Personal Finance

Not another rrsp vs. mortgage post!

I had mentioned previously that our general financial plan to prepare for retirement was to pay off all debts, max out my rrsp room, and hopefully invest outside the rrsp as well. I don’t want to ignite the immortal rrsp vs. mortgage debate since it appears that either option or any combination is a financially prudent course of action, but I would like to share my approach for my situation.

In our case, we do both rrsp contributions and extra mortgage payments. I don’t maximize the rrsp for now because I’d rather focus more on the mortgage since it worries me a lot more than the any lack of rrsp does at this point in time. On the other hand, being in a high tax bracket I like to make rrsp contributions because the money left over after taxes is not all that much. On the other hand again, the mortgage doesn’t go down very quickly if you don’t make extra payments.

I’ve read a number of rrsp vs. mortgage debates where the rrsp side argues that future investment returns will be higher than the current mortgage rates and vice-versa but the reality is that if you are planning to pay off your mortgage in 10-15 years as I am (or even quicker) then it’s debatable how much confidence someone can have in assuming a certain rate of return on their investments since 10-15 years is not really a long time when you’re talking about equities. Another factor is the mortgage rate assumption, a lot of investors just take the current rates and assume they won’t change when they do their calculations but are the rates really going to stay in a narrow range over the next five, ten, fifteen years? Assumptions are great for getting an “idea” of what might happen but they are really just guesses.

To conclude, I don’t know if it really matters that much exactly how we go about (eventually) maxing my rrsp and paying off the mortgage as long as we do it in a way that feels most comfortable.

Book Review

“Where are the Customers Yacht’s?” Book Review

I decided to read this book because I’ve seen it referenced in numerous finance books, one of which is the Four Pillars of Investing by William Bernstein. Canadian Capitalist has posted a list of the recommended readings from Bernstein.

This book written by Fred Schwed is a fairly light-hearted look at the investing game. The author, who worked in the industry as a trader, does not take the industry or himself seriously at all. Although it’s not a serious academic study, the author lays the groundwork for the efficient market hypothesis (EMH) although he never uses those words in the book. Interestingly enough, having read both “Four Pillars of Investing” and “A Random Walk Down Wall Street”, this book was clearly the genesis of those two books. Some of the same stories, analogies and even jokes are shared among the three books. Since Schwed’s book came out in 1940, obviously the latter two books copied some material from it.

Unlike most finance books which tend to have lots of studies, graphs and the like, this book offers no proof whatsoever of his theories. Schwed doesn’t even explain how he came up with his version of the EMH. What he does do is explain how various market professionals are more or less useless, with a lot of Mark Twain type comments mixed in. The book is somewhat dated which makes for some amusing reading, in particular the section about investors who sell short entitled “The Short Seller – He of the Black Heart”.

My favourite paragraph from the book is about speculators (traders) and how the only thing they know of the companies they trade is the stock symbol:

This inability to grasp ultimate realities is the outstanding mental deficiency of the speculator, small as well as great. He is an incurable romantic and usually egotistical. His mind is fast, active, and resourceful, and, in a peculiarly limited way, shrewd. That is, he is shrewd in everything save that he is constantly, day by day, laying himself open to the possibility of being ruined. He seems to believe, with Mother Goose, that a treetop is the proper place for a cradle.

Bottom line: This book is interesting, funny and easy to read. If you’re like me and like reading a lot of finance books then I recommend this one for a change of pace. If you’re just getting started as a DIY investor then I would suggest something more recent such as the other two books I mentioned earlier.


DIY Investor Wish List

I was going to start a 97 part series on my investment portfolio today but Outroupistache had a comment on my first post where he suggested writing about investment related areas that still need improvement.

So without further adieu…

Financial Advisors – This is wishful thinking, right up there with world peace, but I wish that the financial advisory field was a regulated profession and not an industry group of commissioned salespeople. This may not be all that relevant to a hard core DIYer but there are a lot of other DIYers who would still like to use a professional for some aspects of their planning. Fee-based planning seems to be the answer although from what I understand it’s very difficult to make a living charging fees when all the other financial advisors are “free”.

