I live up in Canada and we have access to some registered accounts like a RRSP ( Registered Retirement Savings Plan ) and a TFSA ( Tax Free Savings Account ). The US equivalents of the RRSP and TFSA are the 401k and Roth IRA.
I’m making an assumption that the vast majority of people when they open these accounts simply send forms off to some company like Standard Life, ManuLife or go through a bank RRSP, pick some mutual funds and then just get a statement through every now and again to see how it goes.
Nobody will care about your money as much as you but you need to learn how to invest it properly. The ‘lazy’ way is to just hand the money over to an advisor, they deal with it all and you get some kind of return hopefully by the end of the year. I get why people do this as they may not have time, but like anything, if you put the effort in, you get more comfortable and confident over time and hopefully you should outperform these funds. I’m not against something that Warren Buffet proposed which is to put your money into a very cheap index fund by Vanguard but i still believe you can capitalize on other opportunities when they arise.
I like to be in charge of my stuff, i want to maximize my investment potential as quickly as possible. i don’t like handing fees over willy nilly, i am comfortable with short-term investing and long-term so it for me, it made sense to open a self-directed RRSP and TFSA.
The RRSP contribution room grows by about 18% of your previous years income at the time of writing. You can put up to that amount in per year unless you have more contribution room, it does rollover which is nice. It essentially reduces your income that you paid tax on and you get a rebate at the end of it. I don’t spend it, i literally put it all back into next years contribution room – this makes the following year easier to max out.
Once the money goes in, it doesn’t come out until you retire. There are exceptions like getting a loan from it for first time home buying and so on, all those details are on the CRA website. When the money comes out, you get taxed at whatever the retirement income per year. There are tons of articles about this all over the place about how much you should save so i won’t go into details on that here.
The TFSA is a slightly different beast, this investment vehicle only started in 2009 and every year that goes by, the contribution room increases by 5500$ ( inflation adjusted ). At the time of writing, the maximum contribution is about $31,000 so if you have $0 in it right now, it’s time to load up. The worst part about TFSA is the name, it is actually an investment vehicle and is an extremely useful investment tool to have. Although you can put money into the TFSA, you can take it out right away ( you don’t get that withdrawal contribution room back until the following year). You don’t get a tax rebate for contributing, you don’t get taxed on withdrawals, you don’t get taxed on profits. What’s the catch? You cannot claim capital losses on it. So if you decide to blow your account, you are screwed so to speak.
So you can just invest the money in a low interest savings account, make 1-2%, not very exciting and certainly won’t make you wealthy. You can park the money in some mutual funds and sure, it’s less stress but the gains are generally pretty average. You can learn to invest yourself and potentially earn or lose a lot more, this is your ‘pension’ and tax-free account remember. Many people won’t feel comfortable with this and will be too much risk for them but it is the choice i have made.
I invest in Canadian, Australian, UK and US equities.
US and Canada have a tax treaty for the RRSP, you will not be dinged any withholding taxes on dividends if you hold US equities in this account. This is a huge win. Foreign equities on the NYSE are titled ADR’s ( American Depository Receipts) – Australian stocks and UK stocks such as Vodafone ( VOD ) and Unilever ( UL ) have no withholding tax on dividends so these also fit nicely into the RRSP.
I write covered call options
This is essentially creating a ‘synthetic’ dividend. If you own shares, you can write ( sell ) a call option against those shares and hope that the value of the contract goes to $0. You collect the premium for the contract you sold. Each option is equivalent to 100 shares. If the price of the stock goes up past the and the option gets exercised, 100 shares of my stock are sold against it. It basically limits your upside if the stock runs up big. If the market is bearish then selling calls with elevated volatility is a great strategy if you intend to hold the stock for a long time.
I buy long calls and puts
These are simply leverage investment vehicles. If you want to play Apple for example, buying $500 per share for a move to say $550, sure you get a nice 10% return but i’d need to drop a bundle on it to get anything worth out of the risk i took. With options, you get much more bang for buck. Let’s say i think that the price will be $550 in 3 months, the long call option at $500 maybe about $4000 or so, if the price jumps $50, i could probably end up with about $9000 or whatever based on time left, the intrinsic value and so on. The risk and rewards are much greater.
Picking direction in stocks is a tricky business at the best of times and as you have things like theta decay working against you aswell as just the unknowns in a stock. Some people may just use long puts for example as a hedge on the rest of their portfolio. Insurance if you will. When the vix is low, these are generally very cheap. You don’t have to buy long calls or puts on the stock either, you could just buy SPY puts against your portfolio, this is a much more sane strategy in my eyes.
You are not able to sell naked calls or naked puts in a registered account due to the risk involved.
I invest in Canadian, Australian and UK equities
Although there are some similarities with the RRSP, the TFSA does not have an special withholding tax on it for US equities so i will not hold any US equities for dividends here. The UK and Australian as above have no withholding tax so these are fine and you do not get taxed on dividends for Canadian equities either.
I buy long calls and puts on the US Markets
As the amount of funds in the TFSA is considerable less than the RRSP, i use leverage instruments to amplify my returns. Any money you make on these will have no capital gains which is great. If you blow your account, you cannot claim any tax loss on it and you have lost that contribution room for good.
So i tend to do less ‘active’ trading in my RRSP than my TFSA. I tend to hold big blue chip companies in the RRSP but i will occasionally pile on some big options positions if i am comfortable with a potential move in a stock or the market. This helps to massively accelerate the returns. If i end up being right, i will take a good chunk of those profits and feed them right back into dividend stocks. My aim is to get the compounding effect on the dividends stocks to take hold as fast as possible.
The only other thing i do is register DRIPS ( Dividend Reinvestment Programs ) in both my TFSA and RRSP. For long-term investments, i just want to keep buying as much of a stock as possible for as cheap as possible. You can often get a discount off the current share price ( depends on the broker ) and you are not charged commissions when the share repurchase occurs. This is something other people may or may not do and prefer to accumulate the funds and then pick another stock.
I also have a non-registered account which is just your standard broker account, fully taxed and all the trimmings. I tend to do most of my risky trading there like selling naked options, trading futures and so forth.
I’ll post a review on various brokers in the future but up in Canada we are really limited to quality brokers. You can run with the banks but they charge an arm and a leg for commissions and are pretty basic. There aren’t too many choices but the one i eventually went with was Questrade.
When i first opened the account a few years back, i wasn’t that impressed to be honest. The technology was behind the curve, the only appeal were the $4.95 commissions. However, over time they have made considerable effort to improve the website, the trading platform and the support is much better. They also support holding USD$ in the RSP and it is interchangeable at an ok rate. I just use their IQ Essential platform, there are no costs with this, it works in all the browsers. I find the other stuff is too ‘heavy’ for my needs. I want to minimize my costs in every possible fashion. It is too easy to blow money on streaming fees, chart packages and so on. At the end of the day, it all comes down to practise, knowing the markets, not how many indicators you have on your screen or some other funky algorithm for predicting this or that.
I use other brokers like ThinkorSwim for monitoring live data on options and risk analysis but they don’t support registered accounts.
Hopefully that has helped anyone if they are thinking about getting started. The key is to keep the risk as low as possible in the registered accounts and i believe focusing on blue-chip dividend reinvestments is a pretty good way to go in my eyes. I increase the risk with my shorter term trading but i am ok with that, it all depends on your circumstances and experience.
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