My Own Advisor

“The investor’s chief problem – and even his worst enemy – is likely to be himself.”

-Benjamin Graham, Value Investor, Mentor to Warren Buffett

Contrary to what many institutions might have you believe, investing in sub-par performing investment products is not an investor’s chief problem to overcome.  Sure, investment returns matter over time but they don’t matter nearly as much as bad behaviour.  An impatient investor can destroy an investment portfolio.  It is my experience that successful investing is not about getting everything right, it’s about doing the right things more often than not – and that means letting your assets do all the work over time.  Furthermore, an investor is not a trader in my book.  An investor by definition has a vested interest in their holdings and sticks with them through the good times and the bad.  In fact, an investor does not chase performance but instead looks for opportunities to buy more assets at modest prices or when re-balancing is due.

“The power to tax is the power to destroy.”

-John Marshall, former Chief Justice of United States, founder of U.S. Constitutional Law

Who here enjoys paying taxes?  Anyone?  Any hands?  Just what I thought – nobody enjoys paying taxes.  Paying income taxes, property taxes and getting dinged on our value added tax (GST) at the cash register are things we cannot avoid.  However, what you might not know is Canadian investment income is taxed at favourable rates, certainly when compared to employment income.  So if you learn to put certain securities in certain accounts, you can reduce your tax burden.  For example, you might already know investment products in a registered retirement savings plan (RRSP) grows tax-deferred but securities in a tax free savings account (TFSA) grows completely tax-free.  What you might not know is Canadian dividend income is taxed favourably.  Also, high-growth, non-dividend paying stocks can be excellent investments to hold in taxable accounts since capital gains receive better tax treatment than employment income.  A good rule of thumb to remember:  any investment that is taxed at a rate lower than your employment income is a candidate to be held outside your registered accounts.  For investments that don’t fit that criteria like bonds, it’s probably best to keep them in an RRSP, registered retirement income fund (RRIF) or a tax-free savings account (TFSA).  Putting your assets in their proper location can make you a wealthier investor.

“The money you spend on money management fees is the money you never keep for yourself.”

-My Own Advisor, DIY Investor

Plain and simple, paying high money management fees are a major drag on returns.  If you don’t want to take my word for it, read this article on WhereDoesAllMyMoneyGo:

“…a 2.69% MER mutual fund consumed 92.53% of your original contribution over 25 years and left you with 49.42% less money due to the effect of fees.”

Want some more proof?  Take the Rule of 40 challenge:  take the number 40, divide it by your mutual fund’s Management Expense Ratio (MER) that you can find here and the result is the number of years it takes for money management fees to eat 1/3 of your investment.  Yes, you read that correctly.

Example:  Your high priced TD Canadian Equity mutual fund has an MER of 2.18%.  So, 40 / 2.18 means in 18 years plus a few months, about 1/3 of your investment value will be lost to fees.

Instead of worrying about investing forces of nature that are well beyond your mere mortal powers of control, forces such as stock market returns, inflation and interest rates, focus on things you can control.  My advice and my own practice seeks to keep my investing behaviour aligned with my financial plan, take advantage of the tax laws where I can and pay if I absolutely must some money management fees but not a penny more.

Any more investing enemies I should call out?  Which one above is the biggest villain to your portfolio? 

Thanks for reading and sharing this article.

 

Happy New Year everyone!

With some close friends, my wife and I rang-in the New Year at our place.  It was a great night to celebrate the year that was with them and to toast our respective year ahead.  We’re looking forward to seeing what 2013 has in store for us.  I hope whatever you did for your New Year’s celebration was enjoyable…

Looking back at 2012, My Own Advisor was rather busy posting an average of 10 blogposts per month.  For today’s post, we’re going to review some of my favourite posts from last year, articles that pushed me to learn a little bit more about what matters when it comes to saving, investing and spending money wisely.  Check out The Best of My Own Advisor – 2012 below.  If you have any favourites from this list let me know about them by leaving me a comment or sending me a tweet @myownadvisor.

