Author: Mike Holman

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Announcements

The RRSP Book – Review And Contest

Preet Banerjee from WhereDoesAllMyMoneyGo recently wrote a great book for Canadians called “The RRSP Book” which he has provided to us for review. This book includes a lot of rules and strategies which most investors will find useful. If you want to buy this book directly from Preet then you can easily do so by visiting the secure book purchase site he has set up. Note – the only compensation we are getting is a free book for the review.

To help kick things off we are going to have a book giveaway – just leave a comment below and you will be entered. Contest ends Monday, January 21 at midnight.

I’d like to point out that Canadian Capitalist already did a review of this book (he’s a speed reader) and is giving away four copies of this book. Now four books sounds mighty impressive compared to our one, but if you consider that his traffic is at least a thousand times more than ours, your odds of winning are a lot better on this site!

Mike at The Financial Blogger also did a review – check it out!

For the non-Canadian readers – sorry, but this contest is only open to Canadian residents – but trust me, this book is of no use to someone living outside of Canada.

What’s it all about?

Good introduction to Canadian tax tax system and exactly how RRSPs work.

He starts off with various strategies surrounding RRSP some of them are fairly basic but most are quite innovative. The book is very well written with an appropriate amount of humour – he even has a subtle reference to Star Wars in it.

Strategies that I found most interesting

RRSP loans – He suggests various strategies around RRSP, loans for example such as getting two separate RRSP loans – one which you will pay back monthly and a smaller one which will be paid back in six months with the tax refund thereby managing your cash flow a bit better.

Home Buyer’s Plan – Very good discussion of the various rules and I learned that I could have used the HBP to borrow from my RRSP for my second house. He talks about not paying back the HBP in a down year and claiming the repayment as income – we are doing this since my wife is not working and it is a great strategy. The downside is that I lose a bit on the spousal credit but the saved tax is well worth it.

RRSP over-contribution – Preet suggests an interesting over contribution strategy for someone who is 71 – excellent advice.

Investment swapping – He also covers why you should hold fixed income investments inside your rrsp and also offers a “swapping” strategy to switch investments around if you have FI outside the rrsp which can be switched with equities inside the rrsp. Another use for the swap is to get cash out of the rrsp which can be switched with investments outside the rrsp. I learned a lot in this section.

RRSP planning – A great discussion of the cons of a poorly planned RRSP – they are a great tax saving tool for most Canadians but if the planning isn’t done properly you can end up “shooting yourself in the foot”

Best advice in the book concerns investors who save too much in their RRSP “RETIRE EARLIER!”

RRSP Beneficiary – This section has some excellent advice about naming a beneficiary for your RRSPs. If you haven’t done this or it’s out of date then do this now!!!

Leveraged investing – A good look at leveraged investing including the “Preet” principle.

Summary

An excellent book on the topic of RRSPs.

Once again, if you want to order this book then visit the secure book purchase site he has set up.

Categories
Investing

Do You Really “Earn” Your Investment Income?

I met an acquaintance a while back who told me that he was day trading while in between jobs. I was quite curious about his strategies and how much he was making but he wouldn’t give me many details and I didn’t know him well enough to push. He did tell me on several different occasions though that he “was making good money” with the day trading.

The reason I wanted to know what kind of returns he was getting was because I was skeptical that he was doing as well as he said he was, and also because I wanted to point out to him that in a year when the market goes up around 18% as it did that year, it’s not hard to “make good money” by doing pretty much any kind of investing.

Stock markets go up and down over time. The main reason people invest in them is because they believe that over time, the stock market goes up more than it goes down, which has held true since the beginning of time (or stock markets). The reality is that nobody can accurately predict what the market is going to do any given year. It might go up 10%, it might stay flat or there could be a big loss. The phrase “A rising tide floats all boats” applies very well to equities. In years when the market gives double digit returns, everyone looks like a great investor. In years when the markets drop, almost everyone is a loser.

My point is that someone who is invested in equities in a market that goes up 10% and gets 10% on their investments didn’t really “earn” anything because of their investing prowess since they only got the market return which is easily obtainable with a basic ETF or index fund.

I think that all active investors should measure how much value they are adding by choosing their own stocks or mutual funds by comparing their returns to some kind of index or passive alternative based on an index such as an index fund or exchange traded fund. This would apply regardless of if you are trading stocks hourly or buying stocks for the long run (hello Siegel!).

For example if you trade your own stocks or bought active mutual fund and got a 10% return in a year, that sounds pretty good but is it? Did you really “earn” 10% by picking your own investments? What if the index returned 8% that year. Then I would say that your stock picking really only earned 2%, not 10%. Conversely, what if the index returned 12% that year. I would then say that your active management cost you 2% of your potential portfolio that year.

