Pay Yourself First

Every month we have been transferring $400 to an ING account that we call our “one-time expense” account. This is for things beyond the money we need in our chequing on a daily basis for things such as food. ING accounts are great. You are allowed a maximum of 4 accounts per person, so all told my wife and I could have 8 accounts if we wanted. Since we made each of our INGs joint, we can both access all 8 accounts. Right now we are really only using 2 accounts, our one-time expense account and our vacation account. You can give your accounts nicknames too. Over the last few months since we re-organized our finances and switched over to PC Financial, we haven’t had to use our one-time expense account that much. But recently we started running out of money in our chequing account. A few times, the $350 I transfer in to our chequing account every week for daily expenses hasn’t been enough to get through the week. So a few times we had to transfer anywhere between $50 and $150 additional money from our one-time expense account at ING to our chequing account at PC, in order to make it through the week. Just last week I purchased a bike for $352 and that also came out of our one-time expense account. In order to stop the bleeding and prevent us from spending all of the money in that ING account, I decided to transfer $500 of it into our ING “Christmas” account which has been sitting at $0 since last Christmas. It is far less likely that we will dip into the Christmas account, most likely we will completely forget that that money is there, just like we have forgotten about all the money that has been piling up in our vacation account. That is the beauty of paying yourself first. You put money away in an account that is less liquid than your chequing account, give that money a specific purpose so you won’t be inclined to spend it on something else, and you will completely forget about it. I do not think I have every saved up for Christmas this early before. We will probably need another $200 for Christmas, but it is so nice to start getting that out of the way early as it means we don’t need to think about it and can save up for other things.

How is Your Spouse’s Portfolio Managed?

I had assumed my financial advisor was going to manage my RRSP portfolio and my spouse’s separately. ie. I thought he was going to have an asset allocation model for her and an asset allocation model for me and each was going to be totally independent. I was going to suggest to him a long time ago that we use a spousal RRSP for one of us and put all our monthly contributions into one account. One of us would contribute to our RRSP directly, the other would contribute to the spousal RRSP of their spouse. It would be as if we had one portfolio. Except our RRSPs would get really lop-sided after doing that for a while and we would have to switch to the other RRSP and start contributing into it as well. That doesn’t seem like the optimal way to do things.

I just found out today that he is planning on manage my RRSP and my wife’s together, treating the two RRSP accounts as one massive portfolio. So I could have the international and US stuff, for example, and my wife could have the Canadian and the fixed income. This would be much more efficient from a cost perspective. If we bought all ETFs all at once for example (one ETF for each market: US, Cdn, Int., Bonds) our commissions would be cut in half. Instead of buying 8 ETFs (4 each) we would just buy 4 ETFs (2 each). I didn’t think advisors ever did this because it would be harder to manage because underneath they are separate accounts. But I’m glad that mine does! What about your spouse? Is his or her portfolio managed together with yours as one large portofolio?

Could Harper’s Win Cost Voters their Homes?

According to this article, Harper’s win could cost voters their homes. The author describes how Harper’s policies could end up causing some people to lose their homes, as increased government spending on military campaigns by the Harper government will lead to higher interest rates.

Both Reagan and Bush Jr. sharply cut taxes, particularly for the rich. Both of their administrations also went on military-spending binges. The combination of reduced revenues and higher military expenditures created whopping deficits. The Bush administration’s shortfall approaches a half-trillion dollars.

Harper has promised to increase military spending and cut taxes. He also plans to redo the fiscal framework to ensure more money goes to the provinces.

The Liberals claimed during the recent campaign that this would blow a huge hole in Ottawa’s finances. The Conservatives vehemently denied it. However, given the record of socially conservative U.S. Republican administrations, it’s easy to imagine that Harper’s approach could result in a large deficit.

Whenever a government collects less than it spends, it competes with the private sector to borrow money. This puts upward pressure on Canadian interest rates.

Vancouver already has the highest housing prices in the country, with many people carrying large mortgages. This makes them especially sensitive to rising interest rates, which can occur when a government rings up a huge deficit.

During the 2004 federal election, Liberal candidate Kwangyul Peck, an economist, claimed that Harper’s flawed fiscal policy could cause some voters to lose their homes.

I am not so worried about some voters losing their homes. I do not think interest rates would increase so dramatically that people who were not already at a high risk of losing their homes would lose their homes. And the point is a bit moot. If you ever lose a home (or anything) you can always blame someone. Blaming the prime minister seems a bit ridiculous. But I think the threat of increased government deficit is very real, especially after what I saw on the news last night. Harper talking about how Canadian forces will not “cut and run,” and that “the Canadian Forces need to be in Afghanistan for 10 years or longer to help rebuild the battered country.” Peter Mackay said “the length of Canada’s commitment to Afghanistan remains an ‘open question.'” We could see our federal surplus and/or federal spending in various areas drop dramatically.

