Weekend Reading – Debt, tech boom, 4% rule, how to build a dividend portfolio and more!
Hi All,
Welcome to my latest Weekend Reading edition where I share some of my favourite articles from the week that was across the personal finance and investing blogosphere.
On the heels of the big tech boom highlights (making many people wealthy) that I shared in last week’s Weekend Reading edition, here I found a few good articles about debt and how to get started with investing.
Here goes – and enjoy your weekend!
Mark
On The Personal Finance Show, host Beau Humphreys talks about debt and wonders – how does someone get into debt anyhow?
Beau is right – debt is “a big deal”.
When it comes to some forms of debt, I’ve always been a believer that “life happens” and sometimes it’s not for the best for many of us. Healthcare crises, family emergencies, unplanned job loss or more can be crippling and life-altering changes that can leave many people, most people, in a massive long-term financial mess. Even the best laid plans can turn out horribly wrong through no personal wrong-doing. Thoughts on what Beau said in his podcast or my points above?
Another young reader asked me how I built up my income stream after reading about my July dividend income update. Well, full disclosure, this income stream took decades in the making! I’m saving and investing as part of my get wealthy eventually strategy.
You can read how I did that (and you can too).
But, more importantly maybe…I pointed her to this comprehensive post about just starting to invest – that includes a FREE ebook. I encourage all parents of millennials (and millennials themselves) to check out this post and download a copy. Let me know your thoughts on what the author mentioned!
Well done Matthew, a millennial busy staying invested and growing his dividend income stream. I also appreciate him being a big fan and strong supporter of this site on social media!
Respected financial writer Jon Chevreau wrote about the 4% rule on MoneySense recently. He reached out to a few other experts on this subject and concluded while the 4% rule is fine to some extent, the bigger challenge is “retirees need to get more comfortable with risk and tilt their portfolios a little more in favor of equities. With near zero returns on bonds, more capital is required to deliver comparable incomes…”.
To Jon’s point, I wrote some time ago that investors should be learning to live with stocks for just that reason. I think a bias to more equities in your portfolio vs. fixed income, even in retirement, is going to be rather smart for the decades ahead. Let me know your own thoughts on that…
Continuing with this theme, Ben Carlson wondered why would anyone own bonds right now?
Ben cites a few reasons but my favourite is in bold below with my reasoning:
- Bonds can help your investing behaviour – riding out stock market volatility.
- Bonds can be used to rebalance your portfolio; keep your portfolio aligned to your investing risk tolerance, and help you adjust it back to its target asset allocation (i.e., keeping a balanced mix of stocks and bonds).
- Bonds can be used for spending purposes – where some fixed income is “king” for major, upcoming expenses or spending.
- Bonds can help protect against deflation – since inflation is a killer for bonds long-term.
The main reason I would keep any bonds (and I don’t right now) in my portfolio is if you’re saving for a major purchase in a few years and would like rely on some form of fixed income between now and then to help with that purchase. Otherwise, an interest savings account in the short-term will do that. You should own more stocks than bonds for wealth generation…
Boomer and Echo wrote about past performance and your investing returns. A good complement and reminder to Ben’s post above on asset allocation and your risk tolerance:
“If you can’t stomach the idea of stocks losing 30% or 40% in a short period of time, then don’t put 80% or more of your portfolio in stocks. A balanced portfolio of 50% to 60% stocks and 40% to 50% bonds will lower that volatility and smooth out your investment returns over time.”
Good stuff by the guys hosting the Rational Reminder podcast to have DIY investor, author and public-speaker Andrew Hallam on their show.
I interviewed Andrew for my site a few times about how best to invest, how he invests (and why) and much more here – and I should have him back at some point. I will put that on my to-do list and see if he is game!
Dale Roberts from Cut The Crap Investing took at look at BMO’s stellar low-volatility ETF ZLB.
Reader question of the week (adapted slightly for the site)
Hi Mark,
I’m sure you get asked this type of question a lot, and I know you have discussed similar topics on your blog. However, I have not seen anything that’s similar specifically to the situation I’m in.
