Trading Commodities Futures

For most investors, commodities trading actually means trading commodities futures contracts. While it’s possible to trade for immediate and physical delivery on the spot market, the fact of the matter is that most “regular” investors don’t have the ability to engage in such transactions. The spot market is mostly used by producers and direct commodity consumers. Instead, you are much more likely to trade on the futures market, where you will not receive physical delivery of any sort of goods.

When you trade a commodities futures contract, you are trading a contract for the price of the underlying commodity, and not buying the commodity itself. The contract is settled prior to delivery, and you end up with gains or losses, depending on when you bought, and the price you sell at. A good example of how commodity futures work is when you consider a lumber seller, or producer. These contracts are designed to protect producers:

A lumber seller may project a certain amount of wood to sell. They can sell it ahead of time, in order to cover the costs of harvesting the lumber (and perhaps make a profit as well). While it’s possible that waiting could mean a higher price, selling ahead of time guarantees that a minimum is met. The buyer of the lumber contract pays the producer, and then puts the contract with the lumber seller on the futures market. The contract can then be “bought” and “sold”. If the price moves higher, the contract holder receives profits, since the commodity has gained in value. A lower price, though, means that contract holder loses. The producer, however, has already received payment, so it’s not such a big deal.

Understand the Risks

When you are trading based on futures, you are taking risks that are considered greater than if you were to trade stocks and bonds in the traditional way. Commodity prices are volatile, and affected by changes in global supply, political upheaval, and economic changes. You should also understand the risks of leverage. It’s often possible to use a small amount of your own capital to control large positions. Your gains are magnified in these cases — and so are your losses. You need to carefully assess your situation, and understand the risks before you engage in commodities future trading.

With the arrival of commodity ETFs, many people are interested in dipping their toes in. However, it’s important to realize that, even though these investments can reduce your exposure to risk, they have risks of their own. Because the ETFs are based on futures, and not on the commodities themselves, there is a chance for a situation known as contango, and that has its own risks. Before you invest, make sure you understand the process, and that you are prepared for possible losses.

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Should You Invest in Commodities? originally appeared on Canadian Finance Blog on May 21, 2012.

With so much hype surrounding the Facebook IPO (hype that only seems to be heightened by snags in the process, and the resulting delays), a number of consumers are vulnerable to Facebook IPO scams. You need to be alert for this, since it presents an opportunity that seems to be a legit way to get in on the ground floor of the Facebook IPO.

How IPO Scams Work

For the most part, shares of pre-IPO companies are offered to insiders associated with the company already (employees, venture capitalists, founders, officers, etc.). That doesn’t stop scammers, though. These scams claim that you can buy pre-IPO shares of Facebook — and the scammer may even claim to be an investor, or an insider. You are offered the chance to buy in, and promised untold riches when Facebook goes public and the price skyrockets. Thousands of dollars in profit — instantly!

The problem, of course, is that someone with actual inside knowledge of Facebook (or any company for that matter), isn’t likely to offer these soon-to-be-valuable shares with just any person on the Internet. People with real access to pre-IPO Facebook shares are likely to cut their actual family members and friends in before sending some random person an email. Indeed, such an insider is likely to hang on to the shares until after the IPO.

Anytime someone — especially someone you don’t actually know — sends you an email offering you the chance to take advantage of an opportunity, you need to be suspicious. Most of the time, these scammers just plan to take your money and run. They might make a show of providing you with “evidence” of returns on paper, but eventually the fraudster will take off, leaving you empty-handed.

Stay Vigilant about Scams

You always need to be on the lookout for scams online. Facebook isn’t the first company name to be used in order to scam consumers out of hard-earned cash. Plenty of other anticipated IPOs are preceded by scams claiming an insider track to shares. Some scammers might even settle on just allowing you access to lesser-known IPOs, or even ask for your money to invest in a variety of promising, low-profile IPOs that will bear fruit in a few months.

