Category: Investing

Return since inception vs. yearly return

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I recently received my December statement for both my RRSP and TFSA portfolio. This portfolio is for retirement purposes only, therefore I don’t plan to draw from it until I retire.

As an information, its breakdown is as follow: 75 % equities, 20% bonds, 5% cash. Its geographical allocation is predominantly North American, but I have made efforts to diversify as much as possible, and also have investments in Japan, Europe, China and emerging countries. The equity portion of my portfolio is across pretty much all sectors.

Disclaimer: I am not a Financial Adviser and the above information is just that. Information. You should always do your own research before deciding on how and where to invest your hard-earned money.

Back to my returns, my RRSP return for 2019 was an astonishing 22% and my TFSA’s was 19%.

I didn’t let these numbers dazzle me

Why, you may -rightfully- ask.

Well, first of all, these returns are only “paper-returns”. What I mean by this, is that these returns are unrealized. In order to actually “bag” those numbers, I would need to sell my entire portfolio.

Remember, as long as you haven’t sold, you are not actually making or losing money.

Secondly, these returns are only for one point in time, aka 2019. 2019 has come and gone.

So what number to look for instead?

Look for return since inception instead

Return since inception simply means return since you first started your portfolio. Most brokerage firms will give you that number, the same way they give you monthly and annual returns.

Returns since inception take into consideration all time-periods, as well as the associated market fluctuations. I find that number to be more realistic than a monthly or yearly return.

Returns since inception don’t tell the whole story either

Actually, none of the various rates of return ever do.

As a time-weighted return, the return since inception doesn’t take into considerations any movement within your portfolio such as withdrawals and contributions.

For that, you need to look at your money-weighted rate of return.

And also keep in mind that any return rate never accounts for inflation or taxes, making it further complicated to figure-out your real rate of return….

Opportunity cost

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If you are a reader of the blog, you know I decided to obtain an MBA. I have been studying for almost a year now.

Last September, an opportunity came across to study for a semester on the Malaysian campus of my university. After careful budgeting, I decided to accept it.

I have been in Malaysia since January, and it has been a bliss! To get the financials out of the way, the semester is all paid for. It was paid by my personal savings as well as an insurance settlement. I would also like to add that I don’t have any consumer debt, which made it easier as well.

In total, I spent a little over $22K. Since becoming consumer-debt free, retirement has been front and center on my mind.

I had been thinking about transferring $ 20K to my RRSP. Well, it is not going to happen. At least not yet. Why? Because I chose to go to Malaysia instead.

OPPORTUNITY COST

This post is totally related to a concept that I am currently studying in Economics: opportunity cost. It is defined as ” the benefit that is missed or given up when an investor, individual or business chooses one alternative over another”.

In my case, the opportunity cost is the benefits foregone by not contributing to my RRSP. These are: big contribution that would most likely have triggered a bigger tax refund; tax refund that I could have put back in my RRSP; additional dividends and interests; long-term compounding on the latter.

OPPORTUNITY COST IS NOT JUST FINANCIAL

Being a PF blogger, I obviously had to talk about the monetary side. But there are other aspects to opportunity cost, such as time, pleasure or usage.

To go back to my own example, the benefits of going to Malaysia outweigh the opportunity cost of not contributing to my RRSP, including in the long-term.

The truth is that I hadn’t been doing well or feeling well for some time. Last year was difficult. It was the culmination of a few years of growing dissatisfaction with my life. I felt very stuck with no idea of how to unstuck. I was also plagued with health issues.

I needed a substantial change, but not necessarily a drastic one either.  I needed to step-out of my comfort zone for an extended period of time. Being in Malaysia definitely brought me that and much more. My health issues are gone, primarily because my lifestyle here is very different from my lifestyle Canada. I intend to bring it  back with me, as much as possible.

I have a totally different perspective on my life, on Canada and on myself. Contributing to my RRSP would not have given me any of the above…..

FINAL WORD

Opportunity cost happens to all of us on a daily basis. Most of us are probably unaware of it. We all make choices. There is always an opportunity cost behind our decisions, no matter how trivial these decisions are.

 

 

 

 

 

When to sell your stocks

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I sold some stocks recently. Not only I didn’t loose any money, but I actually made some. If you have been reading the news, you are aware the markets are in correction territory, a.k.a. bearish. It resulted in massive sell-offs across the globe.

A BEAR MARKET IS NOT A REASON TO SELL YOUR STOCKS

Bear markets are actually pretty normal. They should be expected. The twist here, is that we are no longer used to them. We have been in the longest bull market in history. Most of us have forgotten what the bear looks and feels like.

That being said, there are definitely valid reasons to sell your stocks. Here are a few of them.

you need the money; your stocks are all you have

Yep. Shit happens. If your cash is depleted, your credit cards maxed-out and you are in a dire situation, then sell away.

