Do You Yawn When You Hear Index Funds? Think Again.

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In 1975, John Bogle, the founder of Vanguard did something extraordinary. He introduced the world’s first index fund. Toronto’s own Dan Bortolotti made index funds go viral in Canada with aid from his Canadian Couch Potato blog.

Now, what the heck is an index fund?

An index fund is akin to a mutual fund which uses computers to buy stocks and match the components of a market index (An example being S & P 500). Hence, index funds are famously known as “passive investing”. It is not an actively managed fund managed by a financial advisor. Science has shown again and again that majority of actively managed mutual funds fail to beat the market.

How can this be possible?

After all, the financial professionals have their own research team and research analysts that help them to pick their mutual funds or stocks. Well, one thing is for certain: Nobody has the ability to predict the stock market especially individual stocks  or “time” the market. Till date, no one has consistently beaten the market returns. One of the dominant reasons for actively managed funds failing to beat index funds would be the high management expense ratios a.k.a. MERs. Please feel free to replace MERs with a different set of four letters – FEES. Sadly, Canada has one of the highest mutual fund fees in the world. Mutual funds in Canada can have MERs as high as three percent. Research has shown that over the long term, it is fair to say the overall stock market has consistently returned about eight percent. Now, if mutual fund managers are pocketing three percent every year from your returns, you will be left only with five percent. Over long-term, you would be losing hundreds of thousands of dollars instead of building your portfolio for your own retirement. To pour salt on the wound, mutual fund managers would be receiving the three percent during a bear market as well.

In contrast, index funds have can have MERs as low as 0.18 percent. Another advantage of index funds is that very little trading activity occurs. As a result, you don’t have to pay tax on the dividends earned each year unless you sell the shares which means the CRA’s share of money continues to work for you. Mutual fund managers are brave and a little lousy as they believe they can “time” the market and trade frequently. As a result, trading commission fees follow each time you do a transaction. Not a great idea.

Personally, I have been investing with TD Bank’s e-Series index fund (Fund code – TDB900) for six years now. The MER for this index fund is 0.33% as of December 31, 2015 as mentioned in TD’s website. Not too shabby if you compare it with three percent charged by your gorgeous advisor. My fund have been doing okay so far. On a side note, don’t forget banks’ primary objective is to make money for the shareholders, not to help their customers. Has your helpful banker ever helped you save money on interest? I doubt it.  All banks are in the business of generating revenue through selling borrowing and investing products. Lines of credit? Then, they have the audacity to use LOC as an abbreviation. I am sorry but I just graduated from nursing school a couple of weeks ago. For me, LOC will always stand for level of consciousness.  Anyways, I get both sides as a customer and as an investor. I am pissed as a customer. $10.95 monthly fee if you don’t have $3000 in your chequing account. Anyone? Hi negative interest rate. And, they give us 0.05% interest on our savings account. WTF! However, as a shareholder, its a different ball game. I smile as I collect my dividends at the end of the year and it’s been increasing every year for the past 6 years.

Now, some of you might laugh at me thinking – “Oh, you didn’t go through the financial crisis of 2008-2009 as you started investing only in 2010. Obviously, your fund is doing okay”. I have news for you. I have quietly been praying like a monk for the market to fall  (True story: My grandfather was a well-respected monk back in Tibet). I want the market to sink so I can buy shares at a discounted price. My apologies to retirees but I am twenty-seven-year-old as I write (Maybe type?) this blog. History suggests I have enough time to recoup. I am aware about Isaac Newton’s law of gravity. More importantly, I am aware about the financial laws of gravity. I know the apple will fall down one day or the other.

I would like to warn you if you do plan to apply for TD Bank’s e-Series fund, it is a little complicated. I vividly remember like it was yesterday when I went to a TD branch six years ago with my brother to open up the e-series fund. The bank representative had no idea about it and had to make several calls to make sure TD offered such funds. I giggled like a nine-year-old girl when she sees her crush. The bank representative offered me to purchase mutual funds. I giggled more. Here’s a cool link to  step-by-step guide on how to get a TD e-Series fund.