The allure of instant riches can be a powerful factor in getting you to turn over your money. And, of course, these scams are meant to sound plausible, encouraging you to sign up by using jargon, and insisting that it’s possible to get pre-IPO shares at a fraction of their value. Even though you might hesitate, it seems like a solid opportunity, and you probably want it to be true.

No matter the “investment opportunity”, it’s important to be on your guard. Remember: If it sounds too good to be true, it probably is.

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Watch Out for Facebook IPO Scams originally appeared on Canadian Finance Blog on April 30, 2012.

What are DRIPs?

A dividend reinvestment plan (DRIP) is a way of investing automatically in dividend stocks. When you invest in dividend stocks, you receive a portion of the profits as a payout. The payout can be given to you straight, or it can be used to reinvest in the stock. A DRIP, instead of sending a cash payout to you, automatically takes your dividend and buys more stock with it.

So, if you have 100 shares of a company that pays 15 cents quarterly, you receive $15 each quarter. You can either choose to have that money sent to you, or you participate in a DRIP, and the money will automatically buy more stock. If the shares cost $30 apiece, your $15 will buy 1/2 a share. Over time, your extra shares add up, and you end up with more shares — and higher dividend payments.

DRIPs and Building Wealth

Because of the way DRIPs work, they can help you build wealth at an accelerated rate. Your portfolio grows at a faster rate because you regularly add more shares. As you add shares, you receive higher dividend payouts, since your payouts are based on the number of shares you own. The higher payouts allow you to automatically receive more shares — and so on. You can see how the cycle can help you grow your portfolio.

Later, you can take advantage of this. When you are ready retire, you will have more shares that you can sell at a (hopefully) higher price. Another option is to use the dividend portfolio as a source of income. Building an income portfolio is a goal for many, but it is also a time-consuming task — especially if you don’t have a large chunk of capital. A DRIP can help you speed up the process a bit, adding more shares to your portfolio so that you can see more income down the road.

With the help of DRIPs, it’s possible to boost your wealth potential.

Risks of using a DRIP

Of course, with all investments there are risks. The biggest risk, of course, is a loss of capital. When you invest in anything, you can lose out, since there is no guarantee that the share price will keep rising. While you might continue to receive the dividend income, you could lose some of your capital during a stock market crash, or if something changes fundamentally about the stocks in your dividend/DRIP portfolio. When you are ready to cash in all those shares, you might find that they aren’t worth as much as you had depended on.

Before you invest in anything, make sure that you do your research. There are a number of solid dividend paying stocks out there, and good companies that offer DRIPs. Look for those that are most likely to help you reach your goals, and always be mindful of the risks involved.

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How Can DRIPs Help You Build Wealth? originally appeared on Canadian Finance Blog on April 2, 2012.

The regulators who put suitability standards in place try to protect investors from ‘salespeople’ who are more concerned about selling investments than trying to match appropriate investments with investors.  Although the concept may appear to be relatively straight forward, the practice of determining suitability is not perfect.

Regulators set the rules

In Canada, the regulators set the rules around suitability and one of the common practices in the investment industry is something called the Know Your Client (KYC) rules.  Basically, all investment firms and professionals must complete a KYC form before they can make investment recommendations.

Know Your Client

Under the know your client rules there are a few key things investment professionals and companies must know before they can recommend investments

• Risk Tolerance.  Risk tolerance is simply how much risk the investor is willing to take.  The more conservative the investor, the more conservative the investments need to be.  Investors should not be investing in high risk investments unless they have some tolerance for risk.
• Time Horizon.  Basically, the longer your investment time horizon, the more risk you can accept in a portfolio.  The shorter your time horizon, the more conservative your investments should be.
• Investment Objectives.  What is your primary investment objective?  Is it to grow the portfolio, is it about safety and preserving capital or is it to try to get income from your investments.  Your investment objective will in part determine the types of investments you should own.  If you are a safe investor looking to preserve capital it may not be suitable or appropriate to own lots of high risk growth investments.
• Investment Knowledge.  How knowledgeable are you about investment concepts, information, strategies and ideas?  It’s probably inappropriate for investors with very little knowledge to invest in very complex investments like hedge funds and option strategies.
• Financial stability.  Theoretically, the more financially stable you are, the better you are to withstand risk in a portfolio.