I have some large contribution room that remains in both my RRSP and TFSA. Based on your site, I feel the focus for me has been to maximize the TFSA as quickly as possible although there’s still about $20,000 to go; I think it should take less time to maximize this account than my RRSP. Fortunately, I’m in a good position to put all savings into investing for retirement now. I hope to continue with this goal in mind for about the next 8 years by making good and sound decisions.
However, is it prudent to move everything from TFSA to RRSP (in order to maximize my contribution room) only to start over again with the TFSA? Or, is it better to strike more of a balance between contributing to each account?
Your thoughts are much appreciated.
Great questions and personal case studies – keep them coming!
First off, all personal finance plans are personal. What might work very well for me might not be ideal for you.
That disclaimer aside, I continue to write on my site given the TFSA contribution room is available to any working Canadian (and can be a tremendous account to build wealth), I think all Canadians should strive to max out that account first, above and beyond any available contribution room inside the RRSP.
My thesis on this is simple:
- Owning, saving and maximizing contributions to a TFSA every year is admirable for any income-level; RRSP accounts tend to favour higher-income earners through the tax-deferral feature.
- Unless you are diligent in reinvesting the RRSP-generated tax refund, every single year, you might be better off using the TFSA.
So, (and again, this is my own thinking since you asked!) I suggest all Canadians work hard to max out their TFSAs, first, then focus on the RRSP contributions. That’s what I do. It could work for you too. I do this because I want my tax-free money (TFSA) working right away. I feel tax-free money compounding is better than tax-deferred money (RRSP).
Also, if you can easily max out your TFSA first, every year starting January 1st when contribution room opens up it probably means:
- you’re probably making decent money to contribute to your RRSP anyhow, and/or
- you’re disciplined enough to contribute to your RRSP and not waste the refund to appropriately maximize the tax-deferred RRSP account benefits.
If you can max out TFSA contributions and RRSP contributions in the coming years, 8 years or otherwise, I think you’ll be well on your way to realizing some great financial goals.
Good luck and happy investing to all.
Mark
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I'm looking to start semi-retirement soon, sooner than most. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Regular saving and compound interest always proves to be one of the best pieces of investment advice i heard. I heard it when i was young but didnt start saving till mid to late 20s so lost a good few years with going out partying.
I certainly partied in my 20s but by my 30s I started to get my financial act together 🙂
All the best!
Mark
Amazing how much debt the world is in. People get in to so much debt it amazes me why they do it.
I think people need to be aware of marginal rates but learn to think of their taxes at the average tax rate, especially when planning retirement. In 2019 our marginal tax rate was 25% but our effective tax rate was 6.5%. You have to look at all potential income sources during retirement and plan accordingly.
Yes, which makes my draw down strategy and which accounts to tap when very important for sure.
The form of debt can be a big deal. Debt from gambling, credit cards and consumerism is a big deal.
Debt used to buy potentially appreciating assets such as homes, stocks, land, businesses, education not so much.
The headline that Canadian debt to income ratio is 170%+ and growing is scary but I believe overblown for the most part. Better to look at debt service ratio (can you comfortably service the debt from your cash flow). Income security becomes the scarier issue then as Covid has brought to light.Most important is your debt to asset ratio. If you have several times more assets than you have total debt, debt is not that big an issue. For example I owe $200K in debt but OWN $600K in assets I have the ability to pay my debt 3 times over. If I have no assets to cover my debt or my income security to service my debt is threatened, that’s the real issue.
Remember you can be debt free with no cash flow. (House rich and cash poor comes to mind)
Work at growing your asset base and controlling your debt.
“Income security becomes the scarier issue then as Covid has brought to light.”
Yes it does. This is why I’ve decided to invest more now in hopes that if something were to happen to my job, other, then I could survive financially with assets in the bank and any severance from work. It was part of my these for writing this post:
https://www.myownadvisor.ca/how-im-preparing-for-a-global-recession/
We are fortunate to have several times in assets vs. debt but I still want my debt gone so I can consider any leveraged investing, maybe $50K or so to borrow to invest inside my taxable account. Hope to be debt-free/mortgage free in the coming 3-5 years.