Financial advisors and brokers will try to convince you that they can “time” the market and pick hot mutual funds to buy. Nothing could be farther from the truth. Numerous nobel prize-winning economists have advocated for index funds. Furthermore, pension fund managers are trusted to invest billions of dollars and how do they invest? Most of them use an indexed approach. In his book, The Only Investment Guide You’ll Ever Need – Andrew Tobias declares, “Just by investing all the money you have earmarked for the stock market in the Vanguard Index Trust, you will generally do better than most bank trust departments, mutual fund managers and private investors – with far less effort”.

Sure, sticking with index funds might be boring but clearly, investing in index funds gives you the best odds of investment success. Ask Warren Buffet, what you should invest in? He would suggest to buy index funds. When the “Oracle of Omaha” speaks, you listen.

Xoxo, Urgen

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Do you know your credit score?

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I asked a couple of my soccer teammates if they have checked their credit score. Almost everyone said they haven’t. I wasn’t shocked but I was a little upset. Heck, one of my teammates wanted to get a new car for the summer using an auto loan. He had no idea about his credit score.

Well, I heed about my credit score. So should you.

Do you plan to buy a house or a new car in the near future? Your credit score is your BFF. Make sure you know what’s going on with your new BFF.

Your credit score is an indicator of your debt or “borrowing” stability. It has nothing to do with your financial stability. Many mix it up, don’t be one of them. Every lender in Canada looks at this score and makes a decision. It is a 3-digit number that ranges from 300- 900. The higher the score – better for you and less risk for the lender. You can get your credit score from one of the two main credit-reporting agencies, Equifax and TransUnion.

Now, many will suggest getting your score online or mailing your form to the credit-report agencies. Some just prefer to complain and take zero action. Listen up, crybabies. Oui, I am talking to you – my beautiful nursing classmates.

Do what I did if you live in the 416, my fellow Torontonians. Go to 5700 Yonge Street and you should be able to find the Equifax branch office in a corner. I can guarantee you more than 90% of Torontonians have never heard or don’t know about this branch office. You are very welcome. I am an avid TTC user but I have yet to see an ad illustrating – Equifax has one of their branch offices located at Yonge and Finch. It is within a stone’s throw of Finch station. I waited in the line for about 10 minutes, paid $12.75 and I got my credit score. Make sure you have your S.I.N. card with you and your driver’s licence or citizenship card.Why wait for an entire week if you can obtain it in 10 minutes. And if you get your score online, Equifax will charge you $23.95.

Want to know my score? Absolutely. It was 785. Not too shabby. For Hamiltonians, I was told you guys have a TransUnion office in Hamilton. Anyone been there?

Some may argue you can get your credit score for free. False. You can obtain your credit report for free, not your credit score. I strongly suggest getting your credit report as well. It is free. Why not? It can give you an early picture in relation to where you stand with your loans and credit cards. There have been several cases of inaccurate information when people obtained their report. Yes, this can happen and has happened. Hence, make sure all the information is correct when you get your report.

There are two ways to get a free credit report: by phone or through the mail. Let me be the hero and make it super easy for you.

Equifax: 1-800-465-7166 TransUnion: 1-800-663-9980

And, here are the forms if you want to avert long waits on the phone.

Equifax form

TransUnion form

Again for my fellow Torontonians, you can go to 5700 Yonge street and get your credit report only if you want. Yup, for free.

Why is your credit score important?

Ever wondered why Rogers, Bell and all other major cell phone companies ask you if they can check your credit score when you get a cellphone plan. By now, you should have an idea.

More importantly, if your credit score is poor, you might be denied to get an auto loan. Many lenders and sellers want to see a credit score well above 700 for them to offer an auto loan. Sure, some dealers will still provide you with the loan even if your credit score is poor. The catch? HUGE. You will have to pay a higher interest rate. Also, many mortgage lenders will want to see a minimum score of 680 to get the best interest rate. Still not convinced paying a higher interest rate will have a huge affect on your pocket. Think about paying it for amortization period of 25 or 30 years. Seriously, if you dont have a good credit score – getting a fair home loan can be difficult and it doesn’t matter if you are included in the province’s annual Sunshine List.

Here s a link on more information about credit report, credit score and credit rating

Oh, remember my soccer teammates. I saw them a week later for our soccer game. I asked them again if they checked their credit score. They replied with a “No dude, let’s focus on the game”. I grimaced, thinking how can I convince them. Hey, we won the soccer game. My cortisol level dropped.