The other document used to determine suitability of and investment portfolio is something familiar to most investors . . . The risk profile questionnaire.  With the risk profile questionnaire, investors are asked to answer 8 to 15 questions and the result matches them to a portfolio that is suitable for their needs.

Suitability is far from perfect

Although I understand the principle behind suitability, there is really are no universal standards of what suitability means.

Having been a financial advisor who has sold product in the past, I know from experience that all of the rules are subject to interpretation and the real problem is that different compliance people can interpret rules differently from office to office, company to company, province to province.  What I know for sure is a lot of money, time and resources are allocated to ensuring that suitability is enforced (which may be part of the reason mutual fund fees are so high).

The other problem is how to define some of these overgeneralized terms and standards.  For example, when someone uses the term conservative, what does conservative mean?  The definition of conservative for a 70 year old may be very different than a 30 year olds definition.  What about a 5 year time horizon?  That might be long term to some and short term for others?

With all the flaws of the system, the principle of suitability makes sense.  It’s all about making sure there is some common sense and prudence put in place in an industry where there are a few bad advisors and institutions that put their selfish interest over the clients.

All investors need to understand that investments should be suitable to their needs and while there are a few documents in the financial industry to determine suitability, investors need to use some common sense and personal judgment as a basic standard.

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Are Your Investments Suitable? originally appeared on Canadian Finance Blog on March 6, 2012.

This is the idea behind income investing. When you are involved with income investing, you make investments that are designed to provide you with regular cash flow. The goal of income investing is to invest capital in such a way that your regular returns can fund your every day expenses.

An Income Portfolio Takes Time to Build

Income investing sounds like a nice idea, but it’s important to understand that the desired results don’t come overnight — or even next year. Unless you have a large amount of capital already (from an inheritance, winning the lottery, or an accumulated nest egg), it takes time to build up an income portfolio. It can take seven to 10 years, or longer, to build up a portfolio that provides reasonably regular returns.

Here are some of the more common investments found in an income portfolio:

Bonds: Bonds are basically loans you make to an organization. You supply the principal, and the organization pays interest during the term of the loan. When the term is over, the principal is returned to you. You can then use the money to invest in another bond. It is possible to invest in bond funds, though, so that you aren’t always trying to replace your bonds.

However, it is possible that the bond will be defaulted on. In such cases, you can lose your principal; all you have to show is the interest earned so far. Another issue is that the yield on less risky bonds might not be high enough to beat inflation, so your earning power might be reduced, even though you are receiving regular interest payments.

Dividend stocks: When you buy dividend stocks, you receive a regular payout. Dividend paying companies pay a portion of their profits to stock holders. You can build up your shares in a dividend paying company, and watch your payouts grow. On top of that, you have the possibility of capital appreciation if the stock price rises over time.

However, dividend paying companies can cut — or eliminate — their payouts any time. If the stock price tanks, you could lose out on your principal, as well as your source of income (if the drop results in a dividend cut).

It is also worth noting that you can invest in REITs for dividend payments, if you want to add a little real estate to your portfolio.

Peer lending: P2P lending is becoming increasingly popular, since you receive regular interest payments. Whether you are providing microloans to startups in other countries, or helping someone pay off debt, you have the opportunity for a regular interest income. However, you could end up in a default situation, where your principal is lost.

Income investing can be a way to create regular income for you by putting your money to work. However, as with all investing, there are risks involved. And it takes time to build up a portfolio that is likely to meet your spending needs.

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What is Income Investing? originally appeared on Canadian Finance Blog on February 27, 2012.

