Regulated Crypto

Investing in crypto assets is not for the risk-averse. Fortunately, the Ontario Securities Commission (OSC) has authorized a half dozen platforms for those seeking to invest in crypto assets on exchanges with some regulatory oversight. In 2021, the following were registered with the OSC: WealthSimple Trade, Coinberry, Netcoins, Coinsmart, Fidelity, and Bitbuy. These may not be the best platforms for investing in crypto, but at least they have taken the steps (often over a number of years) to obtain registration with the OSC.

Investing in Canadian marijuana stocks?

Here are some interesting facts you should consider. This comes directly from Statistics Canada’s National Cannabis Survey 2nd quarter, 2019.

  1. About a quarter of those Canadians who consumed cannabis did not pay for it. How can licensed marijuana producers make money when a quarter of their potential market won’t pay?
  2. Less than half of all cannabis consumers bought some of their cannabis from a legal source. Only 29% of current consumers obtained their cannabis exclusively from a legal source. Assuming that the cost of buying from licensed producers is too high for consumers, what will declining prices do to producers’ profitability?
  3. Cannabis consumption has not increased since legalization! It was essentially the same in the second quarter of 2019 as it was in the second quarter in 2018. And 99% of Canadians who have never consumed cannabis apparently have no intention of using it any time soon. Where is that multi-billion dollar market that ‘experts’ predicted would develop?

Laurie wants to start investing, and… (Part 6 of 6)

…she wants to know what she just bought (in Part 5). What does her investment portfolio look like?

Continuing with the assumption that we bought the June 30, 2019, 30%/70% CPM ETF Portfolio, $300 (30% × $1,000) of the investment portfolio would consist of bonds (the ZAG ETF). Almost 40% of these bonds are AAA rated, consisting largely of Government of Canada and Province of Ontario debt.

The five largest Canadian stock investments (in the VCN ETV), representing about 7.1% of the $1,000 portfolio, would be:

  • $18.87 in Royal Bank of Canada
  • $17.52 in Toronto-Dominion Bank
  • $12.74 in Enbridge Inc
  • $11. 18 in Canadian National Railway Co
  • $10.88 in Bank of Nova Scotia

Similarly, the five largest non-Canadian stock investments (in the XAW ETF), representing about 3.1% of the $1,000 portfolio:

  • $8.94 in Microsoft Corp
  • $7.53 in Apple Inc
  • $6.84 in Inc
  • $4.04 in Facebook Inc A
  • $3.61 in Berkshire Hathaway Inc B

The remaining approximately $600 is invested, in amounts of less than $10 per stock, across hundreds of stocks in Canada and around the world.

What else is important to note? Well, according to the June 30, 2019, 30%/70% CPM ETF Portfolio, the worst 1-year return in the last 20 has been -23.44%. If that’s too much to stomach, then perhaps you should consider a portfolio invested more in bonds and less in stocks.

On the other hand, over the past 20 years (a period which includes the Financial Crisis of 2008-2009), this particular portfolio has returned an average of 5.65% per year. And if the past is an indication of the future, there is about a 2/3 chance than any one year’s return will be between -2.53% and 13.83% (judging by the standard deviation number).

One last thing. The three components of the portfolio will, over time, drift away from their original 30%/23%/47% weightings of ZAG/VCN/XAW. One or two of these ETFs will perform better than another. Therefore, to keep the investment portfolio in shape, it would be wise to:

  • Check to see if your risk profile (see, Part 2) has changed during that period
  • And rebalance the portfolio to your current risk profile (not too frequently, but at a minimum, annually)

Laurie wants to begin investing, but…(Part 5 of 6)

…she doesn’t know why she should be buying ETFs or which ones to buy.

ETF means exchange-traded fund. An ETF is an investment fund (financed by the pooling of investors’ monies) that is traded on a stock exchange. It is like a mutual fund (another type of investment fund), if you’re familiar with them, but much cheaper to own (mutual funds are not traded on a stock exchange and can only be redeemed at a price calculated at the end of each day).