P.s. – Personally, I have never used it but there is a new fin-tech company called Borrowell where you can get your credit score for free.

Urgen is a nursing student who loves soccer and tennis. He also loves nutella and Liverpool F.C. He considers himself to be a passionate bibliophile, an ambivert, a huge fan of index funds and Toronto Public Library. He is a recipient of Stephen E. Quinlan Award and a member of Seneca men’s varsity soccer team. Also, he is the first Seneca student to conduct a workshop during the recent Seneca Leadership Institute. He is a tutor for first year nursing students at his campus. Can be reached at ukuyee@gmail.com.

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Why open a savings account with EQ?

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I was talking to a few of my classmates last week and we stumbled on the topic about savings account. I yelled EQ bank with gusto. All my nursing peers had no idea about it. One of my friends placed her arms akimbo. Another grimaced. My cortisol level skyrocketed.

Heck, why did I yell EQ bank?

EQ bank made some noise in January by pitching in an attractive 3% return on savings. Obviously, I jumped on it and started earning a solid three percent return. However, on April 18, 2016 – EQ dropped their return on savings to 2.25%. After exchanging a couple of emails with Rob Carrick, I figured EQ would reduce the rate again in a couple of months. Here s the link to Rob’s newsletter. Furthermore, new customers will be asked to “reserve a spot” when signing up. Be ready to be on the “reserve list” for a few weeks but I firmly believe it’s worth it.

Also, if you call EQ about your account getting activated or just to find out the status of your account, don’t be surprised to be on hold for 35-45 minutes. I went through it but again, I feel it’s worth it. EQ replied to my emails after 3 business days. Why is EQ so slow on calls and have a “reserve list”? I don’t know. I would assume this happened as more Canadians became aware of EQ’s delicious return on savings and the demand overwhelmed EQ’s customer service department. For my friends in Quebec, EQ is not available in Quebec.

How does EQ operate?

There are no bank branches because EQ deems they are costly to run. Everything is online. Millennials must be smiling quietly. I am one of them. On their website, EQ states “We prefer to operate online and share our cost savings with you, by offering one of the highest rates on the market and other perks, like 5 free Interac e – Transfers per month. Feel free to compare”. Indeed, a bold statement. Here s a link to a cool site that compares high interest savings account.

One can sign up online without mailing in the documents. Once your check has been received, your account should be activated in 7-10 business days. EQ will send you a welcome email. I would like to confess I made a mistake by asking my other bank for a money draft instead of a personal check. Wrong move. Make sure you order your personal check if you want your account to be activated sooner than later. Okay, I was being frugal and don’t panic, if you happen to make the same error. Do what I did. Go back to the same branch where you obtained your money draft and ask them for a refund POLITELY saying you no longer need the money draft. If this is your first time, they will happily refund your money back.

EQ is a member of Canada Deposit Insurance Corporation (CDIC). For rookies like my nursing classmates, CDIC is the federally backed agency that protects savings deposits for up to $100,000 each. Your money is safe gals. Now, is there a catch? The appealing return on savings won’t last but I believe EQ will stay competitive. As mentioned earlier, there are no bank branches and there is no debit card issued with your account. Just incase, my classmates get mad at me and complain, how come I didn’t get a debit card?

I was comparing my interest earned from my savings account at my other “big” bank after a couple of years and the interest earned from EQ after a couple of months. I smiled. This was during my exam week. My cortisol level dropped significantly.

Lastly, forgive me for invading your personal affairs, but let me ask: Do you know how much interest are you earning on your savings account?

Urgen is a nursing student who loves soccer and tennis. He also loves nutella and Liverpool F.C. He considers himself to be a passionate bibliophile, an ambivert, a huge fan of index funds and Toronto Public Library. He is a recipient of Stephen E. Quinlan Award and a member of Seneca men’s varsity soccer team. Also, he is the first Seneca student to conduct a workshop during the recent Seneca Leadership Institute. He is a tutor for first year nursing students at his campus. Can be reached at ukuyee@gmail.com.

P.S. – EQ has lowered its savings interest to 2% now.

