In Canada, a discount brokerage is a type of investment firm that can not provide advice and must take all instructions given by the client regardless of how poor it may seem. General information may be communicated but what to buy, why to buy, and when to buy can never be answered. Essentially, these accounts are self-directed by investors with the knowledge and capabilities of taking control of the investments and finances. At least, that's what I thought.
Throughout my tenure at the firm, I encountered a vast amount of Canadians so ill-informed about the market that their stories still stick with me today. I would try to refer them to an advisor but often times that could be taken offensively. It was a fine line to walk on. The stories I share today are not meant to ridicule any one in particular or the firm, but to put into perspective your financial ability's and whether or not you are ready to manage your own investments.
The Dentist
I received a phone call from a brand new client. His profile said he was a dentist and had been with us for less than a week. He asked me to sell his mutual funds which were just transferred in. I made the trade as discussed and noticed that the transfer came from our company's full brokerage side. I made the assumption that either he felt confident in running his own portfolio or he wanted a cheaper commission on the sale of his account. Either way, I went ahead and made the trade. After confirming the order, this is a paraphrase of how our conversation went from there on.
"How much money did I receive?"
"Well, we don't know the actual value of the sale as it is not determined until the end of the day."
"What? I don't understand."
"Unlike stocks, mutual funds are priced at the end of the day. So the price you see on the Internet is yesterday's close."
"But my old broker told me that they would be sold immediately."
"Yes, the mutual fund has been given instructions to be sold, but again, the price is not determined until the end of the day. That is how mutual funds work."
The conversation would loop for a few more minutes before the dentist finally absorbed the information. What was interesting to me was that he mentioned he was with the full broker for years, but did not learn a thing. It was this moment that made me decide that if I took the full-advice channel, I would build a relationship that was built on education and information to form strong, trusting bonds.
The lesson to take away here is not just that mutual funds are priced once a day, but that you should be taking ownership of your investments when you feel educated and confident. And although your level of knowledge on financial products may never be equal to those in the industry, it is beneficial to familiarize yourself with the basics and invest within your comfort level.
To give credit, this client was not stupid by any means, he was simply unaware of the major differences of mutual funds and stocks, which is very frequent as we will see in the next story.
The Research in Motion Lady
I call her the RIM lady because of her holdings. It was well into the six-figures, but a large chunk, like 90 per cent, of her holdings were invested in one company, Research in Motion, now BlackBerry. And then there were two mutual funds which accounted for the rest. This was not well-diversified enough by any means, but she was up like triple on the stock. She called in to sell her mutual funds as well, but had just purchased them within a month.
"Hello there. I would like to sell my mutual funds."
"Absolutely ma'am, but just so you are aware, these funds were purchased two weeks ago and will incur a charge for not holding them at least 30 days."
"What? I thought this was a discount brokerage and these funds don't have charges."
"Yes ma'am, we are a discount brokerage, but mutual funds have a holding period."
"Okay fine, just sell them. I've had them for two weeks and the price has barely moved. They are terrible products."
"Well, that's because these are diversified mutual funds and they're designed to hold a lot of companies. And considering you've had them for only two weeks, you can't say they are bad products. Big returns so shortly don't happen."
"Well, Research in Motion did."
"Yeah, that is an exception."
As you can see, I got emotional and defensive because she was complaining about our brand's mutual funds and in doing so, I potentially may have crossed the fine line between advice and education but I felt that this lady was just not informed enough about her investments. If she still owns her stock, she has seen her shares fall to $8 from as much as $150 just four years ago.
The moral of this story is to diversify if you are starting out and not a great stock picker. Patience will get you through the long-term, especially if the companies you own are very well run and managed and have a steady stream of profits. There will be ups and downs, but what matters is the plan you devised. Although I am against mutual funds myself, they do have their benefits. And before making any purchase in any professionally managed product, always ask questions especially about the fees.
The Crying Lady
The last story I would like to share was actually an event that happened with my co-worker who sat next to me. It was a devastating situation that needed empathy and understanding, but a real lesson can be learned here.
It was days after the financial meltdown and the stock market was plummeting. Margins were being called and people were losing money all over the place. But the story of this one lady struck a cord with me. She was retired and had been very wealthy all her life. Not a millionaire, but saved enough to retire comfortably. Prior to the financial crisis, it was a raging bull market and more people starting borrowing money to better returns. It worked for years until October 2008.
The lady called in and got my colleague. It appeared that she had to sell all her stock to cover her loans but because of the collapse, it was not enough. She had piled up a debt within her trading account that exceed $100,000. To top it off, she was retired. She started to cry because she was lost. She did not know who to turn to or what. I believe in the end Credit made a payment plan of some sorts, but it made me really fearful of borrowing for weeks to come. She went from having a comfortable retirement build up of wealth to massive debt. And this was four days into the crisis.
