The Canadian Investor - Investing Lump Sums & Canadian Home Bias

Episode Date: August 30, 2021

In this episode of the Canadian Investor Podcast we start by discussing the announcement from National Bank that they are eliminating trading commissions on stocks and ETFs. We then chat about home country bias for Canadians and finish by talking about investing a lump sum.  https://thecanadianinvestorpodcast.com/ Nordberg’s gambit episode https://thecanadianinvestorpodcast.com/episode/converting-cad-to-usd-and-stock-options-basics  https://stratosphereinvesting.com/blog/how-to-convert-cad-to-usd-norberts-gambit-questrade Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital See omnystudio.com/listener for privacy information.

Welcome back into the show. This is the Canadian Investor Podcast, made possible by our friends and show sponsor, EQ Bank, which helps Canadians make bank with high interest and no fees on everyday banking. We also love their savings and investment products like GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs, which offer some of the best rates on the market. I personally, and I know Simone as well, is using the GICs on a regular basis to set money aside for personal income taxes in April of every year. Their GICs are perfect because the interest rate is guaranteed, and I know I won't be able to touch that money until I need it for tax time. Whether you're looking to set some money aside for a rainy day or a big purchase is

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I am Brayden Dennis, joined by Simon Belanger. We got a jam-packed episode today for you guys. We're talking Canadian news. We're talking Canadian home bias and lump sum investing. We're going to get a little candid about what Simon and I have been doing with our portfolios, what we've done with family and friends' portfolios when this kind of situation arises. So stick around and we'll talk about that in a bit. Simon, can you kick off some important DIY investing news for Canadians? This is kind of hot off the press over the last day or two, so feel free to share that. Yeah, yeah. Some big news that came out with National Bank announcing that

they were eliminating trading commission to purchase stocks and ETFs. So National Bank became the first major Canadian bank to eliminate trading commission, although fees do still apply for trading options. This is effective immediately as I did check on their website and it's already showing zero dollar commission with the exception of options. For some context, let's recap what happened in the u.s in the series of events over there when online brokers started offering zero commission and it may provide some insight on what could potentially happen in canada robin hood had already been offering zero commission for stock purchases well before october 2019 in october 2019 charles Schwab and Interactive Brokers announced they would also eliminate trading commission on stocks and ETF purchases. A week later, TD Ameritrade announced

that it was also following its two large rivals. A few months later, Schwab announced that it would acquire TD Ameritrade. The deal closed in the fall of 2020. Of course, a big reason of why that acquisition was made is the economics changed a lot for TD Ameritrade, which was a division of TD Bank in Canada. From my personal perspective, it'll be interesting to watch what will happen with online brokers. As everyone knows, all the major banks offer online brokers and there are also some independent online brokers as well. The US experiment showed us that competitors will most likely follow suit, but who knows when it will happen. It'll be interesting just to keep track of what happens in that space. It's really interesting watching what unfolds.

And like you said, the path for what is going to happen was already laid out south of the border. This has happened with multiple occasions in the DIY investing space where the US is ahead of us in certain areas and we follow a few years later. We're laggards to a lot of this when it comes to DIY investing. For instance, ETFs, SPY, the very common ETF that tracks the S&P 500, ticker SPY, that ETF has been around for a long, long time. ETFs are not necessarily a new invention. But in Canada, I'm pretty sure Vanguard Canada didn't open its doors and actually offer ETFs on the TSX till like 2014. So we are laggard in most of these scenarios. So like you said, it will be interesting to see what unfolds with the online brokers here

in Canada. We've mentioned before with other services similar, there is a lot of downward pricing pressure for them to do so. And there's other ways to monetize their business outside of pure commission. So, it is very interesting. All in all, this is a good thing for Canadian investors. Wouldn't you agree? Yeah. Yeah. Very good thing. And I'm just thinking when I started investing when I was 19, 20, the fees were just so high. And it was a percentage of I think there was an amount on the like a minimum amount, and then it could go up depending on the order size, there was all these