I’m pretty sure I know what your going to say but I’ll ask the question anyway. If you are willing to leverage after your mortgage is paid why wouldn’t your consider leveraging now that you are just a few years away? Especially if you can get a secure HELOC for a lower rate. The $50K will only cost you $200 a month or so to service, invest in DGI stocks like cannew’s awesome books suggest and continue to pay your mortgage as always. Inside your taxable account you can claim the loan interest and create a tax refund on interest at marginal rate. You now have opportunity for capital gains and dividends. Once mortgage is paid off keep making mortgage style payments to eliminate the loan. If your property equity is worth $600K (guess) you are “risking” 8.3% of the value. Your property only has to appreciate 8.3% in total during the years you own it to cover the loan. Being the smart guy you are I’m sure you wouldn’t buy something silly. My HELOC is currently under 4% and you can buy most Canadian banks and get over 4% dividend easily. I think everyone with a nearly paid for home should have a HELOC and consider this option. Learn to take smart risks.
I’m leveraged with my investments. You’re right in that the even the ‘best laid plans’ can leave people in financial ruin, and it’s been a stomach churning experience (especially in April).
I think that leverage can be VERY powerful, if used prudently. I missed out on the tech boom with my leverage and instead invested in “safer” companies for the long run (banks, utilities, etc.).
I’m still on the younger side, and was at risk of losing my job early in the pandemic as I was still on probation at a new job I started at the beginning of the year. I was also relatively broke (10k in assets / networth, 0 debt) and knew this kind of opportunity was extremely rare. I was able to build myself a sort of safety net by ensuring that, at the very least, asset purchases through leverage would be able to service the loans on their own. It might take a little longer than I’d like, but if job loss happened, the loans would still be serviceable.
Went from about $70 a month in dividends to just shy of $6k / year in about 4 months. My leveraged assets have also appreciated in value to about a year’s worth of pay for me (with still plenty of leg room).
I still, thankfully, have my job and will be working on aggressive de-leveraging once the market starts to look expensive (I still see a LOT of value in certain sectors). Else, my current budget reduces my debt 3.3% a month – I can triple this number if need be.
Really admire your courage and good timing of the market. I was always thinking about leveraging to invest but never got enough courage to do so. With the current low interest, I figure the dividend income from a leveraged investment should be able to cover the interest and more. I think this is actually similar to buying a renting apartment, as long as the cash flow is positive, the risk is not that high.
Still, not enough courage to do that yet.
Thank you for the kind words! I think you’re right in buying an investment property, like an apartment to rent out. I got the idea from one of Mark’s posts where he mentions something along the lines of: “I pay bills to Enbridge. So why not own Enbridge and get them to pay themselves?”
My interest rate is 6.45% at CIBC. CIBC was returning greater than 7% at one point and I was like: “… Wait… Can I get CIBC to pay their own loan off and give me money just for taking one out?” I diversified at similar dividend yields in different sectors, just in case CIBC has to cut their dividend, but you get the idea.
I don’t blame you for not choosing to try leveraging, not sure I’d recommend it to many people, it’s really gut wrenching at times. I imagine you probably sleep MUCH better than I do.
Hi May.
If you do work up the courage to leverage try a very small amount that you can pay quickly. This works best if you can pay down the loan from regular cash flow and not from the dividend payout. Turn on the DRIP and forget it. Then just pay off the loan.
Thanks a lot for the advice. I am mortgage free right now and if I ever collect enough courage to leverage to invest, most likely I will not leverage the entire limit of my heloc but probably only 60% of it, and then I will borrow again from my heloc to pay the interest so for a very long time I don’t need to worry about that I cannot afford the interest. The time frame for this should be more than 10 years.
One problem for this is what would happen if I need to sell this house? I like my current house but I figure I will need to downsize when we are too old to take care of it. It’s a big house with about 4000 square feet.
We have a few hundred thousand for leveraged investing if we want to take advantage of it but I cannot see me going (back) into that much debt as I get older.
4,000 sq. feet is a big house for sure!
