Author: Mike Holman

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Announcements

New Theme – Come To The Site To Check It Out

As you can see, I’ve installed a new theme on Four Pillars.  If you are reading this in an email or feed reader then feel free to click on through to the site to check it out. I’ve been wanting a new theme for a while and finally made the decision to buy a theme called Thesis.  This theme looks pretty good without much customization and is pretty easy to modify using widgets.

One of the unfortunate casualties of this change was the Canadian flag I had proudly flying in the header…let’s just say that Sheila Copps called and she wanted her flag back.  🙂

I didn’t have time to do a lot of the changes I had planned but hopefully I’ll get to them sometime this year. If you are interested in buying this theme then please consider using my affiliate link by clicking on the banner below. Please let me know if you have any layout suggestions or find any problems.

Also the logo was done by Pete over at Logos for Websites.  I would definitely recommend him – he’s fast and creative.  I think my instructions were something like “Gimme one of those logo thingys” and he came up with what you see up top. 🙂

My hosting is provided by MediaTemple.

Categories
Announcements

Are You Changing Your Asset Allocation? Contest for $$!

Glenn Cooke, President of InsureCan, is sponsoring a contest on this blog (and a few others listed below) where you can win one of two $50 Chapters gift cards. Here’s how to enter the contest:

In the comments – please answer the following question

“Have you changed (or are you going to change) your asset allocation as a result of the awful equity returns in the past year?   Please indicate any change ie “used to be 100% equities – now I’m zero percent equities”.

Answering this question will give you 1 chance at a gift certificate.  Subscribing to the blog if you don’t already do so, might also help your odds (but not likely) 🙂

Contest will be closed at 8 pm on Thursday, January 22.

Contest is open to Canadian residents only.

Check out similar contests at the Canadian Capitalist and the Financial Blogger.

Categories
Announcements

Friday, Jan 16 LinkStuff

Weight

182 pounds – down 1 pound from last week which is good.  Didn’t run this week because of knee problems which are hopefully temporary.

The Links

Jordan’s post this week on investing part of a house down payment in stocks reminded me of a Rob Carrick article on investing lessons learned over the past year.  One of the people mentioned was an investment advisor who advised a client to invest the proceeds of their recent house sale into equities even though they were planning to buy another house in a year.  I thought this was pretty bad advice and if I were that client, I’d be looking for a lawyer!  The most amazing thing is that the advisor used his name in the article – perhaps he should sign up for my other blog and learn something about investment time horizons?

Another article I read recently which quite amazed me was about student loans and unethical private loan companies.  While the premise of the article was interesting (students being taken advantage of by loan companies) the thing that blew me away was the student profiled.  She obtained a degree in photography in Santa Barbara and managed to rack up $140,000 in student loans!  Just to show that wasn’t a typo – $140,000 in student loans!!!!!

Who in their right mind would ever agree to graduate from a program with a ridiculous debt load like that?  I can see if you are in medicine or some guaranteed high-paying career path it might make sense, but for most people, it just doesn’t make any sense.

The blogs

Big Cajun Man had an interesting story about his recent layoff from Nortel and the fact that he was lucky to get out when he did.  Unfortunately employees who were more recently laid off (or are about to be laid off) might not get much of a severance package.

Jason from Frugal Dad has started blog about blogging called SideHustleBlogging.com – if you are interesting in blogging or the business behind it then check out this blog.

Million Dollar Journey had an interesting case study – a young couple provided their finances and wondered if they can afford a house.

Preet has some total return indices’ calendar returns for the last 15 years.  This is in Canadian dollars.

Financial Blogger explains why the markets are so volatile.

PFN and stuff

Money Ning is looking for advice on where he should live in 2009.

Blunt Money says that sometimes repairs are worthwhile in it’s going to cost more to fix it than it’s worth.

Squawkfox created a free printable workout log.

Canadian Capitalist reports that currency neutral funds are no bargain.

The Intelligent Speculator tells us about the flip side to leveraged ETFs.

Investing School explains the spread between the bid and ask prices for stocks.

ABCs of Investing wrote about setting financial goals and variable and fixed annuities and stock splits.

Carnivals

Carnival of Financial Planning was held at the Skilled Investor.

Categories
Personal Finance

John Bogle: “The stock market is a giant distraction.”

This guest post is written by Mike from the The Oblivious Investor.   This blog has been around for a few months and is very investment oriented (but not too techy) so I would recommend you check it out (I’m a regular reader).

For me, the above quote was enough to make Bogle’s Little Book of Common Sense Investing worth the read.

