My Own Advisor

If you push long enough, I guess you can get what you want.  Today, hedge-fund guru Bill Ackman won his fight to replace Canadian Pacific Railway Ltd. (CP)’s chief executive officer, wiping out many board of directors in the process.  For months, Ackman has hinted at hiring Hunter Harrison, the 67-year-old former CEO of rival Canadian National Railway Co. (CNR) – we’ll see if this comes true.  Capitalism at work I guess. 

In other interesting business news, Facebook Inc. priced its initial public offering (IPO) at $38 USD per share, making it the world’s # 1 online social network valuation, just over an Austin Powers-esque $100 billion dollars.  Mark Zuckerberg has done rather well for himself, I must say, after founding this company in a Harvard dorm room.  I read Facebook will celebrate its Wall Street debut with an all-night “hackathon” at its headquarters tonight, where Facebook’s computer programmers work on side projects that sometimes become part of the main product offering.  Uh-huh…

While Facebook itself is an interesting tool, I’m not on it enough let alone fascinated enough in the company to buy it.  Maybe I’m missing out on the next Google, who knows.  For now, I’ll sit on the sidelines and watch the theatrics. 

This week was a busy one so I only got one blogpost in.  I just finished writing Part 2 of 2 of My Favourite Takeaways – Rob Carrick’s Guide to What’s Good, Bad and Downright Awful in Canadian Investments Today so I should be posting that next week. 

I’m also writing a post about our new square foot garden.  We not only want to invest in ourselves financially but also in our health – which is why we’ve started our garden.  We’ve got a small 3′ x 5′ raised crib to fill, ready to go for the great Ottawa weather expected this weekend.  All that to say, I hope to post a few articles about our garden, what is cost us, how we built it and what we expect to grow.

Before I get to those posts, check out these great articles this long weekend.  While you’re on my blog this weekend by the way, spread the word about My Own Advisor.  We’re getting closer to 600 readers and over 500 followers on Twitter, and I have no intention of slowing down.

Have a great long weekend!

Canadian Personal Finance wrote, and I agree, why Facebook should be scared about its revenue strategy.

Michael James on Money had a nice story about Jose Canseco and his recent charity efforts in Ottawa.

Jim Yih told us 3 ways to buy bonds.

Prairie EcoThrifter offered some advice when times are tough.

Boomer & Echo gave some inspiration to young adults, and how they can thrive financially.

Dividend Monk said Philip Morris is a solid buy.

The Loonie Bin shared his strategy to pay taxes now, so there’s hopefully less tax to pay later.

Million Dollar Journey shared his Smith Manoeuvre Portfolio Update for May 2012.  Impressive dividend income.

Y&T wrestled the RRSP vs. RESP contribution question.

BankNerd told us about a new Scotia iTrade App.

Canadian Capitalist reminded readers about the benefits of market diversification, citing limitations in holding only the TSX Composite Index in your portfolio. “The US stock market also offers exposure to sectors such as Information Technology, Healthcare and Consumer goods that have a much smaller representation in the Canadian index.  The MSCI EAFE Index which provides exposure to developed stock markets in Europe and the Pacific region is also well diversified across sectors.”

Financial Highway discussed increasing fixed income returns.

Big Cajun Man discussed taking advantage of rules when you can.

Beating The Index discussed the Viking Oil play in Alberta…a very detailed post for those invested or considering an investment in Canadian oil producers.

Money Smarts Blog is back, wondering if you should sell your house and avoid the market crash.

Canadian Couch Potato reviewed a new book, one that I would like to read, in a post entitled “Market Timing Goes to College”.

SPF had a post why “No More Lattes” rarely work.

Invest It Wisely told us how living to 100 will affect our retirement plans.  Geez, if I live to 100, I need more dividend income!

Preet Banerjee had another cool podcast this week, this one focusing on Canada’s real estate market, including some interesting material from Darth Vader.  Yes, Darth Vader – you read that correctly.

My Passive Income friend, who is on a quest to live off dividend income as well, released his impressive dividend income report for May 2012.

Susan Brunner reviewed Progressive Waste Solutions, a company I like and own.