The main benefit of an index ETF is that it provides you with a way to inexpensively diversify your investment portfolio. By diversifying, you are following the age old adage, “Don’t put all of your eggs in one basket” (lest you trip and fall and all the eggs break). So some of the investments in an ETF will do well and some will “break”, but overall enough of your nest eggs will thrive to make up for the “breakage”.

Part 4 of this series indicated that only 3 ETFs could suffice. Well, what are they? Assuming that a risk assessment was performed as stipulated in Part 2, so that a range of debt (bonds) and equities (stocks) have been determined, and that the account will be a self-directed RRSP brokerage account like those described in Part 3, then the combination of those 3 ETFs may be taken from a chart prepared by Select the “CPM Model ETF Portfolios”, although the other model ETF portfolios (Vanguard, BMO, iShares) do not differ much in cost or content. Here is the list of June 30, 2019 CPM Model ETF Portfolios. The first page is for RRSPs and RRIFs (tax-deferred portfolios).

Continuing with the assumption that we want an RRSP portfolio of investments, we would move along the top of the page until we come to the proportions of debt (bonds) and equities (stocks) suggested from doing our risk assessment in Part 2. Let’s say that as a result of our risk assessment, we decide to invest 30% in bonds and 70% in stocks (the fourth portfolio from the right). Accordingly, with $1,000 to start our portfolio we would buy $300 (30% of $1,000) of the ETF with the symbol ZAG, $230 (23% of $1,000) of VCN, and $470 (47% of $1,000) of XAW.

The reason we buy XAW is because it contains stocks from around the world, excluding Canada. With Canada representing only about 2 to 2.5% of the world’s economy, it makes sense to take advantage of productivity of some of the other 98% of the world. VCN represents our investment in Canadian stocks, and ZAG represents our investment in Canadian bonds or debt securities.

There, we’ve started. In Part 6, we’ll describe our investment portfolio with a bit more detail.

Laurie wants to begin investing, but… (Part 4 of 6)

…she needs to know in which securities (ETFs, in this case) she needs to invest.

Whenever the shares of a company trade on a stock exchange, there is always one winner and one loser. The winner is the seller if the share price drops after the sale, or the buyer if the share price climbs after the purchase. The loser, you guessed it, is the buyer if the share price drops after the purchase, or the seller if the share price climbs after the sale. In the short-term at least, its a zero-sum, win-lose, lose-win, game. There are no win-win scenarios.

So, how is a person, with no better information than the next person, to decide whether a given price for a security is too high or too low? One answer could be, assume that the market is efficient, and accept the current price of the security as the best estimate of the value of that security. This is not unreasonable, because the current price is based on the buying and selling decisions of hundreds, thousands, or even millions of investors. And one must indeed have some superior information to go against such a large crowd.

In the very long run, it generally pays to be a buyer. See, for example, the U.S. stock market returns over the past 130+ years, for various holding periods. The average return over 20 years is 6.7% (the average his higher for shorter periods of time, but the range of possible returns is also broader, and include losses).

Okay, so what to buy for the investment portfolio. Given the scenario created in the previous posts, one suggestion would be to invest in a simple portfolio of 3 ETFs. Yes, just 3 investments. Details in Part 5.

Laurie want to begin investing, but…(Part 3 of 6)

…she doesn’t know where to invest in equities (stocks) or debt securities (bonds) for her self-directed investment portfolio.

If you’re like Laurie, you’ve selected what proportions you want to invest in equities and in debt in Part 2. You could now go to any one of your favourite financial institutions and open a self-directed investment account. All major financial institutions (banks and credit unions) in Canada offer them. Note however, that:

  • They all generally charge fees
  • The amount of fees differ between them
  • And, those fees can eat up a significant chunk of your investment returns if you are starting with a small account

Or you could find out which financial institutions do not charge you fees. For example, Questrade doesn’t charge for the purchase of ETFs and comes highly recommended by a number of Canadian financial web sites.

