Oct 2013 – Investment Update

The following is an update of Tim’s plan to retire early.  Please note the house is paid off, so net worth is no longer tracked.

To track my progress I’ve decided to track both my expenses and my investment gains.  So once the investments gains are consistently beating my expenses I’m financially independent and can stop working.  I think my ideal tracking of this would be one full year of investment and spending data, but I don’t have that yet.  So for now I’ll do a trailing six 12 month average on spending (but excluding vacations) and investments for the calendar year to date.

Investments

Account (Contribution), [+/- Gain or Loss less contributions]

RRSP $36,000 ($100), [+$940]
LIRA $13,260 ($0), [+$400]
TFSA $35,160 ($0), [+$2060]
Pension $81,940 ($1050), [+$2210]
Wife’s RRSP $41,800($1500), [+$1190]
Wife’s Investment Account $0 (-$60), [$0]
Wife’s TFSA $32,220 ($2000), [+$1520]
My Investment Account $0 (-$45), [$0]
High Interest Savings Account $2110 (+$600),[$10]

Investment Net Worth $242,490 ($5250 ), [+$7915 or +3.3%]

(YTD Contribution: $35,998), [YTD Gain: $23,791 or +13.0%], YTD Avg Monthly Gain $2379

Spending Averages

Last Month $1412

Trailing Last 12 Months $3041

Results

Number of months trailing average spending covered by investment gains: 0.78 {Target 1.0 or higher}

Commentary:

Wow, that was one heck of a stock market surge since I technically was financially independent (just for the month).  Yet what is interesting is that is the second time that has occurred this year (the first was back in January).  Overall I’m happy, but not expecting it to last…I’m interested in the longer term result ratio (currently at 0.78) being above 1.0 for a few months prior to getting excited.

Well finally we closed our investment accounts and the paperwork wasn’t even that hard.  Yet that didn’t occur before we got nailed with more account fees, so my lesson has been learned.  Don’t put off paperwork, it will only cost you money.

I also came across an small error on my RRSP contributions in these updates,  I had put in the wrong number one month and carried it forward.  Yikes!  So I revised the totals to be correct this month.  So my contributions are down slightly, but the end result is higher gains (I always deduct contributions from these gain totals).  Total correction was minor like $400 or so.

My wife’s TFSA has now been fully funded, so that means both are now maxed out…until next year’s contribution room.  Now the focus will shift to loading up my wife’s spousal RRSP for the remainder of 2013.  We will continue to max that out in 2014 as well to finish up my excess RRSP contribution room.

Any questions?

(click for a bigger version)

Invest Update Oct 2013

Eating Like a King

I would describe myself as a “Food Enthusiast”, as an alternative to “Foodie” (which I really dislike as a descriptor). I think enthusiast better describes me, because I will eat basically anything available as food. An interest in food, especially “good” food could turn into an expensive habit, since it would be very easy to justify overspending – everyone needs to eat.

I classify “good” food as locally raised meat – I stick to beef and pork mainly, and lots of fruits and vegetables (which is difficult to find locally when you live in Ontario and it starts snowing in October). Based on various studies and my knowledge of growing standards, I don’t really find it worthwhile to spend the extra money on organic produce, but I know people who do.

I get most of my fruits and vegetables from a normal grocery store, but to buy my meat there, would be upwards of $15 per pound for some cuts and much higher for “good” cuts.

I feel very strongly in the meat products I have chosen, I am disgusted with most cattle and pork feedlots found in North America and the impact that these businesses have on both the animal and the environment. I buy my meat directly from farms, where I can (if I wanted to) visit/inspect the operation and see where my meat is “made” – what the animals eat, how much room the animals have to eat. In the past year, I have bought half a pig (at $5 per pound) and a quarter of a cow (at $6 per pound).

Getting animals in this form allows me to eat what I want to eat, at a reasonable price, and directly help the businesses I want to support – the farmer who grows the animal, and the small abattoir that butchers on a small scale (both which are becoming more scarce these days). I get the entire animal as well, which I enjoy (all of the organs, bones, and fat) – it’s as close as I can get to being in charge of what I eat.

Most things that seem expensive in the outset have a cheaper version that is probably 85% as good. Homebrewing (a hobby I am interested in) could cost thousands and thousands of dollars to upgrade equipment to brewery-quality, or you could get by with a couple hundred dollars worth of equipment and cobble together other items. Sports can be done cheaply as well, buying second-hand equipment and resisting the urge to upgrade constantly.

Moving closer to retirement, I know I will have much more time, and much less money coming in on a monthly basis. I think having the ability to find the “Other way”, which may result in patching together Kijiji findings to have stuff I want to have. This kind of thing can be seen as “Cheapness”, but I prefer to look at it as an efficient use of money.

Have you found an “Other Way” (maybe unorthodox) of taking part in something expensive?

Compensating for Bias

This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.

There has been a lot of talk among economists and investors about human biases under the heading Behavioural Economics. People aren’t nearly as rational as economists assumed in their early work at modelling transactions and decision-making. We have predictable tendencies to exaggerate losses, to overestimate our resiliency to risk and to be overconfident about our ability to predict the future.

Our biases make it more difficult for us to be successful investors. How many people, when the market drops, focus too much on their paper losses, panic and want to sell their investments? How many people, when the market crashes, sell at the bottom and swear off investing forever? I know from my experience working as a financial advisor that the (admittedly imprecise) answer is: too many. The money that many people pay for investment advice pays not only for advice on investment opportunities and asset allocation, but also babysitting to avoid selling investments at every market correction, and to avoid getting sucked into enticing investments that offer 17% guaranteed returns (seriously, I’ve seen this), but is simply too good to be true (and I’ve seen it go bankrupt).

So let’s be honest with ourselves. Saving money is hard. We’d prefer to have something now rather than delay our purchase into the unpredictable future. It’s harder for some people than for others. But as long as we’re being honest, there are ways to compensate for the difficulty. As an example, having the employer deduct a certain amount of savings from every paycheque. As an example, a friend was telling me yesterday at his work that most of his colleagues can only have 1% or 1.5% withheld for the company savings plan, despite 100% matching from the employer (free money!). It’s because they live paycheque to paycheque and $100 makes a difference. I wonder if they would be able to increase their savings by 0.5% every six months or every year, without feeling the pain. I also suggested to clients that every time they get a raise, half of it be redirected toward savings. Being realistic allows us to work around our biases.

Facing reality also means knowing that the stock market is going to be volatile and fluctuate, sometimes wildly. In my research, I have found very few good reasons to own a diversified portfolio of stocks and bonds. Sometimes stocks perform far better. Occasionally, bonds perform better, while being far safer. These two investments have different purposes, in response to different investment needs. The benefit to an individual investor of buying a portfolio that’s 60% stocks, 40% bonds is that the ride will be smoother, the individual will have less opportunity to experience “losses” and will be less likely to panic. But in some cases, that can be a very real benefit.

Being realistic and honest with yourself is likely the best way to manage investment risk. Expect a small return each year, expect bad years once in a while, and expect to have trouble saving as much as you’d like. Then find ways to compensate for those difficulties. How honest are you with yourself about your investments? What do you do to compensate for your biases?