I’ve been meaning to post a review of Rob Carrick’s Guide to What’s Good, Bad and Downright Awful in Canadian Investments Today for many months now.  After meeting Rob at dinner the other week, and hearing about his new book, I figured it was time to get my butt in gear and comment on his last book – before the new one takes all the attention.  Carrick is considered one of Canada’s most respected, not to mention, well-known financial experts.  Thanks to former blogger The Wealthy Canadian, I got a push to read Rob’s book.

After beginning Rob’s Guide, to be honest, I wasn’t sure what to make of this read.  Was it a how-to-book for the would-be DIY investor?  Was a tome to vent about our high-fee mutual fund industry in Canada?  Actually, it’s a bit of both and more.  Throw in a small encyclopedia of financial terms and personal finance best practices and you’ve got a great 200 page resource for any Canadian investor.  Not bad for a $15 investment.

I’ve got lots to say about Rob’s Guide, so this is only Part 1 of 2 blogposts about this book.  Regarding the first few chapters, here are some of my favourite takeaways from the Guide to What’s Good, Bad and Downright Awful in Canadian Investments Today.

Chapter 1 – Getting You Off To A Good Start

“Rule one of being a rookie investor is that you will make mistakes.”  Very true Rob.  Even experienced investors make mistakes.  I don’t consider myself an experienced investor yet and I confess I make a bunch of them for sure.  So, instead of pretending investors can be perfect Carrick offers some suggestions in this chapter to help folks out, what to avoid, what to do, which makes for a great actionable list for rookies and veterans alike:

• Avoid buying hot stocks and mutual funds – don’t chase performance.
• Diversify – Rob says that means “bonds and cash are lifeboats”.
• Avoid buying things you don’t understand.  I wrote a post about that actually. 
• Avoid selling too soon or too late – although Rob admits this is easier said than done…totally agree.
• Avoid buying high and selling low – Rob says “find the right mix of stocks and bonds for your portfolio and stick to it through good and bad times”.
• Don’t assume guaranteed investment certificates (GICs) are risk-free.  Rob says “no investment is risk-free”.
• Don’t mistake luck in stock trading for skill.  Rob says “Learning stock trading is a bit like taking up a sport in a serious way.”

Chapter 2 – Mutual Funds

About mutual funds Rob says “an awful lot of people have their financial aspirations riding on them.”  Not that Rob is dead against mutual funds, he just wants folks to know what they are getting themselves into.  As a former investor in mutual funds, I agree, buyer always beware.  You should beware of mutual funds as well!  Some mutual funds kill (returns to their investors that is) because of the fees they charge.  As an expert, Rob knows this far more than I do.  He’s been covering the financial industry for about two decades now and he doesn’t like what he sees when it comes to mutual funds.  Carrick knows the mutual fund industry shenanigans and shares them in detail in this book under the sub-topics of:

• Making a big deal about management fees.
• Blowing smoke about bad investing results.
• Creating gazillions of versions of the same funds.

On this last point, Carrick reminds us that “mutual funds are products, and, of course, product innovation and development are inevitable and, indeed, desirable.  Variety is great, but there’s too much of it in fundland.”   Instead of beating up the entire industry, Carrick does offer some great finds in “fundland” but you’ll have to buy his book to find out which ones.

Chapter 3 – Navigating The Stock Market

Rob writes “The stock market is where you go in order to make higher returns that you can get from virtually risk-free bonds and guaranteed investment certificates.”  True, but this is why asset allocation is what really matters in a portfolio.  You need to balance risk for reward.  This is why Carrick advocates “intelligent buy-and-hold investing” for most of us.  This means, determine the correct mix of investments to suit your needs and risk tolerance, and then maintain this mix through all market ups and downs – only changing the mix through rebalancing when the portfolio gets off-centre.  If you’re not comfortable with this on your own, there is absolutely nothing wrong with getting a financial advisor to help you out.  In fact, he encourages it by saying advisors can be “great simplifiers” for you.

Within this chapter, speaking of simplification, for investors that might be new to exchange-traded funds (ETFs) Carrick breaks down their benefits succinctly:

• Low fees – a fraction of what many mutual funds cost.
• Variety – lots of choice to build a sound portfolio.
• Liquidity – buy them at any time the market is open.
• Transparency – holdings are readily seen on the company’s website.
• Diversification – some ETFs hold hundreds of stocks.
• Tax efficiency – replicating indexes they track can generate lower taxable capital-gains distributions.
• Accessibility – buy them in quantities you want.