Mutual fund costs – According to a recent study by some international academics, we have the highest mutual fund fees in the world. I’m not convinced of the accuracy of their measurements but I don’t doubt their final conclusion. This really is up to the consumer to change. As long as 99% of investors don’t know or care about relative costs then they will never come down. Investors need to shop around a bit for cheaper funds. As well, all the major mutual fund companies will reduce their management fees by up to 0.5% or so and the annual trailer fees paid to the advisor can also be reduced by up to 0.5% as well. You would need a fairly large portfolio (I would guess $300k+) to be able to knock 1% off the management fee but I would suggest that if you have at least $50,000 you should ask about a reduction, if you have more than $100k then demand it. It might only be 0.25% but that still makes a difference. If anyone out there has done this then please let me know the details of your situation.

Education – I recall some economics courses being offered in high school (which I didn’t take) but I don’t remember any personal finance or investing courses. These should be mandatory courses for high school students and should be offered to post-secondary students as well. It seems like most people are afraid to do any investing on their own because they don’t know the first thing about it. If they even had a basic level of understanding of investing and financial planning then they would be far better prepared to deal with financial advisors or to do it themselves.

Any other ideas on investment areas that need improvement?


Why did I start this blog?

Now that I’ve got the first post out of the way and participated in my first tour, I should probably introduce myself.

Name: Mike

Favourite investment book: Four Pillars of Investing – William Bernstein

I’ve had an interest in finance for at least 15 years, however in the last six months I’ve gained a huge interest in personal finance. I think having a fairly sizable mortgage along with not getting any younger, motivated me to try to take stock (no pun intended) of my financial situation particularly with respect to retirement.

During the process of assessing our rrsp portfolio, rrsp contributions, debt repayments, retirement lifestyle etc, I’ve learned about a lot of new things and the Canadian financial blog community has been one of the best sources of information for me.

In the last several months I have really enjoyed reading other financial blogs and leaving comments (some quite lengthy) on them and having discussions with bloggers and other commenters. I’m hoping that by having a blog of my own, I can provide another source of information and opinions for other people and I’m sure I’ll learn a lot in the process myself.

Soon I’ll be starting a series covering our investment portfolio and financial situation and going through the thought process that has occurred in trying to figure out things like asset allocation, specific investments, risk levels etc. The portfolio is still a work in progress but I’ll be providing updates on that as well. I don’t want this blog to be all about me, me, me so I’d like to mix in posts about items in the markets or news.

See you tomorrow!

p.s. I just put the blog together a few days ago so if you have any suggestions for improvements then feel free to let me know.

p.s.s. I’m not sure if the RSS stuff works so if anyone signs up then please let me know if it’s working or not.


DIYers, You never had it so good!

Do you lose sleep trying to calculate if you should convert your index fund holdings to ETFs now or wait another month? Was it a tough decision to go with the brokerage with the $8 trades vs. the one with the $5 trades? If so then you might want to consider the fact that as investment DIYers, things have never been better.

Here are some of the reasons why:

Stock trading commissions – In the past you could only buy and sell stocks through full service brokerages which would charge in excess of $100 for a trade that you can do now for $5. A frequent trader would go bankrupt pretty quick with those commissions and even for a buy and hold strategy, lower commissions represent a big saving.  Read a BMO Investorline review here.

Mutual fund costs – Prior to the advent of the dreaded DSC (or back end) option in 1987, front end commissions were as high as 9%. The DSC option was actually an improvement over the front-end option because all of your investment dollars would be invested instead of being lopped off for commission. Now you can get most funds with front end option and no commissions. You still have to shop around for lower MERs however.

Information – The number one improvement in this area is the internet. Financial blogs, forums, websites, company sites, investment book reviews, learning pages, online research reports all help DIYers not only learn more about investments but allow them to carry out the execution via online brokerages. Television is also another area where there is much more information on dedicated business channels than in the past.

Index Funds – These first appeared in the US in the mid-70s although they were slow to catch on. According to there are only 6 Canadian index funds that have 15 year returns with the oldest being established in 1985. These passive investment funds provide a low cost alternative to actively managed mutual funds.

ETFs – The first Canadian Exchange Traded Fund established in 1990 was called TIPS and was the first ETF in Canada or the US. The last several years has seen a huge increase in the number of ETFs traded on the TSE and the US markets. ETFs are valuable building blocks for a low cost diversified portfolio.

If you can think of any other reasons why DIYers have it much better now than in the past then feel free to leave a comment!