Friday, March 14, 2008

homeless in vancouver

It's official, no one can afford to own a home in Vancouver!

RBC economics released its most recent housing affordability survey which showed that in Vancouver 74% of ones's pre-tax household income is needed to service the costs of owning a home. This compares with 47% in Toronto and 42% in Calgary. I knew the B.C. market was bubbly, but this is ridiculous. Apparently this affordability level of 74% is the worst on record, ever.

For example, an Affordability reading of 50 per cent means that homeownership costs, including mortgage payments, utilities and property taxes, take up 50 per cent of a typical household's monthly pre-tax income.

This trend is expected to cool though, as interest rates are coming down, house prices are predicted to moderate, and incomes are expected to grow.

Thursday, March 13, 2008

march net worth preview

I track my net worth bi-monthly. That is, I calculate my net worth on or around the 15th of March, May, July, September, November, and January. The reason I do this bi-monthly instead of monthly is because I feel that tracking it monthly would create to much 'noise' or variance in the figures. I feel that spreading out the tracking period to 60 days versus 30 days provides a better picture of how we are doing vs. a choppier graph that month to month variable expenses and income, as well as stock market fluctuations can skew.

Here is breakdown of our progress since I've started the moneygardener

Since I started tracking my net worth in May of 2006, I consider my fiscal year for net worth May to May. So when May, 2008 comes and I am showing my one year (let's call it 2007) progress you'll know where I'm coming from.

The value and meaning of net worth have been debated among bloggers ad nauseam on personal finance blogs. Personally I really like the whole concept of net worth, and I make it a priority to strive to grow ours. Much of one's personal finances can really be boiled down to net worth. Blogger Frugal Trader (FT) over at Million Dollar Journey actually compiled a net worth ranking of personal finance bloggers. I thought this was really interesting, and apparently others did too as there were 86 comments on the post! I was 10th on the list out of 13 bloggers, I really hope FT continues this idea as a regular series of posts, as more bloggers participate.

I'll complete my March, 2008 net worth within the next few days. This update will include our new RESP account as well as some serious carnage from an angry stock market...

Tuesday, March 11, 2008

in defence of plastic

Back in August of last year I described some of our personal finance habits that allow us to save and invest a significant portion of our income, in a post called 'how i manage day to day'.

I would like to elaborate on point #3 on that list, which was: Use Credit Cards

I often think credit cards get a bad rap in personal finance circles. Credit Cards seem to be the Antichrist of personal finance. Television programs like 'Til Debt Do Us Part' etc. often demonize credit cards as an evil that causes debt. I would agree that in undisciplined hands credit cards can certainly be dangerous. Credit card debt is the worst type of debt, as interest rates are normally 18%+. Having a piece of plastic that has the power to buy anything you desire for no money down can be detrimental to many people's finances in a big way. Not paying credit card balances in full each month is probably the single worst mistake most people can make in managing their finances. That being said, for those of us who strive to grow our net worth and achieve financial freedom, credit cards are a saving grace.

It is widely known that several credit cards are equipped with rewards programs that may or may not have annual fees attached. Some offer cash back, air miles, and other various points programs. While some of these are worthwhile programs, especially those free of annual fees, these programs have nothing to do with why I think credit cards are plastic gold for the financially aware. The reason why I view credit cards as great tools for getting ahead financially are the following:
  • Zero Transaction Costs. Banks are thieves when it comes to fees. Every debit card transaction you make contributes to your monthly transaction total which can cost you around $0.60/transaction if you complete more than your plan allows. Banks love when you use your debit card. They really love when they can convince you to choose their 'Premium Plan', which allows unlimited transactions per month but sadly costs you $25/month. Let's all own bank stocks instead, collect their dividends and reap the benefits of other people's debit cards.
  • Convenience. There is something to be said for the wide acceptance of Visa and Mastercard. Even the last bastion of my cash needs, the addictive Tim Hortons has recently begun accepting plastic. No matter what you do or where you travel, you are likely able to have the option to pay with a card that you keep in your wallet, free of fees and hassle. Trips to the ATM to obtain cash have become a rare event in my day to day routine and I like it that way. Less cash lying around usually means less money going from me to merchants, not to mention less fees from transacting and, none of the dreaded 'other ATM fees' that are simply mind boggling. Let me reiterate, own bank stocks and they'll pay you the fees they make from your neighbour using the ATM at the airport.
  • Tracking. I don't think there is an easier or more accurate way to track your expenses than by using credit cards. If you want to take the opening steps of setting up a budget by tracking your expenses, just use a credit card exclusively for a month or two. Personally, I have become so accustomed to our monthly expenses that I find credit cards are ideal to use for predictability, and monitoring. If we happened to be really spending that month it'll usually come out pretty clear on our credit card statement why that is. Let's say you want to monitor how much you are spending on gasoline, groceries, or any other category; using a certain credit card exclusively for this category is an ideal way to do this. We use a card that knocks $0.02 per litre off of each trip to the pump. I like the instant savings but an added benefit is that I can actually see what we are spending on gas each month. This is great information for budgeting and managing your finances well.