If you are not at this stage, consider using cash, liquidating term-deposits or selling your bonds before selling your stocks, particulalrly if the markets are bearish.

your stocks have served their purpose

When buying stocks, one should always have an objective. Whether short or long-term or for speculation or diversification, your stocks should always have a purpose. Once achieved, your stocks have no reason to be in your portfolio anymore.

you experience major life changes 

You loose your job; you go through a divorce or you are nearing retirement. These types of change may require rebalancing your portfolio to a more conservative allocation.

your risk tolerance is drastically lower

A major life change and ageing will lower your risk tolerance.

I always say it is important that your portfolio be in line with your risk tolerance. Most of us have a lower tolerance than we initially claim. Case in point with the recent mass sell-offs….

ONE OF YOUR STOCKS IS CONSISTENTLY UNDERPERFORMING

We all make mistakes, including with our investments. A stock has been in your portfolio for some time, and it is just not picking up when similar stocks are rocking the market.

When the market becomes bearish, your stock becomes worse when similar ones weather the turmoil. Time to sell!

MY CASE

As I mentioned above, I recently sold some stocks. These stocks were in my TFSA for a few years.

They were part of my emergency fund. Yes, you are reading correctly. Back then EQ Bank and Tangerine had not launched their high-interest savings accounts. The majority of banks was offering peanuts in term of interests.

I have had major life changes recently, with more coming. I needed to rebalance the allocation of my emergency fund. So, I sold some stocks. I made money despite the bear market. I sold stocks that triggered a capital gain. I still have 20% of stocks in my portfolio.

 

 

10 Financial killers

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In my previous post, I shared how F.I.R.E. has an element of privilege to it. I also indicated that for most people, F.I.R.E. will remain a pipe dream.

There are very real obstacles to becoming financially independent and potentially retiring early. Here they are, in my personal order of importance:

FINANCIAL KILLERS # 1 & 2: STAGNANT WAGES AND INFLATION

5 years ago, Statistics Canada published a very interesting study on the evolution of wages in Canada between 1981 and 2011. The study shows, among other things, that hourly wages barely bulged during that period. A full-time worker would earn about $ 21 in 1981 and just under $ 24 in 2011. Not even 15% more.

There were also gaps depending on gender, age and education.

In the meantime, inflation during the same period rose by 149.16%. 

FINANCIAL KILLERS # 3 & 4: DISAPPEARANCE OF JOB SECURITY AND PENSION PLANS

Job hopping is the new normal these days. Most people will have an average of 15 to 20 jobs and 2 to 3 different careers. Sadly said so, most employees are seen as disposables. Job security is a thing of the past, just like companies’ pension plans.

Only 37% of Canadian employees have a pension plan today, primarily in the public sector. It used to be over 50% in the seventies. A company pension plan used to be an important pillar of retirement, making-up for paltry CPP amounts and lack of personal savings. Nowadays, workers need to save more for their retirement. It can be an arduous task when looking at Financial killers # 1 & 2.

FINANCIAL KILLER # 5: POST-SECONDARY EDUCATION COSTS

Canadian students graduate with an average of $ 27 000 in student-loan debt. Depending on the degree and university, this amount can be much higher. Starting adult life and career with such burden is crippling, even more so when looking at the previous 4 financial killers.

FINANCIAL KILLER # 6: UNHEALTHY OBSESSION WITH HOME-OWNERSHIP

Yes, I am aware I am a home owner, thank you very much. That being said, I did not think about buying until I was in my mid-thirties, and after doing thorough calculations. Nothing says you have to buy a property right after graduation or after getting married!

In order to buy, you need to save for both a minimum down-payment and the closing costs. You also need to stay put for at least 5 years, if you want to gain equity and recover from the closing costs you paid.

FINANCIAL KILLER # 7: CAR AND COMMUTING COSTS

A subcompact car will cost on average $ 10 000 per year. This includes car payment, insurance, gas, maintenance and tolls. Since more people have to move to suburbia to find affordable housing and easily need 2 cars per household, these costs can only go higher.

FINANCIAL KILLER # 8: STAGGERING DAYCARE COSTS

If you chose to have children, it is very likely you will have to go back to work, despite the Federal government paid maternity leave and the Canada Child Benefit program.

This is not always a question of personal choice. It is merely based on at least the 5 first Financial killers.

A spot for an infant in a licensed daycare in Vancouver costs close to $ 1 300/month. For a toddler, you are looking at just over $ 1 000.  Prices in other big Canadian cities are similar, with the exception of Montreal. The Quebec government has its own childcare program and costs are way lower.

FINANCIAL KILLER # 9: CONSUMER-DEBT, AVOCADO TOASTS AND LATTES

A lot of people are still trying to keep-up with the Joneses, by constantly upgrading to bigger and shinier things.

