Author: Mike Holman

Categories
Announcements

Saturday weigh-in and linkstuff – April Fool’s Edition

First up – I missed the weekly weigh-in last Saturday because we were in the hospital with the newborn. This morning I weighed 182.5 pounds which is up a bit.

My diet hasn’t been great this week and I blame the fact that my mom is staying with us and feeding me all kinds of yummy crap!!

Guest post and an interview.

I was interviewed this week over at My Two Dollars – check it out!
I also did a guest post at the Canadian Capitalist recently where I talked about the benefits of getting an employer match in your group rrsp.

April Fool’s Day

We did an April Fool’s day post this week which was quite enjoyable. Mr. Cheap created most of the post, but both myself and Mrs. Pillars helped out which is unusual for this blog since we generally write our posts independently. I was surprised that more bloggers didn’t do these kind of posts but I’ve managed to locate a few and listed them here.

Carnivals

Carnival of Personal Finance was held at Stock Trading To Go.

Categories
Investing

Hedge Funds – Are We Missing Out?

I had lunch with a friend recently and he mentioned that he thought that hedge funds and private equity funds are the best places to make money. I disagreed with him and said that I don’t think hedge funds do anything any different than a normal investment fund except that they don’t have any constraints on their investment activities.

Most people who want to invest in managed assets are generally restricted to retail mutual funds. These funds usually have mandates which prevent them from investing outside their core area ie an American bond fund would not be able to invest 40% of its money in Mexican bonds. They also have restrictions against things like options, leverage, private investments. So in other words they will generally just buy publicly traded securities which fall under their advertised areas.

Hedge funds on the other hands can invest in the same type of securities as mutual funds but they can also buy option, use leverage, purchase private companies, trade currencies. All of these options can increase their diversification but also increase their risk.

As a fairly hardcore passive investor I don’t believe that anyone can pick investments that will outperform the “norm” for any length of time. When I hear friends tell me that hedge funds can “outperform” because….of some sort of hedge fund magic – I say that I think the people running the hedge funds are doing perfectly normal economically sound investments (they are smart people after all) and the reasons that people think they are doing so well are as follows:

  • Secrecy – most hedge funds don’t say a word to anyone about anything.
  • Performance presentation – mutual funds have to keep up-to-date performance returns so everyone knows how good or bad they are doing. Hedge funds don’t have to so no one knows how good or bad they are doing.
  • Recent history – The last five or six years have been very good for equities. I don’t care how you invested or which brand of dartboard your analysts utilized – it was pretty hard to lose.

My personal opinion on why hedge funds have done so well in the last five years or so is because the markets have been strong and because of a lot of leverage. Hedge funds are renowned for their use of leverage and while I personally don’t have anything against leverage (I use it myself). The reality is that pretty much anyone could have invested in anything over the last several years and done well. If they used a lot of leverage then they would have done exceptionally well.

Compensation

The typical hedge fund compensation scam…err scheme is 2/20. 2% of assets regardless of how good or bad the fund performs. This part is similar to mutual funds that charge a fixed percentage of assets for their management fees. The 20% is 20% of the profits past a pre-determined level. I don’t know what the typical hurdle rate is but the biggest problem with this compensation is that it encourages the managers to “swing for the fences”. Since fund managers make virtually all their money on the upside and 2% of the assets on the downside (enough to pay for the Rolls), why worry about risk management? Go for the big returns – if they work, the managers are rich. If they don’t, then the managers end up making not much less than if they were conservative to begin with.

My opinion on leverage is that it should be used to increase the risk level of your portfolio if desired. Some investors like to increase their risk by investing in riskier securities. I like to buy safer investments and use leverage on top of that.

Categories
Baby Expenses

New Baby and Newborn Hospital Costs

Last week we welcomed our baby daughter into the world. She is quite healthy, happy (in a screaming, crying sort of way) and cute as a button. Mom, Dad and big brother are all doing quite well except for a lack of sleep which will hopefully go away in a few years. 🙂

Hospital costs for the new baby

I decided to keep track of the costs incurred during hospital visit. Our total cost for the three night stay (c-section) was $424. Here is a breakdown:

  • Parking – $144
  • Pharmacy costs (diapers etc) – $55
  • Cafeteria – $35
  • Rooms – $150. The rooms are actually $260 per night but my employer insurance covers $210 of that so our cost was $50 per night.
  • Gas – I made a lot of trips between home and hospital so I estimate the cost at $40.

The diet

Ok, enough about the baby already – what about Mike’s diet you are undoubtedly asking? Diet went well – I managed to eat pretty healthy and avoid the junk food. It was interesting remembering the kind of items I was buying two years ago when my son was born – a lot of coffee, donuts, two bite brownies, cream soups etc. This time it was much healthier foods and I think I felt a lot better for it.

