered accounts. Two types which every investor will use at some point because of their tax-reducing benefits are the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Money you invest in a registered account is often referred to as your contribution. You may only hold qualified investments in registered accounts. Some examples of qualified investments are GICs, bonds, stocks, and mutual funds. There are no restrictions on the type of investments for non-registered accounts, but it’s best to hold tax-favoured securities such as stocks in these accounts.

REGISTERED RETIRED SAVINGS PLAN (RRSP)

The RRSP isn’t necessarily a specific ‘plan’, but it’s meant to be comprised of your investment portfolio which makes up your retirement fund. Investing in your RRSP has two key benefits which last for as long as the money stays in your RRSP account: 1) RRSP contributions may be deducted from your income to reduce taxation, and 2) gains from the investments in your RRSP are not taxed. When you take money out of your RRSP account at a later time, you will be taxed on the amount you’re withdrawing. This amount will be taxed as regular income, even if some of that money comes from capital gains. 

If you invested $2000 in mutual funds to go into your RRSP, you may reduce your taxable income by $2000 for the 2016 tax year by claiming a deduction for that amount. In 2045, that investment and its gains are worth $5,500. If you sell your mutual funds and withdraw that $5,500 in 2045, then $5,500 will be added to your income for that tax year. At that point, you’ll be taxed according to your tax bracket.

The above example is a tax-deferring benefit you should take advantage of during your active earning years. You defer paying taxes on some of your income and investment gains. It’s a better time to withdraw when you’re making less, such as during retirement. If you make any lump-sum withdrawal from your RRSP before retirement, your financial institution withholds a minimum percentage. This withheld amount is a portion of your income tax which goes to CRA. When you file your taxes, you pay the remaining difference based on your income tax rate for that year.

Contributing to Your RRSP

Every year you’re allowed to contribute up to a certain amount called your deduction limit or contribution room. If you look at your income tax’s Notice of Assessment for 2015, it will tell you what you can contribute up to in 2016 – this amount is also the most you can deduct from your income. Your deduction limit is calculated as a percentage of your net earned income in the previous year. You can contribute 18% of your earned income in 2015 up to a maximum amount of $25,370. This maximum amount changes annually. Also added is any RRSP contribution room carried forward from previous years. If you are enrolled in a retirement plan at work, whatever was contributed towards the plan that year is subtracted. This amount is known as the pension adjustment. After everything has been added and subtracted, you have your RRSP deduction limit for the following year.

You’re able to exceed your contribution room by $2000, but if you contribute more than that you will be taxed on that exceeding amount at one percent per month until it’s taken out. Once you take out the excess, it’s then taxed as income. It’s important to keep track of how much you’re contributing. If your numbers aren’t adding up with what you see on your Notice of Assessment, then contact CRA to clear things up. You may also make a contribution during a year when your income is lower and choose to hold off and claim your RRSP deduction during a different year when your earnings are higher, as long as you’re within your deduction limit.

You may open your RRSP account after you start working and filing your income taxes. You can only make contributions until the year you’re 71. After that, your RRSPs collapse and you either suffer from a tax attack on your entire retirement fund all at once or you may opt to transfer your RRSPs into other tax-deferring options involving smaller annual withdrawals or regular payments. We will explore this further when we discuss retirement.

Some Additional RRSP Features

There are additional RRSP features to help you pay for important things without permanently taking money out of your retirement fund. When you make a withdrawal from your RRSP, your contribution room won’t increase and allow repayment with the exception of the following circumstances. Under the Home Buyers’ Plan, you can use up to $25,000 of your RRSP savings to put towards your first home. You won’t have to pay taxes on this withdrawal, but you must pay back the funds over a 15-year period. Any amount not paid back after those 15 years is treated like a plan withdrawal. This amount is added to your income and you’ll be taxed accordingly. The Lifelong Learning Plan behaves similarly, but you’re allowed to use up to $20,000 towards higher education for you or your spouse and your repayment period is 10 years.

The Spousal RRSP allows a spouse to contribute to the other spouse’s RRSP and still get a tax deduction. If your spouse earns less than you and can’t contribute much to his or her plan, you may contribute to both of your RRSPs and deduct up to the full total of your contributions from your own income. However, your own contribution room doesn’t increase by contributing to your spouse’s RRSP, so be sure to not exceed your limit.

Withdrawals from your spouse’s RRSP will be taxed to your spouse at his or her lower tax rate. If your contributions remain in your spouse’s plan for less than three years, however, any withdrawals on your contributions will be taxed to you. This spousal plan is especially advantageous if you’re 71 and can no longer contribute to your RRSP, but you may still claim a deduction on your income by contributing to your spouse’s RRSP as long as he or she is younger than 71.

TAX-FREE SAVINGS ACCOUNT (TFSA)

There are two main benefits to the TFSA: 1) TFSA contributions don’t result in tax deductions from your income, but any gains from your investments will not be taxed – ever; and 2) withdrawals from your TFSA are not taxed as income – ever. The only time you will get taxed is if you exceed your contribution room. At that point, you’ll be hit with a penalty tax of one percent on the excess amount which will be applied monthly until you get rid of the excess. 