But having said that, it’s also true that you have to be clever about how you invest your time and money. You don’t want to squander precious time and treasure needlessly. Here are the 5 best ways to invest in yourself in order to get the most bang for the smallest amount of bucks possible.

1. Interview Successful People

No, I’m not asking you to get thick glasses and try to be a Geraldo Rivera wannbe. But I do suggest that you tap in to the talent and knowledge pool you have all around you. Talk to the people who have what you want and ask them to share their secrets with you. This won’t cost much and it’s an invaluable resource. And don’t worry, people love talking about themselves to others. You’ll get plenty of takers.

Make a list of your most successful friends, family and acquaintances and ask them if they would agree to have lunch with you. During lunch, try to get inside their heads by asking questions such as:

• What was the single most important thing you did to become successful?
• What mistakes do you wish you would have aided?
• What advice would you give to someone just starting out right now?
• What would you do differently if you were starting over?

One question will lead to another. Let it flow. Try to really understand the foundation of the success the people you interview built their lives on. Look for common traits and decisions among the successful group of people.

At the end of the meeting explain that you really want to be successful and want to talk to as many successful people as you can. Ask the person you’ve just interviewed for names of other people she thinks you should talk to.

2. Side Business

There is no better way to learn about success than putting your own money on the line. And the smartest way to do that is to start a small business. It doesn’t matter so much what the business is. It matters that you go for it.

Don’t be intimidated. You’ll learn as you go. Start very small. It’s far better to risk your time than your money – or the money of your friends and family. If you simply must invest money, don’t lean on your credit cards. If you have limited resources and are convinced the business is strong, consider using a company like Lending Club rather than more expensive sources.

But remember, there are plenty of great small business ideas you can find by simply looking around and some of the very best won’t cost you a cent to launch.

3. Read Right Not Wrong

There are plenty of great resources on the web. A site like Canadian Finance Blog is a perfect example. And if you are looking for a great book on success, read every Dale Carnegie book you can find. But don’t overload yourself. You only need a handful of ideas but you need to stick to them. Don’t waste your time reading every book on success you can find. Success is about action. Go out and do it.

4. Start Investing Now

No matter how much money you have, you can start investing right now. Don’t think you have to have it all figured out. I have been investing for over 30 years and I’m still learning. Don’t put too much money on the line when you are unsure of what your are doing. If you are just starting out, take advantage of websites like Betterment. This site is perfect for beginners. For a very small fee, they educate you on how to invest and they actually do the investing for you once you get set up. The sweet part is that they do this for you without any transaction fees. Me Likey.

5. Low Salary

Many people think the they must get the highest paying gig they can find but it’s not true. During your career, you’ll find that it might make sense to take a low paying job if the experience and exposure warrant it. When I graduated from college I took the highest paying job I could find and it was a huge mistake. Within 8 months I quit because I just couldn’t stand it. I would have been far better off had I simply considered the best career move rather than focusing on getting the fattest pay check.

Author Bio: Neal Frankle is a Certified Financial Planner and owner of Wealth Pilgrim, one of my favourite personal finance blogs. His most recent post was his Prosper Review.

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5 Best Ways to Invest in Yourself originally appeared on Canadian Finance Blog on February 21, 2012.

Junk Bonds vs. Treasury Bonds

Junk bonds have higher yields because they are considered rather risky. Investors assume that there is a higher risk of default. U.S. Treasury bonds, on the other hand, are considered to be one of the least risky investments available. As a result, the yield is rather low.

The difference between junk bond yields and 10-year Treasury bond yields is known as a spread. The wider the spread, the more risk-averse investors are thought to be. When you are in an environment where the spread is widening, it means that investors expected to be compensated more for taking on the risk associated with junk bonds. As a result, it could mean that the stock market is heading for a drop, since risk aversion is high. In these situations, many investors decide to put their money in places where they think it will be “safe” — and the stock market is rarely the first place investors go when they want something safe.

