RESP for Baby

Before Baby was born we already research how we are going to invest for her.  We had money from our wedding and we decided to invest that for baby (although we have to hold it in Trust for her until she's older and pay the taxes on the gains as well).

Also, we research RESP investment options.  Originally we thought about setting up a RESP account at BMO so that we can ask everyone to put money towards her education instead of buying her gifts.  BMO doesn't have a minimum limit like a lot of RESP accounts do.  Then grandpa said he was going to give her $100 every month towards her RESP.  And we were going to get $100 a month from Universal Child Benefit.  With these two regular monthly amounts, we thought we set up a regular RESP contribution for her through our insurance company's RESP programs. 

Through this program, they apply for the government matches, invest the money, and match our contributions by 15%.  This will be a nice little sum for her to add to our other investments for her for her education when she's older.

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My Investment Strategy Part 3 of 3 - Private Equity

This part of my investment strategy kind of happened by accident.  I had felt that there was something missing in my portfolio.  As a small shareholder in publicly traded companies I have very little control over what happened in the company.  Real estate investment means a huge chunk of money invested in a small number of properties in one type of investment.  I found out about the opportunity to invest in private equity when I went along with my sister to meet her investment advisor.  It seem to fit in between my equity and real estate investment.

I can participate in a small/medium sized company in lines of business I wouldn't be able to do myself such as factoring or flow through shares.  Also through my investment advisor and his firm, we have a lot more visibility over the company's decisions and strategies.

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My Investment Strategy Part 2 of 3 - Real Estate

No big surprise that part of my investment strategy is in Real Estate.  I invest in Real Estate mainly through rental properties with Sis.  Currently we have three properties in Calgary and one property in Edmonton.  We have two criteria when we evaluate a property for purchase:

Appreciation potential:

• Is this property priced right or under/over priced?
• What is the price we can likely negotiate?
• How long do we expect to keep this house for?  What kind of appreciation can we expect when we sell?
•  Are there any improvement costs we will need to invest immediately to bring this property up to par for renting? 
• Are there any improvement costs we will need to invest over time to up keep or prepare the property for selling?

Cash Flow:

• Will this property be cash flow positive?  i.e. we want the income to cover expenses so we don't have to inject money into the rental monthly.

This is the primary way we invest in Real Estate.  Then we also put a small budget aside for investment in the occasional property flips, and land investment through private companies.

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My Investment Strategy Part 1 of 3 - Stocks

When I first started working, I was a fairly involved investor.  I read books on how to invest, research the stocks, and invested in equities.  As time went on, I find that with limited free time and so many other things I'd like to do, I have less and less time to actively manage my own portfolio.  Also, as a hobby investor, it's hard to achieve good returns.  I switched to a more passive and laid back investment strategy: indexing based on Exchange Traded Funds(ETFs).

I did my research and looked at my risk tolerance to decided what sectors & the ratios of my portfolio I want to invest in each sector.   Then I picked the ETF I wanted to use to index each sector.  Then once a year, I re-balance to ensure the ratios are back to originally decided.  In my portfolio I have ETFs that index the US market, Canadian Market, Emerging Markets, International Markets, and Bonds.  I still reserved about 5% of my portfolio to purchase one or two stocks for fun.  This has served me well since I can pay more attention to the stocks I purchased.

So that's my investment strategy Part 1.  For me another type of diversification, in addition to diversifying in the market is to diversify the type of invest. 

Coming up:

My investment strategy Part 3 - Real Estate 
My investment strategy Part 2 - Private Equity

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Life Insurance for our Life Changes

As a single person I never really felt the need to get life insurance.  However, when Sis and I bought our rentals together, Beau helped me see the prudence of having life insurance.  It is rather irresponsible of me to leave my family with the burden of these mortgages if anything does happen to me.

Since insurance premiums increase as you get older, Beau helped me do a small $250K permanent life insurance policy before I turned 30.  There are two types of life insurance, permanent and term.  Simply put permanent is lifelong life insurance, and term is life insurance for a limited time (i.e. 25, 30, 35 years when you need the protection).  Term is cheaper than permanent.  We decided on permanent at the time since it was relatively cheap before 30.

