Categories
Personal Finance

LinkStuff – A Great Day In The Markets Edition

I’ve been negligent with my portfolio rebalancing this year and have way too much cash in my accounts. Although I don’t think I can time the markets, I am loathe to buy equities after they have gone up a lot.

Today – I finally pulled the trigger on some ETFs for my couch potato portfolio. The markets have been in a slump lately and today was just a great time to do some buying.

I purchased:

  • XIU (iShares Canadian large cap ETF) at $17.70
  • VEA (Vanguard Europe & Asia equity index ETF) at $34.12
  • VTI (Vanguard US equity index ETF) at $62.37

These ETFs are all lower than the beginning of the year and well off their recent highs.

I still have a lot more cash to get rid of, so I’m hoping the markets will fall even further.

On with the links

The Wealthy Canadian wrote about opening an RESP account for his little boy. He also said some nice words about my book. 🙂

In Japan, they have subway employees who’s job it is to push people into the trains. I had heard of this, but I just couldn’t believe this YouTube video – they really know how to jam people into subway cars in Japan.

The Oblivious Investor had some very good advice in asset allocation – set to your maximum loss.

The Steadyhand blog is doing a financial profile on a guy named Bruce.  I love financial profiles and the fact that this Bruce fellow sounds a lot like me, makes this one all the more interesting.

Michael James thinks that most active stock pickers are working for a negative wage.

Michael’s post reminded me of a post I did called Do you really “earn” your investment income. It’s easy to think you are making money in an up market, but you have to compare your performance to that of a passive strategy. Even if you can beat the market, is it worthwhile to do so unless you have a large portfolio?

Boomer & Echo has some interesting stories about dealing with elderly parents.

Canadian Capitalist doesn’t mind if you mash couch potatoes. But he demands a reasonable alternative.

Today’s Economy blog has some followup discussion on the great debt ceiling debate.

Million Dollar Journey talks about little known Canadian benefit programs.

Categories
Investing

Why Rebalance Your Portfolio Asset Allocation?

The Canadian Capitalist recently wrote about couch potato investing and Sampson left some interesting comments about rebalancing and passive investors. 

 Here are a few thoughts I have about portfolio rebalancing:

 1) The main reason I rebalance is to maintain a consistent risk level in my portfolio.  For example if I decide I want a portfolio made up of 60% equities and 40% bonds and then after a couple of years, the portfolio is 70% equities and 30% bonds, my portfolio is now riskier than I planned and I will want to rebalance back to 60% equities and 40% bonds.

 2) Asset allocation is not something that just couch potato investors do – every investor has an asset allocation and likely rebalances.  Of course if you have 100% equities, your asset allocation never changes, so no rebalancing is required.

 3) I’m not a believer that rebalancing (in any form) will increase returns significantly or at all.  It really depends on the market activity and an assumption that asset classes will “revert” to the mean. In some markets it will help – in other markets it will hinder.

 4) Rebalancing assumes that your different asset classes are not correlated.  In my case, I use a short term bond ETF for my fixed income – I’m fairly certain that short term Canadian bonds are not very correlated with various world equities. Even if they were, my asset allocation would never change much and I would have no need to rebalance. 

 5) Rebalancing can take many forms including tactical asset allocation.  The reason a lot of people like to use a specific rebalancing rule is because it makes things easier. I don’t have a firm rebalancing rule, but I will try to check my portfolio once a year and if the allocations are significantly out of what, I’ll rebalance.

Categories
Personal Finance

How To Lower Your Mortgage Interest Rate Without Paying Any Penalties

One of the many challenges of owning your own home is the decision between a variable rate mortgage or locking in for a longer term. Currently, the variable rates (2.2%) are significantly lower than the 5-year fixed rates (3.8%), so going variable is very tempting.

But what if interest rates shoot up?  Then the fixed option might end up being cheaper.  It’s a tough decision without a crystal ball available.

When my wife & I renewed our mortgage almost four years ago, we decided to get a 5-year fixed rate mortgage with an interest rate of 5.19%.  We chose a fixed-rate mortgage so we wouldn’t have to worry about increasing interest rates.  At the time, our budget was a bit tight and the last thing we needed was higher mortgage payments.