To accomplish this comparison if you trade stocks and/or buy mutual funds is to find an ETF that covers similar stocks. If you are an investor who likes to buy large American companies then you might want to look at an ETF like Vanguard Large-Cap ETF (VV) or even just look at the entire American stock market with Vanguard Total Stock Market Index VTI (the “American” is silent). ETFs and index funds charge a small fee so they will never match the index but should be pretty close.

Another thing to think about is the absolute amount of dollars you are earning from your investments.  If you spend a lot of time trading stocks or planning investments and you are really only earning say a 2% premium return on your investments per year then how does that work out per hour?  If you are investing $10 million dollars then 2% is $200k which is well worth the effort.  But if you only have a couple of hundred thousand then 2% is only $4k which is not a lot of money if you spend a lot of time on your investments.

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Announcements

Saturday Weigh In and Links

Green Dragon Potato

Weight

Weight this morning was 180 pounds. I made my goal of 182 pounds last week so the next challenge is to try to get to 175 pounds. Onward and downward!!

Unhappy unsubscriber

I got a pretty good laugh this week when one of my email subscribers decided to unsubscribe from the feed. When this happens (rarely) I get an email notification. Along with the notification I got another email from the unsubscriber himself who returned the post email (which was on weekly mortgage payments) with the following message (I added the “*”s):

What’s wrong with paying mortgage off faster. F*** off you dumb, fat, f***ing pig.

Of all the posts we’ve done I thought that one was least likely to make someone go off the deep end but I guess you never know! 🙂

Some links!

Million Dollar Journey had a very interesting post on his future home gym which generated quite a discussion in the comments.

Moolanomy had a question and answer post with Larry Swedroe who is a financial advisor. My question on currency hedging for Canadians was answered and I thought the answer was definitely worth reading. He also had an interesting post about how mutual fund investors can inadvertently pay for other investor’s taxes.

Cash For Life hosted the Carnival of Frugality this week. I don’t normally read this carnival but I’m glad I did this week. Early Retirement Extreme had a post on why you should get a push mower to save money. I say you should get a push mower because it’s good exercise! Stop the ride had a great post on 13 Ways To Use Dryer Lint. Yes, DRYER LINT!! Check out the link at #6 if you want to learn how to make lint paper mache animals – great for Xmas gifts or to decorate the house! 🙂

This week my post Shooting Down Goals was in the Carnival of Financial Goals hosted by beingfrugal.net which had a really cute theme.

Mr. Cheap’s popular post on how to calculate (or at least estimate) your Entertainment Return On Investment was featured in the Carnival of Personal Finance.

Green Dragon Potato

And last but certainly not least – the photo you see at the top is what I call “Green Dragon Potato” and my wife made them for dinner last night. It’s not sushi but it’s a heck of a lot cheaper!

Categories
Investing

Questrade Discount Brokerage Offers US Dollars In RRSPs

Big news in the Canadian discount brokerage world today when Questrade announced that they will be the first Canadian brokerage to allow US dollars in rrsp accounts.

What this means is that you can transfer US$ money to your rrsp without going through currency conversion which costs 0.5% at Questrade and usually more at other brokerages. The other benefit is for selling and buying equities that trade on American stock exchanges. This would include any US stocks as well as all ETFs sold by American companies such as Vanguard. Previously when selling the US$ equity the money would get converted to Canadian dollars and then you would have to convert again to buy another US security thereby paying the currency conversion fee twice.

I’ve read of various customer complaints in blog world but I have to say that I’ve been quite pleased with their service. I have my rrsp as well as my open account with Questrade mainly because they have by far and away the lowest commissions available at $4.95 per trade for trades of 495 shares or less.

You can read my previous posts on Questrade here and here.

If you want to sign up with Questrade then feel free to use this link or just use “FourPillars” as the referrer when you fill out the application. For other bloggers feel free to sign up for the referral program and of course use “FourPillars” as the parent affiliate.

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Personal Finance

The “Myth” of Weekly Mortgage Payments

When I bought my first house way back in the beginning of 2000, I set up the mortgage payments to be withdrawn from my account every week. I had heard and read that making payments more frequently would reduce the time necessary to pay off the mortgage significantly. Instead of keeping the money in my account and paying a monthly payment at the end of the month, you would save on interest by paying the weekly amounts ahead of time.

So what happened? Well, I hated the weekly payment because at the time I was being paid twice a month so every few months there would be three mortgage payments in one pay period which would mess up my budget. I decided to switch the payments to semi-monthly to match my pay cheques.

Does this mean I’m paying thousand$ more in interest costs? Not a chance! I had a conversation with a good friend of mine around the time I switched from weekly to semi-monthly payments and he explained to to me that the reason that “weekly” payments (as promoted by the banks) pay the mortgage down quicker is because you are paying more to the principal, not because you are making more frequent payments.

For example if your monthly mortgage payment is $1200 then if you want to do weekly payments, the bank divides the monthly payment by four which means your weekly payment is $300. The problem is that there are more than four weeks per month so by paying one quarter of the monthly payment each week, you are in effect paying more money into your mortgage.