That being said, a lot of people are also using credit cards to make ends meet, due to the above financial killers.

FINANCIAL KILLER # 10: LACK OF FINANCIAL LITERACY

Unfortunately, we are not taught at school that we need to save for retirement or for emergencies. We are also not taught how to best do these things. We are not taught how interests on credit cards or loans is calculated. We are not taught about management fees.

This doesn’t help, but it is not what sends someone to a trustee in bankruptcy, contrary to popular belief.

F.I.R.E. explained and debunked

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F.I.R.E. is a very popular acronym is the Personal Finance blogosphere. It stands for Financially Independent Retire Early. Over the years, this concept has become more and more appealing, and no wonder. With major changes in the workplace, such as stagnant wages, the disappearence of pension plans and a higher unemployment rate, a growing number of people aspires to quit the grind….myself included.

F.I.R.E. IS NOT A GET-RICH-QUICKLY SCHEME

Unfortunately, it will take some time before anyone is in a position of pulling the plug on their dreaded job, as a sufficient amount of money needs to be saved first.

Said amount will require thorough calculations first. Conventional wisdom says it should be 1 million or 25 times your yearly expenses. I say conventional wisdom needs to be challenged! I will save this for another post.

In order to save for the magic number, you need to make money, there is simply no way around this!

F.I.R.E. HAS AN ELEMENT OF PRIVILEGE IN IT

When you take a look at F.I.R.E. bloggers, most of them were making a decent income – well into the 6 figures, combined or not- before becoming financially independent (F.I.) . Some of them don’t have children or had them long after being F.I. Others chose not to buy properties or graduated with no student debt or had no debt at all.

The above definitely gives a head-start to anyone choosing F.I.R.E. It doesn’t mean you can’t achieve F.I.R.E. if the above-mentioned doesn’t apply to you. However, it may be more challenging and take longer.

The harsh truth is that F.I.R.E. will remain a dream for a lot of people.

F.I.R.E. HAS AN ELEMENT OF FRUGALITY IN IT

In order to achieve F.I.R.E., you not only need to earn money, but also to cut down on expenses.

By doing so, you may realize you need less than you initially thought to live on.

Being frugal can be borderline with being cheap at times.

Frugality is not for everyone either. That being said, not being frugal does not prevent anyone from reaching F.I.R.E. either. It will just take longer.

F.I.R.E. IS MORE ABOUT FINANCIAL INDEPENDENCE THAN EARLY RETIREMENT

A lot of people achieving Financial Independence actually do not retire or stop working. They choose to pursue different career paths instead, the most popular being becoming a writer and/or a blogger.

This is where the problem lies, in my not-so humble opinion. A lot of people blogs about retiring early and never working again, when they are actually still earning income instead of drawing from their savings!

The core concept is that F.I.R.E. gives you the ability to choose when and where to work as well as what to work on. Money is no longer part of the equation. This is what I personally find really attractive.

FINAL WORDS

I would love to reach Financial Independence sooner than later. That being said, I don’t know if it is a possibility right now, and it is OK. I fully acknowledge my economic reality and the limitations of the F.I.R.E. concept.

I would also caution anyone not to take at face-value anything read on the Internet from people claiming to be F.I.R.E. We never have the “full picture” of their situations. We don’t have access to their bank accounts, investment portfolio or tax returns. We can never be sure where their income comes from.

 

 

Time-weighted vs. Money-weighted rate of return

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With the implementation of CRM2, Canadian banks, investments brokers, mutual funds dealers and other financial entities must disclose the method used to calculate the rate of return of a portfolio or investments like an ETF or a mutual fund.

There are 2 methods used: time-weighted and money-weighted. Both are valid and accepted. Let’s take a look at the 2 approaches.

there is only one big difference between the 2

The time-weighted method does not take into consideration any contribution or withdrawal (cash flows) made to a portfolio. It does not take into account any dividend or interest received either.

The money-weighted method, on the other hand, does take cash flows into consideration, including dividends and interests.

the time-weighted method works best for product comparison

In the time-weighted method, all periods’returns have the same weight, regardless of cash movements. For example, if the return for period 1 is 10%, and the return for period 2 is  -8%, the return would always be 1.2%.

This method works very well to compare products such as mutual funds or ETFs. The majority, if not all, of fund managers uses this method. it is also easier for them, as they have no control on cash flows.

the money-weighted return works best at individual level

The money weighted method, as indicated above, takes cash movements into consideration to calculate return.

It  finds the interest rate or rate of return that would have to have been paid for the investor to obtain the actual ending value, given the beginning value and the deposits and withdrawals that occurred during the period.

The result is way more precise for investors, and can help them understand why they might be loosing money.

