Chan's Personal Blog

The last 14 days in the stock market has been a major house of pain. The Toronto Stock Exchange (TSE) fell more than 800 points in this short period of time. Nothing made sense at all. Positive economic data caused the market to dive. The reason for this? Investors were afraid that the government would raise interest rates to try to cool down the economy. If an economy grows too fast, then you get inflation problems. On top of that, they feared that commodities (like steel, gold, copper, etc) and housing were bubbles that were about to pop (just like the dot com bubble). So, interest rates have been aggressively raised this last period, and everything has come crashing down. Investors have actually been hoping for negative economic data in the hopes that the government would think that the economy is slowing, and they'd stop raising interest rates.

You're probably asking why are higher interest rates bad for stock markets? Well, for companies that have debt, they end up paying more interest on their debt, and this cuts into their earnings and profits. It becomes more expensive for them to operate, and their company will grow slower. For consumers, debt costs more money as well. If you have a mortgage or a car loan, those things now cost more because of higher interest rates. That's less money in the pocket of consumers, so they'll spend less. Consumers spending less means that companies will be making less money from consumers. For the investor, it means low risk investments like money market funds or GICs have a higher yield. This means that you can now invest your money with no risk, and get higher returns, so why bother risk the money on the stock market. So, money tends to flow out of the stock market which brings down stock prices.

Anyway, this is what happens when interest rates go up, and commodity prices dive. Here's the one month chart of what happened to the Toronto Stock Exchange:


The blue line shows the TSE's price, while the red line shows the 50 day average price. As you can see, the TSE is far below the average price now.

The last two weeks have been very humbling. My stock portfolio went from +32% to -10% just like that. This is probably the worst decline in the stock market since the 9/11 terrorist attacks. We've never seen 14 straight days of declines like this in a long time. Every single stock that I watch went down day after day. Even red hot sectors like the ethanol stocks were taken out and shot.

So what do we do when the markets are killing everything? Do we panick and sell stock? Do we throw up our hands and surrender and pull out of the market? No! If a store was throwing a sale, you go and buy more stuff! That's exactly what I've been doing this week. I've been looking at a lot of high quality stocks that are on sale, and I've been picking more up because other people have been panicking and selling.

That's why, if you've read my articles on mutual funds, and you're interested in picking some up, NOW IS THE TIME TO BUY! I can't guarentee that this is the bottom. I can't guarentee that the TSE won't drift lower, but as far as I'm concerned, everything is way too cheap now, and now is the time to be shopping. I want you to go out and buy Canadian equity funds if you haven't already. Don't miss this sale!

This week, I picked up more shares of the RBC Canadian Equity Fund because it had come down a lot in price, and I highly recommend you to pick some up (if it matches your risk profile).

Why am I so confident that the markets will eventually move back up? There's a number of reasons. Today, the government hinted that they're going to stop raising interest rates and killing the stock market. They have sufficiently slowed the economy. Furthermore, 30% of the TSE consists of natural resource stocks (ie coal, copper, gold, oil, natural gas, etc). Hurricane season is about to start, and if one hits the Gulf region of America, natural gas and oil prices go up because supplies are disrupted. We also have the Iranian nuclear problem as well, and everytime their president says "Death To America!", gold prices move up. Lastly, we have a number of tax cuts from the Conservative government kicking in, most importantly, the GST tax cut. These cuts will stimulate the economy, and that's good for business.

So, if you haven't done this already, go out and pick up some Canadian stocks through mutual funds. The stock market is throwing a sale, take advantage of it! As Jim Cramer (investment specialist) always says, "buy weakness, sell strength."

Here we go again with the next installment of the Newbies Guide To RRSPs. If you are just joining us, check out Part 1, Part 2, and Part 3. In this article, we will continue to build on our knowledge of mutual funds which was covered in Part 3.

For this installment, we will cover the different classes of mutual funds including: money market funds, fixed income funds, Canadian equity funds, international equity funds, and sector funds. I will then present a quiz that you can take which will determine how your money should be spread out amongst these funds since there are many to choose from. The quiz takes into account your current financial situation, your financial goals, and your tolerance to risk (pain). Based on the information you provide, the quiz will tell you what kind of investor you are. There are six major kinds of investors: very conservative, conservative, moderately conservative, balanced, growth, and aggressive growth.

