Category Archives: Investing

The Stock Market Melted, Now What?

Well that was interesting.  I generally ignore the stock markets most of the time except for my monthly net worth posts where I login to my accounts and check the balances.  Yet even the current media coverage on the stock market decline managed to pierce my fog of ignorance a bit earlier in the month than I’m used to.  So yes, the TSX index is down like 10% or more from its recent peak.

First off, I don’t panic. In fact, I go back to my previous notes about my emergency plans and what the trigger is.  You know that plan you wrote down when things were going well and you were calm and rational…unlike now where your mind seems to be moving like a squirrel on a double espresso.  And there is black and write is my trigger point which is 10% decline in our portfolio, so while my TSX index is down over 10% I will need to check if my portfolio is down that far yet.  Given my bonds I doubt that the damage will be that bad but I will confirm that tomorrow.

Yet the timing of this does suck.  I was supposed to be re-balancing my portfolio next week and selling some investments to provide cash for next year.  So what do I do?  Well looking at my emergency plan the answer is simple: nothing.

Pardon?!? Yep, the answer is I’m doing nothing.  I’ll just sit back and wait until the US mid-term elections are done and the world just calms down a bit.  In the meanwhile I still have lots of cash in my savings account to live on in the short term and that gives me time to push off pulling money out of my investments until later on in November.  Of course the delay is more psychological than real as I will be pulling money out the bond part of my RRSP.  What I’m really delaying is the re-balancing of my RRSP accounts as I don’t want to re-balance to a stock market blip that will put my off my planned percentage split of investments five minutes after I finish the transactions.

So I might be “missing a buying opportunity” or “trying to time the market” by delaying my re-balancing but the fact is I wrote out a plan back when I was much more calm which said this: when your portfolio goes down 10% or more than you trigger the emergency plan.  Don’t sell investments.  Sit down, take a deep breath. Cut back on optional expenses (if you feel the need to do ‘something’).  Use your slush fund to pay expenses in the short term (if required).  Keep the long view and consider your options: perhaps pick up some part time work or a contract position and consider using debt as a medium term measure if the decline goes on a for an extended period of time.  Keep in mind, you are in this for the long run so don’t do anything stupid in the short term.  Sit on your hands if you have to but DO NOT touch that ‘sell’ button.

See “rational past me” knows “stupid panic current me” very well and wrote out just what I needed to hear: don’t do anything.  Sit tight and if you need to do something work on something to give you some income or perhaps look at your spending in the short term to give yourself a sense of control in a chaotic time.

That is the real value of writing out an investment plan.  It doesn’t have to be long or complex but it should be your ‘go to’ document when things hit the fan and you don’t know what to do.    So what does your investment plan say to do right now?  Or how are you reacting or not to this stock market decline?

Life After FIRE – One Year Review – Part II

Well welcome to part II of my series on my one year of early retirement.  Today, we get into some of the nuts of bolts of how this entire idea of early retirement works: let’s talk about the money.

So in the interest of a proper review let’s look at where I was at during the end of Sept 2017.

  • Investments: $595,030
  • Net Worth:$990,030
  • Spending Previous 12 months (less renovations):$35,305

Meanwhile, my end of August 2018 numbers were:

  • Investments: $619,850 (increase of 4.2%)
  • Net Worth:$1,014,850 (increase of 2.5%)
  • Spending Previous 12 months :$35,814 (increase of 1.4%)

Of course keep in mind I was officially on vacation for my first six weeks of early retirement and getting paid and still saving so the comparison to exactly one year ago is a bit off.  But overall the investments and net worth went up even with the choppy stock market of the last  12 months.  Of course I was sort of hoping to see my spending go down a bit not up during the first year but such is life.

A good part of our family’s income for the year was my wife’s daycare business which she has chosen to keep doing for a few more years (roughly $8000 for the year).  Then the rest came from cash we had pre-saved for the year and dividend income (roughly $10,000).

Now according to my last net worth update I’ve exceeded my goal for the year as our money in from investment gains and income was 108% of our spending. This was even with our spending being a bit higher than predicted and our investment returns did lower than expected. Of course this is somewhat of an illusion because in fact it is only because without my tax refund of just under $4000 this won’t have occurred, with out that I would have been under my target. And of course going forward that large of a tax refund isn’t like to happen again as it was somewhat a left over from my previous job. So am I screwed going forward? Not really.

Why? Well there are two items that come into play. First the low investment returns, had those been closer to my expected long term average of 4.5% we would have still covered our spending without the tax refund. I purposely left some slack in the numbers to cover this very scenario. The second reason I’m not really screw going forward is I’m expecting some additional income in the future.

