When the Market Falls Go Shopping

Unless you have been living under a rock you have noticed that the TSX dropped a heart stopping 400 points or so this week. Has this made me nervous or did I sell off anything. No, actually we went shopping during the drop.

My wife picked up EIT.UN at $6.18, which is a income trust that is comprised of shares of other income trusts in her taxable account. So it is similar to a mutual fund, but have the structure of an income trust. What is nice about this fund is 21% of it is made up of REIT’s which won’t be taxed under the new law for other income trusts. So the excellent yield of 13.5% at which my wife got it will likely drop to around 9% after the new rules come into play, which is still a great number. The other nice thing is about 40% of the distributions won’t be taxable (as return on capital). So overall it was a great deal for us.

The problem with this decision was now I will have to use my line of credit to initially pay for the new furnace going in around the middle of this month until I get my tax return around late April. Yet earning 13.5% on that money for years ahead seems worth it to pay 8.5% on the line of credit for a month and a half.

PS: A reminder that I’m not your adviser and you should do your own research before determining if EIT.UN is right for you.

10 thoughts on “When the Market Falls Go Shopping”

  1. FT,

    Yes. 2005 was 1.37% MER. It’s a scaling value of 1.5% on the first $250 million and 1% after that.

    CD

  2. Wow, you must have a large investment account to be able to afford more than $250 million worth. 😉

  3. The TSX

    The media has made a big deal about the one-day drop in the TSX. However, if we look at a chart of the TSX for the last 5 years, a drop of 400 points only qualifies as normal expected short-term volatility. If that is the end of it, whether it occurred in one day or over several days is academic.

    In hindsight, if one had invested everything in a TSX Index Fund in January of 2003, the portfolio would be worth twice as much today! Like most people I came late to the current bull market party.

    When to invest? When to retire? It reminds me of the lyrics in the Beach Boys song “Good Timin”…”It takes good timing”.

    In hindsight I think the best way to time in the market, and we all time the market intentionally or by accident, is to automatically invest a sum each and every month. Seems to me that only this approach would guarantee buying in during the largest, most profitable corrections. I think they call it Dollar Cost Averaging. I expect that calculations would confirm that this approach would give a somewhat higher long term return than the long term 7-8 percent market return we often hear about.

    http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=CA%3A89199000&sid=46938&o_symb=CA%3A89199000&freq=2&time=12

    Already Retired

  4. …and you likely know that interest you pay on something you purchase to obtain income is a tax deduction? Just ensure there’s a really clear paper trail.

  5. whoops – I hadn’t fully digested your post. Too late. If this comes up again, use the credit to purchase the investment, and your cash to pay for the furnace/roof/car repair etc. (I’m quite sure I’ve got this right, but of course ask your accountant.)

  6. The other side of the coin is to look at what you wanted to do when the market was last at this level.

    It is easy to jump in after a 400 point drop, but there were stocks I wasn’t going to buy when the market was at 12,500 on the way up, so why buy at 12,900 on the way down.

    I like your pick though CD. I am going to do a little bargain hunting of my own today and see if there are any trades I want to place on Monday 🙂

    Nancy is right though, you should have used the credit buy the investment, especially if your income tax refund is going to cover it. I don’t like leveraging investments, but I can’t imagine you are going to wait too long to file your taxes.

    Q

  7. Thanks everyone for your comments.

    Nancy – To address the issue about borrowing money to do the investment. Yes my wife could have done that, but the problem was the line of credit is at a different bank, so to move the money over is a two day trip. She would have lost her buying window if she waited.

    QCash – We had already own a smaller portion of this stock prior to the market drop and we did intend to buy more down the road. The drop just made the decision to do it sooner than later. I start working on my taxes today, but since I have to wait to March 31 for our T3 slips I will likely file ASAP in April.

    FT – Thanks for the joke and pointing out that I should have stated the MER is on the entire fund balance not my portion of it.

    CD

  8. CD,
    I’ve been taking a close look at EIT.UN as well… I’m just curious about your thoughts on the share price after the trust amnesty is over?

    Additionally, how do you think the fund is going to handle trusts that convert back to corporations?

  9. MCM,

    It’s hard to say what will happen to the share price after the rules change over. I believe the market has already mostly corrected for that event during the huge sell off last Nov, but there might be another drop during the actual change.

    As to each company within the fund, if they do convert back to a corporation I imagine the fund management will evaluate each one to see if it is a keeper. I’ve already noticed them dropping some trusts very quietly. I remember reading something after this whole taxing trust thing came out saying the fund would continue past the change regardless since it’s goal is to provide maxing cash flow with a diversified base.

    My two cents,
    CD

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