In just 7 words, Bogle manages to:

•    Provide an insightful piece of investing wisdom.
•    Make you question your assumptions.
•    Offend an entire industry.

So what is Bogle saying here? I think he’s making two distinct points. First, he’s making a statement about intelligent investing. Second, he’s offering a rather pointed criticism of the financial services industry.

Passive investing is a good thing

As to investment strategy, Bogle (as usual) is suggesting a system of passive investing. We can’t predict whether the market is about to go up or about to go down, and attempting to do so will only harm our performance. Similarly, attempting to pick individual stocks is unlikely to prove successful.

So if we stand to gain nothing by timing the market or picking stocks, what’s the point in watching the market? There is no point. All it can do it tempt us toward poor decisions. Better to ignore it.

Financial service is expensive

Bogle’s second point is one about the financial services industry in general, and it’s a bit less obvious. At their most fundamental level, financial markets exist to connect providers of capital (investors) with users of capital (businesses). Without a doubt, this is a valuable service.

However, in recent decades, the financial services industry has convinced us that it performs another service as well: Enhancement of investment returns. This is, however, impossible by definition.

There’s no way that investors—as a group—can earn more than the total earnings of the businesses in which they invest. The total return earned by investors must be equal to the return earned by the businesses in our economy, minus the costs of investing.

We can therefore conclude that, rather than enhancing investor returns, the financial services industry must in fact be reducing investor returns by the sum total of all the fees that they charge us. Sadly, these costs of investing—mutual fund sales loads, fund operating expenses, brokerage fees, etc.—now total in the hundreds of billions of dollars per year.

Conclusion – ignore the market

I think Bogle’s reference to the stock market as a “giant distraction” is his way of telling the reader precisely how much value he sees in the services offered by most firms in the industry.

Takeaway lessons for us:
1.    Turn off BNN and CNBC, and
2.    Do your best to minimize the investment costs you pay.

About the Author: Mike writes at The Oblivious Investor, where he regularly reminds readers to ignore the noise of the market. If you like this post, subscribe to his blog to read more.

Categories
Investing

Can You Invest Your House Down Payment In The Stock Market?

Jordan has agreed to help out the crack writing staff here at Four Pillars by contributing the occasional post.  He is a young guy living and working from home in Vancouver with his wife and 2 young kids.  Jordan is a computer geek at heart and last year discovered he also had a hidden passion for personal finance with the goal of “early financial retirement”. He will write about various financial ideas and situations that he comes across and share resources and useful tools.

When is it ok to invest your house down payment in the stock market?  I’ve always understood that a house down payment shouldn’t be invested in the stock market.  Actually the rule probably is if the time horizon of your money is less than 5 years, it shouldn’t be in the stock market. In fact if someone asked me for my advice I would say exactly the same thing. But I wanted to explore and research the idea for myself, so here is a new page in the Amateur Investor’s Manifesto.

Stock markets are volatile

The logic behind this rule is that the stock market is very volatile over short periods of time. As we clearly saw last year someone fully invested in the market could have easily lost 50%. Over the long term it’s much easier to predict a positive outcome.   As you’ll often hear – “the market always goes up” and “there has never been a 10 year period on the S&P 500 that went down”.  Unfortunately after last year that is no longer true.

So the alternative is to invest in a GIC or high interest savings account which is protected up to $100,000 per account / per bank or $200,000 for couples. The chance of a bank failure seems extremely low in Canada, the more real risk is high inflation eating away your money’s buying power.

Adding equities to your house down payment

What about a short term diversified portfolio? Shouldn’t it be possible to increase the return by taking on a small amount of risk? Let’s see what would have happened to an 80% GIC / 20% stock portfolio that’s invested for just one year. The asset allocation is the ultra conservative portfolio recommended in “The Smartest Investment Book You’ll Ever Read”.  In my test scenarios I’ll be using a $100,000 down payment.

* 80% / $80,000 ING Direct 1 Year GIC
* 10% / $10,000 iShares S&P 500 Index (XSP)
* 8% / $8,000 iShares MSCI EAFE Index (XIN)

* 2% / $2,000 iShares Canadian Index (XIC)

·

Year

GIC

Stocks

Inflation

80/20 Return

80/20 Result

Safe Return

Safe Result

Diff

2008

4.10%

-37.50%

-2.00%

(6,220)

93,780

2,100

102,100

-8.1%

2007

3.50%

4.00%

-1.97%

1,630

101,630

1,530

101,530

0.1%

2006

2.75%

14.90%

-2.47%

2,710

102,710

280

100,280

2.4%

2005

2.50%

9.10%

-1.39%

2,430

102,430

1,110

101,110

1.3%

2004

2.50%

6.30%

-1.99%

1,270

101,270

510

100,510

0.8%

2003

2.75%

7.60%

-2.42%

1,300

101,300

330

100,330

1.0%

2002

2.75%

-21.80%

-1.58%

(3,740)

96,260

1,170

101,170

-4.9%

Inflation is the Core CPI from the Bank of Canada which actually excludes inflation of housing prices, but it does show the buying power of your savings goes down over time.