Of course, interest rates continued to decline after we locked in.  While I wasn’t too annoyed since we locked in for a good reason, it was still a bit aggravating to think about how much money we could have saved with a variable mortgage.

Luckily, I came up with a face-saving method to lower the amount of interest we were going to pay by making use of our line of credit, as well as our fixed mortgage prepayment option.

Our home equity line of credit (HELOC)

Along with our fixed mortgage, we also have a home equity line of credit (HELOC) which has an interest rate equal to the prime rate (currently 3.0%).

When I first got the mortgage, I was using the HELOC to borrow money for my Smith Maneuver attempt, which involves borrowing money to invest in the stock market.  When I ended the Smith Maneuver in the Fall of 2009, this freed up my HELOC and I could use it for other purposes.

The mortgage prepayment option

Our fixed mortgage has a generous annual prepayment option, which is equal to 20% of the original mortgage value.  In our case, that annual prepayment amount was $40,800.  This means that we could make lump sum payments against our mortgage principle at any time totalling up to $40,800 per year.

We’ve never come close to using the maximum prepayment amount, since it’s just too much money.  But it occurred to me that this large prepayment feature could be used in conjunction with our HELOC to lower our effective interest rate.

The solution – use the HELOC to pay off the fixed mortgage

Every August, when a new “prepayment” year started, we made a $40,800 withdrawal from our HELOC and paid down the fixed mortgage by $40,800.

In the first year, this resulted in converting $40,800 of our 5.19% mortgage to the 3.0% HELOC for a saving of $893 in interest.

In the second year, we moved another $40,800 and saved $1,786.  We saved $2,679 in interest over two years.

In our case, our mortgage wasn’t big enough to continue the huge annual pre-payments.  We will be doing our last prepayment this August for about $20,000 and that will be the end of our fixed rate mortgage.

However, we will still be saving each year by having all the mortgage in the HELOC instead of the higher fixed mortgage.

Savings are not guaranteed

The way I’ve described this method, makes it sound like easy money right?  Not so fast.  The only reason we’re saving so much money is because the interest rate on the HELOC is significantly lower than our fixed mortgage rate.

If the HELOC interest rate rises, the interest costs will be higher on the HELOC and our savings will go down.  Worst case scenario is that the prime rate goes over 5.19%, at which point we will end up paying a higher interest rate on the HELOC than on the fixed mortgage.

I’m not predicting that interest rates will stay low forever, but I do think that it will take a while for the prime rate to surpass 5.19%.

Why not just break the mortgage?

If you are stuck in a high interest mortgage, there is always the option of breaking the mortgage and getting a lower rate.  The problem is that the banks will charge you a fee to make up the lost profit on the terminated mortgage.   Ellen Roseman recently wrote an excellent article on these fees called How to reduce the pain when you break a mortgage.  Here is another article I wrote which analyzes if it is worthwhile to refinance your mortgage (hint – it probably isn’t).

Don’t forget to pay off the HELOC

One of the biggest risks of this plan is forgetting to pay off the HELOC balance once the fixed rate mortgage is gone.  Unlike a fixed rate mortgage which has a defined amortization period and requires principle payments along with interest every month, most HELOCs only require a payment large enough to cover the interest.

It is very easy to just make the minimum interest payment each month and enjoy the extra cash in your pocket.

Once your fixed-rate mortgage has been completely converted to the HELOC, you should make total monthly payments equal or larger than the amount you used to pay on your fixed-rate mortgage.  This will ensure the HELOC balance will get paid off in a reasonable amount of time.

Categories
Announcements

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

The big drama this week is in Washington as both political parties are fighting over whether the debt ceiling should be raised. At stake are all the various financial obligations of the US government: Social Security payments, government worker wages, interest payments on debt etc.

If the ceiling isn’t raised in time, then the government will have to start cutting back on some of it’s obligations.

Will social security payments be paid if United States defaults on its debt?

One of the obligations of the United States government is to pay out Social Security payments to retired people. If the government has to cut back, it is possible that Social Security payments might not be paid in August.

It’s certainly not guaranteed however that this will happen.  The government has a lot of financial obligations so there are a lot of different areas where cuts could be made before Social Security.

Will Social Security payments be paid later on?