The way it works I think is similar to owning a rental house: you borrow money to invest in something that also pays you, as long as the cash flow is positive, risk is acceptable. Living in a big house is actually quite expensive, while I have to pay property tax, hydro, gas, maintenance etc., I also have lots of money locked in the house. So I am kind of thinking if I use heloc for investment, then maybe at least the house can support itself this way.
There are other ways I can make the house to support itself. E.g. I have two bedrooms in my basement which I used as guest bedroom. I can host some students and the income will be enough to pay all house related expenses. But that will be quite some work and also make my own life not so flexible. Leveraging heloc to invest, in the other hand, much less work.
Anyway, with so many uncertainties in the market and with coronavirus still around, now is not the best time to do this.
Fair points in terms of making the asset work for you.
I don’t blame you for avoiding leverage right now!
Hi May,
You can try testing out a small amount to get your feet wet first. I think my first leverage was for $1000 or so, just to learn about it, get some experience and test it out.
I’m actually looking into something similar for next year. I’m looking into putting a down payment and getting a mortgage. Plan on trying to rent out the basement or most of the house, using the rent for utilities and most of the mortgage, and then using the smith maneuver with a HELOC.
I plan on paying down my existing debt before trying this.
FWIW, I intend to do the same Jin. Pay off mortgage and then likely some leveraged investing at about $10K or so at a time. A few years away yet for that. In the meantime, just focus on maxing out TFSAs and RRSPs every year here and building a larger emergency fund.
Happy Investing!
I look forward to following your journey when you do try leveraged investing!
Keep you posted via the site!
I will probably take on some minor form of leveraging investing once the mortgage is done but I know other folks have been very successful with leverage – especially during this COVID-19 crisis when things tanked in March only to come back up now.
That’s good Jin but just be careful about leverage – buying assets are great but assets only tend to go up in the rear view mirror – as in over long periods of time. There is no guarantee that short-term real estate or stocks or other assets will rinse significantly in value short-term. Just my word of caution based on 20-years of investing experience. Bad things can and do happen!
Keep me posted on your progress!
Thank you for the advice Mark! I will! I plan on holding these stocks pretty much forever, I managed to get around a 6.9% yield on cost – a lot of the advice I got from reading your blog over the past year or so. Figured it was time to engage your community and say hi.
And, of course, thank you!
The TFSA vs. RRSP discussion really comes down to what is your marginal tax rate today versus what it is likely to be when you retire. For people earlier in their careers, TFSAs are a better option, but for middle-aged people or those who have topped out their careers it is more likely that they are in higher tax brackets now than they will be when they retire so the RRSP makes more sense. Ideally you can get to the point where you can do both.
Agree. If one is making more than $100K a year and contribute full amount of RRSP, then just the tax reduction from the RRSP contribution alone will be more than enough to max out TFSA.
The first thing we do each year is maxing out all registered accounts, RRSP, TFSA, and RESP. Will continue to do this before retirement.
Talking about RESP, the other day I just recognized that if we retire early then we have to pay physio, dental and vision care, etc. on our own before the kids go to university if we retire before that. While we will save some working related expense, without extended medical insurance, some other extra cost. Well, another disadvantage of having kids too late. Maybe just delaying retirement for one year so that we have enough money to cover this extra cost.
I agree May, Jan 2nd is my favourite day of the year since it is when I can top up TFSAs, RRSPs, and RESPs. I imagine most viewers of this blog are in the same boat or heading in that direction.
You raise a very good point of the value of working a couple of years later to maintain access to benefits too. I have a couple of kids in university and this is a consideration for us too. In the grand scheme of things, for people as proactive and investment-focused as you are, this is just icing on the cake – the core is already there.
Yes, hopefully work will “keep us” for a few more years and even then, hopefully we have good relationships with others as to get/keep some part-time work there. That would be ideal: transition to semi-retirement slowly by going for full-time work to part-time work and then to whatever work we want, when we want. That’s is our ideal path as soon as our mortgage debt is gone in 3-5 years. In the meantime, max out x2 TFSAs, x2 RRSPs and have some fun after those investing obligations are done. I figure we deserve it and life is short 🙂
Continued success to you and keep me updated on how your plans are coming along BartBandy.