I wasn’t able to look up the GIC rates for 2002-2006 so I used ING’s historic high interest savings account rate for the beginning of each year which is usually just a bit lower then a GIC.

Oout of the 7 years tested the worst result was underperformance of $8,320, or 8.1%.  The best result was $2,430 of overperformance in 2006. So a slight loss isn’t much fun but not the end of the world.  The gains aren’t huge, but they do help a bit. I think with careful consideration to exactly what your goal is and your risk tolerance it is possible to invest for short term goals because on average the market goes up.

Dealing with a short fall

You basically have 4 options if you come up short, which is very likely for short term investing:

  1. You will need to adjust your goal such as delaying when you buy a house or looking for a lower cost house.
  2. Make up the short fall with income cash flow by redirecting savings before the absolute last moment possible or paying for expenses (ie tuition) as they come up
  3. Borrowing the short fall from another savings account such as a non-RRSP retirement account.
  4. Borrow more money on the mortgage or open up a line of credit.

Can you fully invest your down payment in the stock market?

Yes, in certain situations I believe so.  If you have enough savings outside of your short term savings goal to replenish it if there is a catastrophic loss then you should be able to be fully invested. If you realize the worst annual return possible is -50%, and your short term goal is $100,000 then you need to have an additional 52% ($52,000) in guaranteed savings to cover the loss & estimated inflation. If that other money is also fully invested then you would need to have 104% more ($104,000). This will help you ensure you would end up with $100,000 after a 50% drop.

It definitely wouldn’t be much fun seeing $100,000 of retirement savings vanish just so you could afford your $100,000 down payment, but it’s not really any more risky if you would have been fully invested anyways. The flip side is if you are lucky and there is a bull market, you will either have a larger down payment or you can add the extra money into your already larger retirement account. If you had been invested in 2006 you would have had your $100,000 down payment and your retirement account would have risen to $124,860 (+24%) instead of $112,430.

It’s worth repeating: I would still not recommend investing a house down payment in the stock market. It’s just not a good idea for most people. If you do decide to do it then: know your risks, be conservative, make sure you can fully cover a short fall and hang on for a bumpy ride.

Categories
Announcements

Saturday, Jan 10 LinkStuff

Weight

183.0 – I gained 3 pounds over the holidays which is unfortunate but to be expected.  I went to visit my parents and although I like to blame them for making it easy to overeat, the reality is that I use those visits as an excuse to eat and drink as much as I possibly can! 🙂

The links

A worthwhile read about money on Money Grubbing Lawyer – written by an ex-con which is something you don’t see everyday!

Dividend Growth Investor talks about when to sell dividend stocks.

The Oblivious Investor says that imperfect information is the reason why high-cost mutual funds still exist.

Brip Blap had a great post on time management.  He’s not working 9-5 anymore and it finding it hard to be productive.

Million Dollar Journey has a post on real estate – 7 real estate myths busted wide open.

Thicken My Wallet had a good post on preferred stocks – are they right for me?

Preet is back from holidays and has some conspiracy theories about investment managers on tv.

Financial Blogger has some thoughts (regrets?) on home renovation.

Money Ning says you should toilet train yourself.

A guest post I did a while ago called Know the history of the stock markets.  I wrote this when the market was still crashing but it still applies!

Clever Dude hosted the Carnival of Personal Finance and did a rather clever fairy tale theme.

Blunt Money says that percentage-based budgets don’t work.

Moolanomy presents an introduction to peer-to-peer lending.

Squawkfox celebrated her 1 year blogiversary – she has listed some of her best posts from the past year so go check it out.

Canadian Capitalist reports on asset class returns for 2008 – most of them weren’t good!

The Intelligent Speculator says that leveraged ETFs are a scam.

Investing School lists 5 legendary investors.

ABCs of Investing wrote about asset allocation and the reasons for owning different asset classes.  Dollar cost averaging was the subject of another ABC post.

Carnivals

Carnival of Personal Finance was held at the Fraud Files.

Carnival of Financial Planning was held at the Skilled Investor.

