Year: 2009

Categories
Investing

Using Margin to Lower Trading Costs

A great way to invest is to make regular investments.  Million Dollar Journey recently outlined 4 ways to invest small amounts of money each month, all of which are solid and worth considering.  I agree with his 1% rule (the trading commission should never exceed 1% of the value of the trade), which can make it difficult to execute trades even with low cost brokers for people starting out with investing.

One idea to get around this is to use margin.  Let’s assume that we are using a brokerage that charges $4.95 / trade and that we have $150 / month to invest.  Let’s also assume that we’re aware of the risks of buying on margin and we want to keep our account, at most, at 10% on margin (a margin call occurs when your account exceeds 70% on margin). To keep things simple, we’ll ignore changes in stock value, dividends, interest (paid or collected) and brokerage fees.

Using the 1% rule, as long as we buy at least $495 of stock we’ll keep our transactions costs at or below 1%.  After 4 months we’ll have saved $600 and can make our first purchase.

Now say, instead, that after THREE months we transfer over the $450 to our brokerage account, then buy $495 worth of stock (perhaps a nice, highly-diversified ETF).  This would put us $45 on margin, or 10% (45/450) of our account.

Month Bank Account Stock Margin debt
January $150 $0 $0
February $300 $0 $0
March $0 $495 $45

Next month we transfer $45 to pay off the margin loan, then start accumulating money to buy again. After we have $405 we can afford another purchase (since we can now go up to $90 on margin and stay under our 10% rules).

Month Bank Account Stock Margin debt
April $105 $495 $0
May $255 $495 $0
June $0 $990 $90

Eventually (in this scenario in the 3rd year of investing) we’ll get to the point where we can just keep paying off the margin debt, and every time it is paid off, purchase 10% more of our portfolio worth.  This lets us put money into our portfolio every month at no cost, slowly lowers our transaction costs as a percentage of purchase (since 10% of the portfolio SHOULD be an ever increasing amount) and take advantage of dollar cost averaging.  We own the stock we want sooner, and can get a tax deduction for the interest paid on the margin debt (and avoid paying a higher tax rate on the interest we would have earned if we saved up to make purchases in a high-interest savings account).

There is also the added benefit that if we ever can’t make our monthly payment, it’s not a big deal (since the margin debt will always be conservative compared to the size of the portfolio).  Conversely, if we have a windfall, it can be immediately applied to wipe out the  margin debt (or add to the portfolio and increase the margin amount).

The dangers of this approach are quite slim, as our portfolio would have to drop by over 80% before we were in any danger of a margin call (which would be unlikely to happen in a month or two unless we were investing in VERY volatile equities).

I don’t do this and I don’t necessarily advocated others do it, but if people want to minimize their fees, while being able to add small, regular amounts to a stock portfolio I think this would be a reasonable way to do so.  Another approach is Mike’s ETF vs. Index Fund strategy (which involves simple, regular investments in index funds until a set amount is reached, depending on fees and MERs, at which point the funds are sold and ETFs are bought with the proceeds – very similar to MDJ’s idea #4).

Do you make monthly contributions to an investment account?  How do you do so to minimize fees?

Categories
Money

$250 Social Security And SSI 2009 Stimulus Check Information

One of the highlights of President Obama’s recently signed American Economic Recovery and Reinvestment Act was the announcement of a $250 stimulus payment to individuals who currently receive Supplemental Security Income (SSI), Social Security benefits, Veterans benefits or Railroad Retirement benefits.

Will Social Security Payments Be Paid If United States Defaults On Debt?

Update –Will there be a stimulus check in 2010?]

[Update – Jan 4 – Will there be another stimulus check in 2010?]

[update – find out about the new $250 stimulus check in 2010 for Social Security recipients]

[update – find out about the new $250 stimulus check in 2010 for SSI recipients]

Who is eligible for the $250 check?