Over the course of one year, $1200 per month total $14,400. $300 per week totals $15,600 over the year which is $1300 per month which is a $100 more than our original monthly payment. This is why the “weekly” payment method pays down the mortgage faster.

What does all this mean?

Don’t worry about the frequency of your mortgage payment, just set it up so it fits your budget and pay schedule.

Increasing your total payments along with occasional extra payments will result in a mortgage that is paid down quicker. Whether you pay daily, weekly, bi-weekly, fortnightly, semi-monthly, thrice monthly or once a month (as I do) you should consider the total amount you pay each month and try to keep that as high as possible.

Categories
Investing

My New Asset Allocation (Part XIV)

Yes, that’s right – after reading countless books and posts about asset allocation and writing several convoluted and contradictory posts on the topic myself, I’ve finally decided on an asset allocation model for our investments. The problem with asset allocation is that there is a lot of theory behind various models and the more you know about the subject then the more confused you will probably get. I’ve concluded recently that maybe just picking a simpler asset allocation is probably the best approach since I’m not sure how much it really matters what your exact asset allocation is, as long as you pick one and stick with it.

And now (drum roll please..) on with the allocation!

Equities vs Bonds

The split will be 75% equities and 25% bonds. I like to have a fairly aggressive portfolio but at the same time the bonds will steady the returns and will also allow for more equity purchases in case the equity markets go off a cliff. According to Mr. Bernstein, 75% equity gives you the maximum benefit from owning equities.

Equities 75%

These percentages are of the equity portion (not percentage of the total portfolio).

Canadian equity – 25%

US equity – 37.5%

International equity – 37.5%

Bonds – 25%

20% is a short term Canadian bond ETF (iShares XSB) and some GICs.

5% is a real return bond ETF (iShares XRB). Real return bonds are a hedge against inflation and are supposed to be negatively correlated with regular bonds.

Other asset classes?

What about real estate and emerging markets? I’ve decided not to invest in those right now because both of these classes have done so well in the past several years that it’s hard for me to justify buying them. I’m also not convinced that emerging markets are all that great an investment. When you consider the exposure that a lot of North American companies have to developing markets, I already have enough emerging market in my portfolio.

Anybody want to share their asset allocation philosophies?

Click here to open an account with Questrade

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Announcements

Sat Weigh In and Links

Today’s weight was 181 pounds! Yes, this means I met my goal of 182 pounds which I set back on October 30. This whole effort resulted from Brip Blap’s Public Declaration post in which he challenges people to publicly set a goal and then try to meet it. I have to say that posting about the weight every week was one of the better motivators I had for this project and resulted in losing the weight in only nine weeks which is much less than the four to six months I was expecting.

Well now that I’ve gotten down to 181, my next two goals are:

  1. Keep the weight off. If nothing else by the end of the year I don’t want to be heavier than 181 pounds.
  2. Get down to 175 pounds. I know from my college days that my perfect weight was around 165 pounds but I don’t think that’s a realistic weight to shoot for since it would be too hard to maintain. Wish me luck!

Some interesting reads from this week:

This post from My Dollar Plan blew my mind – it’s about a person who has 181 financial accounts which includes 89 credit cards. Another interesting statistic that she wrote about is that the credit limit on all the cards is just over a million dollars.

Fecundity wrote a humorous list of things to do, and not to do in the presence of a pregnant woman.

Check out the second edition of the Carnival of Financial Goals hosted by BeingFrugal.net. I was an editor’s choice for my post on Shooting Down Goals.

Categories
Investing

Investment Performance for 2007

It was a volatile year in the markets and my asset allocation was even more volatile! I switched most of our low cost mutual funds into ETFs part way through the year, lowered our Canadian content (unfortunately) and lowered the equity portion of our portfolio from 80% equity to 75% equity and 25% fixed income.

Here is a list of some relevant asset returns for 2007 in Canadian dollars which is listed on Canadian Capitalist.

Bonds 3.3%
Canadian Equities 9.5%
US Equities -10.5% (5.3% actual index return)
EAFE Equities -6.6% (10% in USD return)

As you can see the rise of the Canadian dollar was the dominant factor in this year’s returns.

In the end our final return on our investment accounts was 4.1% which is not bad at all. Please note this does not include our leveraged account which will be analysed in a separate post.

To calculate our return I use a very basic estimation which only works if your contributions are a small percentage of your overall portfolio. I take the year end total of all our investments minus the total at the beginning of the year minus any contributions made during the year. The error in this calculation is that I’m assuming that there is a zero percent return on the contributions.

January 1, 2007 total: $219,907

December 31, 2007 total: $241,831

Contributions made during the year: $12,990

Return = ($241,831-$219,907-$12,990)/$219,907 = 4.1%

Our long term investment expected return is 7% so while this year didn’t meet our expected return, it wasn’t very far below it. And if you consider that our 2006 return was 14.7%, we are still on track.

Click here to open an account with Questrade