In conclusion and one caveat, of course I pay my entire balance each and every month. Paying one cent of interest by not doing so, eliminates any benefit credit cards hold. For those who want a convenient and traceable access to cash with no fees credit cards are a no-brainer way to make purchases. Still, they will always be associated with financial heartache and even ruin.

Monday, March 10, 2008

top 3 mistakes investors make

I've been tagged by fellow blogger Dividends4Life to list my top 3 investing mistakes. I believe some bloggers have described 3 investing mistakes they've personally made, while some have described what they believe to be the top 3 mistakes that are generally made by investors. I've decided to keep in general.

Top 3 Mistakes Investors Make
  • Failure to Focus. Just by observation I can say that many investors lack a coherent focus to their strategy and their habits. Investors need to define their strategy based on their time horizon, skills, beliefs, and life situation. Once that strategy is defined, investors should stick to their system long term and not waver back and forth between strategies and investment ideas/styles. This type of back and forth tends to lead to high trading fees, high expectations in short time periods, and low success rates long term.
  • Unrealistic Time Horizon Expectations. Unless you are a trader, equity-based investments should be held for the long term (5 years+). Shorter term (1- 4 year) investments should be diversified in vehicles such as bonds, high interest savings accounts, and money market funds.
  • Failure to Recognize the Equality of 'Investments'. Real estate is to stocks, as stocks are to fine art. Investments come in all shapes and sizes. One can compare the characteristics and fundamentals of investments and the markets they function in. There are far too many people who generalize and believe real estate is 'safer' than stocks. The real estate boom and bust in the U.S. should have revealed the equality of all investments to us all.

Saturday, March 8, 2008

resp in net worth, the decision

This is a fairly long post, but if you track net worth and plan to have children, or have children already you might be interested in reading on...

Recently I've pondered and posed this question to readers:
Do I include our RESP balance as part of our net worth?

Thanks for all the great comments on this. The verdict is certainly still out on whether or not one should include the balance. Commenter's were split on the issue. Here are some of the points that were raised:

The 'Against' Case:
Scott noted:
The intention of the savings plan is to fund your child's education and as such it is his asset. If the funds eventually are rolled into your own RSP's due to them not being used for education it should be considered a windfall because that's really what it is. It was never part of your intended asset base.

Luc-Roc said:
However, you could always create a separate "Family Net Worth" report and add your RESP in that report.

Dividends4Life commented:
One differences though is that my plan under U.S. law is irrevocable - it is theirs at age 18.

Middle Class Millionaire suggested:
However, other than to satisfy the technical definition of networth I don’t think there is really any benefit of including it. When using networth to gauge your progress you’ll probably subtract it why include it?

The 'For' Case:
Sarlock explained:
Whether I had an RESP or not, I would be funding a significant portion of my daughter's post-secondary education and this would be part of my annual expenses during those years. The fact that I am putting away money now toward this future expense just means that I am allowing myself 18 years to spread this expense out instead of having to incur it at the time which would have a much heavier impact on my savings when those days arrive. Thus, I have included it in my personal net worth computations - with a caveat. I have only included the amount that I have put in to her account, not the amount the governments have contributed nor any amount of growth.

pitz said:
RESP is an asset that, in bankruptcy, is the property of *your* estate. So its yours, if the creditors come a'calling

DH noted:
I have and believe as above that i will be helping fund the education and this is just keeping future dollars in my pocket. It is an asset after all? Do you take out your wife's RRSP because it has her name on it and is technically hers if she leaves you? Besides its money you can remove in a worst case scenario if needed (I personally know people who've done this!)

Q from Surrey, BC commented:
I have also included RESP in my networth because it is my money being saved up. Networth is an indication of how you are doing so its unfair to leave the RESP amount out.

I can't emphasize enough how insightful these comments were, and how much they aided me in making my decision. Before I posted about this I really had no idea whether I was going to include it or not. I have decided now after reading these comments and thinking more about it that I am going to include any RESP balances in our net worth. I think at the end of the day you have to think about the RESP as a gift. A good analogy is the following:

Imagine you planned on buying a car for your son for graduating university. When your son is 16 years old you begin to save money in an investment account for the car. When completing your net worth statement a few years later when you have accumulated $12,000, do you include the money? I would say the answer is a resounding 'Yes'. Just because an asset is intended to by used for a purpose in the future that involves it leaving your hands, doesn't mean the asset didn't exist in the first place. Points readers raised about the fact that if we did not save the money now for the education help, I would be likely shelling it out in the future which would take away from our net worth growth at that time, were good ones.