Given that the potential default, isn’t an actual economic default (ie the government isn’t bankrupt), it is very likely that even if the August Social Security payments are not mailed out on time, they will be paid later on, once the debt ceiling situation is resolved.

What is the debt ceiling?

The debt ceiling is a piece of legislation that regulates the amount of dollars of debt the United States government is allowed to borrow. Since the government budget is running a deficit, it is necessary for the government to continually borrow more money to meet its obligations.

Once the total debt equals the debt ceiling figure, the government cannot legally borrow any more money and will have to start making cuts to expenses – even if those expenses are obligations like Social Security to which the government has already committed to paying.

Why isn’t the debt ceiling being raised?

The Republican party is using this opportunity to try to get the government to reduce spending and rein in the deficit.  It is likely that eventually the ceiling will be raised, but for now it is a negotiating game between the Republicans and the Democrats.

Will this be a real economic default?

If the debt ceiling is not raised in time and the US government misses some payments, this will result in a technical default.  However, it should be noted that a “true” default is one where a government can’t make all their payments and does not have the economic strength to make changes in order to remove the default status and can’t borrow enough money.

For example in Greece, the economy is not big enough for the government to be able to pay off all its debts or even make all their payments.  At some point, they will be in a true default.  In other words, they just don’t have enough money and nobody wants to lend them any.

In the US, it is only the debt ceiling legislation that is standing in way of the US government meeting all of its obligations.  This legislation has been raised many times in the past and it will likely get raised again soon – if not by August 2nd, then soon after.

The US government has plenty of money, can easily borrow more money and is not in danger of “running short”.  If necessary they have a lot of power to increase taxes which can help with any budget deficit as well.

 

Categories
Announcements

LinkStuff – Depressing House Edition

One of the links below discusses how expensive houses are. I like my house, but when I think of all the money we have to put into the basement (it’s a complete disaster down there) and a new garage, it is a bit discouraging.

We’re going to be mortgage-free next year and while I had hoped that might open up some different career options, in reality I think the fixes we need to do to the house will just be another form of a mortgage for the next several years. Oh well – as they say on Twitter – #FirstWorldProblems

On a more positive note – I have finished the 2nd edition of The RESP Book. I hired an editor to check for grammar and typos and then I will do the formatting necessary for the printer. So my goal of a September release is still possible.

On with the links

The Wealthy Canadian (a brand new Canadian personal finance blog) breaks down his investment portfolio by sector. Go check it out and subscribe!

My University Money wrote a funny inside look at financial literary programs for high school students. Worth a read.

Scott Ronalds from Steadyhand reviews the ironically named “Manulife Simplicity Balanced Portfolio” fund. Simple it ain’t!

Krystal Yee says that there is nothing wrong with not loving your job. Exactly – that’s why it’s called a “job”.

Michael James explains how you can lose money on a leveraged ETF regardless of how the market performs.

My friend Ruth talks about her Mom who passed away one year ago. A great tribute.

Blunt Bean Counter discusses some of the pros and cons of buying vacation property in the United States.

Canadian Business had a great article about why renting a house is better than buying. I like owning a house, but when I think of all the work involved and the huge sums of money we need to fix up our basement and garage, I have to question why we are doing this.

Financial Uproar makes a great case as to why professional athletes are not overpaid.

Jim Yih wrote a very good article about the new PRPPs and how they should look.

The Oblivious Investor questions whether an emergency fund is essential for everyone. Some good points.

Today’s Economy blog discusses the “Grand Experiment” taking place in a country near you.

Boomer & Echo came up with several ways to save inside your TFSA.

Million Dollar Journey talks about getting pre-approved for a mortgage.

Categories
Investing

What Are Pooled Registered Pension Plans (PRPP)?

Pooled Registered Pension Plans (PRPP) were first announced by the Conservatives during the last election campaign. As is my custom, I ignored it since most campaign promises never see the light of day after the election.

Now that the Conservatives have a majority government and recently issued more information on PRPPs, I thought it would be worth a quick look to see how the plan works and who can benefit from a PRPP.

What exactly is a Pooled Registered Pension Plan (PRPP)?

A PRPP is a defined contribution pension system offered by third party financial institutions such as banks and insurance companies.  The plan administration and fiduciary duty will be the responsibility of the financial institutions.  This should make it fairly easy for small to medium sized companies or self-employed workers to set up a PRPP.