January 2012

At the beginning of the year, I wrote:

“Tired of reading technical and academic “how to” investing books?  Scratching your head to figure out the financial jargon that goes with investing these days?  Let Dan Bortolotti’s MoneySense Guide to the Perfect Portfolio be your helper.  In a visual, straightforward and simple format, Dan will breakdown the components of sound investing, explain the basics of index investing and why it works, and add some humour along the way.  At a lean, crisp 128 pages and for the bargin book price of $9.95, you’ve got an easy, enjoyable and educational read.”

Check out my two-part review of Dan’s book.

February 2012

In February I wrote:

“Most Canadians are enamoured with RRSPs, for all the great reasons above and more.  This tool is also a component in our retirement plan but just one of many.  Instead of busting our butts every winter to maximize our RRSPs we choose to optimize our RRSPs instead.  That is, we contribute only enough money to our RRSPs to avoid paying any more income taxes.  If anything, we might get a small tax return back (which is fine).”

Read about why and how we optimize our RRSPs.

March 2012

In the spring, I wrote about how we view and apply the practice of “paying yourself first”:

“Pretty much anyone who has read anything about personal finance has heard the mantra:  pay yourself first.  David Chilton popularized this mantra with The Wealthy Barber and reinvigorated it again in The Wealthy Barber Returns, two of my favourite personal finance books by the way.  I’ve been giving this financial rule some thought recently, and how it applies to our personal finances, specifically how we manage and build our emergency fund.   Here’s what it means to us:  it’s a bill payment.”

April 2012

In April:

“Recently, my wife and I got our tax refund back.  It wasn’t $1,000 but it was close.  A tax refund can be considered a good thing and a bad thing in my opinion.  On the good side, we were given money back we really didn’t expect or maybe better said, forgot about.  On the bad side, we just gave our government an interest-free loan over the last year.  In this regard, I think getting a huge tax refund is undesirable and many Canadians shouldn’t welcome this although many people do.  Instead of that money working for you, it’s working for the government.  I don’t know about you, but I give the government enough money.”

Read more about how I view tax refunds and how we spent our refund in 2012 here.

May 2012

In May, I had a lot to write about regarding Rob Carrick’s Guide to What’s Good, Bad and Downright Awful in Canadian Investments Today.  Check out some of my favourite takeaways from his book here.

June 2012

Earlier this year, I wrote:

“In the world of courting and finding Mr. or Mrs. Right, a critical part of this journey is dating.  Same goes for the dividend investor.  Any do-it-yourself (DIY) stock investor, who is planning to live off their stream of dividend income, needs to know their dates.”

Check out this article about defining these:  dividend declaration, ex-dividend, record and payment dates.

July 2012

Some time ago, I wrote about my financial rules of thumb – a moderate list of financial principles we try and live by.  In July, I challenged myself to see if I was actually living these values.

Read about how I eat my own cooking more often than not, when it comes to reducing debt, only using our line of credit when necessary and building a rock-solid retirement portfolio.

August 2012

In August, I wrote diversification is a serious issue for active investors:

“Too much weight in too few stocks or too many stocks in one particular sector can cripple a portfolio.   For indexers using Exchange Traded Funds (ETFs), diversification isn’t really an issue; if you own some of the following products, a few companies removed in these ETF holdings are not going to change much of anything in terms of volatility or investment returns.”

Check out how I fight this issue in my portfolio when I answered the time-tested question:  how many dividend stocks are enough?

September 2012

I attended the Canadian Personal Finance Conference (CPFC) in Toronto last fall, and when I wasn’t spending money there I was definitely saving it.  Learn about some super simple things I do to save money.

October 2012

In the fall, I wrote:

“I’ve been a loyal BlackBerry user for over three years now but I’m feeling the urge to switch phones.  The urge comes with seeing newer technology on the market, smartphones with faster processors, more features and better browsing experiences.  It’s a want over a need – got to acknowledge that.  Actually, it’s hard to believe it was only a few years ago a BlackBerry was the phone to have.  This fall/winter, I’m in the market for a new Android phone, not an iPhone.”