Most of the examples and funds that I talk about will be from Royal Bank of Canada (RBC) since I'm fairly familiar with their funds. Full disclosure, I do hold a number of their funds. I will be referencing their mutual funds which can be found here. By clicking on the name of each fund that's listed at the RBC fund site, you'll get information about each fund. It should be noted that most of them have initial investment requirements which is how much you have to initially put in inorder to buy one of these funds. It's usually $500 if you're doing it through an RRSP account, and $1,000 if you're doing it outside of an RRSP. So lets dive in.

The average annual returns that I present below are based on RBC Funds. These numbers will vary across different banks since not all mutual funds are created equally. If a bank has a crappy mutual fund manager, then annual returns can suffer.

Money Market Funds

Risk: Extremely Low
Average Annual Return Over 10 Years: 2.9%

The first class of mutual funds are money market funds. These are the safest mutual funds that you can buy, and there is close to no risk. It's practically impossible to lose money in these funds unless the government is overthrown and a revolution occurs. A money market fund makes its money by buying treasury bills (t-bills) from the government. A t-bill is essentially a short-term loan that the government issues. Think of it as an IOU from the government. A t-bill basically lends money to the government from 30 days to 91+ days, and they give you interest for the loan.

The annual return of these funds are dependent on the prime rate which the Bank of Canada controls. As interest rates rise, you'll make more money in money markets.

The advantage of money market funds is that you'll never lose money on them. They're an extremely defensive investment choice, and it's great for investing money that you can't risk losing or screw around with. Whether the stock markets go up or down, it is unlikely to affect these investments. The disadvantage of these funds is that the annual return is fairly low. Low risk means low returns. However, if the stock market crashes, you'll be laughing at everyone else if you're in money market funds. If you prefer to see a consistent +3% every year as opposed to -50% during the dot com bubble crash, this is for you.

Alright, so we have our third installment of our popular Newbies Guide To RRSPs series. For those that are just joining us, Part 1 covered why RRSPs (Registered Retirement Savings Plan) are even important. We saw that if you put even as little as $100 into your retirement savings, and your money grew at 7% a year, you would have $2,100 by the time you retired. Part 2 of our series covered a super low-risk investment option called GICs (Guarenteed Interest Certificates). The advantage of GICs is that there's close to no risk, and your investment can grow safely at a steady 2%-6% a year depending on what interest rates are like.

Now, I will introduce a more risky investment vehicle known as mutual funds. Chances are, you've probably heard of them, but you may not know exactly what they are.

What Are Mutual Funds?

A mutual fund is essentially a collection of cash, GICs, stocks, and bonds that's managed by a professional. People collectively put money into a mutual fund and they own shares of the mutual fund. Mutual funds are a very popular choice, and there are trillions of dollars invested in mutual funds. The majority of Candians and Americans have some sort of money invested into mutual funds.

Buying a mutual fund is a lot like buying stock in a company. A mutual fund has a price that changes every day, and you can buy shares of it. So for example, if a mutual fund's price is $10/share and you have $100 to invest, you can buy 10 shares of the mutual fund.

What Are The Advantages of Mutual Funds?

• Professionals. Do investment terms such as P/E ratios, dividends, earnings per share, 20-day moving averages, etc freak you out? Is it all jibberish to you? Could you care less about following the stock market every day? If you answered yes to any of these questions, then a mutual fund is for you. Basically, a mutual fund is managed by a professional, so you don't have to learn all this economic theory to invest properly. This is probably the most appealing aspect of mutual funds to most people.
• Increased return on investment. In general, mutual funds give a higher return on investment than a GIC simply because there's some risk associated with mutual funds. The risk comes from the fact that these funds invest money in the stock market.
• Diversification. Say you only had $1,000 to invest. You could invest it in the stock market by buying stock in some company. So lets say you buy $1,000 worth of Tim Hortons' stock. This may seem good, but this is NOT a diversified portfolio. Essentially, you have all your eggs in one basket. If the restaurant sector becomes really crappy, or Tim Hortons' performs really bad, then you're going to be in a house of pain. In general, you need 5 stocks in 5 different sectors to be diversified. Now consider mutual funds. Say you put $1,000 into a mutual fund and the mutual fund owns 25 different stocks. When you buy into that mutual fund, you're essentially getting a small piece of all the stocks that the fund owns. Therefore, you're more than diversified.
• Low minimum investment required. You don't need a lot of money to start investing in mutual funds. At Royal Bank for example, you need only $500 to get into a mutual fund. At ING Direct, there's no minimum amount, you could even start with just $25. However, all mutual funds have different minimum investments. Lets contrast that with a stock portfolio. To own a properly diversified stock portfolio, I would say you need at least $3,000-$4,000 to pull it off.