National Bank Direct Brokerage charges $0 commission when buying or selling exchange trade funds (ETFs – more on that in Part 4). Mind you, there are some restrictions, such as the minimum order size must be for 100 units of an ETF.

WealthSimple Trade, a financial technology (fintech) firm based in Toronto charges no commission to trade securities and has a convenient app with which to do so. Do not confuse WealthSimple Trade with WealthSimple Invest, which charges you to manage a portfolio on your behalf – something you can quite easily do yourself to boost your returns. At the time of writing, WealthSimple Trade did not yet offer TFSA or RRSP accounts, but was planning to do so soon.

To compare other self-directed investing options you may view SavvyNewCanadians‘ list of bank and credit union brokerages along with the commissions that they charge for buying and selling ETFs, plus fees for administration. Saving on commissions and administration costs means your investment account will grow faster than if you share your gains with the brokerage.

Once the self-directed brokerage account has been opened and funded with some cash, investments may be purchased. On to Part 4…

Laurie wants to begin investing, but…(Part 2 of 6)

…she needs to figure out whether she should be investing in:

  • A tax-deferred portfolio (for example, a Registered Retirement Savings Plan – RRSP)
  • Or, in a Tax-Free Savings Account (TFSA)
  • Or, in a taxable portfolio (I’m going to assume that paying taxes every year on your portfolio’s return is not Laurie’s preferred option, so we’ll ignore the taxable portfolio for now)

According to the Ontario Securities Commission’s GetSmarterAboutMoney, “The main difference between an RRSP and TFSA is the timing of taxes: An RRSP lets you defer taxes – an advantage if your marginal tax rate is lower in retirement. With a TFSA, you’ve already paid tax on the money you contribute – an advantage if your marginal tax rate is higher when you withdraw the money.”

SunLife has a chart that suggests that a family with a mortgage use:

  • A TSFA as an emergency fund and to save for vacations
  • A Registered Educational Savings Plan (RESP) to save for children’s education and to collect the Canada Education Savings Grant
  • And an RRSP to save for retirement. I would suggest Laurie start with an RRSP, especially if she doesn’t have a company sponsored pension plan.

So where does Laurie open one of these investment accounts? Find out in Part 3.

Laurie wants to begin investing, but…(Part 1 of 6)

… doesn’t feel confident enough to start. Well, then the following might be steps for her to consider.

Suppose you are Laurie. First, you should figure out the maximum risk you are willing to take, or able to take. There is a difference. For example, your financial situation may enable you to take considerable risk, but your personality makes you unwilling to do so. On the other hand, your family responsibilities could make you less able to take risk, despite your willingness to take more risk. For a more complete description of the distinction between ability and willingness to take risk, you may refer to Risk tolerance (by the Ontario Securities Commission).

It is generally understood that, of the two major asset classes of securities, equity investments (think stocks) are generally more risky than debt investments (think bonds). There are a number of online risk tolerance questionnaires you can experiment with, to determine what proportion of your investment portfolio should be in equity and what proportion in debt. None of these questionnaires are perfect. (Some of the issues with risk tolerance questionnaires may be found in this article). However, one of the better questionnaires, in my opinion, is Your investor profile, by the Autorité des Marchés Financier (the Quebec securities regulator, in English). Upon completion of the questionnaire, you are provided with a range of the proportion for your investment portfolio you should consider investing in debt or equities, with the remainder for investing in the other asset class. The range suggested may be rather wide, so pick any point along the range, remembering that such an assessment is not based on an exact science. Keep your risk tolerance numbers handy for Part 3 (Yes, Part 3, not Part 2).

14 Billion up in Smoke

In a period of 53 minutes, USD 13.877 Billion of Tilray, Inc. (TLRY) “value” was wiped out. Its share price plummeted 50% from USD 300 at 2:50 pm. to USD 151 at 3:43 pm. That’s a lot of marijuana stock “up in smoke”. After the wild ride, the share price later recovered to close out at USD 214 at the end of the trading day.