If you’re considering a new smartphone, consider reading this post about why I didn’t buy an iPhone.

November 2012

As a result of my frustration with our overly complex tax code, I decided to dig deeper and demystify for myself the Canada Revenue Agency (CRA) foreign income reporting requirements.  Check out my rant but also some great information for every investor about foreign income tax reporting requirements.

December 2012

Last month, I reported we nailed all but one of our 2012 personal finance and investing goals.  One reader wrote an email and went so far to say, “you should have stated you realized 5.5/6 goals because you were so close.”  Fair point.  Overall, it was a great year of saving and investing.  We’re just shy of 9 years left on our mortgage at our current debt payment rate and this calendar year, I hope to hit another major milestone when it comes to earning dividend income.   I’ve got some goals planned for 2013 but until I finalize those, check out our accomplishments and shortfalls in this update.

Another year has passed but here’s to a New Year to prosper in.   Happy 2013 Readers!

Thanks for reading and sharing this article.

Dare I say it, but sometimes major corporations actually do the right thing.  Mistakes happen and pardons are in order.

About this time last year, my wife and I decided to purchase a 2012 Kia Soul.  Our purchase was prompted from having two aging cars, hers nearing 10 years old and mine going on 12 years old, both costing us some money every few months when major repairs were discovered and needed.  We needed at least one reliable vehicle.  After taking a few months to research our new car purchase, we settled on the Kia Soul – which had many features we were looking for.  The purchase price was right, the financing was 0% interest and the fuel economy was decent for our 2.0 L model, so the sticker on the window said:  8.5 L/100 km city and 6.8 L/100 km highway.

Over the last year, we’ve enjoyed the Soul but since the engine was “broken in” we found the fuel economy to be higher than the manufacturer’s claim – noticeably.  Since purchasing the car, I just chalked it up to a typical auto manufacturer’s claim; the Soul’s fuel economy was based on test drives in optimal conditions.  We were consuming about 0.5 L/100 km more both in city and highway driving.  Turns out this variance was not going unnoticed by management at Kia Canada, thanks to reliability ratings from Consumer Reports and other watchdog groups.  In fact, Kia Canada recently decided to do something about it – much to my surprise.

Recently, Hyundai and its Kia cousin reported the bad news they’ve known about for some time – they were posting incorrect fuel economy numbers on many new car models, dating all the way back to 2010.  The fuel economy errors involve over a dozen models from the 2011 through 2013 model years, seven Hyundais and six Kias:  Hyundai’s Elantra, Sonata Hybrid, Accent, Azera, Genesis, Tucson, Veloster and Santa Fe; Kia’s Sorrento, Rio, Sportage, Optima Hybrid and yes, our 2012 Soul. Apparently, procedural errors at their testing operations in South Korea led to incorrect fuel consumption ratings.  Hyundai and Kia have since revised (upward) their average combined fleet fuel consumption ratings by 0.3 L/100 km for the 2013 model year.  In addition to correcting fuel consumptions claims going forward for affected vehicles they are also righting their wrongs by ensuring owners of every Hyundai and Kia vehicle impacted are compensated.  Hyundai and Kia owners will be reimbursed for the fuel value difference in the combined fuel consumption rating, plus 15%.  Hyundai and Kia dealers will use odometer readings to determine how much owners might have saved if their cars used the revised (corrected) fuel economy over a year and then give owners a pre-paid credit card for difference, including an additional 15%.  We learned at our Kia dealership this week, the pre-paid credit card will be reloaded every year for as long as we own the Soul vehicle.  Based on our calculations, Kia Canada owes us over $200 – which will pay for about 1.5 months of gas in the vehicle.

What do you make of Kia Canada’s attempt to right a wrong?  Good corporate citizen or a crook caught red-handed who is scrambling to save face?

Thanks for reading and sharing this article.