Contributing to Your TFSA

TFSA contribution limits are set at a certain dollar amount every year. You are able to start contributing once you turn 18, the age at which you’re allowed to open a TFSA. The contribution limit is not based on your earned income as it is with the RRSP. Since 2009, every Canadian citizen and resident age 18 and over has been granted an annual contribution limit. This dollar limit is decided by the federal government. So from 2009-2012, the contribution limit was $5000 per year. From 2013-2014, the contribution limit was $5,500 per year. For 2015, the contribution limit was $10,000. For 2016, the contribution limit is $5500. If you haven’t yet contributed to your TSFA, your contribution room to date is $46,500. If you turned 18 in 2015, then the most you can contribute so far is $15,500. 

Your contribution room accumulates and is carried forward, similar to RRSPs. Once you start contributing, you will be notified in your Notice of Assessment of how much contribution room you have available for the current year. The TFSA differs from the RRSP in that if you make a withdrawal from your TFSA one year, that amount will be re-added to your contribution room the following year and can be carried forward. Unlike the RRSP, you’re allowed to repay funds you’ve withdrawn from your TFSA without requiring special circumstances.

Another benefit is that you don’t ever have to collapse your TFSA the way you do the RRSP when you’re 71. Your TFSA and any contribution room will follow you to the end. Because of the ease of depositing and withdrawing from TFSAs, these are ideal for shorter-term goals, but they can be useful for longer-term goals too.  

Investing in TFSAs in conjunction with RRSPs will truly help maximize your money as an investor. You may hold multiple TFSA and RRSP accounts as long as you don’t exceed your respective contribution room limits.


If you found the above information useful, please read the rest of the book!

Stock Video!

Watch the Loonie to Toonie Stock Video!

Finally! My stock video is ready for the world – specifically the world of people interested in reading stock charts, which I believe is a small, yet growing world. My hope is that one day, reading charts of investments is no longer a practice unique to investment pros, but a basic skill that we all have.

You can hit it big in stocks without ever having to read a chart, but for me, it’s key to my decision process. I created this video to provide a more visual supplement to all the information that I’ve been sharing on how I find and select stocks. 

I’m often asked where to find stocks. I feel it’s important to not only tell you where I find stocks but how I decide on which ones to pay attention to. I hope this helps you in your investment endeavours! 

L2T Updates

updates


November

Financial Literacy

Lots of stuff going on especially with Financial Literacy Month coming up this November. In my world, almost every day is Financial Literacy Day

I’m always trying to learn more about investing and anything related. Right now I’m reading a book called Money, by Felix Martin. Next, I plan to read a book on options trading. I’m sure for most of us, the idea of reading such books doesn’t trigger the same excitement as reading a best-selling thriller like Girl on the Train (which I read too), but it’s great stuff for investor nerds like me.

Speaking of thrilling reads, to encourage financial literacy among new investors, I’ll be offering a massive discount of $5 off my eBook, which is currently available for $6.99. So for the low price of $1.99, you can become financially literate in the short time it takes to read this easy book on your phone or tablet. What’s so thrilling about the book is how knowledgeable you become as you read it!

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Columnista

I’ve got another column coming out in Investor’s Digest of Canada‘s November 25th issue, which you can find at most Chapters Indigo stores. Earlier this month, I was on the cover, front and centre, for another column I’d written. 

id-4

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Stock Picking Cont’d

I will also continue to blog my strategies on Stock Picking which I hope to complete over the course of November.


December

YouTube School of Investing & More

I’ll be posting a video on my process of selecting and analyzing stocks before the end of the year.

I’ll also be posting on various investment strategies based on investments I’d written about in my book to consider for the new year.


2017

Transparent Investing

I’m going to be doing a STOCK INVESTING CHALLENGE. I’m opening a separate RRSP account and I’m going to put $1000 in it. I’ll be selecting Canadian stocks for the portfolio and posting every week the results, my picks, my strategies, my analyses on performance, and the markets. I’m going to be totally transparent to all my readers about the results.

My goal is to make that portfolio grow through stock performance and compounding its growth through regular deposits. It’ll be fun and a great learning experience for us all. I wonder if this is how David Blaine feels when he thinks of his next on-TV challenge…

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Summer Kick-off at the Toronto Public Library in North York

This is an early announcement, but I’m too excited about it to keep it bottled up for almost eight months…

Mark your calendars: On June 20th, I’ll be hosting an event called, Investment Basics Made Easy, at the TORONTO PUBLIC LIBRARY! It’s going to be engaging, extremely informative, and loads of fun. If you’re brand-spanking new to investing, you’ll leave financially savvy and ready to make your money grow!

You really gotta love libraries and their commitment to being incredible resources to the public. The Toronto Public Library offers the Small Business Program in which they regularly schedule experts there to teach you about things related to business, marketing, and investing. I am so grateful for this wonderful invitation to share and engage with people interested in learning how to invest. 


 

That’s it for now, folks!