To get the $250 you must meet the following criteria:

  • Currently receiving Social Security, SSI payments, Veterans benefits or Railroad Retirement benefits.
  • Must have been eligible for benefits at any time in November 2008, December 2008 or January 2009.
  • The person receiving the SS or SSI must have an address of record in one of the 50 states, the District of Columbia, American Samoa, Puerto Rico, the U.S. Virgin Islands, Guam or the Northern Mariana Islands.

 

When will I get my $250 stimulus money?

The SSA (US Social Security Administration) is going to pay all eligible Social Security and SSI beneficiaries by late May 2009, so you should get your payment by no later than the first week of June 2009. The one-time payment will be a separate payment, which will not be included in your regular monthly benefit payment.  You will still get your regular monthly payment amount.

How will I get my $250 payment?

The extra $250 payment will be paid to you in the same method that is currently used to your Social Security or SSI benefit.  If you currently receive your regular benefit by check, your one-time payment will be made by check. If you receive a monthly direct deposit or Direct Express® debit card payment, that is how you will receive your one-time payment.

What do I need to do in order to receive the $250.

You don’t have to do anything – if you are eligible then the payment will be made to you automatically.

How do Veterans get their payment?

Veterans who don’t get SS or SSI will get their $250 payment from the Department of Veterans affairs (VA).  You don’t need to do anything to get the money.

How do Railroad Retirement beneficiaries get their payment?

Your payment will come from the RRB (Railroad Retirement Board).  You don’t have to do anything to get your payment.  It will be delivered to you automatically.  You can call 1-877-772-5772 begin_of_the_skype_highlighting              1-877-772-5772      end_of_the_skype_highlighting (1-877-RRB-5RRB) (TTY 1-312-751-4701) for more information.

If both spouses are on Social Security or SSI – will we both get $250 checks?

Yes, you will.  This program is designed to give $250 to each qualified individual.  If both partners in a household qualify for the payments then they will each get the $250 payment for a total of $500.

Can I get more than $250 or more than 1 payment?

You can’t get more than $250 even if you receive benefits from more than one plan.  Ie if you receive Social Security and Railroad benefits then you won’t be eligible for $500 or 2 payments – just 1 payment of $250.

Some other facts:

The one-time $250 payment will not count as gross income on your federal income tax return.

Disabled children receiving SSI are eligible for the one-time $250 payment.

More information (updated May 2009)

Social Security 2009 stimulus check.

$250 SSI 2009 stimulus check.

Disabled Veterans to receive $250 stimulus checks – on Military Finance Network

Social Security Stimulus Check for 2010 – FAQ

Categories
Real Estate

Rent-to-Own

Rent-to-own (also known as lease-option) is a popular real estate strategy in the US and has been making its way into Canada in “get-rich-quick through real estate” circles.

This agreement, between a landlord and tenant, involves the landlord selling the tenant the OPTION to buy the property at a fixed price at some point in the future (much like a call option for stocks).  Often there will be an initial payment as well as a portion of the monthly rent payments being credited to the tenant.  This might be useful for a tenant who has trouble getting a down payment together (but can afford to put away a little bit each month) or a buyer with credit issues that they’re working out (who expects to be in a position to buy within the option period).

As an example, pretend I’m renting you my condo (which has been assessed at $156K) for $1350 / month.  We agree that I will give you the OPTION (not the obligation) to purchase it for $160K at any time for the next 3 years, with an initial payment of $5K with $150 from each rent payment being credited towards the down payment.  At the end of 3 years say the condo is now worth $165K and you have accumulated a $10,400 down payment (5000+150*12*3).  You arrange for a 5% down mortgage, using the credit you’ve accumulated over the 3 years (which is worth 6.5% of the $160K ) with me using the other 1.5% to cover your closing costs (so you pay nothing more out of pocket and are now the owner of the property).

Say, instead, the real estate market tanks and you decide you don’t want to pay $160K for a condo now worth $130K, you don’t execute the option and at the end of the 3 years there are no further obligations (although the $10,400 is forfeit, the tenant does NOT get it back).

