Where I was dumb, but perhaps a little less so now

Before today, I didn’t own any Canadian equities, other than the high dividend yielding ETF, XDV.

In fact, I didn’t buy that one until a full year ago. Content to add to my bond index (for my Canadian exposure) I didn’t buy any Canadian stocks because I didn’t understand any of them.

I have to fully understand a business before I buy shares. Fully. I’ll order at least 5 years worth of annual reports, and I read every word, starting from the back pages, where all the juicy stuff gets stashed. I trust no one when making buying decisions. It’s OK. You can call me anal.

With the annual reports, I bring out my valuable book on accounting shenanigans and I look for “truths” that are fudged. And I always find them—with nearly every business I’ve researched.

One year ago, because I was perhaps too lazy to learn about a Canadian business, I bought shares in the high yielding index, XDV. When dumb money acknowledges its limitations, it ceases to be dumb, right?

But I just sold those crazy shares, and I hardly ever sell anything (unless I’m selling bonds to take advantage of deliciously low stock prices—God I miss 2009).

OK—I made a nice, tax free 11% gain in one year on XDV, with about 2.5% further, after taxes, in dividends. (As a Singapore resident, I pay dividend tax but not capital gains) Yet, I just put my prehistoric brain in first gear and figured something out.

If I continue owning this silly index, I’ll have to pay 0.55% annually in expense ratios. That’s just plain….dumb. And for what? Most of its holdings (the vast majority) are comprised of only about 8 stocks. So why not buy the eight? Sure, it’s a leap of faith, somewhat, but it’s no more a leap than buying the ETF. And in the process, I’ll save money.

I just placed an order for 620 shares of the Royal Bank of Canada. Total leap of faith. And I’m going to start collecting them. So I hope they (and all the Canadian banks, for starters) get absolutely crushed. May the stock markets get pounded, and offer me cheap cheap nuggets.

Light candles with me my friends. Perhaps we can call the markets down in unison.





Andrew Hallam

I’m a financial columnist for Canada’s national paper, The Globe and Mail, as well as for AssetBuilder, a financial service firm based in Texas. I’m also the author of Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School (2nd Ed. Wiley 2017) and The Global Expatriate’s Guide To Investing: From Millionaire Teacher to Millionaire Expat (Wiley 2015). My mission is to educate, motivate and inspire people on basic retirement planning and best practices for investing, using evidence-based strategies. I’m happy to comment on your questions. However, please read the Terms of Use, Privacy Policy and the Comments Policy.

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15 Responses

  1. Why RBC? Because they underperformed their banking peers?

    Stock markets will get pounded alright, nothing goes up forever, right?

    I am loving this volatility since it rhymes with profitability!

  2. 101 Centavos says:

    I'm with you on index funds, Andrew. Some time ago I was looking at closed end funds that invested in MLPs. I thought at first that hey, I like MLPs and their dividend streams, it could be a a good way to diversify, and maybe pick up a few tips. Well, after a hour or so of looking around, all I found out that these funds had some hefty minimum investments, and even heftier management fees. And they didn't exactly disclose who they invested in. So I gave up this idea, and just stuck with my own picks. As usual.

  3. @101 Centavos

    I do like index funds, but the Canadian one I bought (XDV.TO) represents just a handful of businesses, and it charges 0.55% annually. Paying that seemed a bit silly to me. I figured that I could put together 8 of my own Canadian dividend payers, and likely beat that index—because it's an expensive, yet very simple index to track myself.

  4. DIY Investor says:

    Hey, you got a .55% head start is the way I look at it. Dumb like a fox.

  5. @DIY Investor

    You're right Robert,

    And I get that 0.55% push ever year.

  6. I agree. When it comes to Canada, there is a handful of companies that make up all the funds with some exceptions. The banks are all at the top along with some utilities.

    RY has been getting crushed recently! I got my eyes on it. TD is expending in the states. Back in 2009 during the meltdown, I managed to find money a few times to buy BNS for an average price of 27.50. I happen to have studied some business and I knew our government regulations around the banks was really strong. I had done comparative bank studies with Japanese banks at the time.

    Personally, I intend to own all the top 5 banks. I just happen to be a little hungrier for yields at the moment… so I only own 2 of them.

  7. @The Passive Income Earner

    I think I'll choose to buy two or three of them Passive. Let's hope the bank shares keep dropping. The 620 shares of the Royal Bank that I just bought is a pittance compared to the number of shares I'll own in 20 years. And you're in the same boat with me. So I hope they drop a lot more–for our sake.

  8. Think Dividends says:

    If you think that's bad, iShares S&P/TSX Capped Information Technology Index Fund (XIT) holds only 5 stocks (RIM ~ 30%) and charges the same 0.55% management fee as XDV.

  9. @Think Dividends

    Wow! I had no idea. Now that's a rip off! Just 5 stocks! I guess that old saying holds true: Wall Street (or Bay Street) will sell what Wall Street or Bay Street can sell.

    The word "index" is getting abused. And as you've clearly demonstrated, invesors need to be very careful. Thanks for sharing this.

  10. Hey Andrew,

    You know how I feel about XDV, it's decent, but I agree with you, why not just hold the stocks it holds outright? (That's my long-term plan, I'll write my post about that soon).

    I don't think your RY purchase is a total leap of faith, not even a prayer needed. Many dividend investors have and will likely continue to do well by buying and holding RY for Buffett's favourite period – forever. This bank has a five year average dividend growth rate of almost 12%! It also has a total return of over 40% over the last five years…yes, that includes 2008. You've made a good pick my friend. Other savvy dividend investors like Passive Income Earner and Think Dividends above would surely acknowledge that.

    My long-term plan is to hold all 5 big Canadian banks someday. I'm slowly getting there, I've got large holdings in two (BMO, CIBC) and working steadily every month on # 3 (BNS).

    Indeed – may the stock markets get pounded in 2011 and offer all of us cheap, cheap candy.

    Cheers,

    Mark from My Own Advisor

  11. @Financial Cents

    I think you're right Mark. These aren't exactly American banks, are they? And by that, I mean that they're so dominant in their market. We have 5 big ones that share probably more than 95% of the business. In the U.S., they have all kinds of tiny banks as well..and the big ones (save Wells Fargo, perhaps) aren't as conservatively run as ours. My wife is from Pennsylvania and we go to New Jersey every summer. Guess what the most prolific bank in NJ is? It's advertised perpetually as "America's favorite bank" It's TD! I get such a kick out of seeing Regis Filburn advertise the good 'ol American bank. Light those candles my friend. I know that I paid about $52 for RY, but I'd love to pay $25 during a stock market-wide indiscriminant sell-off. Candles and prayers might help.

  12. Index funds have more utility when they can offer you access to the entire market. Isn't this the new trend in index funds, in order to head off the speculators that try to take advantage of the indexed/non-indexed distinction?

  13. @Kevin@InvestItWisely

    I think so Kevin. The marketers are seeing who they can suck into their game of money-making speculation at our expense—which I obviously fell for!

  14. BadCaleb says:

    I hummed & hawed over this decision as well last year and decided to go individual stocks over the XDV. We have been fortunate with our selections so far and recently purchased RY as well. I don't plan on selling anything so I'd also welcome a downturn to purchase more at better prices.

  15. @BadCaleb

    We're in the same boat then BadCaleb. After RY, what do you recommend I buy?

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