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Sunday, August 30, 2015

The Stock Market Yo-Yo

Posted by Tim Stobbs on August 25, 2015

I sort of laughed at some of the media stories on Monday based the the sharp drop off of many stock markets…reading the articles you would swear the world had just shifted on its axis a few degrees.  Yet then on Tuesday the markets spiked back up and the media then sounds all positive about everything.  Do you know what I did during all of this….nothing.

Yes, I didn’t sell anything and I didn’t buy anything since I had already moved around $10,000 into the markets last week.  I noticed the market was down a bit and we needed to shift over some cash into ETF’s (Exchange Traded Funds) in our RRSP accounts.  I bought some US stock index ETF and my wife had a bit more cash so she did the same US ETF and also picked up some Canadian index ETF.  So we missed the bottom…so what?  We aren’t stock market timers anyway.

I think the problem most people have with this big swings down is they feel the need to do something…when in fact when you are down the answer is usually to buy something rather than sell anything.  Selling just locks in your losses while buying can provided an option to load up on some good investments on the cheap.  Yet if you don’t have cash handy the right answer should be chanting to yourself: this too shall pass.  Because in fact, in the stock market on a whole, just about everything does pass at some point or another.

I’m not saying this isn’t easy to do the first few times.  Being active in managing my own investments does make you want to do something when these big things occur, but in fact a lot of the time the right way to approach things is doing nothing.  Sit on your hands if you have to but don’t login to your trading accounts…that just gets way to tempting to do something.  Instead, pick up a good book and distract yourself for a while.  See if the one day drop or spike is turning into a longer term trend and then decide if you need to make any adjustments according to your plan.

Yes, your plan.  You know your highly emotional at this point and perhaps you already planned for this by writing out your investment objects and plan.  Pardon…objective and plan?  Yes you know that one page document you know you really should have written out ages ago that outlines when you buy and sell things when were rational rather than your current emotional state.  See if you put in anything for drops of less than 5%…likely you didn’t which means you previous rational self is reminding you to keep sitting on your hands.  No trading for you.

In my case it would look something like this:

“Invest the money into your trading accounts approximately once a month…do not let it build up in the chequing account (you may get delusions that you are rich otherwise).  Our investments are broken into three buckets: pension, RRSP and TFSA.  Pension is the long term money and invested in the second most conservative option available from my plan provider.  The RRSPs are in index based ETFs.  The current ideal ratio is about 40% in bonds, the rest even split between Canada, US and world. Only rebalance about once or perhaps twice a year.  TFSAs are the high risk investments in individual stocks.  Seek out mature companies providing monthly billing services that pay dividends (ideally Canadian -remember that the US doesn’t recognize TFSA yet as a tax shelter and you will pay tax on US dividends).  Target average payout from TFSA accounts is 5%.  So some high risk ones are allowed if they are balanced off by lower risk ones. When you max out contribution room in all RRSP and TFSA then consider adding taxable accounts. You may only borrow to invest from the Line of Credit if you have put the money back in less than three months.”

That’s it…notice I have nothing about market drops in there.  It doesn’t prevent me from shopping a downturn, I just need to have the money into the accounts to do it or be able to put there in a short period of time.

So how do you handle these downturns or upswings?

Lack of Value

Posted by Tim Stobbs on July 6, 2015

Perhaps the most common question I get about our financial situation is something along the lines of: how do you save so much?

Well to be honest saving 65% of your income gets easy after a while, so perhaps the easier way to answer the question is simply: I value what I’m saving for.

People often have good intentions with savings so about once a year around RRSP time they think a bit more about it and consider if they are saving enough.  Yet they fail to realize something critical….if you aren’t saving now that shows me you can have good intentions until the end of time and won’t save you a dime.

Look where you are spending your money now and they shows me what you value.  Do you value comfort over convenience?  So you might end up buying more comfortable furniture rather than meals out. Or the other way?  Perhaps you value your appearance over your substance?  Then maybe you buy a knock off designer purse rather than saving for a real one.  Either way isn’t right or wrong, but merely shows you what you value in life.

Me?  I value freedom over comfort, honesty over appearance and love over convenience.  Yes it sounds a little bohemian, but it is true.  These values drive my habits and thoughts more than a spreadsheet to live the life that I do.

Which is perhaps why I drive people I little nuts when they try to understand my success.  They get confused by my willingness to spend over $300 on some higher quality wine kits, but I will rarely buy a book even when I love them.  Or the fact we only have one car when it fact it is a bit of an inconvenience once in a while.  On the surface the issues can look odd, but mainly because the values the under pin them are likely different then your own.