TED Spread

Another spread that can provide clues to where the stock market may be going is what is known as the TED spread. This is the difference between three-year Treasury bond yields and three-month Libor (London interbank offered rate). The Libor is one of the rates used to determine how much one bank pays another when it borrows money. Once again, Treasuries offer a comparison because so many people perceive them to be safe.

The difference between the two is an indicator that the credit markets are a bit jittery. The wider the spread, the bigger the indication that banks are more nervous about lending to each other. A wide spread usually pre-sages a tighter credit situation, and could mean that a stock market drop is on the way in response.

Look for Opportunities

If you see widening spreads, it could mean that it’s time to prepare for opportunities. While there is definite devastation that comes with a stock market drop, there are also chances for you to buy shares cheap. If you think that a stock market drop is coming, you can free up resources so that you can get a good bargain on stocks.

However, it’s important not to get too hung up on any one indication that things are going a certain way. There is no full-proof way to predict what will happen next. You can only look for clues about where investor sentiment might be headed. And, of course, there is the option to use dollar cost averaging with an index fund, and not worry about when to get in and get out.

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Two Spreads to Watch for an Idea of Where the Stock Market is Going originally appeared on Canadian Finance Blog on February 20, 2012.

Before we begin, a caveat. I’m going to assume the million bucks is an inheritance, or lottery winnings, or something that isn’t taxed (at least in Canada). Because what fun is it fantasizing about a million dollars if you immediately lose a quarter or a third of it to taxes? Since I’m pretty sure nobody is planning on giving me some sort of 7 figure surprise, this exercise remains a fantasy.

But hey, if you have a million bucks just burning a hole in your pocket, call me.

First, The Boring Stuff

I have a mortgage. At this point, I’m making fairly aggressive mortgage payments for it to go away, but I’m not really in a hurry to pay it off, especially considering low interest rates look like they’re here to stay for a little while. But if had a million bucks, I’d make it go away. That’s about $135k, right off the top. Balance remaining, $865k.

That’s it for me and debt, so next would be investing for income. I’d take half of the remaining balance ($437,000) and put it into a combination of dividend paying stocks, bonds, GICs and preferred shares. If I could get a scant 5% yield, that would spin off an income of $21,800 per year, without touching the principle. I honestly think I could do a little better than 5%, but I’m trying to be conservative here. Plus, I’d be primarily investing in stuff with less than 5 years to maturity, since interest rates are so low.

Well, that was a quick use of $572,000. What should I do with my remaining $428,000?

Would I Quit My Job?

That’s the big question, isn’t it? I hate to be that guy, but I honestly don’t know if I’d quit or not.

I like my job. It’s physical, which helps me keep the pounds off. For the most part, I like the people I deal with everyday and I like the routine. Plus, I’d still get free chips. I’m cheap at heart, so that’s a perk. Yes, even with a million dollars.

Alternatively, what a great opportunity to start my own business. Making close to $22,000 per year without lifting a finger would take a lot of pressure off having to ramp up earnings right away, not to mention no longer having a mortgage. At this point, I’ve been blogging for 2 years now, and I understand quite a bit about the business of the whole thing. I could start up another blog or two in other subjects, or I could use some of my sudden windfall to buy up a couple of financial blogs. With the time to run them, I know enough about the business to make them profitable.

And now that I type this out, I figured it out. I’d quit my job. How much fun would it be to blog for a living?

The Fun Stuff

I’d stick $100k just in the bank. It would serve as both a travel and opportunity fund. I think I’d still be a frugal traveller, but it would be nice to see certain parts of the world without having to worry about the cost.

What’s left? $328,000. Well, as a millionaire, I couldn’t continue to drive my crappy Ford Focus, now could I? For $28k, I could buy a pretty decent new car, so let’s go with that. Besides, that leaves me with a convenient $300k left to spend.

Hmm… What to spend $300,000 on? I think Canadian real estate in general is overvalued, so I wouldn’t be putting a nickel into that. I’d also avoid any private mortgage lending, barring very promising certain situations.

