I filled out my networth at NetworthIQ for the past half-year (right back to before I purchased my condo). The shoot-up in value then drop resulted from me using my estimated after-renovation value of the condo I bought. If I wanted to be exactly correct, I should have valued it based on work COMPLETED month-to-month through the renos (but I’m happy with the drop as I understand its not really a drop).
People used to say that you should always have 3 months living expenses in your “emergency savings”. When reading “The Intelligent Investor” they claim that you can increase you position to 100% stocks (risky) if you meet a number of criteria, one of which is liquid assets to pay for living expenses for 1 year.
I’m the last person on earth to say “live for today, don’t bother saving”, but the idea of an emergency money pool of cash strikes me as a fallacy. Obviously you need to be able to weather the storm of not earning income for a reasonable period of time (I’m working towards getting this period of time to be the rest of my life, and that’s a big project), but like anything there’s more then one way to accomplish this.
Given my estimated monthly costs of $2,140 in order to survive without earning money for 3 months someone might suggest I keep $6420 ($2,140 x 3) in my checking account.
Since I wouldn’t need the entire amount immediately (just one month’s expenses per month), a slight improvement would be to have this money in a safe, liquid investment (perhaps a cashable GIC, money market account or high-yield savings account). While I’m waiting for the emergency to strike, I would be earning a small yield on this money (say 3% after tax, maybe 1% after taxes and inflations). If the emergency never hits and I keep this fund around for the next 35 years until I retire, I’ve paid a HUGE price to have this “insurance” (considering some use 5.5% as returns after tax and inflation on conservative dividend paying blue chips).
$6,420 compounded at 1% annually over 35 years would be $9,094.59, whereas $6,420 compounded at 5.5% annually over 35 years would be $41,818.76.
So what’s the alternative you ask? Simple. Go into your local bank, and set up an unsecured line-of-credit (LOC). If you have a decent credit rating and income, they should happily give you a pretty large balance at a few percent over prime (I got an offer out of the blue from TD for $10,000 at Prime + 2.75%, they recently offered to increase this to $20,000). Obviously at this rate you wouldn’t want to borrow from this account unless it was a VERY good investment, but it is well suited to use as an emergency source of funds. If I have 3 months without income, I simply withdraw what I need to survive from the LOC every month. A LOC works just like a cash advance on a credit card (you get the money immediately, and immediately start paying interest on it until its re-paid), except that its a FAR more reasonable interest rate.
Then once money starts coming in again, I pay off the LOC before anything else (paying it down will likely be the best investment available to me). With a $20,000 limit, and spending $2,140 / month I can go 9 months without earning income, even with interest factored in. For full disclosure, there’s usually a small monthly minimum payment (3% or $50 whichever is more), but you can juggle money between accounts, or pay this from passive investments or whatever.
This allows me to put all my cash into long term savings, get it working as hard as possible for me, and at the same time have a cushion to deal with unexpected emergencies. If I can see a period of unemployment coming up (currently my contract is over at the end of September, so I can expect to not get paid for a while if I don’t renew it and don’t look for another job), I can keep money available to pay my living expenses (and avoid the LOC interest charges), but this is different then saving money for UNEXPECTED periods without income.
If I ever encountered a longer period of not earning money (say I became disabled or suffered major depression), I’m in trouble regardless of however I’ve structured my finances (unless maybe if I’d bought disability insurance), so a pot of “emergency funds” isn’t going to help all that much (it just puts off things getting bad for a couple of months longer than it would have otherwise). I’d probably just start liquidating long term assets as needed (sell my condo, sell my stocks) and when everything ran out, throw myself on the mercy/charity of friends/family/government (not a fun idea).
This would work the same way for other unexpected costs (such as needing a new appliance, roof repairs, vet bills or a new car).
Any other ideas for the best way to deal with short term financial emergencies?
Say I get paid a dividend (perhaps from my ROC that’s due mid-month) and its paid into my E*Trade account. That account has a negative balance (since I’ve been trading on margin). That interest paid on that negative balance is tax-deductible.
How is that affected if I withdraw the dividend payment and use it for something else? Say I withdrew it and applied it to a principle residence mortgage (non-deductible debt). From Revenue Canada’s perspective, would I have paid back part of my margin loan, then re-borrowed the money for non-deductible purchases (and thereby “contaminated” the margin loan), or would their view be that as long as I withdrew EXACTLY what was deposited, then I didn’t really repay any of the loan (it just traveled briefly through my account)?
If the mingling is bad, can/should I get E*Trade to make dividend payments directly to me?
Thanks if anyone knows! A pointer to a sites dealing with this issue would be greatly appreciated!
On June 6th I lost most of the gains on BMO and ROC that I’d previously made (about $400). The market seemed to turn against them (no specific bad news), and both stocks dipped back to where they were when I bought them.
Its a little bit nerve wracking, but I just doubled my position in both. I bought $5K of each originally because that’s how much I had to spend. I now had some more free cash, so its seems like if they were worth buying at that price before, they should still be and the rational thing is to grab another helping.