Given ETFs are cheap to own, versatile and can have some excellent built-in diversification, Carrick provides some strong considerations in this space*:  iShares CDN S&P/TSX 60 (XIU) and iShares CDN Bond (XBB) to name a few. (* These links take you to some of my previous articles about XIU and XBB, but many more options than iShares are listed in his book.)  Rob also discusses where to look in the stock market for yields, through direct stock ownership.  He suggests all the big Canadian banks for starters and companies like BCE and TransCanada.

Stay tuned for Part 2 of 2, when I reveal the rest of my favourite takeaways from Rob’s Guide including what he says about a few bloggers.

Readers – have you read Rob Carrick’s Guide?   I look forward to your feedback on my two-part series and Rob’s book.

Simply put, you don’t know what you don’t know. 

Until something triggers you to dig into something or you get burned, you’re oblivious.   I’m talking about active mutual fund management fees.  There have been some great articles and blogposts about how badly high mutual fund fees hurt Canadian investors, but John Heinzl’s recent Investor Clinic video cuts to the chase quite nicely.   If you only have 1 minute and 46 seconds to learn more about personal finance this weekend, this is my pick of the week.

Over the next couple of weeks, I hope to post a few book reviews.  I’ve got a review almost finished about Rob Carrick’s Guide to What’s Good, Bad and Downright Awful in Canadian Investments Today and I had the pleasure of speaking with Dessa Kaspardlov, financial planner and author of The Fireman and the Waitress.  Dessa was kind to send me her book for review a short time ago, I read it and I have a few comments to share about it.  I hope you stay tuned for that.

Until I get to those posts, or others next week as the mood strikes, here’s a great list of articles to check out this weekend.

Have a great weekend!

Canadian Couch Potato questionned whether you can protect your portfolio from drawdowns.

I thoroughly enjoyed Preet Banerjee’s Mostly Money, Mostly Canadian podcast recently, with guest Dan Bortolotti from Canadian Couch Potato.

Big Cajun Man wondered about the legality of unsolicited credit card cheques.

The Dividend Guy reviewed Aflac.

Dividend Mantra bought Intel.

Million Dollar Journey asked are you ready to be a homeowner?

Young & Thrifty continued her net worth growth.

My University Money wrote about lifestyle inflation.

Financial Highway shared 12 small tips that can lead to significant water bill savings.  Nicely done.

Boomer & Echo shared some things to consider upon turning the big 6-0.

The Blunt Bean Counter had a great post entitled A Family Vacation – A memory worth not dying for.

Dividend Ninja provided a solid overview of IGM versus CIX versus AGF financial companies.

Andrew Hallam said you can retire in paradise on a middle-class salary.

Finance Fox asked what income level is rich?   My answer:  the highest income level

Invest It Wisely had 5 tips to increase your productivity.  I think tip # 4 is critically important.

SPF wrote a post about something I do, and from what I’ve read, many others do as well – check out this green tip.

Canadian Oil Stocks wrote about Canuck oil companies riding the boom in New Zealand.

Larry MacDonald commented on a Fraser Institute report that said the Canadian health care system needs reform.  Working in the heathcare industry, I agree, more work is needed.

Given today’s small gap between variable rate and fixed rate mortgages, the variable rate mortgage might be dead in the water over the next couple of years.

Balance Junkie reminded us about the power of saying “no”.

Prairie EcoThrifter told us how to save hundreds of dollars per year on your water bill.

Passive Income Earner wrote about high yield stocks.  I own a few, but not many since I get nervous when yields are over 6% for a sustained period – there is a risk of a dividend cut.  He said, and rightly so “avoid falling for really high yield stocks as it is usually a sign of trouble.”

I provided Michael James on Money with some more content this week, and he did a really great job with his own, discussing debt service ratios based on gross pay.  His graphs and narrative tell a good story.

Last month in my dividend income update, I wrote “as an investor, I should never lose sight of the risks direct stock ownership can mean.”

