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Wednesday, October 1, 2014

Release the Cash

Posted by Tim Stobbs on September 26, 2014

Well after sitting on just over $100,000 cash in our RRSP accounts for months now I finished my research in various Exchange Traded Funds (EFTs) and came to agree with the model portfolio option #4 over at the Canadian Couch Potato.

In case you are too lazy to click the link, the portfolio is made up of four major ETFs:

  1. VCN – Vanguard FTSE Canada All Cap
  2. VUN – Vanguard US Total Market
  3. XEF – Ishares MSCI – International
  4. VAB – Vanguard Canada Bond

I laughed because I had predetermined that I would break up our portfolios into 60% equity and 40% bond before I started the research and that is ironically the exact break down recommended by Dan (author of the Couch Potato blog).

So you might wonder what the hell the advantage of going to ETFs are?  Well in a word: fees.  The MER on this portfolio is a rock bottom 0.192%, given we were previously in an index mutual funds with fees of 0.7%, that means we are saving just over $500 per year in fees, which more than offsets the $80 in trades it took to deploy the cash into these portfolios today.

Also you have to consider compared to the average mutual fund fees is around 2% or higher.  So on $100,000 portfolio switching to these exchanged traded funds like this will save you $1808 per year in fees.  Yes you can earn almost an extra $2000 per year in gains just by keeping your fees lower…isn’t that just a little mind blowing? Especially when you consider that compounding of that over a decade.

In case you were wondering…if you invest $100,000 at 6.5% return, after fees of 2% you end up with $157,000 in 10 years.  If you lower you fees to 0.192% your final balance jumps to $187,0000…and that assumes you haven’t added a dime into those accounts.

So that is today’s point….keep your fees low.  It will help you in the long run.  So do you know what your MER fees are for your investments?  If so, how low/high are you?

Diving In

Posted by Dave on September 3, 2014

I tend to over-think things and second-guess most decisions I make, especially when they’re money related. Most of the money-decisions my wife and I have made to-date about our plan to retire early were automatic – spend a lot less than we make and put all of the spare money we have against the outstanding mortgage.

Now, I actually have to do stuff – making lots and lots of investing decisions over the next (hopefully) 60 years. This month will mark the beginning of having funds available to start investing – which will be quite a change in my money-spending lifestyle.

I read a lot of stuff – a good chunk of it is money-related. Like most things on the Internet, a lot of the information available is contradictory. Some sources say that the market is at a peak right now and it would be ridiculous to buy anything. Other sources say that there’s never been a better time to invest in “Stock X”, or “REIT Y”. As an almost total rookie investor, and someone who is a constant second-guesser, this is the point where I get intimidated.

My whole investing plan centers around buying income-producing assets, which slowly (but hopefully surely) replace my wife’s and my salary, until we have enough money to be able to not work anymore. At a 5% return, every $1,000 we invest is going to increase our annual income by $50. I really try to keep these kind of numbers in mind when I go to spend money on something that is unreasonably dumb, because all of those decisions are doing nothing but adding to the time it will take us to achieve our goal.

In order to achieve my goal, I will probably start investing sooner rather than later, increasing our current annual income now. I will hopefully pick assets that will not result in me flushing money down the drain. I guess the good thing about having what could be called a somewhat stable job, is that if 100% of my decisions are wrong, I’ll still be able to eat. In some way of thinking, I think I’ll treat my retirement investing career the same way I’ve treated sports betting. With gambling, I assume that everything I put in is probably going to be gone. For someone who will hesitate to buy some random $5 item, explaining to my wife that this is within the realm of possibilities does give me a bit of a cushion when making these kind of decisions.

While I would prefer to not shovel money out the door, this pessimistic level of thinking does allow me to overcome my decision-making paralysis and continue down my path to financial independence.

How did you decide when to start investing? Do you try to time the market, or just find investments that fit your set criteria?

Long-term Insurance

Posted by Dave on August 26, 2014

One of the things that I enjoy when I write for Tim’s site is the feedback I get from readers on my financial plans. While I joke around, for the most part I’m a guy who kind of pretends to be a grown-up, who kind of has his stuff together enough to discuss my plans of early retirement. I enjoy the exchange of ideas that has happened between myself and everyone who takes the time to comment on some of the schemes I have put forth.

Leaving the workforce 20+ years before “normal” retirement age is something that not very many people have done in the past, or if they did, it wasn’t really written about widely. Not many people know if the plans they set out will work in the long-run, because the long-run takes so long to test for. I can run my average investment returns through prediction machines and compare the returns against all sorts of potential expenses. I can have a certain amount of assurance that the financial “plan” I have in place will work out okay in the long-term, but who knows? I may go broke and be scrambling for any type of job I can find 5 years after I quit work for the last time – this is the major risk of this kind of plan.

My wife and I both know the risks that may come from exiting the workforce early, and have discussed the possibility of insuring that we have enough money to make it through. One of the possibilities we’ve talked about is working at a subsistence level, in order to allow our investments to compound for another 5 to 10 years.

Given our low annual budget, it might be a good time to learn a new kind of trade – whether it’s an actual trade, or just something interesting to do. Given the fact that we won’t have debt or savings requirements, we could live a basic paycheque to paycheque lifestyle, while gaining a bunch of free time in a semi-retirement stage.

We just don’t know how any of our financial plans will turn out though. I have no idea how my current investment plan will work out over the next 10 years pre-retirement, or the 50 years after retirement. I can be pretty sure we’ll be okay with the goal we have, but a few extra years of compounding might be beneficial, for very little “pain” on our end, besides having to get to a job sometimes. The benefit from this type of arrangement is that we could spend with comparative “reckless abandon” compared to the savings rate we are employing these days.