Ideally I would have preferred to buy similar companies in different sectors (expand beyond banking and tobacco), but of the stocks I’m currently looking at, these two still stand out (National Bank is closing in though). I’m comfortable focusing so intently on such a small position because I’m still in the early days of building my portfolio, I’m young enough to be a bit more aggressive, and I really see bank stocks as forming the core of my portfolio anyway (and I don’t have a problem with having a tobacco position if the price is right).
I’m glad the drop has happened to test my nerves a little bit. I’m looking forward to a huge drop (25% after I’ve bought something perhaps) and am hoping that I’ll have the courage buy when that happens.
For anyone who regularly buys stock on a value basis, how do you decide how much more to buy when it drops below a previous purchase price?
EDIT: I got “lucky” and had a big drop after writing this (but before it went live on the site). Currently (June 7th), my portfolio was down $400 at one point in the day. Considering that I was up $400 at one point, that’s a lose of $800 (8% of my portfolio).
Of course, there is no way, except in hindsight, that I could have known what the high and low points would be (I still don’t). I continue to be happy to own these companies, and look forward to future dividend payments!
(now I just need to figure out a better way to decide when to buy more of a stock I own after a drop).
EDIT 2: There seemed to be a bit of a rally (as of mid-afternoon on June 8th), I’m currently down $200.
Today I’ll talk about the equities portion of our portfolio which represents 75% of our entire portfolio. This section of the portfolio is a combination of low cost mutual funds, ETFs or exchange traded funds and one stock.
The breakdown for equities by type is as follows:
The first number is as a percentage of equities portion, the second number in brackets is a percentage of the total portfolio:
Canadian equity 20% (15%)
US equity 33% (25%)
International equity 33% (25%)
Emerging Mkt 8% (6%)
Reits 5% (4%)
How did I come up with this allocation? Good question…
Canadian equity: My Canadian equity portion has gone from about 90% before last year to around 30% last fall and now goes down to 20%. The reality is that for Canadians to be diversified they need to limit their Canadian exposure which is tough to do when you spend Canadian dollars and tend to think that your home country is a lot more economically important than it really is. I’m not too concerned about currency fluctuations since my investment time horizon is fairly long so I can handle currency swings. The Canadian dollar is at a 30 year high so maybe loading up on Canadian dollars is not the greatest thing at the moment.
US equity: As a percentage of the world equity, I believe US equity is around 45%, in my portfolio it’s only 33% of the equity portion. I don’t have any good explanation for the amount I choose except to say that it’s “a lot more than I had before”. Perhaps along the lines that it’s hard to reduce your home country holdings, it’s also hard to put 45% of your equities into another one country. US equity returns have been hampered by the rising Canadian dollar but according to Bernstein the best time to buy is when things look their worst. Feel free to convince me I should have more (or less) US equities!
International equity: This is Europe + Asia – this portion should be 33% according to Martingale, so I have the proper allocation according to it’s world equity weighting.
REITs: I’ve chosen 5% for this. As mentioned in an earlier post, this asset class has a low correlation with other types of investments, namely equities. I’ve only looked at Canadian REITs but I will also be considering US (such as VNQ) and international REITs as well. I really have no idea how much I should have in real estate but I’ve heard anywhere from 5% to 20% of your portfolio should be in real estate. Anyone have any input on this one? Should I increase this amount?
Emerging Markets: The global market capitalization is 9% and I have 8% so that’s pretty close. This section makes me nervous for two reasons, the emerging markets have had a great run over the last few years and although it could continue for quite some time, it could also come crashing down in a hurry. Another thing is the China factor, it’s really hard to believe that this market will not hit a brick wall at some point and if that happens, all other emerging markets will get hammered as well.
Another aspect of emerging markets that I’m not keen on is that the long term returns don’t seem to match up with the incredible risk levels involved. One of the tenets of Bernstein’s Four Pillars (and many other books) is that increased risk leads to increased returns over the long term but I’m not sure if that’s true in this case. I have a separate post for this issue.
To start at the beginning – please see part 1 of this series.
I talked to various friends and family and scoured the web looking for the best way to find contractors. I found so many horror stories about contractors gone out of control, that I was almost as stressed out about hiring contractors as I was about trying the work on my own (and actually wasted a week and a half flip flopping between the two ideas). I had intentionally avoided taking on any work during this period (the theory was originally so that I could do the work myself, but in the end it turned out just to be so I could supervise the work myself).
Since I figured getting the walls painted before getting the new floors put in made sense, I decided to start with that. I got a recommendation from a friend and my girlfriends father recommended getting a painter through Sears. In the end the prices were the same, except that the recommended guy was going to take 3 weeks (and the painter was going to come in with a crew and do it in 3 days) and the Sears job came with a 1 year guarantee. Easy decision, I hired the Sears guy.
The Sears guy actually recommend a flooring man to me, and I got the guy in to do my floors after the painting was finished. Initially the paint was peeling, and I was freaking out that the whole $1800 job was going to come down in strips, but the painter assured me that that was normal and that they’d come in to do touch-up (which they did) and that it’d be good after it had dried for a month (which is was – live and learn).