P. P.S. – After this blog went viral on globe and mail, a couple of readers wanted to find out who is this unknown blogger. Ladies, isn’t he charming?20160606_135811

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Registered Disability Savings Plans

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Canadians seem to know a lot about TFSA, RRSP, RRIF and RESP. RDSP? Not so much. To begin, RDSP is an acronym for Registered Disability Savings Plans. Former finance Minister Jim Flaherty announced the start of the RDSP program in December 2008 with much fanfare (CBCnews). At a press conference he touted the unique plan as a global first. “We are leading the world in this initiative, and I expect it will be copied in many places around the world,” Flaherty said (CBCnews).

Sure, there are flaws and concerns about the program. Some go as far as stating the government is trying to make the sign-up process confusing just so it won’t have to pay out all that money. However, I beg to differ. For Canadians with disabilities, the RDSP is an effective way to build long-term financial security. Last week, I was able to attend a presentation done by Edward Ku, Vice President of BMO Global Asset Management and he justifiably said, this could be a $1-million nest egg account with the help of tax-free growth from earnings while the money remains in the plan.

Who qualifies to be the beneficiary of this plan? Has to be a Canadian resident, under age 60, has a valid social insurance number and the person should be eligible for Disability Tax Credit. The maximum lifetime contribution into this plan is $200, 000 and the plan matures at age 60. Furthermore, only one RDSP is allowed per beneficiary. And, in order to apply for the Disability Tax Credit, one can download Canada Revenue Agency Form T2201 at http://www.cra-arc.gc.ca.

What about government incentives? There are two huge incentives from the government – Canada Disability Savings Grant and Canada Disability Savings Bond. The first plan may qualify for up to $3500 annually, to a lifetime maximum of $70,000 in grants. Annual contribution is required to qualify for the Canada Disability Savings Grant. The second plan may qualify for up to $1,000 annually, to a lifetime maximum of $20,000 in bonds and NO annual contribution is required to qualify for the Canada Disability Savings Bond. Music to my ears. Hey, the government can be courteous at times. There is a catch. I hope we are still friends after you read this. Both these incentives are only available until age 49.

How can you maximize your grants and bonds? For grants, if your annual net income is $90,563 or less, you can contribute $1500 annually. The government will contribute $3 for every $1 contributed on the first $500 and $2 for every $1 contributed on the next $1000 which earns maximum annual grant of $3500 as mentioned earlier. For those who make more than $90,563 annually, you can contribute $1000 annually and the government will contribute $1 for every $1 contributed. For bonds, we said no annual contribution is required. Yipee. If your annual net income is $26,364 or less, the government will contribute $1000 annually. And for those whose annual net income is more than $26,364 and less than $45,282, the government will contribute up to $1000 based on their income.

Another luring factor about the RDSP is earnings grow tax-free while in the plan akin to a RRSP, RESP, RRIF or TFSA. As a result, it helps money invested grow faster so the beneficiary can accumulate more. Beneficiaries with low income pay little tax. However, withdrawals from the plan will be taxed in the hands of the beneficiary. In this case, TFSA is the winner during withdrawals of income or capital as both can be done tax-free.

What happens in the death of the Beneficiary? All grants and bonds received in the 10 years preceding the beneficiary’s death must be returned to the government. The remaining grants, bonds, income growth and account holder contributions will pass to the beneficiary’s estate. Lastly, the proceeds of the plan will be distributed according to the individual’s will. If the individual dies without a will, the funds will be distributed according to provincial estate laws. Please check with your provincial government, as every province is unique in its own way. This is only for Ontario.

Still not convinced to open an RDSP even when you are eligible? My personal opinion, bad move. Remember, the earlier you contribute, the more you can maximize government incentives. What are you waiting for?

Urgen is a nursing student who loves soccer and tennis. He also loves nutella and Liverpool F.C. He considers himself to be a passionate bibliophile, an ambivert, a huge fan of index funds and Toronto Public Library. He is a recipient of Stephen E. Quinlan Award and a member of Seneca men’s varsity soccer team. Also, he is the first Seneca student to conduct a workshop during the recent Seneca Leadership Institute. He is a tutor for first year nursing students at his campus. Can be reached at ukuyee@gmail.com.

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