different things. It really got much simplified over time, way better fees for people to do it. And obviously, if you compare it to even before online brokers, the fees were even higher back then, the days of Peter Lynch and all that before the internet was there. And I was going to add as well, the one place where Canada seems to be, well, is faster than the US is those Bitcoin ETFs. In the US, they still haven't approved any. And in Canada, now we have quite a few of them. So that's been one space. But I think you're right. In general, rural Canada tends to be a bit behind the US when it comes to that. segment on Canadian home bias. Canadian home bias is a term referred to when Canadian fund managers and Canadian self-directed investors are overweight Canada. And I get it. We're very patriotic people. It's a wonderful country. Very happy to live here, but we are overweight our own businesses. And there are some problems with that from my perspective and many others perspective that I'm

going to go into. So to give you some stats here, this is done by Vanguard Canada. These stats, the report actually came out in 2018, but I figured I'd pull it up for you guys here. So 60% is the portion of Canadian equity portfolios made up of Canadian stocks. So of a Canadian equity portfolio, and when I say Canadian, I just mean a portfolio that is owned domestically. It's not necessarily set out to track Canadian stocks. Maybe it is, but this is looking across all of domestic portfolios. 60% of them are made of Canadian equities. Now, they say, okay, if we back out that Canada's weight in the global equity market is 4%, back that out, we come up with about a 56% Canadian home bias for domestic

portfolios. So if we look at what is made of the Canadian index, what are the companies inside of the index, 37% of the top 10 names make up the index. So the top 10 names of the Canadian markets by market cap, so the 10 largest businesses in Canada make up 37% of the equity market. If you look at from a world perspective, the world equity index, the top 10 names only make up 7%. That is a huge difference, 37% compared to 7%. So if you look at the companies inside of the index, you are overexposed to financials, energy, and materials. I mean, that's not really a surprise, right? Our businesses are, Our businesses are, from a market cap perspective, big banks, energy, and materials. If you have now 70% of the Canadian equity in financials, energy, and materials, 70%, that's a lot, you're not actually that diversified if you own a Canadian equity index ETF.

Then you're going to be pretty much underweight everything else, especially tech, especially healthcare, and especially consumer staples. So the bottom line here and what I'm trying to get at is you have to have a global view with your portfolio. I know it's easy to own some of the smaller companies that are listed here that you know well. That's great. You might find some alpha there. You might generate some great returns.

I've done wonderfully with some Canadian businesses, but you can't just be biased on the Canadian index. So if you buy US listed stocks of great businesses, many of them will have a global presence. I believe that owning US listed stocks on top of your Canadian listed stocks will diversify you and probably get you better returns because if you were to look at the index returns over a long perspective, Canada has underperformed for the reasons that I've mentioned. You've been overweight energy and materials and underweight tech. That's the biggest difference in performance over the last 50, 60 years between the two indexes. Yeah. And a couple of things I wanted to add to that.

So I don't think it's specific to Canada. I know I've read that being the case in Australia as well, which is a similar type of country to Canada, same type of thing you're saying. And I think for me, I'll push it even one step further is just to make sure when you do invest, whether it's Canadian or US companies, you understand their operations because some may receive most of their revenue domestically. So very dependent on Canada, but other businesses may, they may only have a small portion of their business in Canada and the rest of it's worldwide. So that's something to keep in mind and making sure that you know the business you invest in Canada. The other thing for the home country bias that's really dangerous is if you're too concentrated in Canada, you also most likely have your salary coming from a Canadian company or very dependent on

the Canadian economy. That might not be the case for everyone, but that's certainly most people are dependent on that. So you have that problem right there. You also, if you're owning a house, for example, while you're also dependent on the Canadian housing market, and then if on top of that, most of your stocks are really overweight Canada, then if something happens economically in Canada and there's a downturn, you're going to really suffer. That's just the reality of it. So by investing in different companies and diversifying a bit outside of Canada at the very

least, you're edging your bets a little bit if there is an economic downturn in Canada. Yeah, well put. And I get it. I get it, right? You got to convert your money into US dollars. There might be fees associated with that. You take an instant haircut when you look at the CAD and the USD currency conversion. It sucks. It feels like you're losing money. I get that part. But once you can move past that, if you've never done it and you only invest in Canadian equities, once you do it once, you'll get it.