The actual investment instruments have not been clarified, but the government has mentioned large “pooled” investment funds with low costs.

Group RRSPs are an option for companies who want to offer a workplace savings plan, but they are a fair bit of work to administer and the employer has the fiduciary duty as well.  Group RRSPs are not as practical for smaller companies or the self-employed.

What is the reason behind PRPPs?

The government is proposing PRPPs as a way to “improve the range of retirement savings options for Canadians. Unfortunately, improving the range of options doesn’t necessarily translate into any extra retirement savings.

The goal is to provides access to 3.5 million Canadians who don’t have access any kind of registered pension plan through their workplace (such as a defined benefit pension plan or a group RRSP).

Those people currently have access to RRSPs and TFSAs, but a lot of them are not properly utilizing either account type.  Lack of saving discipline and investment knowledge is likely the main reason. It takes a bit of work to get an investment account at a bank or through a financial advisor and some people can’t be bothered.

Since the plans aren’t going to have mandatory contributions, they will basically just level the playing field for employees of smaller companies, so they have easier access to what is essentially a group administered RRSP.

There are some big benefits of a workplace savings plan.  Contributions made from payroll deductions are very convenient. The ability to make a contribution from your pay cheque into a registered account without having to pay any withholding tax is also a great feature.

Who will benefit from PRPPs?

Employees who work for a company that does not currently offer any kind of workplace pension saving program will benefit from having access to a PRPP. Even if the employer doesn’t offer a PRPP, employees or self-employed workers can still join one on their own.

Employers that are too small for group RRSPs should be able to offer a PRPP, which might serve as a good recruiting and retention tool.

Employers that currently offer group RRSPs might be interested in switching to a PRPP in order to reduce administration costs and remove their fiduciary duty.

Who won’t benefit from PRPPs?

Employees that have a defined benefit pension plan or an employer-sponsored defined contribution pension plan (such as a group RRSP) won’t have access to a PRPP, which makes sense since they don’t need one.

Anyone who is not currently employed will not benefit from PRPPs.

What kind of investments will be offered through PRPPs?

This part of the new pension plan type is not clear. The government has referred to an “investment pool”.  I’m not sure what that refers to.  Will there be specific funds run by a private company that any worker can invest in?  Will there just be a few big funds that everyone will invest in? Ie Will employees of XYZ Autobody shop will be investing in the same Canadian equity fund that the employees of the local pizza place are investing in? Or can the plan administrator offer any funds/ETFs publicly available?

Hopefully more details will be forthcoming on this issue.

On the PRPP government framework page, it says “lower costs that result from large pooled funds.”

That statements seem pretty naive to me. How exactly will the fees be kept low?  Will this be mandated by the government?  Economy of scale means nothing – just look at Canada’s largest mutual fund – the $14 billion Investor’s Group Dividend fund for an example of how economy of scale saves money for investors.  The MER on that fund is a whopping 2.68% in spite of the massive size of the fund.  In this case, all the economy of scale savings are going straight to the Investor’s Group shareholders – not the mutual fund investors.

Will money in a PRPP be locked-in?

According to the PRPP framework, employer contributions will be locked-in – similar to money in a LIRA account.  This is really dumb and will add a lot of hassle to the plans. It should be up to the employer to decide on a vesting period for any employer contributions, after which the employee can do whatever they want with the employer contribution money.

Will the PRPP be mandatory for employees?

No, it will be up to the employee to make use of the PRPP.  It’s possible that employers might have to auto-enrol every employee, but they can’t force the employee to contribute.

Will the PRPP be mandatory for employers?

It’s up to each province to decide if offering an PRPP will be mandatory for employers.

Will PRPP contributions affect RRSP contribution room?

Contributions to an PRPP are treated like RRSP contributions as far as taxes go.  Any employer contributions are also considered contributions.  IE If you have $8,000 of RRSP contribution room available for a particular year and your employer contributes $2,000 to an PRPP and you contribute $3,000 to the PRPP – that means you have used up $5,000 of RRSP contribution room.

Summary

These plans will close a gap in workplace pension saving coverage by offering a defined contribution pension plan to workers who don’t currently have access to one.  The term “coverage” only refers to giving access to these workplace plans.  It doesn’t mean that any employees will use them.

