Investment Goals: 2017

It’s that time of year where we start looking at investment goals for the new year.

I didn’t really have any goals F2016, except to become a member of, which I’m happy to say that I was successful in accomplishing! I also mentioned in several posts in F2016 that up until recently I had lost focus on my investment portfolio. Well, for F2017, I plan on changing that trend.

To that end, the goals!

Goal 1: Increase TFSA Contributions

I have been an infrequent contributor to my TFSA for the past 2+ years. To pay off my business school loan, and to purchase a new house with my family, I made some significant withdrawals. Taking into account the $5,500 contribution limit for F2017, I have a little over $40,000 in contribution room in my TFSA. My goal for F2017 is to contribute to at least 50% of that limit, or $20,000.

Goal 2: Minimize Taxes

My investments fall into five investment books: a taxable margin account, a tax-free account, a tax deferred account, a certificated account, and a LIRA. My second goal for F2017 is to minimize taxes by consolidating investments into my tax deferred and tax-free accounts, where it is sensible to do so.

Selecting which investments go into tax sheltered accounts is not a trivial task. On the one hand, moving investments from my taxable account will defer any taxes payable (in the case of my RRSP), or eliminate taxes completely (in the case of my TFSA). However, tax sheltered accounts have a disadvantage in that any losses cannot be used to offset capital gains. This means that I will have to take a close look at the investments to ensure they are good fit to go into an account where I am unable to do any tax loss harvesting. Put another way: I have to ensure I am comfortable (financially, and psychologically) to move investments, confident that they will not go down in value to the point where I sell them at a loss.

That said, Goal 1 and Goal 2 are complementary: by moving investments from my taxable margin account to my tax-free account, I can easily come within throwing distance of Goal 1.

Moreover, by moving my US investments from my margin account to my tax deferred RRSP, I will reap an immediate 15% cost avoidance: US based stocks are not subject to the (15%) withholding tax on US dividends, which means I will receive the full amount of dividends from my US holdings.

Goal 3: Rebalance my Total Fund to my Target Allocation

When I started investing in earnest in F2012, I had a very rigid target allocation. The past few years I have deviated very far from that. So my third goal (and arguably the most important) will be to revisit my investment policy statement, and determine the appropriate asset mix for my investments.

Goal 4: Increase Passive Income by 5%

As I am a dividend investor, passive income is my primary goal for investing. Following my December 2016 results, I will be baselining my F2016 income, with a goal of beating that income by 5% this year.

I plan on accomplishing this goal through three key strategic activities:

  1. Re-allocation. I know for a fact that my portfolio is overweighted in some areas. Once I complete Goal 3, I will be reallocating funds to other holdings, to increase exposure to some of my more successful dividend holdings.
  2. DRIP Investing. I plan on increasing exposure to DRIP investments, as they provide a frictionless vehicle for quickly growing dividend income.
  3. TFSA Contributions. As mentioned with Goal 1, I plan on increasing my TFSA exposure. This increase will undoubtedly bring more passive income into the total fund.

Goal 5: Update and Expand Investment Research

Many of my investment research posts are horribly out of date. As the calendar year is starting, many companies I follow will be releasing their annual results in the coming months. I plan on updating all of the companies I follow based on F2016 results. Moreover, I am targeting to analyze at least four new companies this year.

And there you have it; the F2017 goals! I would love to hear what everyone else’s goals are for F2017.

Onwards and upwards!

Cost Avoidance: The Indirect Dividend

Earlier this year I was helping my brother out with his financial planning, and one key element of the planning was to cut expenses. Cutting expenses is an important factor of any planning session, since any reduction in expenses boosts your disposable income by an identical amount: save $5.00, and you suddenly have $5.00 to redeploy elsewhere. At the time, he was paying $14.95/month in banking fees at a major Canadian bank, which equates to $179.40/year. When I asked him why he paid the fees, he really didn’t have an answer. Like many individuals, he took fees as a given–albeit a horrible one–and paid them every month. With some nudging, we managed to move all of his accounts to Tangerine, and he now has an extra $14.95 every month in his pocket. By the way, if you decide to open up your own account at Tangerine, please use my referral key: 16176076S1 .