The money-weighted return will most likely be a different than the time-weighted return.

conclusion

For most investors, regardless of how experienced they are, the money-weighted return is the best method. It gives a more clear picture of how their portfolio is actually performing .

 

Book review: Stock Investing for Canadian for Dummies

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My first introduction to investing was horrendous, to say the least. It took me many years to finally take the plunge -into the stock market- and become a DIY investor. I certainly regret taking so much time to do so, as I have missed on, on one of the longest bull market in history.

When I decided to educate myself on stock investing, I bought the above-mentioned book, written by Andrew Dagys and Paul Mladjenovic. Dagys is a Chartered Professional Accountant (CPA) and Mladjenovic is a Certified Financial Planner (CFP). I can safely write these two know what they are talking about!

the “dummies series” REGULARLY gets updated

This is one of the reasons I bought this book. It is currently at its 5th edition so you do have up-to-date information.

the book uses plain and simple language

Another good reason to read this book is that it does not confuse you more, quite the contrary.

The book uses plain language and gives a lot of tips, examples, references and resources.

the canadian twist is nice

There aren’t that many personal finance books for Canadians. It is good to read a book that talks about the Canadian Financial landscape. Although stock markets operate the same way everywhere, the tax implications and investment vehicles vary from country to country.

 if you are not a novice, this book is not for you

If you already know the basics of investing, you won’t learn anything new here.

final word: buy

I give this book a definite buy. It is the perfect and easiest way to get started with stock investing!

 

 

 

 

 

 

 

 

 

 

 

Labor sponsored investment funds explained

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In Canada, labor-sponsored investment funds -LSIF- were introduced in the 80’s to encourage Canadians to invest in small companies and start-ups.

A LABOR SPONSORED INVESTMENT FUND IS BASICALLY A SMALL CAP MUTUAL FUND…with a few twists

This type of funds is composed exclusively of small businesses and/or start-ups companies that are looking for capital and financing.

It can be bought from an investment firm or directly from the fund company.

Like any small cap fund, these funds are fairly speculative and riskier. The companies they invest in are in early stages of development, and may fail.

the (only) advantage of these funds is the tax credit

If you invest $ 5 000 in a labor sponsored fund provincially registered, the Federal Government will give you the maximum $ 750 tax credit.

The province where the fund is registered will also give you an additional tax credit. For example, British Columbia will also give a 15% credit for $ 5 000 invested.

Tempting, but there is a big catch.

most funds lock your money in for 8 years

You can always redeem before that, but if you do so, you will have to repay the tax credits back. Same goes if the fund is sold or goes bust.

The fund company can also stop redemption at any time. You may not get your money back when you need it.

the mer on these funds is EXTREMELY high

It is fairly common to see a Management Expense Ratio -MER- of 6% to 8% on Labor Sponsored Investment funds.

The MER directly impact the fund’s return, as expenses are paid regardless of the fund’s performance, which brings me to my next point.

labor sponsored funds are under performing

It is actually not surprising given their core nature. When you take into account the high MER, most of the times, investors are loosing money.

final word

Personally, I would not invest in a labor sponsored investment fund. If you choose to do so, carefully read and understand the prospectus.

Any investment decision should never be solely based on obtaining a tax credit.

The Conservative Federal Government had actually scrapped the tax credit before loosing the election to the Liberals….who then decided to restore the credit.

Valuing a stock with the Graham formula

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There are several ways to assess a stock, besides the stock table. One of them is the Graham formula, created by Benjamin Graham.

graham is the father of “value investing”

His book, the Intelligent Investor is considered a classic in the financial industry. Despite being published in 1949, its principles still hold true today. Graham hired Warren Buffet so we can safely say the guy knew what he was talking about!

what is the graham formula?

The formula was created to assess how rationally priced a stock is. In today’s market, when it is becoming more and more difficult to find fairly valued or undervalued stock, the formula is very relevant.

For you math-diggers out there, the formula was initially as follow:

V*=EPS\times (8.5+2g)

V as the intrinsic value, EPS as the company’s Earning per Share over the last 12 months, 8.5 being the ratio for a company not making any profit, g being the company’s estimated growth for the next 5 years.

Later, it was revised to: V*={\cfrac {EPS\times (8.5+2g)\times 4.4}{Y}}

Y being the current yield on 20 year AAA corporate bonds. Graham thought taking interest rates into consideration would give a more accurate intrinsic value (V).

how do I use the formula? 

Don’t worry, there are plenty of calculators that will give you the intrinsic value of any stock. There is a good one here.

Once you have the intrinsic value divide it by the stock current price. If the result is below 1, it means the stock is overvalued. If it is above 1, the stock is either fairly valued or undervalued.

final word

The graham formula is an helpful way to assess a stock. That being said, it should not be the only one way used. It is important to do research on the company and to read – and understand-its financial statements.