I’m skeptical that PRPPs will make much of a difference, but if this plan is offered with financial advice and the costs are low, it might help some people get started with their retirement savings.

This won’t do anything for the large segment of the population that can’t or won’t save money for their retirement. You can lead a horse to water….

Check out the Canadian discount brokerage fee comparison.

 

 

 

 

 

Categories
Announcements

LinkStuff – Tour de France Edition

I’ve been having trouble finding time for posting lately – work, holidays, exercise, and the Tour de France have all been taking up a lot of my time.

The good news is that I’ve been exercising a ton and I feel like I’m getting into decent shape.  This morning I weighed in at 174.5 pounds which is probably a 15 year low.

On with the links

Krystal Yee from GMBMFB, put up some photos of herself wearing braces. If you’ve ever wondered what she looks like and how she got onto the vaunted Hot Personal Finance Blogger Chicks list, now you can find out. I don’t want to say too much (since my wife reads the blog), but I would definitely recommend that the guys go and check out her braces. 😉

Canadian Couch Potato wrote about his experience with the Scotia iTrade US$-friendly RRSP.  This option is not as good as a proper US$ RRSP which is available at Questrade, Qtrade and RBC, but it’s a reasonable workaround for high currency exchange fees.

MapleMoney wrote a Qtrade Investor Online Broker Review.

Michael James had an interesting article on irrational risk avoidance.

Retire Happy put together a great list of questions to ask potential financial advisors before you hire them.

Million Dollar Journey talks about estate planning.

The Oblivious Investor says that risk means different things to different people.

Boomer & Echo says it’s time to check up on your employer sponsored pension plan.

Today’s Economy blog says We’re not frugal, just tired.

The amazing Preet Banerjee reveals that market research is sometimes just spin.

Canadian Capitalist wrote about John Bogle’s estimate of the behaviour gap. I’m always skeptical of these estimates. I’d like to know the methodology behind the numbers.

Larry Swedroe asks if Meredith Whitney could have been more wrong? She made a prediction that the American municipal bond market would collapse and so far – it hasn’t.

Categories
Frugal

Camping With Young Kids – Frugal Folly?

My wife & I have two young kids, age three and four. One family activity we’d like to get into is camping. As in sleeping in a tent, campfire, cook your own food on a Coleman camping stove. Of course, not everyone likes camping, but I think it’s a lot of fun.

Camping is much more affordable than staying in hotels and eating in restaurants. That said, camping isn’t necessarily all that cheap. We were fortunate to get most of our camping gear as hand-me-downs, but we are still buying a few items. If you have to buy all the equipment new, it would be fairly expensive. Camping site fees are not that cheap either.

Last fall, we went camping one night at Darlington (a bit east of Toronto) as an “experiment” just to see what it would be like with the kids. It was close enough that if things went too far downhill, we could easily bail and go home. As it turns out, it was a lot of fun.

So far this year, we camped one night at Glen Rouge, which is right inside Toronto (Kingston Road at the border of Scarborough and Pickering) and will be doing a weekend trip to Awenda (two hours from Toronto) in August. I wasn’t that impressed by Glen Rouge and would rather drive the extra 20 minutes to Darlington in the future.

I had hoped to go camping more frequently this summer, but after the Glen Rouge trip, it was apparent that maybe we aren’t ready for regular camping trips.

The kids had fun, but just because they are having fun doesn’t mean they were well behaved. 🙂 Camping is a lot of work – you have to bring the shelter, food, cooking utensils and doing everything yourself. Having everyone in close quarters can take a bit of getting used to. Add a couple of young kids to the mixture and it can be quite a challenge.

I’m hopeful that as the kids get a bit older, it will be a bit easier to do a proper camping trip and we can go more often.

In the meantime, one option is to just do day trips to local parks. This doesn’t work that well for Toronto, but we were recently in Northern Ontario and spent part of a day at Fairbanks Provincial Park . It is a beautiful park and has a great beach which is perfect for swimming. There are canoes you can borrow and a few trails to explore. We checked out the campsites and there are a lot of nice private sites.

If you can do a day trip to a park, then you get enjoy some of the good things about camping, but there is a lot less hassle.

Have you tried camping with young kids? Was it fun or a disaster?  Got any tips for me?