Now that we are expecting a baby, and I have even more rentals, it was time to reassess my insurance to see if it see meets our needs.  (If you wonder why we did not do this for Beau as well, it's because Beau has been well insured since his early 20s with a mix of policies  He actually has one policy that gives him $500k when he turns 65.)  After looking at our needs, it's clear that my small $250K policy will not cover our mortgage, and four rental mortgages.  We had thought about doing another permanent life insurance policy, something for baby when I pass away.  However, looking at the monthly payments (which is significantly more because of insurance rate increases and my increased age), it was just more than we wanted to spend.  Instead for the second policy we did a 25 year, $500K term policy.  This means I am covered until baby is 24.  If anything happens to me after that age, baby still have to the $250K to cover the small expenses, and hopefully baby should be self sufficient by then with their own savings etc.

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Where to save my Emergency Fund

I know GICs are not sexy, and ING does not always offer the best interest rate out there.  However, the reason why I have a chunk of my TFSA (aka my emergency fund) at ING is because they have these specials rates that comes up once in a while.   For example, every year around the October they offer a TFSA Kickstart account, where you can put in the money you want to contribute for the next year’s TFSA, and they give you double the interest rate until January at which point it gets put into your actual TFSA.

Also right now, they are offering 2% on their 1 year GIC (it can be RRSP/TFSA/Non-registered), which is the same rate for their regular 3 year GIC.  I move part of my TFSA into this.  I understand that it needs to be liquid because it’s an emergency fund.  However, in the 5 years that I have had an emergency fund, I’ve used it once ($2000 this year for renovation at one of the rentals).  Therefore , it’s likely I won’t need to cash all of my TFSAs at once.   And the early withdraw rate is 0.5% if I really, really need to.

If you don't like to watch for these special rates and offers, Canadian Tire Financial offers pretty good rates in general.  i think right now it is offering an interest rate of 1.8% vs. ING's rate of 1.35% for their regular high interest savings account.

So consider using ING or Canadian tire for things such as Emergency funds, which you may need to access in a hurry, but not on a regular bases.

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Too risk averse?

Our company has an employee stock purchase plan. The company matches the purchases which works out to 25%. Most people, even those who don’t have any other stocks, participate in this plan for a few good reasons. Most importantly because we believe in the future of our company stock and the 25% match. Also, it’s saves on trading fees.

During lunch one day we were talking about this and it came up this newish employee didn’t sign up for the plan. She didn’t seem to be aware of the 25% match. When she found out about it she seemed a little interested. So she commented that basically it’s like we get a 25% gain. We pointed out that’s true but your money is not guaranteed because it is a stock and prices may fluctuate. She was completely scared away by that. Even though most analysts are confident about the future of our company, and as employees we are feeling pretty good about our future.

Can one’s aversion to risk be too much? If with a 25% head start, she still can’t consider the idea of buying a stock, she is limiting herself from many other types of investment options. There is usually a correlation between risk and returns. It’s possible that during certain cycles of the economy her risk level is so low that her returns aren’t keeping up with inflation? I read once that one women’s retirement savings of $300K was all in GICs and other guaranteed return investments. Great for her because it’s not easy to save $300K. However, when I look at the interest rates right now, and the taxation structure, her money is probably losing value.

It’s great to be money conscious, to earn and save as much money as you can. But it’s also important to educate yourself on growing the money that you have (without losing sleep at night).

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Bonus interest from PC financial

PC financial is offering 3.75% interest on deposits made between Sept 1 – Nov 30, to be paid in lump sum Dec 2008.

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Where’s my money?

I bought some shares of Frontline Ltd about six months ago. The stock has gone up and best of all, its dividend yield is at 17.5%. I’m not an everyday trader. Even though I keep an eye on what happens to prices of the stocks in my portfolio, I only check dividend payouts once in awhile to update my own spreadsheet.

The last dividend is recorded on June 2 for $2.75 per share. But when I went to check on my statements nothing showed up. Then I checked the dividends information again through the investment account. According to reports there is a $2.75 dividend June 2, and a $0.34 dividend sometime in February (this doesn’t show up on Yahoo Finance). I don’t see either.

Where’s my money? I have to call my brokerage and see what happened.