For the flooring I went with Ikea laminate (TUNDRA, maple effect). The costs seemed to keep jumping up on me (I was quoted $1 / sq. ft. for installation, but then it turned out quarter round and baseboards were extra. Picking up the wood ended up being another extra ($50 for 2 of his friends and a truck) and another $50 to get their help to bring it up to my condo. He offered to redo the tiling instead of laminate in the kitchen, and for some reason I had to pay twice for this area (I’d already paid to have the laminate installed there, then when were were doing tiles instead, I had to pay $1 / sq. ft. AGAIN, so the tiles cost me $2 / sq ft.).
In the end I got about 800 sq. ft. of flooring done (700 sq. ft. of laminate, and 100 sq. ft. of ceramic tiles) for $4000 ($2000 labour, $2000 materials) which I was quite happy with. I called one place that quoted me $2.50 / sq. ft. for the work (which may have included quarter round and baseboards, I’m not sure) and I got Empire Today to come in and give me a quote (which the guy told me it would be a minimum of $10K for their cheapest laminate – no thanks!).
It’s quite funny, as before I did this job I couldn’t care less about “home improvements” and the general state of my living environment. Since I’ve done this, I’ve actually developed an eye for things that are roughly done around peoples houses or in restaurants and certainly appreciate a nicely done living space in good repair. I also enjoy watching the reno shows on HGTV (although I still prefer the Real Estate hunting / haggling shows).
I’m putting in an offer on another “fixer-upper” condo, and the work I had done on this unit definitely has improved my ability to estimate costs of renovations (I hope, otherwise I might be in trouble! 🙂 ). Its amazing the wide array of skills you develop just buying and fixing up a small 1000 sq. ft. living space.
My girlfriends father, an electrician, was good enough to help me replace a few of the light fixtures (they were pretty awful) and all of the electrical outlets (the painters messed them up by getting paint in them – I guess they couldn’t be bothered to cover them).
With the space glowing and fresh (and nicely smelling of fresh paint) I showed the place off to my local friends and sent pictures to my family and distance friends. Now I just needed to find someone to pay me rent every month!
(continue to part 6).
I thought I would take a break from the exciting portfolio building series and write about market timing. This post was inspired by one of my favourite Globe & Mail writers, John Heinzl who wrote this morning about market timing and why you shouldn’t do it. Although he manages to contain himself in that article, he has a very funny sarcastic wit – check out his Saturday Stars & Dogs column sometime to see what I mean.
I used to be an avid market timer, when the markets went down I would switch my equity mutual funds to money market. When the market went back up, I would switch back to equity. I realize in retrospect that I probably could have just stayed invested in the money market fund the whole time and achieved the same return with less risk and stress.
Part of my new investment strategy which I’ve been developing over the past year or so is to avoid market timing since I’ve established that I can’t do it successfully. In his article, Heinzl talks about how last June, the markets had tanked and it really looked like a great time to adopt a more defensive portfolio approach but since then the Canadian market has gone up 30% which is an incredible run.
I’m not suggesting the Canadian market will go up another 30% over the next year but Heinzl’s point is that nobody knows what it will do which means that any moves based on predictions are useless.
I’m not very passionate about asset allocation yet (although I know its an important area I need to educate myself about). The one aspect I have considered is the impact of inflation on savings. Back when interests rates were running at 10-12% (in the early 80’s), people were happy, but what they were foolishly ignoring was that they were being heavily taxed on this (treated as full income) and inflation was knocking it down further.
The funny thing is, and I realized this shortly after buying my condo, is that when you’re in debt inflation is a great thing. My mortgage is currently in the low $90K, and if 90K is worth less then it was in the past, that makes my mortgage easier to pay off. Inflation will drive up what I’m able to collect for rent, while making the mortgage easier to pay (increasing the cash flow).
If your salary was going to double, but the cost of everything would also double, is this a good thing or a bad thing? Ignoring taxes and whatnot, it obviously wouldn’t make a difference if you had no savings or debt. If you have savings, it would effectively cut them in half (since the price of everything has doubled). If you have debts, it would also cut them in half (since you’d be making double the salary). In a nutshell, this is the effect of inflation.
High interest apparently can hammer the stock market, and as it leads to inflation, it would also make dividend payments less valuable. Apparently inflation hurts most businesses, as people have less money and they buy less from them (which prevents them from increasing their dividend).
In “The Intelligent Investor” (which I’m reading right now), they recommend REIT’s as an inflation hedge, clearly owning real property works in pretty much the same manner (you’re just accepting increased volatility since your personal holdings will clearly be less diversified than even the smallest REIT. The one thing I don’t like about REIT’s is that they’re so easy to abuse – the people running it can easily get kick-backs from people doing work on the properties and steal from shareholders). Gold is also popular as an inflation hedge (basically any time you put money into stuff), but its apparently far more speculative then real estate (sometimes goes up a huge amount, and sometimes doesn’t move much for years). I’d also be afraid with gold that a cheap way to produce it will appear (similar to artificial diamonds) and that would wipe out their value (this seems less likely to happen to land and living spaces).