 

Last year, I wrote about my financial rules of thumb – a moderate list of financial principles we try and live by.  Upon reflecting on this older post recently, I wondered if we are actually living these financial values.   In some cases, there are clear indications we do what we say.  In other instances, we’re a bit weak.  A year later, it is interesting to read what I said we would do and what we actually do today….

• Continually reduce our mortgage debt by using prepayment privileges every month.

We’re working on this one every month.  Now that our line of credit is at $0, we intend to stick to our current plan until the end of 2012 by putting $300 extra on our mortgage every month.  This is one of our 2012 financial goals.

• Use our line of credit only when necessary for major home renovations or emergencies.

We haven’t touched the home equity line of credit for months.

• Save and invest at least 10% of our net income every year.

We’re contributing to our pension plans at work, contributing to our RRSPs and TFSAs monthly and we’re also putting aside some money buy more broad market ETFs and dividend paying stocks when we feel the price is right; so we’re meeting this objective.

• Hold a percentage of bonds that closely matches our age.

We’re not doing very well on this one.  I wrote some time ago, when I disagreed with an expert no less, we wanted about 30% fixed income in our portfolio.  We’re a little older than age 30 now but I heard Amanda Lang say “40 is the new 25” on national TV recently so maybe 25% bonds isn’t too bad

• Have an emergency fund.

If you read my last 2012 personal finance and investing goals update, I said we wanted to grow our emergency fund by $3K this year, to about $5,000 in total.  We’re well on our way to completing this goal (I have an update on this soon) but it doesn’t stop there.  Next year, we’re already thinking about growing our emergency fund a little bit more.

• Always be on the lookout for ways to cut back on everyday expenses.

I don’t have as much patience as my wife has, so thankfully she takes time to scour the flyers and print coupons for everyday expenses.  Most often, I just prefer to go to the box stores down the road and get what I need when I need it.

• Avoid carrying any credit card debt in any month.

We don’t put anything on the credit cards we can’t pay off in cash at the end of month.  You know what helps as well – getting cash back on our credit card transactions!  Check out my favourite credit card here.

• Optimize our RRSPs.

We do a couple things with our RRSPs.  1) We make RRSP contributions automatic, sending over a bit of money every month.  2) We optimize our RRSPs in that we only contribute enough to offset paying any additional income taxes come tax time.  This approach works for us for many reasons.  I need to write another post about that.

• Keep the majority of our RRSPs indexed.

Almost a year after this post was written, I realize we don’t live this value as much as I thought.  Over the last year I’ve invested in big blue chip companies like Procter & Gamble (PG:US), so my indexed RRSP is slowly eroding.  Except VTI, my account is becoming home to more U.S. dividend paying stocks every year.  On the flipside, my wife’s RRSP is almost 100% indexed and probably always will be.

• Keep some U.S. dividend paying stocks in our RRSPs.

See above.

• Maximize our TFSAs.

I’ve got my account done for 2012.  We’re actively working on my wife’s account.  We hope to have that maxed out by fall 2012.

• Keep some Canadian dividend-paying stocks in our TFSAs.

Absolutely!  We’ve got about six stocks DRIPping synthetically, buying more shares every quarter.  Unless these companies cut their dividend, I won’t be selling them.

• Don’t invest in anything we can’t explain to a 10-year-old.

We’re always working on this one although some experts don’t agree with me.

• Always keep taxes and inflation top of mind when making any investment decision.

I recently had a conversation with my parents about this.  A few of their friends were talking about investments and some of them said they prefer GICs to the stock market because you are guaranteed a return.  Fine, but I don’t plan on owning GICs or Canada’s Savings Bonds anytime soon because these products are losers to inflation.

• Reinvest all dividends and distributions whenever possible.

I’d like to see all my stocks (eventually I’ll own 40 or more of them) DRIPping.  That means my money is working for me full-time so I don’t have to someday.

• Avoid investing in any “hot stocks”.

