Personal Finance lessons from the BMO huge money loss on derivatives trading.

Bank of Montreal has lost a lot of money with commodities derivatives trading. They've apparently tried to aggressively compensate for ordinary banking results. I'll let others judge BMO itself. My take here is to see if there are any personal finance lessons we can learn from this. Here are a few thoughts:

• Investing in individual stocks is a high risk business. BMO was portrayed as the ultimate blue chip stock. Even "safe" newsletters like Investment Reporter are always recommending BMO for increasing dividends. Using ETFs or even mutual funds protect you from the woes that can affect single stocks.
• Stick with simple approaches ... derivatives, short-selling and other more speculative tricks can easily backfire.
• Stick to your plan. BMO tried to make quick money instead of sticking to their regular conservative ways that made them a great company in the first place.
• Diversify (don't put all your eggs in the same basket!). What was BMO thinking making such huge bets on natural gas?

I personally own companies like CN that are considered conservative. But who knows what will happen to the stock if the economy goes down and they're hit by a big strike at the same time? I'm slowly moving to a pure ETF portfolio but I still hesitate to get rid of stocks that have definitely been good for my portfolio (RBC is another example of a good stock that I own).

The new canadian reference for ETFs !

[updated links] Canadian Capitalist has a series of excellent posts on ETFs (the best is that it's not over yet!). He's already convinced me to switch to Vanguard Total Market (VTI) for the US. One of his reader also suggested Vanguard All World except US (VEU). VTI and VEU would give you an incredible diversity for a very low MER. I'm all for that. I'm still slightly worried about the fact that the Vanguard ETFs are in US currency (non-hedged) but CC has a good point that over the long term, currency fluctuations might even out. And a bonus is that the Canadian dollar is currently historically high.

Here are the posts so far from CC on ETFs:

A Tour of ETFs: Vanguard Emerging Markets ETF

A Tour of ETFs: iShares MSCI EAFE Index Fund

A Tour of ETFs: Vanguard Total Stock Market ETF

Improving the Sleepy Portfolio

More New ETFs

A Reader asks: What do I do Next?

Mutual funds "hidden" fees: trading expenses

Thanks to Rob Carrick Saturday's column in the Globe and Mail, we are now more aware of yet another fee eating at mutual fund returns: trading expenses. They are measured by the trading expense ratio (TER) and have been disclosed for a year by mutual funds companies.

Here's the explanation from the article:

It's called the trading expense ratio, or TER, and it tells you how much your funds are spending to cover the cost of brokerage commissions for buying and selling stocks. People typically determine how much it costs to own a fund by looking at its management expense ratio, or MER. But trading expenses can be a key component of fund costs, and they're not reflected in the MER.

It's basically the equivalent of your transaction costs if you trade yourself. If you trade a lot and brings you more gains, then it's worth it (same for mutual funds). It is very likely though that you are just adding to your costs not your returns (same again for mutual funds). There are obviously exceptions in the mutual funds industry. Mr. Carrick points out that the TER in his sample vary from 0.06 to 0.95 percent. The big Canadian funds tend to have low TER. He also points out that Canadian Dividend Funds tend to have good returns and low MER/TER. So if you are going to buy mutual funds instead of ETFs or individual stocks, these would be a good place to start.

The conclusion on the E*Trade saga (bad customer service, etc.)

Here's a follow-up on the post I made on the troubles a family member had with ETrade:

• It took more than three months to get back a big amount of RRSP money from the void that exists between Ing Direct and Etrade! (Ing had sent the RRSP transfer money check and Etrade claimed they had never received it)
  
• ING Direct was more helpful than Etrade because they happily had a supervisor quickly involved and tried their best to solve the situation (remember that Etrade reps hung up the phone and it required a lawsuit threat to talk to a supervisor)
  
• ING will pay the interest on the money retroactively even if the account was closed ...
  
• Etrade was also resisting somehow completing a form that ING required as proof the check was never deposited.
• So how was the situation solved? The best thing we ever did was to involve Investment Dealers Association of Canada . A friendly person there who had some obvious clout advised us and stayed involved until the end. He even called Etrade. Each side (ING and Etrade) was asked to CC all faxes to this guy. It only took a few days to get the whole thing resolved once he was involved! Keep that in mind if you ever have problems with Etrade.