From the sellers perspective, they get to either sell at a price acceptable to them or earn a premium over market rental rates if the sale doesn’t go through.  Additionally, the tenants will take better care of the property (since they expect to own it) and will be very motivated to pay rent on time and honour their lease (since they could jeopardize the purchase if they don’t).

From one perspective, between financially sophisticated individuals, this is a reasonable way to allow the seller to earn a premium by acting like an insurance company, taking on more risk in exchange for payment.  Sadly, rent-to-own is often instead used to take advantage of unsophisticated renters who want to become buyers but don’t have the means.

Often the tenant who isn’t in a position to buy at the beginning of the lease term STILL won’t be at the end of it (and will be $10K poorer for having gone through the exercise).  Unsurprisingly tenants will be annoyed when this money is gone, and will often become destructive or difficult tenants if they aren’t able to close on the deal (and the seller refuses to return their option payments).

From the sellers position it’s a pretty good deal, as they can set the sale price higher than they expect it will be worth within the option period, and they get paid a premium over what they’d usually earn in rent.  The law is often on their side if the market takes off and they decide to not honour the deal and fight the sale.  That being said, judges will NOT be impressed by these sorts of shenanigans and will be looking for any excuse to rule in the tenant’s favour.

I saw a classified ad from a woman who wanted to do a rent-to-own deal (with her as the tenant) in Toronto so I contacted her.  Turns out her expectation was that she’d pay market rent, but her ENTIRE rent would be credited towards the eventual purchase of the property.  Why she would expect any landlord to agree to this is beyond me, but she did.

I talked to a lawyer friend who talked to a lawyer friends of her’s who specializes in real estate and they were of the opinion that lease-options were too untested legally in Canada to get into unless you were doing them in a big way (in which case they felt it might be worth the expense to research all the legal ramifications and develop the right contracts to make it a business).  Their advice was to do a vendor-take-back mortgage if I wanted to provide seller financing.  In the US, where these deals are far more common, there are also legal and ethical pitfalls.  John T. Reed outlines some of them in an article about lease options (and offers a report for sale with more info).

More information about lease options is available here (general overview), here (with a bunch of links to more articles at the bottom) and here (details lease options in BC with a couple of quotes from Mr. Reed).

Categories
Personal Finance

New Hosting For Four Pillars – Media Temple

The hosting problems we’ve been having lately are finally over – I’ve moved the blog from Dreamhost to Media Temple.  I don’t normally blog about bloggy stuff but I know there are a lot of bloggers who read this site who might find this interesting.

First of all I’d like to thank everyone who helped out with the blog migration and also to many others who offered to help.  I really tried to do this on my own – although painful, it was a good learning experience.  As a self-proclaimed “serious” blogger – I feel it is in my best interests to learn as much as I can about all the different aspects of blogging – even if I don’t want to!  I’m still not sure if I would have been better off hiring someone like Blogcrafted.com (mentioned below) to do it for me given the amount of time and aggravation it was.

Two people who helped out a lot  were:

Finance Freelance Life – she also runs BlogCrafted.com which is basically a blog consulting company.  Some of the services she provides for very reasonable rates are:

  • Migrating blogs from one host to another (like I just did) and from hosted platforms (blogger, wordpress.com) to self-hosted (wordpress on a host).
  • Changes to your theme or setting up and modifying a new theme.
  • Complete new blog setup on any platform.

Pinyo – this guy has a great website at moolanomy.com as well being the brains behind PFBuzz.com which is a great place to find good blog posts.

Some more hosting stuff

For anyone who doesn’t know – “hosting” refers to the server where the blog material and code is kept – there are lots of different companies around that provide this service and the main differentiators are:

  1. Price
  2. Service – how quickly do they respond to help requests and how knowledgeable are they?
  3. Performance – is the blog slow or completely down at times?

How did I decide on the hosting company?