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Day without water

A couple of weeks ago, while at the BF’s, there was a water shutdown because of a burst pipe. We were without water for our day off. Going a day without water was difficult to say the least. We couldn’t do dishes. No bathroom. No drinking water. Luckily we had a couple of bottles of water.

It really made me realize how important water is in our lives. How lucky we are to have running water. Just recently I read somewhere that one sixth of the world has no access to safe water. There are two things to take away from this.

Water is a resource we should not take for granted. Don’t waste it. I’m sure if we take a look at our water usages habits, there are unnecessary usages that we can cut out. A quick look for statistics on water use show that average North Americans use 400 litres of water Per Day, while Europeans use 200 litres, and developing worlds only use 10 litres.

Also, given the importance of water, and that the demand for it will only increase with increasing population and developing countries, it is a good investment. So are companies like GE or Siemens involved in water sanitation etc. For me, I’d rather have a basket of such stocks for better diversification and lower risk. I have PHO. Of course the more savvy investors would say lower risk means lower returns. But to each his own. Choose the risk level that allows you to sleep at night.

Photo curtesy of leannz0r via flickr

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Yay Gold!

aaah! Gold hit $1000! Unfortunately, my one gold stock is not reacting to this new today. Still not bad. WGI on the TSX, up 45% in the last year and half I’ve owned it.

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Dealing with the market ups and downs...

Recently the investment portfolio has taken some big hits. I was down about 25% before I decided not to look anymore. Since then I’ve heard bits and pieces of how the market is tanking from the news and lunch time conversations. I think it is recovering a bit today but I’m pretty sure damage is still more than 25%.

My new rule: until I have the time to sit down and assess the situation and do research I should not look at the stock market or my portfolio…too closely.

Reason one: if I look at the rapid decline in my portfolio I might be tempted for some panic selling. Not good. I choose my stocks based on a long term investment time frame. Therefore, they should be ok… eventually. When I have time to look at the portfolio again and I do decide to sell some stocks I’d feel better because I wouldn’t be a rash/emotional decision.

Reason two: I don’t want to do any rash buys either. Somewhere my brain is saying there might be bargains out there. The shopholic in me is saying ‘let’s go shopping!’ However, without looking into a stock in depth it would be an uninformed buy - risky. When I have the time I’d like to come up with a wish list of stocks I want to have. Then buy them when they are selling at a discount.

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Pay Day Friday!

Today is the first paycheck after I upped my my automated RRSP contributions at work. This of course means a much smaller paycheck until I max out the company match (100% match up to 6% of income, plus 20% match up to 16% of pay).

The smaller paycheck will actually be a good thing since I will force me to live on a much tighter budget, which is a good thing. I’m all for living below my means as much as possible.

With the increased contribution (and match), plus other savings and investment income, I should have no trouble with $100k net worth by June. Now I need to do some research to make sure the contributions are invested wisely.

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My China Investment

Yesterday at my favorite coffee shop (the one with the 60RMB cranberry juice) I flipped through an old issue of Newsweek. This issue featured China and its rapid economic growth. One little graph caught my attention. Last year there were 15 billionaires in China (I assume this is in US dollars). This year there are 106! That’s 7 times growth in one year. No wonder the China stocks are growing like crazy.

That brings me to one of my layman investing mistakes. When I first started investing, I was interested in BRIC stocks as part of my growth investments. I focused on China because my job is so involved in China. I invested in the iShares FTSE/Xinhua China 25 Index (FXI). At $98USD (Dec 2006) it was the most expensive stock I ever bought. But I’ve been watching it since the summer at $70s, I liked the companies it owned, and I wanted in on the China growth story.

Early January 2007 FXI went up to $115+ and then plummeted to low $90s. I nearly had a heart attack. In June when it reached $115 again I took profit and sold the stock. There were a few lessons I learned from this little adventure.

First of all it doesn't matter how great the stock is, it was too expensive for me. The amount I have to invest in this stock was more than I felt comfortable risking. I remember someone saying that if you are up at night worrying about how your investment is going to do tomorrow then that investment is not for you. This is a good check to have. Although I wasn’t up at night worrying, I was worried enough every time I check the prices.