A few caveats:
  • I won't include any government CESG grants, because they were never our money and never could be our money in the future.
  • I will include any market gains that the money garners.
  • I will mentally deal with the huge reduction in net worth at the time our son begins school, by considering the fact that we had always decided to help with the education, and we could have done it at the last minute, which would have reduced our net worth by an equivalent amount. Hopefully by the time this all transpires, our net worth will be relatively large, and the lost money will not be significant.
  • A positive I see with including the balance, is the fact that money we contribute to the account will not only help our son someday, but it helps and encourages our net worth and financial progress now.

Thursday, March 6, 2008

the silver lining

Anyone happen to notice how bad the stock markets have been? The markets are falling hard, financial stocks are circling the drain, banking and insurance will cease to exist, nobody can afford to drive anymore, the end of the world is near...oh sorry..I got carried away there...

The S&P 500 index is down 11.2% year to date. Personally, I am down 11.8% in our non-registered portfolio since January 1, 2008. Ya, on paper I've lost about $4,500 in 66 days. That is a rate of about $68/day including weekends. Very strong emphasis though on the term 'on paper' as I have no intention of selling any of our investments over the next 10 years.

On the dividend front everything seems to be chugging along as normal. Almost every one of the companies I own have raised their dividend over the past year, some of them like SunLife, IGM and Telus have raised dividends very recently. We are still getting paid more and more money each month for just holding these stocks, this is the silver lining.
  • Back on Halloween of 2007, our portfolio was actually worth more than it is worth today and we were receiving $1,249 annually in dividends and distributions.
  • Today we are receiving $1,590 annually in dividends and distributions; that's 27% more passive income.
  • I've been throwing thousands of dollars at our portfolio since October, and it's value has flat lined. My favourite graph on the other hand, just keeps rising...and I really like that.

So while 'on paper' we've lost $68/day so far in 2008, in reality we are now getting paid $4.35 /day. This $4.35 is just getting plowed right back into this awful market, after it builds up in my brokerage account. All the little '$4.35's' are buying more chunks of companies that are paying dividends, so in essence the '$4.35's' are multiplying. Some of them are doing this more efficiently by directly going into shares of the companies that spit them out. Royal Bank (RY), Johnson & Johnson (JNJ), Manulife Financial (MFC), and Telus (T.A) are self-multiplying in Dividend Re-Investment Plans (DRIPs).

My portfolio is now yielding 4.7%. Several of the stocks I own currently, are trading at levels where I would gladly add to them. I can now buy more dividends for every dollar I invest. This is the type of market that a dividend growth investor lives for.

Tuesday, March 4, 2008

another drop in the bucket - GE

Our friend Jeff Immelt, CEO of General Electric (GE) is at it again...

Back in October, I posted about how Jeff bought about $3.3 million dollars worth of GE shares, which would have amounted to a commitment of about $9,150 for someone who earns $50,000 per year. Perhaps a sign that he still feels the global conglomerate is undervalued, Jeff purchased an additional 90,000 shares of GE for about $3.0 Million dollars on February 29, 2008.

I agree with Mr.Immelt, as I'm interested in adding to GE at these levels as well. GE is currently trading at a P/E of 15.3, which is near it's 10 year low. The company has also grown it's profit margin steadily over the past 10 years, and grown it's return on equity over the last 4 years. I like GE's global presence, and their environmental focus in developing and developed markets. GE is currently yielding 3.7%, and is trading near a 52 week low. If this company can produce the 10%+ earnings growth in 2008 and beyond, this is looking like a great entry point. Given the strength of the Canadian dollar, combined with GE's valuation and outlook, I may add to my position soon.

GE already makes up about 6% of my portfolio. You can always view my portfolio holdings and their weight in my portfolio on the panel on the right of the screen.

canadian bank follow up / summary

Last month in my post regarding the state of Canadian bank dividends, I noted that an analyst (Robert Sedran) commented about the possibility that Royal Bank (RY), TD Bank (TD), Bank of Montreal (BMO), and CIBC (CM) may forgo dividend increases this quarter as profits decline. Canadian banks have been raising dividends twice per year, but he commented that dividend increases could be postponed because average profits before one-time items could be down around 1.4%. He would view any increases as a bullish sign.

I'd like to follow up on this post by reviewing what has transpired earnings-wise, particularly for the Canadian banks that I follow:

TD Bank (TD) - Profit rose 5%. Raised dividend 3.5% to $0.59/quarter. This dividend increase is 'on schedule', however the increase is at a slower rate than the bank has been in the habit of raising. TD was the darling of the Canadian banking sector this quarter. They have no subprime exposure, less emphasis on capital markets, and their Canadian retail franchise is strong. TD's dividend increase, although smaller, could be viewed as a bullish sign for the bank going forward.

