Categories
Investing

The Problem With Patterns

I recently had a funny experience. In late October, financial stocks took another dive (at one point my BMO and NA were down about 10% from my average purchase price). The yield kept climbing, and I just couldn’t believe Canadian banks were going to go out of business, so I was tempted to buy more. Speaking with a friend, I quickly talked myself out of this (I’m not working right now, so the purchase would have come from a LOC, which probably isn’t the smartest idea).

Fast forward a week, and the stocks have almost gone back up to my average purchase cost (NA was $50.50 on October 23rd, and its $54.20 and climbing as I write this on Oct. 31st). I’m looking back, seeing that my feeling was correct, and that I missed out on some rapid increases over 8 days.

So next time, I’ll trust my gut and buy? No I won’t.

Humans has a remarkable pattern matching ability that helps us figure out what’s happening in our environment, and predict what will happen in the future. In many areas this is very helpful, but in a few it can cause weird behaviours or hurt us. Optical illusions play on our pattern matching to confuse us. Gambling preys on this pattern matching where we think we’ve figured out what’s going to happen (and trust the feeling as we lose all our money).

If NA had been guaranteed to make a speedy recovery and shoot up in value, institutions and other investors would have been buying it while it was dropping and would have never let it go as low as it did (they wouldn’t leave money on the table). There was some risk that it would drop further, or it would have stayed at its lower value for an extended period. Its price reflected all these possible future outcomes.

I was interested in my own reaction when it went up, because first I thought “I should have bought”, then I thought “I should buy in a similar situtation in the future (since I was right this time)”, then I thought “wait a second, this is the *EXACT* feeling that gets people into trouble!”.

Unpredictable things are unpredictable. Once you start feeling that you have an intuitive instinct about what’s going to happen (or worse, some arcane technical analysis formula that will predict it) you’re turning into a dangerous gambler. Beware that siren’s call, as it could lead you to your doom.

Categories
Announcements

Saturday Morning Update

An update on the weight situation:

  • Weight – 189 this morning which is a whopping 3 pounds less than a week ago. This seems a bit suspicious so part of the loss might just be the normal weight variations. Regardless, it’s a bit less so that’s a good thing!
  • Beer – I hardly drank any beer this week although after helping Mr. Cheap move some stuff to his new apartment on Wednesday he made me drink some beer and nachos with him at a local bar 🙂
  • Diet – not bad, I’ve been making a pretty good effort this week although Halloween didn’t help.
  • Exercise – did my usual stuff this week but I went running on Tuesday night which was an extra.

This week Millionaire Mommy Next Door hosted the Carnival of Personal Finance and included the post ETFs vs Mutual Funds. She added a cool voting feature so I suggest going and voting for my favourite post on the carnival Follow the White Rabbit to Financial Freedom by Brip Blap. If you are a Matrix fan then you will love his post.

Categories
RESP

RESP – Asset Allocations

This post is part of the Big RESP Series. See the entire series here.

See the previous post on resp withdrawals here.

When setting up a resp account it’s important to determine and monitor the asset allocation of the account. Typically the asset allocation is determined by the risk profile of the investor and the amount of time remaining until the money is required. Equities are considered risky assets but over a longer term they are fairly reliable. If you are making an investment and you need the money in two years then equities are not advisable because there is too much risk that their value will go down over those two years. Short term bonds or a high interest savings account is a better investment for money that is required in the short term. The idea is not get superior returns but to ensure that the money is there when needed.

So if equities are a good investment over the long term but not the short term, the question has to be asked – how long is the “long” term and how short is the “short” term. I would say that short term is anything less than five years and the long term is 15 years or more. Please note that this is strictly my opinion so don’t write it in stone!

Unlike retirement planning where you don’t know how long the portfolio will be in use for, RESP planning is a bit easier since you can make a pretty good estimate of the start date of withdrawals and the end date of withdrawals.

For this example I’ll assume that the student goes to school starting the year they turn 17 and finish up four years later.
I’ll go through different stages of the resp in terms of how old the student is:

Age range

Equity %

Bonds %

0-5

100

0

6-11

60

40

12-17

40

60

In school

0

100

Once they are starting school all the money will be withdrawn within five years so it should be in very safe securities such as high interest savings accounts, short term bonds or money market funds.

If you are a more conservative investor then you might want to do the following:

Age range

Equity %

Bonds %

0-5

60

40

6-11

50

50

12-17

25

75

In school

0

100

I would invest equally in Canadian, US and EAFE for the equity portion and in short term bonds ETF or a bond index fund for the bond portion. You can add other asset classes to the mix as well. This example is intended to show a simple asset allocation.

I’ve indicated the allocations at five or six year terms. If you are really keen and plan to rebalance every year then you can also adjust the allocation every year.