People don’t “tip” companies like Bank of Montreal, Enbridge, Johnson & Johnson or Procter & Gamble; they don’t have to.

• Never own a mutual fund again.

Many mutual funds charge too much money.  Enough said.

• Only own companies that pay dividends.

I’ve read that dividends, over many decades, make up almost half of the stock market returns.  That’s one great reason to own them.  Another is; if you have a diversified portfolio you’re guaranteed some steady, passive income in good markets and in bad, although all stocks come with some risks.

• Minimize money management fees.

The money you don’t pay out in fees is the money you get to keep for yourself.  Do I need to go on?

•  Buy more bonds when equities are priced high.

Now is not the time to buy bonds in my opinion.  I’m looking for more equities with every stock market slide.

• Buy more equities when bonds are priced high.

See above.

• Put emphasis on building retirement income rather than portfolio value.

When I was younger I thought a large portfolio was the key to a successful retirement.  Looking back, I was brainwashed by many financial ads; I thought I needed I big “nest egg”.   What I recognize today, while portfolio value is important what I really need is steady income to live off of.   That’s what I’m starting to build month after month.

• Remember the stock market is unpredictable in the short-term and predictable in the long-term.

This is why I invest in broad market ETFs like XIU and VWO.  In fact, as I get older, I will probably invest in more ETFs.  You can read about my favourites here.

• It’s OK to splurge once in a while.

Heck ya.  My wife and I recently took a day trip to Vankleek Hill, about 1 hour east of Ottawa to visit my favourite brewery:  Beau’s!    Our day trip included a tour of the facility, some samples, some more samples, speciality beer purchases to enjoy and then a relaxing lunch on a nearby patio in the hot summer sun.  The cost of our day-trip?  Probably about $100.   The fun factor?   Priceless. 

What about you?  Are you living any of your financial values?

Thanks for reading and sharing this article.

 

Every once in a while, along comes a home improvement project you need help with.  I suppose that’s what professionals are for.

For example, last spring, we needed a new roof installed on our home.  During my lifetime, I’ve seen a few roofs installed but I’ve never actually installed one myself.  For a big, important project like that, my wife and I felt we needed to hire some of the best professionals in the business to protect our investment, our home.  After a great deal of research, we settled on a company and didn’t look back.  Almost a year later after the installation (and a fat line of credit along with it) we are happy with the product and felt the money was well spent.

Other home projects are often necessary but on a much smaller scale.  Fixing the backyard deck due to some safety concerns and installing a backup sump pump are some of the smaller projects we completed last year.  The latter, I could have probably done myself if I made the appropriate time to learn but I wasn’t comfortable with the job so we hired a professional plumber instead.  The plumber was from a reputable company in Ottawa.  I suppose that was mistake #1, never assume.

In any event, while booking the appointment with the company I informed them of the sump pump we wanted to install, a 1/3-hp submersible pump with an automatic float, fairly standard stuff so I’ve come to understand.  A sump pump in our home is essential because of the high-water table in our area.  Last spring, the only pump we had ran almost non-stop for about two weeks during the winter thaw.  Without it, we’d have a flooded basement.  This original pump worked just fine but we wanted a back-up since the original was 12 years old.  With specifications, the new pump and equipment in hand, the plumber arrived within a week of my phone call.  He quickly surveyed the situation, cut some PVC, installed the check-valve and the pump, tested it with me and was quickly on his way.   What he did in 45-minutes would probably take me an entire day.  Initially, the new back-up pump and the original pump worked perfectly in tandem and we were happy everything had gone to plan.

Fast forward to this winter…

Even though our sump pit was dry (no water in it) I figured it was good to test both pumps before the thaw of 2012.  We didn’t get tons of snow in Ottawa this winter but surely the pumps would be running all the same.  I filled the sump pit with water and triggered each automatic float.  Nothing happened.  I tried it again.  Nothing happened.  In fact, upon the second test, I heard the pumps running but they were sucking air, not water.  I was perplexed.  Both pumps had been working perfectly only 4 months before!  What on earth had happened?