For example, I dress moderately nice at work, but I refuse to wear a suit.  I hate wearing suits so even when I present the highest people in the company I still wear a only a tie, not a suit jacket.  I don’t care about appearance to others that much.  Or the fact I love good food, but rarely eat out…I like to cook instead.  I value quality over convenience.

This of course leads a person to consider who exactly they are.  What are you values?  Then after that painful process of self discovery you can then push yourself to align your spending with your values.  At this point something utter fantastic happens: life gets easy.

Pardon?!?

Yes, when you are spending with your values (rather than the values of others) the decisions you make become obvious.  You know what you value so the choice to save now or spend later is obvious to you.  You spend enough to be happy in life, but know that you wants will exceed your income on a permanent basis.  So once you have arranged your spending to align to your values, saving the remainder isn’t a chore or even an effort….it merely makes good sense.

The real difficulty I’ve found is combining your family values into something that everyone can life with.  So you learn the art of compromising….a LOT.  In my case, it means we spend much more on hot water than I would ever like to, but my wife gets to enjoy her luxury of very long hot showers.  Rather than debate it every day, I got her to agree to a lower flow shower head and now shut up about the water bill.

On the flip side she has put up with my odd little projects like collecting raspberries from the backyard all summer long into a bag in the freezer so I can make a little five bottle batch of raspberry wine from scratch.  It would have been much easier to just buy the bloody berries in the first place, but I wanted to make my wine from local ones.  So we agreed, we would save half the berries.  She rolled her eyes and did it anyway…then proceeded to roll her eyes again when she tasted the first bit of the wine.  It was one of my best yet and now I’m saving berries all over again this summer.

The real trick to combining values is to know the core ones are in agreement. They don’t have to be the same, but enough alike for you to both be happy with the spending that you do.  After nearly 15 years of marriage my wife and I have that down to an art form, which is reason we stay married.

So what do you value?  Does your spending align with it?

The Game Changer – Expanded TFSA

Posted by Tim Stobbs on April 22, 2015

With the cat finally out of the bag we now know a few details of the much rumoured expansion of the TFSA contribution limits from yesterday’s Federal budget (page 232 if you want to read the official text). First off it isn’t a actual doubling of the limit rather it is rising up from the current $5500 per person per year to $10,000.  Still that is a huge increase in room, and it takes effect this year.  The only downside of the announcement was the fact that they stripped out the inflation adjustment on the accounts contribution room.  So enjoy that increase because we are likely not going to see another one for a VERY long time.

Of course a change in Federal government leadership might also trigger this to be a single year event with a roll back in the plan down the road.  But for now it is going to happen this year, so let’s look at the potential implications for this in your retirement plan.

To say this is a game changer for some people is a bit of an understatement.  A couple can now put away $20,000 per year in TFSA and never pay a dime of tax on growth in those accounts.  So the holy grail of retirement planning just got a bit easier: the zero income tax retirement. I’m not sure if you realize this is about your life, but your single biggest bill is likely not your mortgage, but rather your tax bill.  Your income tax portion of it can often be a big chunk of change so if you can reduce that in your retirement years you can often speed up your retirement date.

The trick has often been that while the TFSA’s are great ways to invest they don’t often have enough contribution room to make them your sole retirement investment account.  For example, if you made $75,000/year as a family your RRSP limit is 18% of your previous year’s income or $13,500.  So while the old TFSA limit was close at $11,000 for a couple, now it becomes possible to skip the RRSP entirely for most people and pour everything into a TFSA.  (For those with math inclined minds, if your family makes $111,000 per year you can shelter the same amount in your TFSA as your RRSP now).

But what about the RRSP tax refund?  Well while that is a nice thing to get you do still have to pay tax on your growth of your RRSP at the other end when you take the money out.  While a TFSA you can shelter all the growth from getting taxed.  So imagine you have saved well in your life and have a cool $1 million in retirement savings and a paid off house.  Now imagine never having to pay a dime of tax on that and not having it reduce your Old Age Security benefits.  Cool eh?

So to compare you take our $40,000 a year of income from that in an RRSP you would have to pay tax on that money.  The final amount will vary by province but if only one of you take the money out you would lose anywhere from $5800 to $7700 in income tax for 2015.  Leaving you with a net spending amount of $32,300 to $34,200.  Or you could have put it all in a TFSA and got $40,000 to spend.

In our particular case this means I will likely skip putting money in taxable investing accounts and instead just shelter everything in RRSP and TFSA accounts.  While I might need to keep some contributions aside for the last year or two I can then stuff it all in get caught up in no time (ie: likely two years after retirement).

All in all, there is a fair amount of potential in this announcement for your retirement plans.  Of course, you should still do some numbers for your particular case to ensure it would be worth it to you.  So are you making any changes your plan because of this change?  Or you don’t think it will last?