How true, because active money management comes with more risks than other types of investing.  Unlike indexing for example, I’ll never be able to entirely set and forget my dividend investing approach but I really don’t mind.  Dividend investing takes some active work, work I enjoy for now but the dividends certainly don’t take any effort.  Dividend investing continues to be a great complement to my indexing products.

As of this month, I own 23 Canadian companies that pay me dividends every month or every quarter.  Some are riskier investments than others (I’m looking at you TransAlta and CML HealthCare) but overall, I feel my portfolio is taking a more diversified and balanced shape with every new purchase I make.  My Canadian dividend paying stocks are a nice complement to my RRSP, which is mostly indexed although I do keep a few U.S. dividend paying stocks in this account like Johnson & Johnson and Abbott Laboratories to name a few.

At the end of March, after dividends were paid and reinvested wherever possible, I mentioned our dividend income for the 2012 calendar year was projected to be $5,500.  I said we’d hit this target as long as dividends weren’t reduced and the companies we own keep paying them.  Well, they’re paying dividends alright and in some cases, the dividends are increasing!  Recently, Canadian Oil Sands increased their dividend by 17% to $0.35 per share.  That small $0.05 dividend hike increased our annual dividend income by over $25 right there!  You might already know, dividends, if raised once per year, can fight inflation and preserve the purchasing power of goods and services you and I depend on.  Dividend increases aren’t guaranteed every year but many of the companies I own have a history of increasing them often, so it’s a good reason to own such companies long-term.

During April, on the theme of goods and services I depend on, I also purchased some shares in Progressive Waste Solutions (BIN).  I figure the need for waste management is not going anywhere anytime soon.  Of course, no investment is risk-free and not even blue-chip companies are immune to short-term problems however the more different companies I own, the more diversified I am over time, the more reliable my passive income stream will be.  Even if Canadian Oil Sands and Progressive Waste Solutions share prices drop, I will probably still get paid.

This past month alone, we were paid just over $500 in dividends, most of that money reinvested for our future, buying more shares in the companies we own.  Left over cash, albeit small amounts accumulated again this month so later this year, I’ll be hunting for more companies to own.  We’re on pace to earn just over $5,500 in dividends in 2012, inching closer to my indirect goal of $6,000.

I hope we get there and I’m looking forward to celebrating a little bit if and when we do.

I’ve heard these terms thrown around by a few financial institutions from time to time.  Here is a quick look and my quick take on them: 

• Gross Debt Service Ratio (GDSR) – % income required to pay basic housing costs.

Under the “basic” banner:  mortgage payments (including principal and interest), condo fees (if you have any), property taxes and heating costs.  This sum is divided by your total gross income.  Financial institutions want to see your GDSR under 32%.  This is because spending more than 32% on “basic” housing costs could make it difficult to cover other expenses.  If you exceed 32%, your mortgage application or loan amount would likely be declined.

• Total Debt Service Ratio (TDSR) - % income required to cover basic housing costs and all other consumer debts.

This is a percentage of your gross monthly income used for housing and other outstanding loans and debts.  Financial institutions want to see your TDSR under 40%, although lenders will usually allow clients to borrow up to this limit.  It would be rare however, if a financial institution would loan money to folks with a TDSR higher than 40%.  Do they? 

The struggle I have with GDSR and TDSR is your gross income is your income before deductions.  Gross income is before income taxes, Canada Pension Plan (CPP) and Employment Insurance (EI) premiums and other premiums such as workplace benefits.   For me (and probably for you?) these deductions account for least 30% of my gross income or in other words, income I never see.   While I could rationalize why creditors and institutions would use gross income as the baseline for service ratios, as a debt-holder it doesn’t make any sense to me.   Both ratios are simply way too high for me and border on scary.   With about 70% or less of my take-home pay available to service various debt, I want my total debt ratio under 30% using net income as my denominator.  Personally, I’d like to get my total debt ratio under 20% within the next 5 years.  This debt would include not only my outstanding mortgage but also any car payment.  No line of credit, no credit card debt, nothing else.

As a 30-something saving and investing his way out of debt towards financial freedom that’s a much more comfortable debt ratio I could live with.

What about you? 

Have you ever taken a deeper look at these debt service ratios as they relate to your personal finance situation?