I called the company that did the installation and explained the issue.  Within a few days they sent the same plumber who performed the installation to our house to troubleshoot the problem.  Upon arriving at our house a couple of weeks ago, the plumber said “it’s not uncommon to have an air lock in your line when a sump pump that is supposed to be submersed in water, is not.”  The plumber went on to say “all you need to do is make sure your sump pit is always filled with water.  That way no air can get inside the line.”  He proved his point by filling the pit with water, unplugging and plugging in each pump from the electrical outlet, releasing the air lock from each pump discharge line and then triggering the automatic float.  Everything worked.   The head-scratcher for me was, what if I’m not home to ensure the pit is always filled with water to perform this procedure?  The plumber’s response to my question was, “just check it every few days and it will be fine.  After a few weeks, the pumps will sort themselves out.  I see this all the time.”

Skeptical still, I said thanks for the no-charge troubleshooting and the plumber was on his way, again. 

I remained skeptical after his visit; something wasn’t sitting right with me so like an obsessive dog with a bone I went to the pump owner’s and installation manual.  I wanted to read step-by-step what the installation process was for these things and what the manual said about air locks.  In some fine print in the manual, to my surprise, I read the following in the “Pump Servicing” section:

Problem:  “Pump runs but does not deliver water.” 

Troubleshooting:  “These pumps have a small air vent hole in the impeller cavity to let out trapped air.  If this hole becomes plugged, pump may air lock.  To break the air lock, use a small screwdriver to clear hold in the impeller cavity.  As a secondary precaution in installations of this type – 1/16” hole should be drilled in the discharge pipe below the check valve.”

Huh?  What?

The plumber never drilled this hole.  I watched part of the installation process and I know he didn’t do this.  Why didn’t he?  Why didn’t he pursue this precaution during his second visit to our home to troubleshoot the air lock?

I was mad but also relieved because even though a professional did the installation, the amateur in me had a solution.

After reading a few online plumbing forums about this issue, I decided to do the work myself.  It was simple enough.  I drilled one 3/16″ hole (based on the forum suggestion) into each discharge line below the check valve.  You can see what I mean from this diagram courtesy of the Plumbing Forum:

After the holes in the PVC pipe were made for each line, I filled our sump pit with water and bingo – pumps operational!  I tested both pumps a couple more times, to ensure it wasn’t a fluke and sure enough, they were up and running.

I was relieved but also annoyed.  

What good is hiring a professional when they deliver amateur results?

I learned a few things from this small project that I’m going to try and remember for future projects if/when we need more help:

1. Like financial products in your portfolio, never assume past performance is any indicator of future performance.  A reputable company doesn’t always means reputable professionals who work at them. 
2. Make a list of questions about the product and service you are purchasing and make sure you ask those questions beforehand.  
3. Focus on problems you might encounter with a product or service.  No question is a stupid question when it comes to your home and the hard-earned dollars that go into it.
4. Ask for the owner’s or installation manuals for the product being installed.  Read the manual(s) thoroughly at some point, preferably before or at the time of installation.  Ask the professional any questions about what’s in or not in the manual(s) that you don’t understand.  Even if you can’t do the work yourself, the more you can understand about a product the better equipped you are if/when something goes astray.     
5. Don’t assume after any product or service work, everything is fine and it will stay that way.  Follow-up and keep an eye out for issues.  Challenge the product as advised.  Just like the financial products in your portfolio, risk comes with not knowing what you’re doing or monitoring.
6. Trust your instincts.  If something looks wrong, feels wrong, it probably is.  Don’t delay and get to the root causes. 

As with most things in life, you usually get what you pay for and ask for.  When dealing with professionals, or who you think are professionals, do your own due diligence, ask lots of questions and trust your instincts.  Your home is arguably the largest investment you’ll ever make, so take good care of it and make it last.

Have you ever had any experiences like mine?  Work done by a professional with an amateur result?

Thanks for reading and sharing this article.