This brings me to the second point. When investing long term (which is what I aim for) don’t worry too much about daily fluctuations. FXI fluctuates sometimes by $10 a day. However, over the long term it is still doing well ($182 today). If I stuck to my goal (around 2008 Olympics) and not be put off by daily fluctuations I’d still be in on the growth.

Thirdly, don’t be emotional. With a long term investment strategy a day or two is not going to matter. When I was watching the stock, I was afraid that if I missed selling/buying today I’d miss out completely. That's not true. Take your time and do the research and think things over. If it is a good stock to buy it still will be in another. If it's time to sell a day early or later will just be a little less profit. The important thing is to know you made a good rational decision.

Oh...And no use crying over spilled milk. Yes I could've made $65 more if I held on. Well knowing me and my risk tolerance I could never have held on that long. It was just too much money to lose.

I’ve come a ways since then. There is still a long way to go for me but I'm learning my lessons and slowly but surely becoming a more aware and confident investor. Now I have a clearer idea of what my risk tolerance is. I stick close to a strategy which I am comfortable with and is inline with my goals. Occasionally I still put a little money on riskier equities but only when I'm prepared for the risk.

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An old saying from the 1800's California gold rush goes:

the best way to make money is to be the one selling shovels

I read this article yesterday on the Globe and Mail - Buy the fund, or buy the company?: Owning mutual funds can be a smart investment, but there's something to be said for owning the fund company's stock.

I'm sure I've read similar articles before so it’s not a brand new concept. However, I think it's something important for me to remember next time I'm paying 2% management fee for a mutual fund with an average of 9% annual return.

The Statistics
Over a 10 year period:

• S&P/TSX composite index average 9.1% annual return


• Domestic equity funds: 7.9%


• Top three Canadian fund companies IGM Financial Inc., Mackenzie Financial Corp, and AGF Management Inc: 10.7%, 12.6%, 21.2% respectively

Also, owning the fund company stock means paying less in fees compared to owning their mutual funds.

For the complete article follow the link above. Along those same lines: What about buying banks? They are making large profits and we are always paying high fees, which only get higher as time goes on. And oil companies? How about leveraging those high prices we pay for our gas by buying oil company stocks?

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The old “When I have time…”

Back to my friend Patrick and what to do with his extra savings…

Patrick told me that he would like to buy stocks. He’s really keen on this company that he has been working with lately. I’m not savvy enough to give him financial advice on a particular stock but I thought it was a great idea for him to open a trading account.

For example, if he opened an E*TRADE account not only can he make trades it also offers 4.15% interest on uninvested cash. That’s like a high interest savings account and investing account all in one shot. For Patrick it’s even better because he hates hassle.

When I told him about this he thought it was a good idea. Then he said he’ll look into it when he has more time.

It’s something I hear a lot. I felt like telling him….but, but if you invest that initial amount of time setting up you are all set. Even if it’s getting the higher interest rate account. That’s what passive income is all about right? So you don’t have to spend the time.

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My friend’s investment strategy

My friend Patrick has got some extra money saved up this quarter – extra on top of RRSP contributions and regular planned savings. We got to talking about how he could invest that money. I was very surprised at a couple of things.

First, when he was saving up the money over the last few months it’s just been sitting in his regular Major-Canadian-Bank savings account. It’s still sitting there right now, earning hardly any interest.

Second, he has never invested in anything outside of his company group plan. (And of course his house which he lives in)

It’s easy to see what was wrong with the first part. At his regular savings account he is earning like 0.5% interest, whereas online accounts offer from 3.75% (ING direct) to 4.25% (President’s Financial). These accounts are easy to use online and he can access his money any time once he decides what to do with it.

What’s wrong with the second part? They say it’s good to invest in group plans because the fees are lower. Yes, and I contribute through my company plan as well. However, I am not making that my whole investment strategy.

There’s been a lot of talk about mutual funds not worth the expenses they charge. Also, only investing in a company plan limits his options to something like 3 Balanced Funds, 2 Income Funds, 2 International Funds, and 3 Growth funds all from Fund Company X. That’s not a lot of options for his life’s savings.

I guess I thought he’d have it more figured out because he’s older than I am.

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