I’d take $100k of that cash and use it for picking stocks primarily for capital gains. I’d buy beaten up companies, hopefully ones with decent potential for turnarounds. I’d spend all sorts of my new found free time analyzing balance sheets and doing research. Yes, this is what I’d do for fun.

As for the last $200,000, I honestly have no idea. I’d keep it relatively liquid, maybe in short term GICs or a money market account. I’d call it my opportunity fund, reserved for buying some sort of other asset, like perhaps American read estate.

So, in conclusion, I’d only spend $700,000 of my $1 million, and barely spend any of it frivolously. Why would I? I have everything I need, and material stuff doesn’t really motivate me. The best part of having a million bucks? It isn’t the ability to buy a bunch of stuff. It’s the freedom that only passive income can bring. Since none of you are actually going to give me a million bucks, I guess I’m outta luck.

Readers, what would you do with a million bucks? The comment section is all yours.

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If I Had A Million Dollars originally appeared on Canadian Finance Blog on February 16, 2012.

It seems like every blog is touting the advantages of passive investing. And yet, millions of Canadians continue to invest in mutual funds that, thanks to fees, will continue to underperform the underlying index. Will passive investing ever make actively managed mutual funds go away? I don’t think so, and here’s why:

Marketing

Between Canada’s big 5 banks and our handful of actively managed mutual fund companies, billions of dollars are spent promoting their wealth management products. They’re clever at their advertising, never actually pushing their products directly, rather preaching a message of security. Financial security is only a few trips to the bank away, at least according to their advertising.

TD uses two old men primarily in their advertising, along with a big comfy green chair. Just go to TD, the commercials say, and you won’t have to worry about money. The old men seem pretty happy with TD’s offerings, after all, they do hang around outside of the bank.

I’m picking on TD specifically, but each bank in Canada is guilty of using the same marketing techniques. And why shouldn’t they? They don’t really care about how much investors in their products make. All they care about is driving results for their shareholders.

The Way They’re Sold

Let’s divide mutual fund salespeople into two groups, the people who work at banks and the people who work for separate wealth management companies like Investor’s Group.

Both groups are similar in the way they get compensated, which is a sales fee when the investor buys the fund, as well as a fee every year the investor holds the fund, called a trailer fee. Advisors are thus rewarded for getting more business.

In a bank, there isn’t much need for the mutual fund folks to go out and drum up new business. The bank places promotional materials around the branch, especially during RRSP season, urging investors to contribute to their investments. Bank tellers are also encouraged to upsell products to people with large chequing account balances, or people who just don’t have any investments with the bank. Bank mutual fund representatives have a whole branch funnelling prospects their way. So they don’t have to work that hard to sell.

Meanwhile, the independent salespeople do have to drum up business. They do the usual things to drum up business – networking, marketing and the like, all in the hopes of increasing their assets under management and their trailer fees. With several different companies offering very comparable products, it’s a dog eat dog world out there. They work hard to get the business the banks do not.

And then we have the world of exchange traded funds and index funds. The companies who manage them make money, but once a product is introduced that seeks to replicate a certain index, that’s it. You can only have one product per index. Since management fees on these products are minuscule, (hence making them best for investors) nobody has any financial interest to push them. Financially savvy people learn about them, while Joe Investor does not.

There’s a whole army of people selling actively managed mutual funds, and hardly anybody singing the praises of passive investing. This is starting to change, but it’s not going to be an easy fight.

A Lack Of Education

Fellas, if you ever want to ruin a date, start talking about investments. You might catch a woman who’s legitimately interested, but for the most part, the ladies don’t care about this stuff.

Okay, to be fair, I also know a fair share of guys who don’t give two hoots about investing either. People can’t be bothered to learn even the basics. The terminology is hard. The content is boring, and often too math-y for people. People just aren’t interested in learning about how to be better investors.

Then comes along the friendly mutual fund salesperson who caters nicely to this attitude. Don’t worry about anything, they say, just give your money to me and some smart investment type people will manage it. This appeals to somebody with little investing education, so they’re happy to oblige. Some might call it preying on the uninformed, but banks call it good business.