Too Many Choices (or why I am ready to give up)

If you have read my last post you will know by now that I am set to start my new portfolio at Clearsight. I have been debating what to choose for my US equity component, and whether or not to go with my advisor’s recommendation of CI Value Trust (satellite fund of Legg Mason Value Trust). I said in my last post that am not interested in investing in Bill Miller‘s Value Trust fund but that I said I would rather go with the Rydex S&P 500 Equal Weight Index ETF (RSP) instead. I have now come to the realization that RSP is very similar to the S&P 400 Midcap Index which is also available as an ETF (MDY). It is very highly correlated and comparing the performance of these two ETFs makes this obvious. There is also a small advantage to getting MDY over RSP in that “the higher volume on MDY is an advantage for that fund, as is the typically tighter bid/ask spread” but this is probably splitting hairs. Comparing either of these two funds to Bill Miller’s Value Trust is probably not a fair comparison, just as comparing S&P 500 (huge-cap) to S&P 500 Equal Weight (semi-large to large-cap) is not exactly a fair comparison as they are in different classes and will of course perform differently. I found yet another index choice today, the S&P 500 Value Index (IVE). It has beaten the S&P 500 index but it has not been able to catch Bill Miller’s Value Trust. Sounds like a great alternative to the S&P 500 index though as it screens out some stocks which aren’t a good value.

At this point I began to get frustrated with the number of choices out there. RSP, SPY, MDY, IVE, and that is only a few of the ETFs available. Then there are the actively managed mutual funds, LMVTX being only one of many, and of course there are the index mutual funds of which there are probably one for every index just like the ETFs I mentioned above. Sometimes I feel like I know exactly what I want, other times I can not makes heads or tails of it with all the choices and knowing there are even more choices out there that I have not examined is daunting. It is frustrating for some someone like me, skilled in the maths and sciences and now software, that there is not some exact deterministic way of determining the ideal choice.

When I left TD, one of the main reasons was because I did not have a proper selection process for what I would buy for my RRSPs. Usually I would scan the performance (usually the longest term possible, 10-years or since inception if available) and choose funds that looked like they had done well in the past. This was flawed because crappy funds can have a few stellar years and good funds can have a few bad years. Or sometimes I would look for funds that did well in the past, but might have just come off a bad year (hoping to catch the fund on the up-swing). This method was also flawed. The second reason I left TD was that I did not want to be a DIYer anymore. I felt like an amateur/hack trying to do a professional’s job, and I was not succeeding. Not only that but I did not have enough time to spend on this. You may think that writing and researching articles for this blog takes time, and yes is does (and I have learned a lot about investing by writing this blog), but it cannot compare to the amount of time financial advisors and their superiors have spent day in and day out trying to answer these same questions. It is after all their full-time job. My financial advisor says that he does not pick stocks. He leaves that to the professionals, such as Ross Healy or Bill Miller. He does not have time to research stocks for his clients. By the same token, I should leave the management of my portfolio to my advisor because I do not have time to do it myself.

This does not mean that I should leave everything up to my advisor. Much like my advisor will monitor the actions of Ross Healy and Bill Miller I should also vet all actions my advisor recommends for my portfolio. Right now I think I am ready to give up and let him decide what is best. I would like to have a say in the asset allocation and I really want to have 25% bonds and the rest balanced between Canadian, US, and International. But as for what is inside those categories I really do not have the time to examine his choices of holdings for me in microscopic detail. It has already taken far too much of my time. The portfolio that my advisor is recommending is already much better than my old TD portfolio for many reasons, and if going with an advisor helps keep my hands off my portfolio and helps me keep this allocation over the long term, then it will surely achieve much better performance in the long run than I was getting with TD as a DIYer.

No time to read over this rant, it’s too long. Grammar mistakes be damned!

Portfolio Update

My RRSP holdings at TD Canada Trust have been transferred from TD to Clearsight in-kind, meaning that they been transferred whole without being sold first. I was only required to sell my TD eFunds to transfer them. Now my advisor and I are getting ready to sell all my TD holdings and start my long-term retirement portfolio anew. My advisor forwarded me a suggested portfolio on Friday:

RRSP holding Type Account %
Value Trust
US Equity 15%
International Stock Fund
Global Equity 35%
Canadian TSX60 index Canadian Large Cap 40%
Energy Index
Canadian Energy Equity 5%
Growth Opportunities
Canadian Small Cap 5%

Here’s the total asset allocation breakdown:
15% US Equity, 35% International Equity, 40% Canadian Large Cap Equity, 5% Canadian Energy Equity, 5% Canadian Small Cap Equity

This is similar to what he suggested before, the main difference being that he suggested a lower US portfolio allocation because he thinks their currency is set to take a beating; however, he says we will shift towards my 25%-25% allocation later as he, like me, believes in keeping a fairly static asset allocation over the long term. Also, it says TSX60 Index above, but it is actually iUnits XIC ETF which no longer tracks the S&P TSX 60 but tracks the X&P TSX Composite.

