Knowing whether your fund manager has his or her own skin in the game tells you a lot about the incentives they have.
What sort of protection for your funds do you get from a non-bank online broker (such as Qtrade or Questrade) compared to a bank-owned online broker (such as BMO InvestorLine or RBC Direct Investing) if the broker should go belly up?
All investment dealers (including the ones you mentioned) that are members of the Investment Industry Regulatory Organization of Canada are also automatically members of the Canadian Investor Protection Fund. CIPF covers property – including cash and securities – that is lost because of an investment firm's insolvency.
However, CIPF does not cover losses that arise because of bad investment advice, fraud or a drop in an investment's value. Coverage is generally up to $1-million for all non-registered and tax-free savings accounts combined; $1-million for all registered retirement accounts; and $1-million for registered education savings plans. More information – and a list of CIPF members – is available at cipf.ca.
How does an exchange-traded fund or stock open at a higher (or lower) price than it closed at the night before? This has always puzzled me.
Market prices are determined by the "bid" (what a potential buyer is willing to pay) and "ask" (what a potential seller is willing to accept). As bids and asks change throughout the day, so too does the price at which a stock trades. It's largely the same for ETFs, whose prices are determined by the value of their underlying securities.
Lots of things can happen between the time the stock market closes and when it opens the next day – such as economic, earnings or political news – that cause bid and ask prices to change. As a result, the opening price of a stock or ETF is rarely the same as the previous day's closing price.
I see in your Strategy Lab model dividend portfolio that you own Johnson & Johnson (JNJ) and Procter & Gamble (PG). They are very good individual stocks but would you consider, say, the Vanguard Large-Cap ETF that includes them? My reason for asking is that I am a pretty bad stock picker.
If you don't have the time or expertise to choose individual stocks then by all means consider an ETF. Just make sure you pick an ETF with low management expense ratio and a straightforward investing approach so you'll know exactly what you are buying.
The Vanguard Large Cap ETF (VV) fits the bill: It has an expense ratio of 0.08 per cent and holds more than 600 of the largest U.S. companies. Alternatively, you may wish to consider an S&P 500 index ETF or a large-cap U.S. dividend ETF. These ETFs will all have a fair amount of overlap in their holdings. Some Canadian investors prefer to buy currency-hedged U.S. ETFs but there are pros and cons to hedging, as I've discussed previously (tgam.ca/EQOO).
You have mentioned that you generally try to keep your U.S.-listed stocks to less than 10 per cent of your portfolio. Why 10 per cent?
That's just my way of controlling my currency risk – the number is not carved in stone. Other people may have a higher – or lower – tolerance for currency volatility. Certainly, with the Canadian dollar plunging from more than $1 (U.S.) in early 2013 to its current level of about 75 cents, the more U.S. dollar exposure you had, the better your returns were.
Now, however, I'm not as eager to stick my neck out currency-wise for the simple reason that a recovery in the Canadian dollar would pose a headwind. It's worth pointing out, however, that many Canadian-listed companies – such as utilities, banks and insurers – have extensive U.S. or foreign holdings, so even a portfolio of strictly Canadian-listed stocks will have some U.S. dollar exposure.
My daughter is now in a position to start investing in stocks but has no knowledge or understanding of markets. Could you suggest a good book or two that she could read that would be of assistance and give her some basic information to get started?
I'm going to draw on the collective wisdom of Globe and Mail readers for this one. If you've come across a great introductory investing book (or website, YouTube channel or other resource), tell me about it in an e-mail and I'll publish some of your tips in a future column.
John Heinzl