I use a method called Norbert's Gambit. I have a guide on how to do that on my website. So maybe a good time to link it again in the show notes. We've talked about this guide many, many times, but if you're moving more than like $1,000, $2,000 into US dollars on your brokerage, this is the way to go from my perspective. It takes a little bit of work, but you might save 40, 50, 60, much more depending on how much you're moving in currency conversion fees. And keeping your fees down is something you can control and something that we always recommend. Yeah. And I guess probably the last thing, if you're too lazy

and you don't even want to do that great method that Brayden just talked about, and I've used it before and followed his guide, by the way, and it is great, very easy to use. At the very least, there are some Canadian listed ETFs that track US indexes, that track worldwide indexes. So, make sure that you at the very least, you know, get some exposure to those to get that exposure outside of Canada. Yeah. In a few clicks of a button, you could buy a world equity index ETF. Yeah. And boom, like that's so easy. I mean, 50% of it will be in the US and maybe Canada makes up, if I was to guess, maybe less than 5%, maybe 3% if I was to really guess. Oh yeah. Without having it in front of us, but there's ways to do it. There's no like

what I'm trying to say and there's no excuse not to do it. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself,

I've been impressed with Questrade's customer service. Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just

going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests. It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at airbnb.ca forward slash host. That is airbnb.ca forward slash host. All right, moving on. Let's talk about lump sum investing. So the reason that this topic has come to be is I've been talking to Simon back and forth about deploying my Lira. So I have a locked in retirement account. Now I'll get into why I have one of those in a second.

So I just want to preface this, all of this with, I threw the whole thing in Constellation software, literally the entire thing. And you're like, you're like, whoa. Now I do not recommend you do that because you cannot borrow the conviction that I have. So that goes with anything on this podcast. If you hear it and then you see a drawdown in a certain position, it doesn't work. You can't just be like, oh, I heard it on this podcast because every stock moves up and down. There's volatility in every single security. And if you don't own the business and if you don't have, I'm sorry, if you don't know the business and you don't have the conviction that maybe me or Simon have, then how are you supposed to know if you should act, if it's just

regular volatility or if there's something wrong with the business? So you can't borrow conviction. I just want to get that right out of the go. I just wanted to add before you get started on that, for those of you who are not familiar with Allura, I know Brayden did say it was a locked-in retirement account, but Allura is for pension plans that are provincially legislated and a locked-in RRP would be for pension plan that are federally legislated. So, he's talking about a lira here but locked in RSP would be essentially the same thing. That's right. Okay. So, I was paying into a pension and it made no sense to keep the pension. So, I cashed some of it out and then the bulk of it came out in a lira, a locked in retirement account. So, it's a big chunk of change. How do you deploy it?

So I have this Lira all in cash that moved into my brokerage Questrade as of August 1st. That's when it showed up. So let's just say this lump sum is around 100K. It's actually a bit less, but let's just say for simple math, and we're talking about deploying lump sum, I'm talking about 100K. You got to ask yourself, okay, so I'm going to give myself a theoretical exercise here. This is money I'm going to be investing for a long time horizon. What am I aiming to do? What is the goal of this money? The goal is to compound it over decades, not years, not months. We're talking decades. When I'm talking about decades, I'm talking about investing in great businesses,

defensible positions, wide moats, pricing power, and long runways for growth. I'm talking about long time horizons. I'm going to put it in high conviction names. I feel nice sleeping at night that I own them because I don't want to tinker with them. Since there's no new fresh capital going into it, this is an important aspect. There's no fresh capital going in. It's a locked in retirement account. I could always sell a position and then tinker with it, I suppose, sell a position and then tinker with it, I suppose. But the whole exercise here is I'm trying to think of businesses I want to own for 10 plus years. If the market closed for 10 years and I own them, I'm feeling okay about it. I'm feeling good about it. So I'm basically investing in the names which are on the Stratosphere Compounders model portfolio, which you can get at

getstockmarket.com. You can check that out anytime, track it. Now, I'm going to give you three lists of ideas here in terms of lump sum investing. The types of businesses that I'd want to own. Okay. So the first type of business I would want to own is what I call like an ultra wide moat compounder. We're talking about the best businesses in the world. Really, really defensible positions. So my ideas here, Alphabet, which is the owner of Google, Visa, MasterCard, Moody's Corporation, and S&P Global, the credit rating agency businesses, Costco, Microsoft, American Tower, Equinix, Amazon, BlackRock. Simon, feel free to jump in on any ideas here. The next bucket is high upside businesses with high growth. Thinking about