You are on an excellent path May if you can do this in the coming years: “The first thing we do each year is maxing out all registered accounts, RRSP, TFSA, and RESP. Will continue to do this before retirement.”
Ideally, yes, do both, I agree but if you had to pick one and could only max out just one given your income-level (assuming that is lower) then the TFSA makes more sense to me. I do fully see where you are coming from with the marginal tax rate though.
We are in the exact opposite position. As high-income earners w are only contributing to our RRSPs right now. That is also in part due to our real estate investment portfolio. Because our rental properties generate cashflow if we didn’t contribute to an RRSP to decrease our marginal tax rate we would owe a lot of money at tax time. Been there done that – not again thank you. But we know that our strategy works for us and won’t work for everyone. And I agree, if you are not a high-income earner (or diligent with your tax refund) then TFSA is best.
We are also 100% equities in our RRSP. With the bond rates being as dismal as they are I would think that you are actually losing money being invested in bonds because they are not keeping up with inflammation. Is 100% equities “riskier”? Probably, but again it works for us.
Another great round-up Mark – lots to read this weekend.
Thanks Maria.
You own a number of properties I recall and I can see why you focus your RRSP vs. TFSA – but even then, only so much contribution room right?
“Is 100% equities “riskier”?” Short-term, yes, but long-term as in 10 or 20-years history says no way and FAR more predictable than bonds actually 🙂
Continued success to your plan!
Total agree with Mark, that one should max out their TFSA before considering any other investments (except matching a company RRSP). I can’t imagine why anyone would even suggest moving TFSA funds to an RRSP.
Cannew, I echo your last line. Why would you move TFSA to RRSP?
Also the funds in a TFSA are accessible tax-free in case of an unexpected need/emergency while those in a RRSP are not.
Right or wrong here is what I did. In my last few years of teaching I stopped RRSP contributions and put money into TFSA. In my last year I used TFSA money to fund my final RRSP contribution ($17K)since I had created more room and was at my max marginal rate of 30.5%. That created a $5185 refund which I used to pay some debt. I then had the opportunity to do a pension buy back for my sub teaching year which cost about $17 000 and I simply transferred that money from my RRSP into my pension. There are no tax implications on this. This increase my annual pension by $2000. That is a return of $7185/$17 000 = over 42%. I also made that $17K partially indexed to inflation by moving it to the pension.
Interesting play. Is that the first year you’ve done that?
For the coming couple of years anyhow we’re going to have a simple plan of maxing out both (x2) TFSAs every January 1st and then striving to max out contributions to RRSPs early during the year as well. Then simply pay down debt and live our lives. My financial projections have us at semi-retirement in 3-5 years using that strategy.
I think this depends on personal status. Let’s assume $10K in TFSA, for 20 years, return 6% each year, there will be $32K tax-free. If moving to RRSP, assume a marginal rate 35%, contribute the 3500 tax return into TFSA. 20 years later, assuming the marginal tax rate will be lower, let’s say 20%, then the money can be used will be $32K * 0.8 = $25600, plus about $11K in TFSA tax-free, so $36.6K after tax. It will be $4600 more.
Basically I think this is a math question, with different variables, you will get different answers.
Taxes are definitely a wildcard in any income plan, so I agree, so many variables you could have many answers!
Mark
Ya, I’m not sure where they were coming from on that but I think investors need to simplify their plan to the extent possible – a simple plan has a better chance of long-term investing success.
How is the income investing coming along? Sticking with your same basket of CDN stocks through COVID-19?
Stay well.
Mark
Still holding the same stocks and doing well.
I think most people are deluding themselves that marginal tax rates 25 years or more in the future will be less than they are currently. Worse, should their RRSP grows as expected or they contribute significant amounts, they will be likely be required to draw large amounts, which will keep them in a high marginal tax rate.
I don’t see any world cannew where the taxation will be less than now, especially with demographic shifts now well underway and COVID-19 to deal with. I could be wrong but I’m absolutely planning for higher taxation as I get older.