In general, I tell all novice investors to definitely get into mutual funds before trying stocks. It's a good way for novice investors to see how events that occur in the market place affect their mutual fund prices. Mutual funds will also reveal their top 25 stocks and bonds that they own, so it's a good a way to identify what stocks are good. Mutual funds are also required to tell you what sort of potential risks there are in the future which could affect stock prices, so this is useful information to learn how certain market events can be risky.

Jim Cramer, one of the stock analysts that I follow, says that an investor should have $10,000 in mutual funds before they consider going out and investing in individual stocks. Basically, that first $10,000 that you put in mutual funds is a learning excercise, and hopefully it helps you build your confidence and knowledge as an investor. Mutual funds was my first investment, and I learned quite a bit from them.

In the last two weeks, I've been making adjustments to my stock portfolio since it's a new quarter, and we're in a new economic environment. So, it was time for some spring cleaning for the old portfolio.

In April, this is what the portfolio looked like when broken down by sector:

As you can see, the portfolio was horriblely heavy in technology stocks. Jim Cramer, a stock analyst that I follow, says that a diversified portfolio should have at most 20% per sector.

You might ask, what's the harm of having say 60% in tech if it's doing REALLY well? You might say, Chan, your alternative energy stock, Ballard, has been doing super well, why don't you put 100% into it? My response is, remember the dot com bubble? A lot of people had 100% of their money in technology stocks, and when the bubble burst, they lost everything. By diversifying, you limit your potential gains, but you also limit your potential losses. As Jim Cramer says, "diversification is the only free lunch" in investing. You never want to have all your eggs in one basket.

Also, it should be noted that the portfolio shown above is just my stock portfolio. I also hold investments in mutual funds which act as a fallback position just in case my stock picks crap out. I don't list them because they're not as exciting. So, I am actually more diversified than what the graphs show above, but still, I'm overweighted in tech. (Mutual funds will be covered in another article later).

In the last week, I've been tweaking my portfolio, and now it looks like this:

As you can see, I've added natural resources to my mix. Technology is still overweight, and I hope to bring it down some more by the end of the month.

Anyway, the reason why I've added natural resources is because oil prices are at a historical high right now, and I believe it's only going higher as summer approaches. Demand for oil goes even higher during driving season. People think that oil companies are ripping customers off by charging crazy high prices for oil, but that's simply not the case. The simple fact is that demand for oil worldwide has gone up. China in particular is thirsty for oil, and they're scouring the globe to secure supplies, and as their economy grows, their oil need grows as well. On top of that, rebels in Nigeria have been blowing up pipelines which reduces oil output in the world.

Iraqi oil exports are down this year, compared to last year. I read a stat that says Iraq is exporting only 50% of what it was exporting before the war started. That's taking a lot of oil off the world markets.

Also, remember also how Hurricane Katrina hit the Gulf of Mexico last year and it damaged a bunch of oil platforms? Well, a lot of those are still offline.

To make matters worse, we have a crazy government in Iran pursuing nukes, and the threat of sanctions will further drive oil prices up. Every time their president says, "Death To Am-ree-ka", oil prices move up. If the UN actually has the balls to impose sanctions on Iran, then oil prices are moving even higher.

So, demand for oil is higher this year, and supply is lower. It doesn't take an economics degree to figure out that oil is going to be expensive this year, and it's not because of the evil oil companies charging high prices.

Rather than whining about high oil prices, I decided to be proactive about it, and invested in a company that refines oil. Whatever profits they make will be passed on to me as a shareholder. So hey, if oil's going to be expensive this summer, you might as well make some money off of it.

Anyway, the Spring clean-up still isn't done. I hope to bring tech down to 25% of the portfolio, and take some out of alternative energy as well. I'll probably add a health care stock to the mix since the sector has been taking a huge beating which means the stock market is throwing a sale on health care stocks. Natural resource is the hot sector right now, so money is just pouring into it, and it's being moved out of less exciting sectors like health care. So, I intend to be a scavenger and see what the bulls have left behind in health care.

You might have notice that the blog has been a bit heavy on investment articles, but a lot of people seem really interested in them right now. A lot of people have been asking me about how to start investing, so I intend to write more in this area for the next little while. If you absolutely hate the topic, drop me an e-mail and request something else. I follow what the viewers want to read.

Standard disclaimer as usual. I'm not responsible for any money you may make or lose if you choose to follow the opinions stated above. Opinions of investment strategies and of stocks can change dramatically over time as the stock market is in a constant state of flux, and these opinions are subject to change without warning. Please consult a financial expert before pursuing investment options.