Again, she was a smart woman and it was not that she was financially naive, no. It was a set of bad luck that tore through the accounts of hundreds, if not thousands of Canadians and millions across the globe. An event like this reminds us that we should invest within our means and if you plan to borrow, which is actually a very good way to make money, you must remember to have a secondary plan when things go wrong. Can you pay back the debt? Can you afford to invest? These are questions you must ask yourself before making your first real investment.
Gold's Punishment Not Over
The euphoria that surrounded gold two years ago made gold bugs wealthy as lofty predictions and price targets sent traders in a frenzy trying to play catch-up, but its decline over the last two years has shown us how quickly momentum can shift. And the accelerated drop in prices this year has been triggered by news of Fed tapering coupled with a stronger American dollar.
Last week, an independent author for Marketwatch.com provided technical analysis informing traders that a breakdown on the uptrend line would result in massive selling. Two different continuation patterns were crossing paths giving reason that the breakdown was days away. On Tuesday, that trend-line was breached with many indicators going bearish such as the DMI and RSI, as seen below. Gold is down about 4 per cent since. Based on our calculations, the selling pressure could mount to an additional 3 per cent drop with the SPDR Gold Trust (GLD), a US-priced exchange-traded fund that tracks the spot price of gold, could drop to the $124 price, which is the last level of support
How to read the charts
The price chart's purple trend lines were rising upwards until September 10, when the price dips below it. A general rule of thumb is to allow three days for any signal to be confirmed since signals of change can be false or to find additional evidence. Today is the third day, and gold prices have not mounted any comeback and has pushed down to the Bollinger Bands, a mathematical band creating a range used to determine overbought or oversold conditions. We see that gold is now oversold, suggesting a short-term rise or end to declines, but its breach also means that the bands will start moving downward and create conditions for more falling prices.
In the lower indicators, the MACD (Moving Average Convergence/Divergence) confirmed gold is bearish as well, pointing to a second potential signal. MarketWatch uses simple to use colours and when the "red line" rises above the "blue line," it is basically saying that negative conditions trump positive conditions. This is consistent in all their indicators. The black divergence curve also went negative at the same time as the cross and is another clue that the trend was confirmed.
In the DMI (Directional Movement Index), we see the exact same colours crossing. The lines essentially represent the battle between the bulls vs. the bears. And a declining "blue line" means that bulls have lost strength. A crossover means that sentiment has shifted, in this case bullish to bearish.
So what do I predict? Gold will have declines into October, but for two days, we should not see anything. Wait until next week to create a position, either short, go long a bear-ETF, buy the puts or a credit call spread. Any of these trades should be profitable if executed properly along with a decline in gold prices.
Last week, an independent author for Marketwatch.com provided technical analysis informing traders that a breakdown on the uptrend line would result in massive selling. Two different continuation patterns were crossing paths giving reason that the breakdown was days away. On Tuesday, that trend-line was breached with many indicators going bearish such as the DMI and RSI, as seen below. Gold is down about 4 per cent since. Based on our calculations, the selling pressure could mount to an additional 3 per cent drop with the SPDR Gold Trust (GLD), a US-priced exchange-traded fund that tracks the spot price of gold, could drop to the $124 price, which is the last level of support
The price chart's purple trend lines were rising upwards until September 10, when the price dips below it. A general rule of thumb is to allow three days for any signal to be confirmed since signals of change can be false or to find additional evidence. Today is the third day, and gold prices have not mounted any comeback and has pushed down to the Bollinger Bands, a mathematical band creating a range used to determine overbought or oversold conditions. We see that gold is now oversold, suggesting a short-term rise or end to declines, but its breach also means that the bands will start moving downward and create conditions for more falling prices.
In the lower indicators, the MACD (Moving Average Convergence/Divergence) confirmed gold is bearish as well, pointing to a second potential signal. MarketWatch uses simple to use colours and when the "red line" rises above the "blue line," it is basically saying that negative conditions trump positive conditions. This is consistent in all their indicators. The black divergence curve also went negative at the same time as the cross and is another clue that the trend was confirmed.
In the DMI (Directional Movement Index), we see the exact same colours crossing. The lines essentially represent the battle between the bulls vs. the bears. And a declining "blue line" means that bulls have lost strength. A crossover means that sentiment has shifted, in this case bullish to bearish.
So what do I predict? Gold will have declines into October, but for two days, we should not see anything. Wait until next week to create a position, either short, go long a bear-ETF, buy the puts or a credit call spread. Any of these trades should be profitable if executed properly along with a decline in gold prices.
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