Long term savings is about setting aside dollars today so you can spend them later. Therefore, the strategy calls for “lending” your savings (capital) to others who need it and reaping “rent” on those dollars until they are returned to you.
Depending on your savings vehicle, the “rent” is called interest (bonds, term deposits and GIC), it’s called dividend for stocks and capital gains (or loss) for the sale of stocks and bonds. On top of the “rent” are the systematic fees that reduce this amount. In other words, all the advice we receive and systems we must use cost money… that is investment fees. Unfortunately, these fees are often hidden but definitely take a bite out of the “rent” we receive. These fees whether hidden or not can be quite expensive. Therefore, our savings mantra should be:
Lower the fees… keep more of the rent money
My lowest savings fees are in my accounts with Questrade. When I buy or sell stocks there, the commission I pay is a penny a share, minimum $4.95 and maximum $9.95. Afterwards, Questrade deposits my dividends in my accounts… at no additional fees.
At the other end of the “rent” paid by borrowers, banks offer a 5 year GIC that pays 2.75% (while they lend out the same money at 6%)… quite a lot of hidden fees in there. The cheapest on line bank offers the same 5 year GIC at 3.05%!
I do not have GICs or term deposits in my long term savings. Obviously, I do own some banks.
With mutual funds, management fees go up to 2.75% a year. Imagine that your mutual fund owns stocks that pay out 3% in dividends, it’s just enough to pay the management fee… Fortunately, we have Exchange traded funds (ETF) which operate more efficiciently, at lower costs… thus lower fees.
I sold my last mutual funds and ETFs in 2005.
I do not put a lot of energy in selecting stocks. In my experience, it’s more important to have disciplined funds allocation and disciplined stock diversification and allocation according to the S&P 500 economic sector weights. Thus, I aim to own 2 Canadian and 2 American stocks in each of the 11 economic sectors that make up the S&P 500 index.
Thus, in April, I sold my Oracle (ORCL-Q) holding and replaced it with the Canadian Open text (OTEX-T). Now I own 2 Canadian tech companies – Tecsys (TCS-T) and Open text and 2 US tech companies – ADP (ADP-Q) and Microsoft (MSFT-Q).
While on the subject of technology companies, I sold some Tecsys in April as its price was climbing too high. My stock allocation indicated that I redeploy the cash proceeds into the financial sector. I therefore added to my Canadian Western Bank (CWB-T) position.
I also finally found a Canadian health care stock I can live with. Toronto based Medical Facilities Corp. operates surgical facilities in the US. The dividend yield is 6.86%. It’s interesting that as a Canadian company, its dividend is “eligible” for the Canadian dividend tax credit.
Until next month,