I narrowed down the possible hosting companies to LunarPages and Media Temple.  Both companies came highly recommended and I know quite a few good sized bloggers who use either.  There are many others out there which I’m sure are comparable but I tend to go with recommendations from other bloggers.

Lunar Pages has what I think is the best value anywhere with their shared server hosting – for only $4.95 per month (if you pay for a year) this is as cheap as it gets.  The great thing is that they are very reliable and have good tech support.  I think the shared server option is best for most blogs – you won’t have to upgrade until you get to at least 2,000 uniques per day or a lot more.

Media Temple has a dedicated virtual server option which is quite good for $50 per month.  This is a lot more expensive than Lunar Pages so not only do you need significant traffic – I would suggest a minimum of 2,000 uniques per day, you also need the revenue to support the costs.  One thing to note is that if you pay for a year up front – the cost is only $500 ($41/month) – not so bad.

I was on the fence for quite a while about which company I should go with but eventually I choose Media Temple because I thought I might have too much traffic for Lunar Pages shared server.

My advice for anyone looking for a host is to go cheap until you know you are ready to upgrade.  Both Lunar Pages and Media Temple have cheaper shared server options all the way up to expensive private server options so you don’t necessarily have to leave the company to upgrade (or downgrade).  I made the mistake of upgrading my Dreamhost account to the virtual private server a long time ago thinking that more traffic and money would be soon to follow.  In the end I think I threw a couple of hundred bucks away.  I should have just stuck with the shared server.

Why did I leave Dreamhost?

The reason I decided to leave Dreamhost was mainly because of an incident several weeks ago where the blog was completely down.  I put in a support ticket (they don’t have phone support) and it took them 22 hours to respond.  In my opinion this is unacceptable and was enough reason to start thinking about switching.  The second reason was that the quality of the support was very poor – in the incident the support person didn’t have a clue what was wrong and thought it was my themes.  I knew this was ridiculous because both of the themes I use are very common (Thesis and Grid Focus) and I never heard of anyone else having problems.

To be fair, I did use Dreamhost for 1.5 years without any incident so they are not bad – it was only when I needed help quickly that they failed.  Dreamhost is no bargain either – I think the monthly base charge was $11 per month and I had a virtual server option which was a minimum of $15 on top of the base rate (you can set it to higher rates for more juice).

What was the problem?

In the end I believe that removing the gravatars from the comments was the biggest factor in getting the blog running properly again.  I have one post that has a ton of traffic as well as comments so all those extra calls were slowing things down dramatically.

Categories
Personal Finance

CAW Reaches Deal With GM

No sooner had I labeled the head of the CAW as a dreamer for thinking that he could reach a deal with GM that didn’t involve some sort of wage and pension reductions, then lo and behold – that’s exactly what he did.

[edit]

Apparently the original story was wrong and the union did give some wage concessions – I guess I should have waited a while longer before posting this. 🙂

According to this Globe article – the deal reduces the total compensation (wages and benefits) by about $7 per hour to $63/hour.  This doesn’t seem all that dramatic but it’s a good show of faith by the CAW.  I suspect they will have to give up more in the future but the real cost savings will be in head count – as in a lot less of them.

[end edit]

My first thought was why the heck did GM agree to this deal?  It seems quite obvious to me that significant salary cuts are needed – both in hourly wages and a reduced work force.  It could be just one more example of how GM (and the other car companies) are incapable of negotiating properly with the unions but I think maybe some of these factors might also have been at play:

  • This deal was made just to get the bailout money.  The companies and unions have to show some serious money savings in order to qualify for the bailout so they put together a deal which they feel is the “minimum” necessary.  If I was in charge of the bailout money – this deal wouldn’t get a dime.
  • Given the worsening financial situation at GM, this deal might not mean much if they file for bankruptcy in a few months which I think is going to happen sooner or later.  Even if they don’t file – financial conditions in a few months might mean this deal becomes irrelevant anyway.
Categories
Announcements

Some Links For A Saturday Night

Rough week in Pillar land – family stomach flu and hosting problems which resulted in switching the blog to a new host.  I’ll be posting the details on Monday (about the hosting change – not the flu!).