Obviously none of the above allocations are perfect for every investor so try to keep in mind the idea that money which is required in the short term should be invested in safe investments and try to adapt the above suggestions to your situation.

See the next post on RESP Individual and Family Plans.

Categories
Personal Finance

Childish Misunderstandings About Money

I’ve answered a couple of memes in the past, so I’m at the point where I’d like to try starting my own.

What early (i.e. before you were 10 years old) ideas did you have about money or finance that turned out to be totally (and amusingly) wrong? Please tag at least 3 people when you answer this meme, and link or traceback to  https://moneysmartsblog.com/childish-misunderstandings-about-money/, or leave a comment with a link to your response at the same address (so we can collect all answers generated in one place). Feel free to cut and paste this paragraph into your response post.

To begin with, when I was a kid (like 5 or something) I thought that you had to buy jobs. I got the concept that there were jobs that were better then other jobs, but I thought you got them by paying more money for them (so if you wanted to be a doctor, you’d have to pay the hospital $100,000 but if you wanted to be a paperboy, you only had to pay the newspaper $500). I realized that you did get paid for a job, but I thought you needed to pay them first. I *think* I thought you’d be able to sell a job when you left too… So I thought people saved up, then bought a better job.

The funny thing is, in SOME ways this *is* a little bit correct (e.g. you have to pay for an expensive education to become a doctor or lawyer). In many ways families buy better jobs for their children. Dividend paying stocks, annuities, GICs and whatnot have always made sense to me, because that’s how I thought even employement worked (you paid a lump sum of money then collected the ongoing payments).

I’d like to tag Million Dollar Journey, The Dividend Guy, Wooly Woman and Krystal to continue this meme.

Categories
Real Estate

Anecdotes and Advice from a First Time Home Buyer Part 4 – What To Buy

My friend Christine has kindly agreed to write a series of posts on her experiences with buying a home for the first time which will be posted occasionally.
See Part 3 – Choosing a realtor.

Prioritizing a wish list

Be realistic about what you want or need in a home. There are so many permutations of features in houses and condos out there that you have to think about what you absolutely cannot live without and then be clear in explaining your needs list to your realtor.

Creating a wish list is a process of evaluating what is realistic balanced against the market and is a good starting point for your realtor. A condo or a house? A fixer-upper versus a newly built home? How many bedrooms and bathrooms do you require. Do you need parking? Close to the night life or a quiet subdivision? Are you willing to commute? Do you wish to rent out part of the home? Are you a gardener or do you hate the idea of outside maintenance?

What we are looking for

My ideal home is downtown, has at least four bedrooms with as many bathrooms, and has an open, Hotel W aesthetic with immense closets. The dream is achievable, but not in Toronto and not on my budget.

With a $500-600,000 budget, the home that I am seeking is walking distance to the subway in central or north Toronto. While my budget seems generous, the buying power of our money is greatly reduced by the location. My husband and I require three bedrooms and would like to have at least two bathrooms. Within our budget, a detached home is unlikely. Our hope is to find a house that is structurally up-to-date in terms of wiring, plumbing and the roof, such that only cosmetic updating would be needed.

However, we are trying to remain open-minded and are also considering fixer-uppers which our agent feels may be available in the $400,000 range. Within our budget constraints, a fixer-upper would potentially allow us to stay downtown and may give us added space. In terms of future resale potential, it may also be wiser to fix up a solid home in a developing hot central neighbourhood than to buy a starter home in an established one. Some of the smaller renovated homes that we have seen in the Annex were not renovated to our standards or tastes and did not seem to justify the $700,000+ price tag.
Home buying is all about timing, so we shall wait and see what is available in the months ahead.

Location

By far the biggest factor in the cost of a home is location. The neighbourhood that you choose will have a great impact not only on your lifestyle, but on the cost of a home and the type of home that is available.

For my husband and I, location is our top requirement. We wish to be close to the Annex or the Yonge Street corridor, and walking distance to the subway. We are true urbanites who like to be a short walk to everything from grocery stores to restaurants and jobs.

If you are new to a city, check with friends and colleagues about different neighbourhoods. Form your own opinions by visiting open houses, talking to neighbours and looking around the area. If you have children, check into the reputation of the schools nearby.

Some good neighbourhood references are the real estate guide on the Toronto Life website, www.torontothegood.com and a book called, what else, Your Guide to Toronto Neighbourhoods by David Dunkelman. These sources each give an overview of the type of houses in different areas, and, in the case of Toronto Life, fairly recent housing prices. Keep in mind though that the descriptions do not give a complete picture in terms of area safety, noise levels and the type of current residents, factors which you should evaluate in person. Regardless of lifestyle, your real estate agent is a valuable resource for providing up-to-date advice in this regard.