Until everybody becomes better educated financially, I don’t envision actively managed mutual funds with high fees to go away. What do you think?

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Will Actively Managed Mutual Funds Ever Go Away? originally appeared on Canadian Finance Blog on February 2, 2012.

Being The Little Brother Sucks Sometimes

Two things that I believe most Canadians don’t realize in light of the last three years is that the Canadian dollar is artificially high right now, and that it isn’t good for the long-term health of our economy.  Our trade relationship with the USA is still the biggest in the world.  A few years ago (I couldn’t find anything to verify if this was true any longer) my political studies professor shocked us when he said there was more trade between the Detroit/Windsor port of entry than between any two countries in the entire world!  That’s crazy when you think about it.  Over 80% of Canada’s population lives within 100 miles of the USA border and according to The World Factbook in 2007 over 84% of our exports go to our big brother to the south, and we receive over 56% of our imports from them.  Long story short, we need the USA… a lot!  When the dollar goes up, it definitely appeals to our “little brother” complex and it feels like we’re punching above our weight.  It’s also nice to go on a shopping trip and get a lot of bang for your loonie/greenback.  In the bigger picture though, a higher dollar means that we can’t sell as many exports to the American consumer (the engine of the world economy) and with more and more “buy American” laws coming into play (despite their questionable legality), this is going to put a serious dint in our economy.

Liquid Gold? I’d Rather Have Real Gold!

We haven’t yet noticed this dint because we are awash in commodity and energy dollars.  Our oil and other natural resources have given us some huge advantages and have allowed us to show strength at a time when few countries appear to have any.  Eventually this cycle will go back around as it always does and our economy that is heavily dependent on petro dollars will shrink back to its average, while the American one will likely leap to the forefront again if it can ever solve its political gridlock problem.  Most analysts I’ve read, and a brief look at that statistics since 1971 (when the USD allowed itself to start “floating” independent of the gold standard), reveals that our natural exchange rate is likely somewhere between 80-85%.  When you look at the relative size of the economies involved this seems fairly logical.

As Close To a Sure Thing As You’ll Get In Investing

So, if you’re like me, you’re probably wondering how to take advantage of this unique exchange rate situation right?  Well, the first thing you can do is look seriously at cross border shopping.  The Canadian Border Services Agency (CBSA) allows you to head down to the states for 48 hours and return with $400 worth of goods for each person in your vehicle tax- and duty-free.  If you know anyone that smokes or drinks then the sin taxes you save on those products alone can be worth a short jaunt.  The far more lucrative option that I would recommend is to invest with the idea that the CAD is extremely likely to sink back to its average over a long enough time horizon.  I wouldn’t try to speculate when this change will take place, but when you consider the size of our respective economies, and the cyclical nature of commodity prices, I think the eventual return to the mean is a near certainty.

Those Yankees Sure Do Fees Right

Instead of merely trying to make money off of straight currency conversion, I would use this opportunity to add some non-hedged American investments to my RRSP account (where their withholding tax won’t hurt you).  I personally love the Vanguard low-cost ETF series.  It allows you to track huge segments of the American or world markets for extremely low fees (probably 1/40^th of what your mutual fund charges).  By purchasing a basic Vanguard ETF product form your discount brokerage you should see a nice little capital gains run in the long-term (I still believe the USA will rise again, stronger than ever), but you will also likely gain when you eventually sell the ETF and convert the currency back into Canadian funds again.  Right now there are a few brokerages that allow USD holdings and at par conversions within RSPs.  Off the top of my head I know that Questrade, Qtrade, and RBC Direct Investing offer these advantages.  These minor currency exchange fees used to eat into returns big time, so it is definitely worth looking into if you plan on taking advantage of the current economic situation with non-hedged investments.

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The CAD vs USD originally appeared on Canadian Finance Blog on January 31, 2012.