Here are the changes I want to make to it:

  • Add 25% to fixed-income. TD Canadian Bond fund or Altamira Bond fund would be my choices there.
  • No separate energy equity right now. There is plenty of energy stocks in the Canadian index and I am just not interested in playing around with an additional energy index right now, but it is something I will consider later.
  • Instead of CI Value Trust I would like to buy the Rydex S&P Equal Weight ETF. I have talked about it in several previous posts. Bill Miller’s fund is a lot riskier yet it has not managed to beat the equal-weight index.

This would make the allocation: 25% fixed income, 15% US Equity, 35% International Equity, 20% Canadian Large Cap Equity, 5% Canadian Small Cap Equity.

I am not sure what I will end up with. My advisor might be able to sway me the other way a bit, but hopefully we will end up with something he agrees is good for me and that I am comfortable with.

Kiyosaki on PBS

I no longer have any respect for PBS. I cannot believe they are showing this Kiyosaki infomercial crap, especially during their fundraising, not only showing his show, but using his products to generate fund raising dollars. PBS is basically helping him sell his crap with this “exclusive for public television” deal. They keep flashing his products on the screen such as his DVD/VHS (free with $100 donation to PBS), his book package (free with a $300 donation to PBS), and his “Teach to be Rich” book (free with a $150 donation to PBS). The two PBS hosts are just drooling all over this quack saying things like “all this enrichment and enlightenment Robert Kiyosaki has shed in the financial area tonight,” “this is excellent advice,” “this is such a wonderful program,” “this next bit is one of my favourites,” “this is really incredible,” “count on PBS to provide proper role models [referring to Robert and his wife],” “we learned a lot from Robert Kiyosaki tonight.”

Kiyosaki, the Benny Hinn of financial self-help, is even more ridiculous on TV then he is in the articles he writes online. When I first turned the TV on, he was in the middle of explaining how “working hard” is an out-of-date concept. When did this happen? He says that starting in 1943 “working hard” is no longer an option (to be successful and become “rich” I guess) because starting then, the US government starting collecting income taxes even more (the withholding tax on wages was introduced) and working hard only puts you in a higher tax bracket meaning you will be taxed even more. He said he invests and takes advantage of “loopholes” so he pays zero tax legally. Next he explained how “saving” no longer works. According to him “saving” stopped working since 1971 when “cash became a currency.” Then he starts giving a series of examples that do not lead to any real point. He draws a graph showing that cash has lost 50% of its value in since 2000 but gold has gone from $250 to $500. How his dad’s house has gone from a few tens of thousands of dollars to $1.5 million. Oil prices have gone from $20 to $50/barrel. There was no real point to all of this babbling.

The next thing I remember him talking about was how “control” = “no risk.” He then explained how people and their financial advisors who invest in a diversified portfolio of mutual funds have no control. It was all quackery at its fines.

The rest of the show provided nothing useful. It only provided some amazing quotes:

“Acquiring wealth is fun for me, I love investing, it’s not frightening, it’s controlled.”

“I had a classmate who was considered a genius in school. This guy could do quantum physics and all that when he was in kindergarten. The trouble was he couldn’t tie his shoelaces.”

“I did not know when I was 9 years old playing monopoly that I was seeing the future. When I played monopoly I saw that I can become a rich man.”

“I flunked out of school twice because I could not write. And I do not read that well yet. No, it’s true. I flunked when I was 15 and I flunked out when I was 17. And today I have one of the top 3 books in the history of the New York Times.”

Bad Investment Advice – Part II

This is a continuation of the story I shared with you in “Bad Investment Advice.” If you do not have time to read the entire article, in short, a brother of a friend of mine went into TD looking to start up an RRSP, armed with some great recommendations for a balanced, well-diversififed set of index mutual funds in equities and stocks. Instead, thanks to the “advice” of one of their investment “advisors,” he came out with a 100% equity portfolio in Canadian equities because “it has done so well in the last few years.”

I wrote about that story on January 25th. The story continues. Just yesterday before the RRSP contribution deadline for deductions made for the 2005 tax year, my friend’s brother went in to add to his RRSP. Here’s what happened:

[he] went in to the bank to contribute some last minute money to his RRSP’s, and the tried to get him to transfer his mutual funds to a GIC paying 2.5% per annum! A 23 year old kid with 45+ years of investing on the horizon, and she recommends a GIC paying 2.5%!? I’m going in there with him this Saturday.