MercadoLibre, Unity, The Trade Desk, Autodesk, Shopify, and even Facebook. And then the third bucket, which typically are some of my favorite businesses. They're a great way to sleep at night with instant diversification within a single stock holding. So some ideas here. Constellation Software, Topicus, Roper Technologies, Berkshire Hathaway, Brookfield Asset Management, and Accenture. Okay. So, Sam, do you have any quick thoughts on any of those names, any themes you're seeing? Yeah. I mean, I'm not surprised because I know you like all of those businesses. So,

I definitely would have... The ones I talk about. Yeah. I was just checking, making sure you talked about Constellation Software after you said you put it all in there, but you did. Yeah, I had to mention it. Yeah. For me, I mean, those are all great businesses. I don't.

I own some of them. I don't own all of them. But I did use when I had Alira myself a couple of years ago, I had a similar approach, although a bit different. So, I kind of use more like dividend stable growers as the foundation of my portfolio. And I sprinkled it with some higher upside kind of stocks, but very similar to that where you have like very established companies that are the bedrock of your portfolio. And then you have other companies that you can put in there, You allocate accordingly. Obviously, I wouldn't put

50% of your old thing in MercadoLibre because you're probably going to have a heart attack every day just looking at your portfolio. Yeah, it swings like 10% all the time. Yeah, that's it. But overall, yeah, as long as you're someone with a similar approach, as long as they're okay with sleeping at night and they won't overreact if there's moves with whichever business they invested, I think that's the biggest thing. Because if you overreact, then you'll sell and you don't compound anymore. That's right. And that's why I put them into three different buckets to think about. I wouldn't throw 100% of my portfolio in any of the buckets other than the high-performing conglomerates. And the reason for that is those businesses I mentioned own hundreds and hundreds of companies

sometimes within each of those names. So that's why I feel comfortable doing that. You're basically handing over your money to a capital allocator like investors of Berkshire Hathaway. You're investing, you give your capital to Charlie Munger and Warren Buffett to deploy for you. Okay. So the whole purpose of this section was how do you deploy it? Those are some ideas, but so this is not investment advice. This is just theoretical. Let's say it's a hundred K deploy it over a year or more. You have to be patient. And the reason for that is there are market drawdowns and market timing. Humans are horrendous market timers. It's a terrible idea. It never works. So let's say you do it over a year, every three months,

quarterly. So you're deploying $25,000 each time in this example. And if it's five stocks you picked, you say 5K in each. 5K in each, 5K in each, 5K in each for the 25K. So five times five. You do this four times over throughout the year. And the reason for that is you're avoiding bad market timing risk. And then boom, you have your 100K deployed, but you have to be patient because, oh, deploying it over a year, that sounds easy on paper. And then a month later, two months later, you start tinkering again. You just can't do that. You got to be patient. Just like everything

with investing, patience pays off. It's the most profitable way to deploy an investment portfolio is always be patient. As do-it-yourself investors, we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense, and with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service.

Whenever I call or email, every support rep is very knowledgeable and they get exactly what I need done quickly. Switch for free today and keep more of your money. Visit questrade.com for details. That is questrade.com. Here on the show, we talk about companies with strong two-sided networks make for the best products. I'm going to spend this coming February and March in an Airbnb in South Florida for a combination of work and vacation and realized, hey, my place could be a great Airbnb while I'm away. Since it's just going to be sitting empty, it could make some extra income. But there are still so many people who don't even think about hosting on Airbnb or think it's a lot of work to get started. But now it is easier than ever with Airbnb's new co-host network. You can hire a local quality co-host to take care of your home and guests.

It's a win-win since you make some extra money hosting on Airbnb, but can still focus on enjoying your time away. Find a co-host at Airbnb.ca forward slash host. That isbnb.ca forward slash host. That is airbnb.ca forward slash host. Yeah, well put. I mean, for me, I did it for my parents. They had a lump sum when I got them to ditch their financial advisor who was putting them in 2.75% mutual funds. Oh, God. 2.75% mutual funds. I think it was about five years ago at this point. And so they had a pretty substantial sum of money. So what I did for them, if I choose your example of 100K to invest, let's say you have 10 businesses, you want to invest 10K each. So what I did was a whole schedule for them, easy to follow. That way there's no thinking behind it.

