A Comment -- General Comments From an Expert (A Commentary)

Employee Stock Purchase Plans: Cause you to stay concentrated in one company. If the company is matching or contributing, then you might want to do it, but take the money out as soon as you can to diversify all but 10% of it. Don’t have more than 10% in one company.

Investing on your own – Caller’s situation: 25% of investments are in the banks own products (not necessarily bad, but a red flag), 1% in emerging markets (if less than 5, it’s not worth having) and the rest in bonds (bad prognosis going forward so he would not have the rest in bonds). When you change, the instruction charges $100-$125 PER ACCOUNT in transfer fees. The descent thing for the next institution to do is to pay these fees, but unlikely with discount brokers.

Caller’s situation: 80% in GICs and rest in dividends. At age 50 and even with chronic illness, he says no more than 45% in GICs. Age times decimal of your age as percentage in fixed income is his general rule.

ETF coming out in the future based on the Venture Exchange: Venture capital is riskier and therefore should have higher returns. You take away the risk of the individual companies.

Components of a Portfolio: Age times Decimal of your age as a percent in fixed income; Remainder divided equally among: Canadian Equity, US Equity, Emerging Markets Equity, International Equity and Tangibles (inflation protection). If you are young enough, he doesn’t get caught up in dividends.

Huge profits in high dividend stocks – do you take profits? No, set stop losses and hang on.

Market: When interest rates go up, REITS will be under pressure. They compete with the kinds of interest rates consumers can get, such as GICs. It’s really about spreads. The REITs borrow money and then have to earn a spread on that. You have to pick good quality.

Markets: Owned a lot of oil stocks and that were impacted by Libya. He is conservative. One thing he knows is that you are ALWAYS going to be surprised. You need a portfolio that allows you to surmount these events like Libya and Japan. He is bullish on inflation. We are already seeing inflation in cotton and food impacting consumers. He thinks this is only the beginning and that we will see much higher inflation next year than we have seen in the last 30 years. With fixed income he wants to hold short durations. Perpetual preferred shares should be short so you don’t get locked in to a low dividend. He is buying US companies to take advantage of the level of the Canadian dollar, but he thinks it will stay that way as far as the eyes can see.

Markets: It’s hard to get excited about 3%-10 year bonds. We are back to seeing some value in the emerging markets. Recent events in Japan have seen them get a little more attractive. If a foreign currency rises and the yield picks up, you get a double benefit. We are with a ‘risk on’ period, so treasuries have been sold and spreads have widened with other bonds.

Stripped Bonds: Bond yield (coupon) is separated from the principle (residual) and sold separately. In bankruptcy, interest payments stop (worthless) and company funds are divided between the owners of the residuals. Coupon is more risky than residual.

If economy does well and central bank raises rates, shouldn’t it be positive for corporate bonds?: No. 3 things impact corporate bond yield: Inflation, real interest rate, and credit spread. But if economy does well, interest rates should rise it is pretty negative for all bonds. Any rise in rates is not going to be good for corporate bonds.

RRSP Portfolio of 30-year Canadian corporate bonds yielding 6.25%: Long bonds are a very important part of a life insurance company’s portfolio. 6.25% beats equity portfolios over the last 30 years. The portfolio value might take a hit at some point but then you get it all back at maturity.

GICs: Are in fact the fixed income market. It is just a matter of percentages. He suggests moving to a Bond ETF as a first step.

Tier 1 Bonds: rate further down the ladder. With Canadian banks you don’t get too concerned. With European banks we have seen some converted into stock. 10 years and less they will likely get called at their first possible call date but longer out they will probably get called early.

Bond ETFs: If you have the bonds outright you can hold to maturity and get all your interest and capital, but the ETF can go down. ETF is simpler to trade, and bonds outright are good for buy and hold.