Categories
Real Estate

Dealing With Real Estate Agents And Other Real Estate Resources

My parents (Hi Mom and Dad!) are planning to buy a new house in the near future after living in their current house for 40 years.  Right now they are in the process of figuring out how to get a real estate agent.  Unfortunately I can’t be of much help to them since I don’t live in the same city but I did offer to share all my writings on real estate agents.  The following is a list of posts we’ve done on real estate and agents with a brief description of each.

The next series of posts were written by a first-time home buyer who explains all the various steps she went through:

That’s it!  Good luck with the house hunting!

Categories
Real Estate

11 Things To Think About When Buying A House

Buying a house is a very difficult decision – there are large sums of money involved, the transaction costs and hassle of moving mean that you can’t just buy another house if you don’t like the one you end up with, and you don’t have enough information to make a completely informed decision. The best you can do is try to educate yourself in all aspects of the house hunt, keep a clear head and buy a house that fits your situation.

Here are some things for house buyers to be aware of when looking for a new home.

1) Location

  • How far is it from where you work? Can you handle the time/money involved in the commute?
  • If you have young kids or are planning to have them – how far from the grandparents from the house? They tend to be the best babysitters.

2) Budget

It’s nice to say “buy within your budget” but that might not realistic. Do a quick budget estimate, look at some houses that you might be interested in and then revise the budget or revise the houses. If you really can’t afford a house then don’t buy one. There is nothing wrong with renting.

3) Know your market

It’s critical that you know the market you are looking in. The asking prices for houses are often not indicative of their true value and the only way to be able to estimate a house value is to look at as many houses as possible. Take notes and find out what they sold for.

4) Don’t trust your real estate agent

I would suggest that most house buyers use an agent but keep in mind that although they may be very competent, their commission structure ensure a huge conflict of interest. Please read this post on why you shouldn’t trust your real estate agent.

5) Don’t end up house poor

Sometimes house buyers “fall in love” with a house or neighborhood or even just the idea of owning a house and they place too high a priority on it. This can lead to regret when the novelty wears off and you don’t have any money to do the things you like to do. Try living for six months on a “pretend” mortgage payment and see how it goes.

6) Take your time

Until recently, many buyers were afraid of missing out on future price gains or being “priced out of the market”. If you are renting and saving as much as you can, then you will be fine. Here are some tips for renters to be able to keep up (or down as the case may be) with their house owning friends.  Note – this one isn’t as relevant as it was last year!

7) Make a decision

Previously, I said to look at lots of houses to learn the market. At that point you should be able to purchase a house fairly quickly. If you are looking for the perfect house or trying to time the market then you will never buy a house. I know people who did ten year house searches which is a big waste of time. The reality is that you will be happy with a good percentage of all the houses you look at, so as long as you can eliminate the worst choices then you will be thrilled with your new home.

8) Don’t worry about the down payment

Yes, I know – it sounds pretty shocking in the sub-prime era to suggest that a down payment of less than 20% is acceptable, but in my opinion, the ability to make the mortgage payments is the main factor for affordability. In other words, it’s the size of the mortgage that matters. Of course you can get better rates with a larger down payment so it’s better if you have one, but don’t sweat it if you have a small or zero down payment.

9) Don’t blow your budget on renovations and furniture

Most people end up buying a house that has mortgage payments large enough that the buyers have to “make the payments fit” into their budget. While this is not the best way to buy a house, some of these buyers then make things worse by spending more money on renovations and house decorations. Unless you buy a total wreck of a house, you do not need to spend big bucks on renovations. You can live with the non-granite kitchen counter and the couch set that doesn’t fit the room perfectly. I don’t care if the house has full-on 70’s decor – you can live with it for a year or more until you can fit the extra expense in your budget.

10) Be careful of flip properties

There are people and contractors who will buy a house, fix it up very quickly and turn around and sell it for profit. The problem with these houses is that they tend to look very good on the surface ie nice paint, trim, granite counters etc, but on the inside they are pretty ugly and might have substandard electrical, insulation etc.

If you are interested in one of these houses then make sure they have closed permits and check with the inspector to see if their inspection notes. Better yet, just don’t buy one.

11) Don’t buy the perfect house

If the house is livable and you have a good life, then you will be happy with whatever house you end up buying. If you spend more money on a “better” house, then you will quickly get used to it and will be no happier than if you had bought an “average” house.

My opinion is that it’s just a house. The people inside are what make it special.

Summary

Learn as much as you can about real estate, your budget and your local house market, but be prepared for the fact that buying a house is all about compromise, incomplete information and a lot of doubts! If you keep at it however, the odds are very good that you will end up with a home that suits your needs.

Other posts

10 mistakes I made as a first time home buyer.