Carnivals

Carnival of Personal Finance #145 was hosted at Million Dollar Journey who ironically did a “Baby Education Edition”.

Categories
Investing

Strategies for ETFs and Index Funds

In my last ETF vs Index Funds post I concluded that I really didn’t know what the best way to approach the decision between buying ETFs (exchange traded funds) or index funds.

I was trying to show that some investors with small portfolios would be better off starting out with more expensive (because of trading costs) Exchange Traded Funds because eventually they will save money, rather than go with index funds first and then switch to ETFs because if they don’t switch to ETFs later on then the index funds will eventually be a lot more expensive.

As I wrote the post however it hit home that my approach was somewhat flawed because ETFs are quite a bit more work than index funds so someone who can’t be bothered doing a transfer to a discount brokerage probably isn’t going to be interested in logging into their discount brokerage account every month or two and buying more ETFs.  Figuring out the best solution to index funds vs ETFs is not a simple process.

So to clear up the whole issue once and for all, I have come up with a brand new strategy which actually applies to anyone – lazy or not! Please delete my last post on this subject from your brain and read on….

A bit of background

Buying ETFs is always a manual process – first you have to log into the trading platform of the discount brokerage. Once you check the current price of the ETF (you need to know the symbol) then you enter an order which hopefully gets filled. It’s not a lot of work and I find it quite enjoyable, but for an investor who wants a hands off strategy then it might not be the best approach.

Buying index funds (or any mutual funds for that matter) on a regular basis is sooo easy. This is the big reason why ETFs will never be as popular as mutual funds – most people won’t do the work involved to buy ETFs. With an index fund you can set up a monthly purchase plan (often called a PAC) to take a set amount of money out of your bank account each month and purchase various index funds in the proportion you want. For example if you want to buy $100 each of TD e-fund bond, Canadian equity, US equity funds every month then you set that up once and from that day on, $300 will get taken from your bank account each month and a $100 purchase for each of those funds will get completed. Unless you change bank accounts or want to change something such as asset allocation or portfolio rebalance, you never have to lift a finger. I’ve recently found out that Questrade is planning to allow regular debits from your bank account which will fund your account on a regular basis. You would still have to purchase the ETF manually however since they trade like stocks.

New (and improved) Strategy

What I suggest (until next week when I come up with something better) is do your accumulation of assets at TD using their index funds and automated purchases, and then once you have enough assets to make ETFs worthwhile, transfer those assets over to a discount brokerage (I use Questrade ). Once the assets are at the discount brokerage then you buy ETFs. The trick is to continue to do your accumulation at TD.

What happens if you already have a fair bit in assets? No problem – put the assets you have in the discount brokerage and buy some ETFs. Then set up the TD account and follow the accumulation and eventual transfer procedure as described above.

Variables

One question you might ask is about the transfer fees to move assets from TD to the discount brokerage. I would say that should be factored into the equation but also to try to get the discount brokerage to pay for the transfer. If you are moving big bucks ie $100k then I think your odds are pretty good of getting some or all of a transfer fee paid for – even to an existing account. Keep in mind that transfer fees for rrsps are generally no more than $150.

The next question is – at what point of accumulation do I move the assets to the discount brokerage? $25k, $50k, $14 million?

The answer is a bit tricky. You have to calculate the MER being paid at TD and the MER on the ETFs that you would buy at the discount broker and also include the trading fees that you will probably incur at the discount broker – but since the trades aren’t going to be very frequent they can almost be ignored.

For example in my last post I calculated a potential TD MER of 0.44% and a Questrade MER of 0.19%. If you ignore trading and transfer costs then it makes sense to move assets to Questrade every month. This won’t work of course because of the transfer fees and hassle – plus it’s just dumb.

What I would suggest is to transfer assets to Questrade at a point when you can either get a free transfer or the difference in MER is equal (or close to) the cost of the transfer. Now mathematically this doesn’t really work out since you should really be transferring money as soon as you have enough that the difference in MER for several years is equal to a transfer fee, but the other cost in a transfer is the hassle of actually doing the transfer so it might not be worthwhile to do it too often.

So using my example of TD MER of 0.44% and Questrade MER of 0.19%, the difference in MER reaches $125 (I’ll assume this is the transfer cost) at $50,000. According to my rule, this is when you should transfer the assets to the discount broker. This is a pretty reasonable rule since for most investors it will take quite a while to get a TD account up to $50k so it’s not like they will be transferring every six months.