Here are a few posts that I read this week:

I thought this post on what you should do when job hunting was simply brilliant. I really liked the advice about keeping yourself “employed” (or what appears to be employed on paper) when you are not.  I found out about Penelope Trunk’s Brazen Careerist blog after seeing repeated links from Brip Blap who is always a great read.  Both blogs are very worthwhile.

Ron from the Wisdom Journal explains how he and his wife paid off $120,000 in debt in 52 months.  Keep in mind that 52 months is over 4 years so we’re not talking about a short-term effort here.  Congrats to Ron and I’m sure he can’t help but wonder what things would be like if they had not accrued that much debt in the first place.

One of my favourite topics lately is the car companies – Ken Lewenza, the head of the CAW insists that he can maintain his members’ existing wage and benefits packages.  While I understand that the CAW is negotiating and no union should agree to major cutbacks just because a company is in a short-term down period – I think in this case the only way Mr. Lewenza can keep his ridiculous promise would be to somehow buy all the car companies himself.  Of course in that case he would probably lose his union job.

Moolanomy has a regular feature called Ask Larry Swedroe who is a very good investing expert.  This weeks question was “Should you own individual stocks” – I’ve read a lot of answers to this common question before but I thought Larry’s answer was very good.

And last, but certainly not least – Plonkee Money – a very worthwhile read – wrote a post about the magic money cupboard.  This post really illustrates a common opinion that most financial companies have some “secret” money management skills that somehow allow them to earn above average investment returns.  If they do, they certainly keep those excess profits close to home.

Categories
Opinion

Who Do You Trust?

Almost two years ago Promod Sharma at Riscario Insider wrote a post, partially in response to something I had written, about “Who can you trust?“.  Promod suggests referrals as a way to trust someone you start doing business with, and in the comments I mused about following the reasoning of people you first encounter, and the more you agree with them, the more you can trust them in the future and the more times you catch them making questionable assertions the less you can trust them in the future:

I’d say another good way to find who to trust (referrals is a great option) is to follow their line of thinking (don’t just turn off your brain) and increase your trust as you agree with more of what they say. John T. Reed’s thinking is very well founded and he provides extensive supporting evidence. I don’t *have* to trust him, I can follow his reasoning.

Some Christian’s who don’t like evolution will talk about Darwin recanting on his deathbed and converting to Christianity. The assumption here is “don’t trust what this guy wrote, he took it back later in his life”. The thing is, we don’t *have* to trust Darwin, his reasoning stands on its own. Even if he said “I was just kidding about that whole Origin of the Species joke” we don’t need to trust the man to believe the information (whereas a cornerstone of faith is that you have to trust the messenger since no evidence is offered).

Once you’ve agreed enough with what someone has to say when they talk about things you understand, you can start believing them (trusting them) when they tell you their conclusions about things you *don’t* understand (although the best case scenario would be to get them to explain these things to you such that you agree with them because you understand the issue and no longer have to take their conclusion on “trust”).

A while back I responded to a classified ad by a woman who was looking for a real estate guru in Kitchener-Waterloo.  I warned her that her post had a good chance of attracting people who were trying to take advantage of her and to be careful (and pointed her to some of my real estate posts).  I recommended she read as much as she could for free on-line (and in books) before she started paying people to help her.  She asked me specifically what I thought about Robert Allen, who she had read and thought was good, and I directed her to John T. Reed’s pages about him.  After she looked at them she responded with:

I read Reed’s blog before.. but to tell you the truth.. I didn’t like his tactics.. he is no different then Allen.. kind of the same idea, lot’s of: I will show you.. I will teach you.. I will explain.. but just buy this particular book that cost $xxx, if you want to know this then it will cost you $xxx.. again.. He is putting someone else’s face down and trying to stay on top by claiming that he got “the Secret” and “The knowledge”.. so pay the price and read it

I found her response somewhat perplexing. To equate Allen and Reed seemed like saying Albert Einstein is the same as Ben Stein since they’re both Jewish intellectuals (and their names end in stein) or Macauly Caulkin is the same as Lucy Liu because they’re both actors.  Where do you begin to differentiate two people who are *SO* different?