Of course, it is not always possible to move all of your banking. I have the lion’s share of my accounts at Tangerine, however I also have an account at BMO because my mortgage is with them, I have a US Dollar Chequing account there, and I use BMO InvestorLine as my discount brokerage. Having an account there just makes things easier. But, even having an account, there are ways to avoid the monthly fees. For my own plan, if I keep a minimum balance of $2,500 in the account, the fees are waived.

Now, I gave that bit of background, because Bank of Montreal is increasing the minimum balance you require to waive fees as of December 1, 2016. Here is a snaphot (as of November 29, 2016) of the proposed fee increases:

Plan Current minimum balance New minimum balance Difference $ Difference %
Practical $1,500 $2,000 +$500 +33%
Plus $2,500 $3,000 +$500 +20%
Performance $3,500 $4,000 +$500 +14%
Premium $5,000 $6,000 +$1,000 +20%

As with everything, the need to pay for fees is all about opportunity cost. As a consumer, I have two choices:

  1. Pay a monthly fee, and use the minimum balance as I see fit.
  2. Do not pay a monthly fee, and lock up the minimum balance with BMO.

Let’s look at the annual banking fees, relative to the minimum balance to avoid paying those fees:

Plan Monthly Fee Annual Fee Minimum Balance (Old) Cost Yield (Old) Minimum Balance (New) Cost Yield (New)
Practical $4.00 $48.00 $1,500 3.2% $2,000 2.4%
Plus $10.95 $131.40 $2,500 5.3% $3,000 4.4%
Performance $14.95 $179.40 $3,500 5.1% $4,000 4.5%
Premium $30.00 $360.00 $5,000 7.2% $6,000 6.0%

In the above, the Cost Yield column represents the percentage cost based on the minimum balance, to avoid paying the fees. So, for the Plus Plan, by keeping $2,500 in the account, I am avoiding $131.40 in fees per year, or 5.3% of the locked in money. Put another way: if I can find an investment that pays me at least 5.3%, I would be better off taking the $2,500, investing it in the investment, and using the proceeds to pay off the monthly fees. However, that 5.3% doesn’t take into account taxes. My marginal tax rate on dividends is 25.38% according to the tables on, so in reality I need to find an investment that yields at least 7.0% (since 7.0%, less 25.38% taxes, would yield me 5.3%).

Now, years ago when I was faced this decision, it was hard to find an investment that would guarantee me 7.0% return (with an acceptable level of risk). The other wrinkle was that many ETFs or companies pay dividends quarterly, which means the income stream from the investment would be “lumpy” relative to the frequency of payments. But with the increase in BMO’s minimum balance, things change. Here are the updated tables using the December 1, 2016, minimum balances:

Plan Monthly Fee Annual Fee Minimum Balance (new) Cost Yield (new) After Tax Cost Yield (new)
Practical $4.00 $48.00 $2,000 2.4% 3.2%
Plus $10.95 $131.40 $3,000 4.4% 5.9%
Performance $14.95 $179.40 $4,000 4.5% 6.0%
Premium $30.00 $360.00 $6,000 6.0% 8.0%

My specific plan is the Plus plan, so I now have two choices: find an investment which gives me a guaranteed 5.9% return on $3,000 (which would give me $177.00, or $132.07 after taxes), or keep $3,000 locked at BMO, and avoid $131.40 in annual fees. Given that this $3,000 is a good place to stash emergency funds, and I wish to preserve safety of principal, at this point I feel it is still safer to keep the “ransom money” with BMO to avoid the fee. It is because of the savings that I call this the “indirect dividend”: I can either claim a dividend by investing the capital, or I can save the fee by locking the money away. Either way, I am “making” money off of locking away a fixed amount of capital.

Of course, there are ways to improve the above analysis. For one, if I purchased the shares in my TFSA, then there would be no tax implications, so I could focus on the Cost Yield, not the After Tax Cost Yield. Another possibility is preferred shares, which I spoke of in an earlier post. Over the next few weeks I will continue this analysis to see if there is a better way to obtain overall higher returns.

Onwards and upwards!