You just follow that schedule. So week one, you invest the first portion of the first business. So if it's 10K for each business, you invest, let's say, $2,500. Week two, you invest $2,500 in the second business. And then you continue like that until you've put $2,500, sorry, in each businesses. And then you repeat for a second round. and then you repeat for a second round and then you repeat for a third round and then a fourth round for your last installments. That way it gives you something to do every week. You get to buy a stock every single week and it obviously dollar cost average

because you won't buy the same stock for another 10 weeks afterwards. So that's a way very similar to what you were saying, just a different approach. But if some people like to tinker in their portfolio at least once a week, that would be a quick fix right there. You buy that one stock, you buy that other stock the next week, you have a schedule, you remove all the emotion or the guesswork out of it. You're like a machine basically. I find that was a really easy approach for my parents to follow and it really helped them to dollar cost average and to those position for a pretty substantial amount of money too. Yeah, that's smart and I like the schedule idea.

The point we're making here is you're not investing it all on the same trading day because market timing risk comes into play there. Then on a one-year basis, you're putting so much risk into one trading day. I don't think that's a particularly smart idea. Now, if you're talking about long, long time horizons, it might not make a huge difference, but you are protecting yourself from what you don't know. You're protecting yourself from the uncertainty because I'm sure, Simon, I'm sure there are people who invested huge lump sums in February of 2020 and then thought, holy shit, in March, right? Yeah. Oh, yeah. And I was going to add something though to what we just said. And obviously, if there's a huge market, like broad market correction, there's nothing wrong with using

your judgment and maybe accelerating for that period of time. So, obviously, like if there's nothing wrong with using your judgment and maybe accelerating for that period of time. So, obviously, like if there's an obvious market drawdown like we saw in March of 2020, where within a couple of weeks, everything's down like 30, 40, like I don't know what it was, but 30%, then maybe you want to be a bit more opportunistic and buy a bit more during that period of time. But you'll still want to continue to DCA even if you see that because it could always go lower. You never know. Yeah, like historically, I believe it's every two years

the market sees at least a 15% drawdown, which seems like quite a bit. When you zoom out on a long chart, you don't notice those just because it's just done nothing but go up and to the right. But these drawdowns do happen. And there's been studies on them that they happen about every two years. There's recessions about every seven years. Now, those are just rules of thumb. It doesn't mean you're going to happen. And they hardly ever happen on the intervals of those averages. But if you were to come up with an average, those are the types of figures you're

looking at. Now, you could call last year's bear market a recession, but in terms of stock returns, the market was down for what, like a month and a half, maybe, before it was at a new high? Yeah. And I think typically a recession is really the GDP, right? So, I think it's two consecutive quarters of GDP, of negative GDP growth will count as a recession. But again, even if you think there's a recession coming, there's not a perfect correlation between a recession and the stock market going down. Oftentimes, you'll actually see the stock market go up during recessions. So, all that to say the DCA really, it makes things a lot easier, removes the emotion out of it. And I personally find by doing that, you can sleep well at night,

you don't have to worry about trying to time the market and just getting the perfect valuation for a stock and then potentially missing out on it. You average out and you'll be happy for it 20, 30 years from now. Exactly. This is just one giant reiteration of you should dollar cost average with your portfolio. That's when Simon says DCA stands for dollar cost average, which means putting in your money over set intervals of time and continuing to add to the portfolio. That does it for this episode, guys. Thank you guys so much for listening to another episode of the podcast. If you're not following us on Twitter yet, go to at CDN underscore investing. If you go to our website, which is in the show notes, that is new.

Check it out. You can see. I really like the search function, Simon, on the podcast website, because if you are interested in a certain topic, it pulls episodes based on keywords that might be in the show notes or from the episode title. So if you're looking for a specific topic in our backlog of episodes that we talk about, if you go on the website, which is in the show notes linked, there's a search function and you can find that right away and get pulled to that episode, which is my favorite part of the new website. So go ahead

and check that out. We will see you in a few days. Take care. Bye-bye. The Canadian investor is not to be taken as investment advice. Braden or Simone may own securities mentioned on this podcast. Always make sure to do your own research and due diligence before making investment decisions.