Some might say that citing Reed shows that I’ve accepted him as my guru, which is no different than people in the Whitney, Trump or Kiyosaki camps.  I think the primary difference is that Reed first of all acknowledges the bias in a number of articles (not in this one however).  Additionally there is a massive difference in price.  Reed’s books range from $30-$50 with no possibility for seminars or follow up, other than books on different topics.  This stands in stark contract to $5K / weekend “courses” (which include pitches for more expensive follow-up courses since you’ve proven you’re not very bright and you have too much money).  Finally, the gurus he debunks say “X is true.”, and provide nothing to back it up.  Many of Reed’s opinions on various gurus result from his investigating their claims (and finding them to be bogus).  Reed does an excellent job of concisely proving providing his line of reasoning.  You may not agree with it entirely, but it’s all laid out for you to decide what part you agree or disagree with (which is useful as I mentioned in my comment on Pramod’s post).  I’m pretty opposed to a draft, but John T. Reed’s article arguing in favour of it was one of the most convincing arguments from the other side I’ve ever read.

We’ve had a similar experience with our real estate articles.  An agent levelled the accusation that we wrote attacks on real estate agents in order to get readers to visit our site and make money from advertisers, so we have just as much of a bias as we’re accusing agents of having (and people shouldn’t take our posts seriously).  The strange perspective there is the expectation that somehow pointing out the bias in how real estate agents get paid leads to more readers.  Maybe we’d have gotten more readers if we’d written a manifesto detailing why people need to trust their real estate agents more.  Or maybe we’d have gotten more readers if we’d written about why Cheddar cheese is the best cheese on the planet.  We’re often surprised which of our posts get the most attention, it’s certainly not something we’re deliberate about (“let’s write about topic XYZ to get lots of readers / advertisers / cash!!!”).  Our goal is to write entertaining, informative articles.  If we write something that’s untrue, our readers and commenters catch it, so we have a bias toward providing correct information.  We could be accused of writing inflammatory posts to get attention, but I’m confident they’re fairly accurate even if they are controversial (and given some of our recent posts such as “TFSA Institution Transfer Strategies” or “Mr. Cheap Asks: What Kind of Dog Should I Get My Dad?” I think controversial might even be a stretch).

How you trust someone you urgently need something from (like a doctor during a medical emergency or a lawyer during a legal emergency) is a tougher issue.  Ideally you’ll have someone you’ll have build a basis of trust with before the emergency, but if you don’t referrals might be your best course of action.

How do you decide who to trust in the short-term or the long-term?

Categories
Investing

2008 Portfolio Returns

I know this is a bit late but I finally got around to calculating my 2008 portfolio return. For some reason this year I was not as motivated to know how much money I made..lost.

Given that most markets went down at least 30% we did quite well with only a 17% drop.

Canadian Capitalist has listed all the 2008 asset class returns for comparison.

My asset allocation at the beginning of the year was as follows:

  • Bonds – 20%
  • Real return bonds 5%
  • Canadian equity – 19%
  • US equity – 27%
  • International equity 29%

Part way through the year I converted about 5% of the bonds to REITS which was not a good move!  🙂

You might be wondering how I only had a 17% drop with this allocation – I’d like to claim some sort of market timing skill but the reality is that a good part of our equity was out of the market for most of September and October (ie the bad months) because they were being moved to RBC.  Once at RBC, we took our sweet time buying back in.  This probably added about 5% to our return for the year.

Does anyone else have any “lucky” investment stories from last year?

Here are some returns from other bloggers

Pinyo from Moolanomy.com was down about 35% – his portfolio is pretty close to the S&P500.

Canadian Capitalist was down 22% for the year.