Other things to think about

Look at the difference in MERs – in my example I used several low cost ETFs from Vanguard – if you choose to use more expensive ETFs from iShares (for example the currency neutral options) then the MER difference between TD e-funds and the ETFs will be much smaller and you might end up transferring assets at a much higher level (ie $100k or more).

Trading costs – I’m assuming that once you transfer the money to the discount broker, you buy your ETFs (not too many), set up dividend reinvestment plans and then don’t do any more trades.

Categories
Baby Expenses

The Perfect Gift For A Newborn Baby

newborn1.jpg

Many people have encountered the situation where a friend or relative is having a baby and they want to buy a gift for the new addition, but they don’t know what to get.
Two years ago we welcomed our son into the world and received quite a variety of gifts, services and food which has made us realize that what may seem like a great gift for a new baby or parent might be a life saver or it might be quite useless. As we await the arrival of our second child, I’ve been reflecting on what kind of items are good gifts for new parents and what might be bad gifts and have decided to share my thoughts here.

Buy a gift for the new parents instead

Mr. Cheap was visiting last week and brought my wife a book as a gift – Guns, Germs & Steel which we are both interested in reading. Unless you have some specific directions as to what the new child requires then chances are they don’t need what you will buy them. Instead I would suggest buying something for Mom and Dad.

  • Alcohol – ok, this is more for Dad if Mom is breastfeeding, but it’s always a great gift.
  • Money – nothing is better than this.
  • Food – trying to prepare food in the first week or two of a new baby (especially if it is the first) is really tough. The best gifts that we received were cooked food that was delivered to our doorstep. All we had to do was heat and eat.
  • Services – this could include things like grocery shopping (the parents have to prepare a detailed list), mowing the lawn, cooking a meal, cleaning etc. Be careful with this one – if you have to ask a million questions while cleaning the kitchen then you aren’t doing any favours.
  • Babysitting – if the newborn has any older brothers and sisters then volunteer to spend time with them. You don’t have to take them away to an amusement park – just playing with them and reading stories in their living room will be a huge help to the parents who will be occupied enough with the newborn and might not have the patience to read Curious George for the 20th time that day.
  • Cleaning service – either hire them directly or give a gift certificate. This might not be appropriate for the couple of weeks.
  • Diapers – giving new parents diapers is like giving them cash.  I would avoid the newborn size and go with size one or two.
  • Educational savings – this won’t happen right away but consider helping out with an RESP (Canadian) or 529 plan (American).
  • CPR/first aid course – these cost money and would be a great gift. This would be best given before the baby is born.

Buy a gift for a sibling.

I never thought of this before, but Mr. Cheap bought a book called “I’m going to be a big brother” for my son which was an awesome gift. If you want to buy something for any siblings of the newborn then buy something small or talk to the parents for suggestions.

Baby Clothes – I would stay from baby clothes unless they are specifically requested or unless of course they have the labels of the parent’s favourite sports teams. The problem with clothes is that the cuter the outfit, the less it will probably get worn. Shoes are a complete and utter waste of money for a baby who can’t walk. If you think the parents are in a situation where they need clothes or other baby items, then talk to them first and maybe buy a gift certificate. Don’t expect the parent to know exactly what they need.

Toys – complete waste of money. For the first two or three months, babies are more stimulated by looking at different patterns than any toy you might buy. Plus this is is one of the default gifts that everyone gets so they will undoubtedly have too many already.

Other baby items – cribs, monitors etc. Talk to the parents before buying anything.

Summary

Newborns don’t really need or want anything you can buy for them, so consider buying a gift or performing a service for a different family member who might appreciate it. Doing some errands, bringing some prepared food or babysitting for the family will be appreciated far more than any standard gift for the baby. Most important thing is to talk to the new parents before buying anything.

Categories
Real Estate

Even More Reasons Not To Trust Your Real Estate Agent

That’s right – after completing two posts on why you should not trust your real estate agent when you are buying a house and when you are selling a house, several more reasons have surfaced from various sources and I felt it was worth another post on the topic.

Underestimate potential costs for renovations and repairs

This is pretty common – a buyer looks at a house but is concerned with the potential costs of renovations and maintenance items like a new furnace. Most real estate agents are only too happy to give the buyer an idea of what the items will cost. The problem is that it’s in the best interest of the agent to downplay the costs since that will encourage the buyer to make the purchase and the commission will be paid. This happened to both Mr. Cheap and myself on previous real estate deals so we’ve learned this lesson the hard way.

The fact is that estimating renovation costs (not an simple skill) doesn’t necessarily have anything to do with buying and selling real estate. Your real estate agent might be a former contractor or might have a lot of experience with renovations…or they might have absolutely zero experience with renovations and are just taking numbers from something they might have read in the past.

