Planning vs reacting

There is an axiom in medicine:  don’t do a test unless it will change your management.  It’s tempting to get information just for the sake of having more information, especially when it’s easy to come by.  But this is dangerous.  Why muddy the waters with extraneous information if it will not inform a subsequent decision?  If you’re going to do a test, you must have a plan for the results.

Watching the markets is like running a test:  once you do it you receive a data point.  What are you going to do with that information?  What question were you trying to answer?  If you don’t know this before you start, you are just reacting. 

If you are starting out, you are going to need to know what the stocks are worth so that you can buy the number that fits with your plan.  If you’ve carved out an afternoon to re-balance your portfolio, you need to know market prices for the same reason.  If you’ve received an alert that a dividend has been cut, your plan (which should be explicit and written down) may involve an adjustment.

It’s all about the plan.  

In fact, having a plan is more important than your investment strategy.  A mutual fund investor paying 2% fees who sticks with her plan will be better off than a dividend investor who is reacting to the ups and downs of the market.  Don’t react.  Execute your plan.

Creating a plan is probably one of the greatest advantages that financial planners provide and one of the greatest improvements that DIY investors could make.  Do you have one?  Not just a vague idea in your mind, but an actual written plan?  Be honest.  If you don’t I can assure you, you’re not alone.  I didn’t have one for years but it is the single most important ingredient for success as a DIY investor.

Think it’s difficult? – it’s not.

Don’t know where to start? – here’s a template.

A template plan

  1. Current Status:  How much do you have saved? – list assets by account.  How much are you earning? – include all sources of income.
  2. Objective:  How much do you need to be financially independent – one million, two million?  (This calculator might help) 
  3. Time frame: How long will it take you to save that amount?  How long will that amount need to last? (be conservative)
  4. Savings target: How much of each paycheque will be saved? – savings should be automatically transferred, like paying a recurring bill.  Into what account(s) will the funds be deposited?
  5. Asset allocation:  Are you a traditional 60% stocks, 40% bonds person?  How much in Canadian vs. international?  Have an idea of your tolerance for risk and volatility.  
  6. Strategy:  Mutual funds? – I hope not.  Index ETFs? – good for many DIY investors.  High quality dividend stocks? – that’s how I roll.  A combination? – sure!  Here’s one example – at the beginning of every calendar year buy and hold the BTSX portfolio (50%), a US index fund (20%), an international index fund (20%), and a bond fund (10%) .  Use accumulated dividends to rebalance every three months.

*Note: this is a hypothetical plan for illustrative purposes

Failing to plan is planning to fail.  Plan to live, live your plan.  Sometimes the cliches are true.

Make a decent plan and stick to it.  In fact, the DIY investors who perform the best over time are those who forget about their accounts.

Reality check

But let’s be honest.  We won’t forget about our investments.  We’re going to check the market.  We can’t help it.  Not every day but . . . occasionally.  We’re not perfect.  I know I’m not.

And this is exactly why a plan is so important:  Not to stop you from checking (although it should help to reduce it) but to prevent the checking from triggering bad decisions.

Beating the TSX is one of the best investment strategies we have available to us as DIY investors, but it is the last part of the plan.  If we are going to be successful we need to put the first five parts in order first.  It doesn’t have to be perfect.  Make a draft.  Get familiar with the process.  Revise it later.  Give yourself an hour to think it out and write it down.  Your future (wealthier) self will thank you.

Here’s the punchline for April: 

  1. National Bank nudged Shaw out of the 10th spot
  2. There were four dividend raises and no dividend cuts
  3. Average yield is 4.94%.

Addendum:  The fact that Shaw is off the list and National Bank is on it does not mean we should sell the former and buy the latter.  Part of the strength of BTSX method lies in the fact that transactions occur annually (i.e. not frequently).  I’ve published this list for those who are starting out or who may not be using the calendar year for their annual adjustments.

Thanks to Ross Grant for pointing out this potential source of confusion

Both BCE and TRP raised their dividends by 5%.  CIBC increased theirs by 3% and BNS by over 2%.  In an uncertain economy with political turmoil around the world and stock markets exhibiting some rather odd behaviour (or is that the norm?), I take solace in dividends.  Even better when they’re rising.

What has the stock market done in the last month?  Not much.  But it doesn’t matter.  If it went up I’d say it was no surprise – that’s what markets do.  If it went down, I’d say exactly the same thing.  I’m tempted to leave out the “price” column of this list altogether.  Price changes should not affect our investment decisions.

Some light reading

How often is it a stock-picker’s market? Ben Carlson

Recessions: It’s been a while Collaborative Fund

The twenty craziest investing facts ever The Irrelevant Investor

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This Post Has 21 Comments

  1. Sam Stahl

    Tks Matt Hope all is going good with you and yours. Thanks for keeping us posted .It is a. busy time of the year for us,not a lot of time for our investments,,
    Tks again later

    1. admin

      My pleasure, Sam – thanks for commenting. Paradoxically, less time spent on investments is probably a good thing!