Royal Bank (RY) - Profit declined 17%. Did not raise dividend. This lack of a dividend increase stops their streak of semi-annual raises which they have maintained going back to January 2005. The strong Canadian dollar, weakness in capital markets, and charges related to U.S. asset backed paper and subprime exposure.

Bank of Montreal (BMO) - Profit declined 27%. Did not raise dividend, did not cut dividend. This lack of a dividend increase stops their streak of semi-annual raises which they have maintained going back to 2003. Write downs, investment banking losses, and credit provisions were blamed, and the bank does not expect to meet it's annual targets in 2008.

Bank of Nova Scotia (BNS) - Profit declined 18%. Scotia was not due or expected to raise their dividend. Profit in international operations, the strong loonie and credit provisions were blamed.

In summary Sedran was probably optimistic for the quarter compared with what occurred. TD Bank has to be viewed as the strongest player right now as they are less involved in the messes south of the border, and producing some good numbers in Canada. It seems BNS, RY, and TD have all been taking advantage of the strong loonie by purchasing non Canadian assets lately, which could turn out to be wise long term.

Monday, March 3, 2008

resp as part of net worth

Since I have recently opened a Registered Education Savings Plan (RESP) for our son, a conundrum has occurred to me;

Do I include the RESP balance as part of our Net Worth?

Points To Include Our RESP Balance As Part of Our Net Worth
  • The funds are technically ours (we have complete control over them)
  • If our son does not attend school, the money becomes ours if we choose
  • I hate to see money leave our net worth that has technically been saved, and not really spent on anything, (well anything yet....)
  • If our son does not attend school, it may become our money and will appear onto our net worth one day. If we failed to include it until this point this would look like a windfall. This will throw off my tracking and performance reviews.

Points To Not Include Our RESP Balance As Part of Our Net Worth

  • The funds are theoretically someone else's money (our son's)
  • When our son attends school, which he is very likely to do, the money goes away
  • I would hate to add money to our net worth over the next 20 years that will likely not be ours
  • If our son attends school, it becomes his money and if included, will drop from our net worth one day. This will throw off my tracking and performance reviews.
  • The CESG's (Canadian Government Grant's) sole beneficiary is our son.

What do you think?

Saturday, March 1, 2008

the seeds of an education

This week I started a Registered Education Savings Plan for my 6 week old son.

For some great information on RESPs, you should visit Canadian Capitalist or Quest for Four Pillars. These two authors provide some of the best, most thorough information on Canadian RESPs available on the Internet today. All the great information contained on these two blogs really helped me with my RESP choices and with the process itself. 

How The Process Worked For Me
I filled out a TD Mutual Funds RESP application that I obtained online and mailed it in to their Markham office. Within the application I included a form that needs to be filled out in order to immediately covert the account to an e-series account. 'E-series' simply refers to a group of index funds that can be purchased online. The low management needs of these funds, combined with the efficiencies of using the Internet allow these funds to carry some very low MERs (Management Expense Ratios). MERs are the hidden fees that an investor pays for the administration of a mutual fund, ETF, or index fund. Also included in our application was our application to receive the CESG grant, which allows the government to match 20% of our contributions.

The account was set up very quickly, and TD notified me by email. The email prompted me to call TD Investment Services where I was advised that I needed an access card to get onto their online EasyWeb system. EasyWeb allows the investor to manage the entire RESP account online. I went into a TD Canada Trust branch and obtained the access card. Now that I have the card I am able to access EasyWeb, where I have switched out of the TD Canadian Money Market fund where I deposited my cash initially. I put the cash in the money market fund just to allow the funds to be held for a brief time before I decided where to transfer it for long term growth.

Why I Chose TD E-Series Funds
The merits of index investing as a way to replicate market returns for minimal cost are widely known. What I like about index funds aside from the low MERs is the fact that they are great to use for taking a no-hassle approach to investing. For this RESP account my priorities were minimal management on my part, low fees, and long term growth. I believe the following allocation, which I have chosen satisfies this:

TD Canadian Index E-Series -----MER=0.31%------30% allocation
TD U.S. Index E-Series-----------MER=0.33%------35% allocation
TD International Index E-Series--MER=0.48%------35% allocation

I plan to re-balance this infrequently if the asset allocation gets too far out of line. Obviously as we get closer to our son's first day of post secondary education the money will need to be managed more for stability of capital rather than for growth, and I'll adjust accordingly. That is a long time off right now as currently we are trying to get him to keep a soother in his mouth.