The two main increasing sources of income will be when I actually like publish a book or two (or take on some other ‘fun’ work which pays) and our Child Tax Benefit is set to swell dramatically in 2019 (estimates have it increasing from around $340/month to closer to $1000/month).  Also we have stopped adding money to our kids’ RESP account as of this summer so know we can actually use our current Child Tax Benefit for our kids day to day expenses.  We stopped adding money to the RESP because we broke our $80,000 target (the actual account balance is closer to $80,500 if you want to know).  Of course a concern would be changing of the Federal government in the 2019 election, which even if they did roll things back to the old program amount we would still get around $730/month.

So going forward we should definitely have more income coming in even if our spending stays at the current level.  Later this year I’ll take some cash from my RRSP account to fill up our high interest savings account which we use to help ‘pay’ ourselves an income twice a month.  I use automatic transfers twice a month to simulate a paycheque.

So short term, I really don’t expect any problems for the next year or two.  But with the long term we do have a potential issue that if our investments continue to perform below our planned long term average for the next five years my wife’s full retirement might get delayed.  Yet even if that did occur we do have options like me doing some part time work to help boost savings and/or downsizing the house or any of my other back up plans.

The point is we will deal with that if it occurs in the future.  Life never goes according the plan.  You just adjust as you go which is honestly how we go to this point in our lives.  We adjust as things happened.

Any questions on the money side of things?  Or any other questions you would like to know about? If so, please ask in the comments.

ETFs and RRSPs

I sometimes take it for granted you the reader understand the alphabet soup of abbreviations that I use on this blog and while I do try to remember to define them in most posts I know I fail to do that once in a while.

So today I’m going to go discuss the basics of how we use Exchange Traded Funds (ETF) in our Registered Retirement Savings Plans(RRSP).  But before we dig into the specifics I should do a quick over view of what those both are.

First the RRSP is just an type of investing account. The RRSP is basically a glass you can put different investments into such as bonds, stocks, mutual funds or just cash as a savings deposit.  So you don’t buy an RRSP, instead you buy an investment to put in an RRSP.

The RRSP account is nice because of two main features: it gives you a tax refund and it allows your money to grow tax free.  The first point most people understand in basic terms. You put money in an RRSP during the year and when you file your income tax return you let the government know about that deduction and they give you a refund on your taxes for the amount contributed.  In short, if you put in $1000 into an RRSP the government pretends you earned $1000 less that year and gives you back the income tax you paid on that $1000.  The rate they use is the rate you paid on your last dollar of income (other wise know as your marginal rate).  If you are not sure what your rate is look it up on these tables.   After the money is inside the RRSP account it then grows tax free while in there, but that is a bit of catch with RRSPs that few people understand when it come to taking the money out.  When you pull the money out of the RRSP you then owe income tax on that money.  Why? Basically when the RRSP allows you to defer income tax to a later time (it doesn’t let you avoid it) which is why they give you the tax refund after you put money in.

A quick aside, the Tax Free Saving Account (TFSA) is similar to an RRSP in the respect the money grows tax free.  The big difference is there is no tax refund on a TFSA contribution because you don’t pay income tax when you take the money out.  You don’t defer the income tax because you already paid that before you put the money inside the TFSA.

Now putting that aside, what the hell is the ETF?  Basically an ETF is exactly as the name implies it is an Exchanged Traded Fund, which doesn’t make a lot of sense to most people. So in short form I tell people image a company stock and an index mutual fund had a baby, the results would be a ETF.  A lot of ETFs are index based mutual funds that happened to be traded on the stock exchange like a stock.  So they have a ticker symbol assigned to them and you can buy them via any self directed investment account either at a bank or a discount broker and you pay a transaction fee to do so.  Of course you pay that fee each time you buy some or sell some of the ETF.

So why are ETFs things so great?  In two words: low fees.  I mean like VERY low in some cases.  I think most Canadians understand we pay some high mutual fund management fees.  Over 2% per year is common.   While Vanguard’s Canadian Index (symbol VCN) management fee is a mere 0.06%.  No that isn’t a typo.  Yes some ETFs are higher and around 0.25% but that is still a LOT less than than 2% or higher.  So by keeping your fund fees very low you end up with more money in your accounts each year and they grow faster than a typical mutual fund.  The downside is the transaction fees to buy the ETF.  So often people suggest you wait to change over to ETF investing until you have $25,000 to $50,000 to invest in total so your transaction fees costs don’t exceed your savings on your lower management fees.  The amount you need depends somewhat how often you contribute to the account (if only once a year you can get away with the lower amount).

ETF also come in fixed income types so it is entirely possible to have your entire portfolio in ETF with rock bottom fees which is exactly what my wife and I did with our RRSP accounts.  Our portfolios are dead simple and only consist of four funds.  One for the Canadian stock market, one for the US stock market, one for international stocks and finally one for fixed income.  We aim for 40% fixed with 20% in each of the other funds.  So overall more of our money stays in our self directed accounts due to low fees and they allows them to grow a bit faster than most people.

So I hope that helps explain a bit more of how our RRSPs work with ETFs.  Let me know if you have any questions.