If like myself, neighbourhood “walkability” and nearby amenities are important, www.walkscore.com is a wonderful tool. Just type in an address or postal code, and up pops a list of everything from coffee shops to parks and their proximity. A walk score rating out of 100 is also listed. Also helpful for pinpointing location is the mapping program on www.google.com.

Finally, on Fridays, the Globe and Mail has a real estate section with helpful profiles on recently sold homes and their asking and selling prices.

Read the next post in this series “The Search“.

Categories
Opinion

Public Declaration

Ok, I’ve been tagged by my buddy Brip Blap to publicly declare a goal and hopefully by making it public I will be able to stick to it. So even though he conveniently didn’t make a declaration himself :), here’s mine…

Lose 10 pounds!

This isn’t a difficult goal since I’ve done it before however I’d like to be able to lose the weight (and possibly more) and keep it off.

Some history

In July of last year I hit a personal best weight of 201 pounds (I’d guess my ideal weight is 165 pounds) so I started watching what I eat/drink and managed to get down to about 182 by April of this year. Unfortunately over the last six months my weight has crept back up to 192 which is not good. So the goal is to get back to 182 and stay there.

How will I do it?

If it worked once then it will work again…these are some of the things for me to focus on:

Beer – I love beer. In my perfect dream world I would spend every night on the couch watching bad movies and my favourite sports teams (Leafs & Bills) and drink beer. The problems with beer are that it’s not an overly healthy food, when I drink it I tend to stay up too late and get hungry and eat everything in sight, and lastly if I have too many then I’ll be tired/hungover the next day and will be more inclined to eat crap foods instead of healthy foods.

Action Item #1: Drink less beer.

Diet – I’m pretty partial to eating healthy foods such as salads however I do like to eat a lot of unhealthy foods in unhealthy quantities. I also eat a lot of carbs for which I’ll blame my wife who is addicted to them 🙂

Action Item #2: Concentrate on eating better – less fat, less carbs, less quantity.

Exercise – I do stay pretty active but clearly more needs to be done. For the last six months I have been riding my bike to work everyday (20 minute ride), I play hockey once a week and I usually go roller blading for about 40 minutes once or twice a week. This may sound good but in my younger days I used to be an exercise fanatic. While I don’t think I can ever get to the fitness levels I had 10 years ago, I can do a lot better. I will also have to make up for the fact that I won’t be able to ride my bike and roller blade much longer due to the weather.

I hate to blame my lack of fitness on age because at my age (39) there are guys playing pro hockey and climbing mountains so clearly I’m not “too old”. My theory as to why it is harder to exercise as we get older is because of lifestyle. When I was younger and didn’t have a family and not many obligations, I had plenty of time and opportunities to exercise. For example in a one week period I might have had 15 opportunities to exercise – so even if I only took advantage of six of those opportunities, that was still quite a bit of exercise. Now I might only have five opportunities to get exercise a week so if I only take advantage of two of those times, then that’s not very much exercise.

Action item #3 – Increase exercise by going jogging once a week. This might have to increase once my bike riding & roller blading stops.

So that’s my public declaration – I’m not going to tag anyone else since I think Brip Blap already tagged half the internet 🙂 but I’ll leave it up to anyone reading to carry it on if they wish.

Categories
Investing

Deductible Borrowing

Now that I’m living off of savings, I expect at some point I’m going to have to dip into my line of credit. Since its always better for debt to be deductible (save you money on your taxes), rather than non-deductible, my plan is to start borrowing money to pay for my condo expenses.

How this will work is, I pay $126 every week for the mortgage payment (principal and interest) and $500 a month for condo fees. On the day the expense are paid, I’ll transfer an equivalent amount from my line of credit into my checking account (where these expense are drawn from).

This will put about $1000 / month (plus interest) on my LOC, while I should be able to live off of the $1300 / month that my condo is bringing in in income. I have a few thousand in savings which I’ll use for any unexpected expenses. Once I start my PhD (or bring in some coin from contract work), I’ll start paying down the LOC.

The benefit of doing this will be that I’ll get a tax deduction on the 9% interest I’ll be paying on this every month (since I’m using it to pay for investment related expenses). If I waited until I ran out of savings then started borrowing from the LOC for personal spending, it wouldn’t be deductible.

I’ve ran this past a couple of friends and I’m pretty sure that its valid. If anyone knows if this isn’t allowed (or can warn me of any potential pitfalls), I’d be very interested.

Categories
Announcements

Sunday linkstuff

A quick note to say that we were in the recent #123rd Carnival of Personal Finance hosted by “The Dough Roller“.

If you have ever thought about giving a reference for someone you don’t really know that well then read this post first.

And lastly for anyone who likes to invest in Canadian junior mining stocks or anyone who thinks we actually have law and order in Canada when it comes to securities then read this bizarre and almost unbelievable tale.