Push for maximum purchase

In the case where someone is looking to buy a house but isn’t using anywhere near their maximum available credit, it’s possible for the agent to push the buyer to raise their price level which will increase the potential commission for the agent. For a price difference of $10k or $20k it’s not going to make a big difference to the agent but if they can get the buyer to increase their limit by $100,000 or more then it will significantly increase their payday.

Pinyo from Moolanomy left a comment indicating how his agent told him that he could afford $4,000 per month in payments when in actual fact he finds that a $1400 mortgage payment is more than enough.

The lesson here if you are a buyer is to know your own budget and don’t let anyone else tell you what you can or can’t afford.

Agent is probably getting paid for referrals

Most agents make extra money by referring their clients to various people who will give them referral fees. Mortgage brokers, contractors, tradesmen, home stagers, lawyers – you name it and your agent can probably give you a name.

This isn’t to say that a person referred to you buy your real estate agent isn’t going to be competent – it’s just important to know that they might be getting a fee for doing the referral.

Round number – odd number trick

As mentioned in the comments of the previous post, agents will often try to get you to lower your selling price or raise your bid by telling you to “make it a round number” or “make it an odd” number depending on the situation. If your bid is an odd number ie $250,500 they might suggest that $251,000 is a better bid because it’s an even number. As the Financial Blogger suggested – in this case $250,000 is also a round number which might work better for the buyer.

Over estimating the value of your house

Typically if you are selling a house then an agent wants to you to list with them. They are often very tempted to exaggerate the value of your house so that you will hire them as your agent. Once you sign with them and the house doesn’t sell, then they will start working on you to lower the house.

The inflated value doesn’t always originate from the agent, most sellers have an inflated estimation of their house worth so an agent might ‘go along’ to get the listing.

“Free” real estate evaluation

Most home owners have received material in their mail box offering a “free” house evaluation by a real estate agent. These are just marketing, plain and simple. If the home owner has no idea what the house is worth then it might not hurt to find out what the rough estimated value is but keep in mind the previous point about agents giving exaggerated house estimations.

Take a look at another perspective on real estate agents that Mr. Cheap wrote.

Categories
Announcements

Saturday Weight and Links

Ok the weight today was….179.5 pounds. Last week I was at 180.5 pounds so I’m holding steady around the 180 mark. Given the upcoming birth of our daughter, I’m happy to just “hang on” weight wise (that’s my excuse). 🙂

I did another guest post this week over at Paid Twice called Is real estate investing profitable?

Also on the real estate front, Being Frugal had a great post on renting called There is no shame in renting.

Rocket Finance wrote a really good three part story of his family’s finances and some of the steps they took.

Interesting analysis on the hoopla over gas prices over at Frugal Dad.

Carnivals

Carnival of Personal Finance was hosted at Being Frugal.

Festival of Frugality was hosted at Paid Twice.

Categories
Investing

Is VISA a Buy Now?

Yesterday was the highly anticipated initial public offering (ipo) of Visa – stock symbol “V” (you know you are big when you get a single letter) which ended up being the biggest stock IPO in American history. The stock was sold to (already) rich insiders, ie brokers,executives and various other people much richer than I, at a price of $44 per share.

As is often the case with “hot stock ipos”, the price started trading much higher (around $65) than the initial offering price and ended up the day at $56.50. So the huge financial gap between those rich insiders and myself, is ever so slightly larger as I write this.

The success of the VISA ipo is all the more surprising considering the fact that not once did I use my VISA card yesterday, so I’m guessing someone else perhaps took up the slack? 🙂

Is VISA a good buy now?

Hmmmm…..I have no idea. As I mentioned a couple of days ago I think that the amount of hype around this stock makes it a long shot to make money from trading in VISA shares but what do I know?? Well, I do know that if it was a good buy at the ipo price $44 (which apparently it was), it’s a lot less of a good buy at $56 which is quite a bit higher.

Who made money on the VISA ipo?

Not me (thanks for asking), but judging from the fact that 177 million shares were traded today out of a total float of 406 million – I would guess that a lot of the fat cat insiders who were able to order some ipo shares made out like bandits. Too bad the VISA investment bankers were not inspired by the Google Dutch auction system.

Anyone else?

From my extensive research it appears that the following institutions also made out like bandits in this deal:

  • Bank of America (BAC) – $625 million.
  • J.P. Morgan and Goldman Sachs – $500 million in fees.
  • Citygroup Inc. – $300 million.
  • Quest For Four Pillars Inc. -$0.00

Conclusion

The rich got richer, I’m still going to work tomorrow and VISA will probably do ok, but don’t expect the kind of returns that MasterCard has produced.