  2. Bruce bircher

    What are your thoughts on ZWU. Bmo utilities covered call which is utilities,telecoms and pipelines and pays about 6%. Most of the BTSX are these companies plus about 30% of the fund is in USA so some diversification too. Thanks. Bruce bircher

    1. admin

      Hi Bruce, I’m not a fan for a few reasons:
      1. Derivatives are complicated. I prefer a simple, effective approach to investing. As Charlie Munger says, “Simplicity has a way of improving performance through enabling us to better understand what we are doing.”
      2. High fees – not just MER (management expense ratio) but TER (trading expense ratio)
      3. Tax implications: a portion of the return (over 1/3 in the case of ZWU) is “return of capital” – in the long term this will result in more capital gains rather than dividends; it also complicates tax planning somewhat as it must be accounted for in calculating your adjusted cost base.
      Rob Carrick wrote more comprehensive analysis of these kinds of products:

      1. Geoff White

        Quote from Rob Carrick article reference to covered call ETF ZWB (Banks) : “A return of capital – basically, it’s like getting back a little of your upfront investment – is not taxed in the year you receive it. However, it does lower the adjusted cost base for an investment and thus increase the potential capital gain on sale. Some investors object to this, preferring to receive income from dividends and bond interest rather than a return of their own money.”

        I would have thought most investors would be better off tax wise have capital gains at 50 % once your tax margin gets above the dividend tax credit advantage. That said, Rob very rightfully identifies the high trading and covered call churn costs and the fact ZWB works better in a less volatile and less aggressive market that what has been as late. The covered call can limit the upside gain in a fast rising market.

        1. admin

          You’re right, Geoff – I didn’t explain myself very well. Will edit my response.


    Hi Matt, Well done. Your excellent, brief, and too the point summary, is refreshing. Thank you. You had mentioned previously that the S&P/TSX 60 top dog 7.734% Dividend IPL was not in your top ten list because of the previous trust history. Perhaps this could be identified in your summary along with any other exclusions? IPL comes up in a top ten search. I try to track the top 20 dividend S&P/TSX 60 stocks to not loose sight of the upcoming or periodic BTSX positions. Like the flip flop BNS and Telus at the beginning of the year. Keep up the good work. Geoff W

    1. admin

      Thank you for the kind words, Geoff. There are so many subjects I want to address here on the blog – and that is definitely one of them. Stay posted!

  4. Phil

    Hi Matt

    Thanks for the great info. Been following you, Ross grant, and David Stanley since the early days. Two questions:

    Would you feel comfortable disclosing the ETFs you’re holding? I’m dumping my international and us mutual funds and looking for ETF alternatives.

    Secondly, why did you decide not to use the dogs of Dow strategy for the US portion of your portfolio? I noticed this is where you and Ross Grant differed.


    1. admin

      The plan I have outlined is a hypothetical one. I do use the Dogs of the Dow for my US holdings (in my RRSP to avoid the 15% dividend withholding tax).

      I’ve always thought that holding the “Dogs” meant indirect international exposure since many of those companies do a significant amount of business overseas.

      An index ETF approach to ex-Canada investing is also a very good one. VXC and XAW are both great options. The Canadian blogger Tawcan did a great overview of them here:

  5. Patricia

    Thinking about USA stocks and abandoning the Dogs of the Dow Theory, I did this some years ago because I am now dependent on using dividends for income and am 83 years old….sorry, young. I now concentrate on Closed End Funds (CEFs) and some ETF’s for growth as well as high income.
    Current holdings USA:
    Gabelli Global Utility (GLU)
    Gabelli Multimedia Trust (GGT)
    Invesco S&P 500 High Dividend Low Volatility (SPHD)
    Liberty All-Star Growth (ASG)
    Liberty All-Star Equity (USA)
    Reaves Utility Income Fund (UTG)
    Vanguard 500 Index Fund (VOO)

    Hope these may be of interest to some readers. I also use some of these stocks for my children’s portfolios, as well, as they look to me for advice managing their RRSP’s and TFSA’s. For the last 10 years I have only invested in dividend paying stocks and have used the BTSX for the Canadian side of my and their portfolios.

  6. Allen McRorie

    just checked stocks in TSX 60 today, in March, ARX and CPG were dropped, BIP.UN and SHOP were added. as well, WEED is being added on April 18, 2019, G is being dropped. these changes affect the listing of the top 10 yielding stocks, BIP.UN was only recently added to the list of TSX 60 stocks, so until that happened, it would not fit the criteria for choice of stocks to consider for the BTSX dividend strategy, even though it did pay out a fairly large yield.

    1. admin

      Thank you for the updated information, Allen – it’s not always easy to find this info. About BIP-UN, you’re right – partly.

      The problem with Brookfield Infrastructure Partners is that it is a limited partnership, not a corporation. As such, they don’t technically pay dividends – they pay distributions that have not been taxed in the hands of the company. Owning BIP-UN in an unregistered account will trigger the issue of another tax form – a T5013. Year to year, the distributions that are passed through to “the partners” will come from different places: foreign dividends, interest income, return of capital, etc. This can really complicate income tax filing. If you choose to own BIP-UN, I would suggest holding it in your RRSP to avoid these tax complications and potential dividend withholding tax (from foreign dividends).

      For these reasons, I will exclude BIP-UN from the BTSX portfolio for now (that’s not to say it is not a sound investment though).

      1. sam

        Your statement “This can really complicate income tax filing” in regards to T5013.

        Would it be correct to assume the T5013 will be issued by the broker even though you are a DIY investor? The form will have the box numbers to place the various amounts, foreign dividends, interest income, return of capital, etc.

        I am new to this game and have paid good money to financial advisors to manage what is now possible to do on your own.

        Thanks for the info you have provided in your site and the various posts from investors who are experienced in this field are enlightening.

        1. admin

          Yes, a T5013 will be issued to you as a DIY investor. The only way to avoid it is to hold these investments in a registered account (RRSP preferably). I think the more complicated part, however, is the ACB adjustment that needs to happen with every distribution – a lot to keep track of, and I like things simple!

          I have not had to go through this personally, however, and am not an accountant. Perhaps one of the other readers will weigh in with a brief description of what’s involved.