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Tuesday, October 25, 2016

Asset Allocation Drift

Posted by Tim Stobbs on October 20, 2016

As part of my pre-retire to do list I started to take a good hard look at my investments and evaluate if I need to change anything.  So I started pulling together the numbers for my asset allocation (just fixed income vs equities) and got a bit of shock.  I had drifted off course by more than a little bit, in fact my target is 60% equities and 40% fixed and I was at 34% fixed and 66% equity. Yikes!

How did this happen?  Well I fell victim to the tendency to compartmentalize things. You see I knew my pension was about 50/50  and I knew my RRSPs were a bit off at 35% fixed income, but not too bad.  Yet I failed to realize in the last few years that the majority of our money has been going into the TFSA and taxable accounts which is almost all equities.  So without really meaning to I drifted off target because in my head I was fine in some of my accounts and I don’t run a total of the entire portfolio all that often for calculating my overall asset allocation.  It is a bit of work to look up the split by each account and then roll it up to the total portfolio amount and often doesn’t change that much, so I got lazy about checking it.

But rather than be mad at myself I decided to have a look on ways to fix the issue.  One of the first and easy ones was shift my risk profile in my pension.  I have always planned on that account to be a bit heavy in fixed income and so I moved a step in my pension options from ‘moderate’ down to ‘conservative’.  In a practical sense that shifted the pension money from a 50%/50% split to 70% fixed income and 30% equities.  The net result was to shift ~$40,000 from equities to fixed income in one mouse click in a single day which was completed two weeks ago.  With that I should be around 40% fixed if I put all the cash in the various accounts into fixed income.

So the that is what I started doing.  First up was the fixing the heavy equity weighting in the TFSA and taxable accounts by investing their cash into fixed income.  In those accounts my wife and I choose to expand our investing wings a bit and try out a preferred share ETF (stock symbol CPD), so yes it isn’t a bond, but it isn’t fully equity either.  A bit of hybrid which works well to boost the cash flow of the fixed income portion of our portfolio.  After all the current trailing yield is around 5%, which is a lot higher than a straight bond fund.  But to keep things in check we only plan to keep the that ETF to no more than 10% of the entire investment portfolio.  So that was just finished up this last week.

The next phase is to re-balance our RRSP accounts to the 40% fixed income weighting via bond ETFs, which shouldn’t require much of an adjustment, but I figure it will be done by the end of next week at the latest.  With that we should be sitting around target of 40% fixed income.

Beyond that our final part of the investment plan is actually really boring…cash.  Lots of cash.  Why?  Well there are several reasons including: an emergency fund in the event our investments drop badly, starting cash for our early retirement period and finally a bit of savings for a few expenses we plan in the next year or two (vacations and renovations).

So did you ever drift badly on your asset allocation?  If so, how much and how did you fix it?

Canada Child Benefit – Update

Posted by Tim Stobbs on July 25, 2016

As you may recall I have a long history of taking any government issued money for my kids and putting it into their RESP account.  Yet as we started to make more income over the years and the kids got older, we slowly got less money and I just decided to top up our monthly investments of $334 to their RESP account to make up the short fall.

Yet now the Federal government has revamped the old Child Tax Benefit and Universal Child Care Benefit into the Canada Child Benefit and everyone found out this week our new amounts and I have to admit I was a bit surprised to see our go up and be higher than I thought it would be.  We previously got just slightly over $200 per month combined on the old system and I had used the online calculator to estimate our new benefit to be only a bit higher at $220 per month.  Of course even if it had been slightly less we would be a bit better off since the new payment is now tax free.  Needless to say I was a bit shocked to see our official letter come in stating the new amount would be just over $350/month.

So what the heck went wrong?  So I went back to the online calculator and read the fine print at the bottom to notice it says “A different definition of income (adjusted family net income) is used to calculate actual entitlement, and would generally be lower than household income.”  So basically, everyone who previously used the calculator got a low ball estimate and got more than they were expecting.  Nice surprise.

This also means that I likely won’t have to put any money aside to top off my kids’ RESP account going forward as I previously thought I would have to do for the initial year after I left my job.  Instead the amount we get from the Canada Child Benefit should be enough to cover the entire $334 to their RESP account every month and even have some leftover to cover other kid related costs.

The side benefit of using tax free money to pay for the RESP contributions is they also get topped up by 30% (10% is from the Saskatchewan government and the other 20% is from the federal). So with very little money from us over the years my kids have over $60,000 put aside for their post secondary education already and we should easily be able to hit my $80,000 target in just a few years and then with investment returns exceed that amount.

Overall the new Canada Child Benefit was a nice surprise for us.  Did anyone else notice the same issue of under estimating how much they would get?

How Compounding Really Works

Posted by Tim Stobbs on June 30, 2016

It is interesting to me that while people sort of understand how compounding works with their investments.  They have been told they should start early and by reinvesting it will grow all by itself. Yet they really don’t get it on some level.  The reality is your first $100,000 in investments will feel like a climbing the biggest mountain in existence and then after that it gets significantly easier to build up your investments.  But rather than discuss this in a broad point of view, I thought it might be useful to go over my investment net worth and point out the time it took to grow between each $100,000 mark.

In the beginning, we have nothing.  Actually with student debt we have less than nothing.  After leaving university and getting married at age 22, my wife and I had debts around the $60,000 mark.  Yet we managed to get some jobs and start paying down our debt and also when I had the option of getting some free money at work via a RRSP matching program I took it.

Now guess how long it took us to save a house down payment, pay off our student loans and save our first $100,000 in investments?  Five years? Nope. Eight years? Nope, keep going.  In fact, I was 32 years old when we managed to hit that threshold.  It took us 10 years  (or 120 months) to save that much money and the thing was we were trying a big harder than the average person.  Now if that sounds like a prison sentence because in some ways it was.  THAT is the difficulty with saving your first $100,000. So when people talk about starting early, this is exactly what they mean.

Depressed yet?  Good, because now we get into the good news.  It gets easier after that first hurdle.  I mean a LOT easier and it just keeps getting easier from there.  Case in point it only took 3 years (or 36 months) to reach $200,000.  Or putting that in context it took 70% less time than the first $100,000.

Then it just kept getting easier.  Hitting $300,000 only took 16 months, so that would be 86% less time than the first $100,000.  Basically that one happened so fast it was like getting investing whiplash as compared to the glacial slow pace of the first $100,000.

Ironically getting to $400,000 took even longer at 19 months, but that did include the collapse of oil prices so somewhat understandable that it would take a bit longer, but still roughly about a 1.5 years.

Finally, while I’m not there yet, my current projection would be to hit $500,000 around Feb of 2017, so that would be only 13 months long, which if correct would be about 90% less time than the first $100,000.  And of course if you keep going it just keeps getting more and more easier to add wealth (no wonder the idea of working just one more year is so popular for people that are almost retired).

The point of all of this is when people give you some well meaning advice to start earlier even with a little bit of savings: PLEASE FOLLOW IT! You will be further ahead in the end and guess what, you don’t even need to consider retiring early when you start out.  Oddly enough you will have lots of time to make the decision in the future and guess what, the worse thing that happens is you have a large amount of savings to make other choices in life.  Some flexibility isn’t a bad thing, after all you never know where you are going to end up so some extra cash to consider starting a business, buying a cottage or taking a unpaid leave from work.  Do what ever you want, just please consider saving something to start climbing that mountain now.  Good luck on your climb.