Stocks went down. Real estate went up. Yet I sold stocks to buy real estate. Welcome to 2022, where things no longer make sense.

That’s right, we made a big decision earlier this year to purchase a lot and build a new house. Once we decided we were serious about taking this step (as in, we found a lot, builder, and floor plan that we liked at a price we could comfortably afford), we sold all of the investments in our TFSAs and moved them to a high interest TFSA at EQ Bank.

We also secured financing so that we could meet the builder’s draw schedule without having to sell our existing house before the final draw. We’ll use a mix of our existing savings, plus a line of credit from our home equity.

The building process should take about 10 months. We haven’t done much yet, other than select our appliances (supply chain!), decide on exterior colours, and pick out windows. We’re eager to see more activity this summer and into the fall.

It has been a weird start to the year, with inflation soaring and stock and bond markets crashing. We’re focusing on what we can control – earning enough in our business to meet our spending and savings goals – and trying not to sweat the markets or the price of gas, avocados, and coffee.

Our business earned as much as we expected in the first six months of the year. We intentionally planned to earn a bit less this year due to our revenge travel tour that included trips to Maui, Italy, the U.K, and Paris. So far, so good.

I planned to invest about $40,000 in our corporate investment account this year, but I’ve front-loaded most of that to take advantage of lower stock prices. We’ve already contributed $32,000 so far this year.

We’re no longer contributing to our RRSPs (due to paying ourselves dividends for now), so those accounts are just sitting there taking a beating this year. 

Indeed, it turns out that selling stocks in January was fortuitous timing in our TFSAs because global stocks are down about 17% on the year.

Finally, we had our house appraised so we could increase our home equity line of credit. If you’ve followed these updates you’ll know I’ve kept our house value at around its purchase price for many years. Well, the Lethbridge market finally took off last year and our appraisal came in at $530,000. Comparable homes are selling in the $560,000 range.

I’m comfortable moving up our home value based on the appraised value, and that gives us some wiggle room in case home prices fall in the coming year.

Now, let’s look at the numbers.

Net worth update: 2022 mid-year review

Total Assets – $1,461,979

• Chequing account – $5,000
• Savings account – $60,000
• Corporate investment account – $205,313
• RRSPs – $250,705
• LIRA – $166,225
• TFSAs – $170,586
• RESP – $74,150
• Principal residence – $530,000

Total Liabilities – $164,712

• Mortgage – $164,712

Net worth – $1,297,267

This report is going to look very different at the end of the year. Our draw schedules will begin soon, which will deplete our existing savings. We’ll end up with more debt due to carrying the line of credit for several months before we sell our house. Hopefully, by March 2023, we’ll end up with our “new normal”, which will be a more expensive principal residence, a bigger mortgage, and empty(ish) TFSAs.

Our 10-year plan is to stay in the new house while our kids finish school and decide where they want to go for their post-secondary education. We’re open to the possibility of moving to be closer to them, or to do our own thing. We’ll see when the time comes. In any case, the new house will better suit our needs and we’re excited for this next chapter of our lives to begin.

Now let’s answer a few questions about the way I calculate net worth:

Credit Cards, Banking, and Investments

We funnel all of our purchases onto a few different rewards credit cards to earn points on our everyday spending.

Our go-to card is the American Express Cobalt Card, which we use for non-Costco groceries and gas. I’m also using the HSBC World Elite MasterCard, which came with an incredible 100,000 point welcome bonus. Finally, we look for the best credit card sign-up bonuses and time our large annual spending (car and house insurance) around these offers. One I’m using currently is the American Express Aeroplan Reserve Card.

Our joint chequing account is held at TD, along with our mortgage and kids’ RESPs. My wife has her own chequing and savings accounts at Tangerine. Our high interest savings account is held at EQ Bank, which pays 1.65% interest.

My RRSP and TFSA is held at the zero-commission trading platform Wealthsimple Trade. My LIRA is held at TD Direct, and the corporate investment account is held at Questrade. My wife’s investments are held at Wealthsimple. You know all of this from my post about how I invest my own money.

RRSP / LIRA / RESP

The right way to calculate net worth is to use the same formula consistently over time to help track and achieve your financial goals.

My preferred method is to list the current value of my RRSP, LIRA, and RESP plans rather than discounting their future value to account for taxes and distributions.

I consider a net worth statement to be a snapshot of your current financial picture, so when it comes time to draw from my RRSP/LIRA and distribute the RESP to my kids, my net worth will decrease accordingly.

Principal Residence

We bought our home in 2011 for $424,000 and developed our basement a few years later, increasing its value to ~$450,000. The next year I bumped up the market value by 2% (which is still less than its city-assessed value), but the local real estate market has since flattened – with nothing selling in our price range – and so I’ve left the value at $459,000 for the past three years. As I explained, we recently had a property appraisal and I have increased the value to match that appraisal at $530,000.

Final Thoughts

I’ve been warning readers for several years that we should probably lower our expectations for future returns. Trees don’t grow to the sky, as they say. That’s why I’m not surprised at all to see global markets fall this year after three years of exceptional returns.

Focus on things you can control, like your savings rate. Your investment portfolio and net worth will fluctuate up and down in the short-term, but what you want (at least in your accumulation years) is to keep the needle moving forward over the long-term.

Money invested today has a higher expected return than it would have 6-12 months ago. Take comfort in that. I know I do.

We’ll continue following our plan, investing what we can in our corporate investment account while preserving cash on our personal side of the ledger for upcoming house expenses. We want to put a sizeable down payment onto the new house and have money left over to do the landscaping, etc. Then we’ll transition into that new chapter, with a new (larger) mortgage payment, and start to fill up our TFSAs again. 

No, I’m not asking how you’re doing (sorry, I know everything sucks right now!). I’m talking about your investments. Active managers love to tout their ability to capture all of the upside of the market while deftly avoiding the downside. We know empirically that is not the case (the SPIVA scorecard shows that more than 90% of equity funds underperform their benchmark over 10-year periods) but individual investors still buy this sales pitch hook, line, and sinker.

Global stock and bond markets are down significantly this year. Could a skilled investor have safely steered his portfolio through these choppy waters to avoid major losses? Could he have even made money? Let’s take a look at year-to-date market returns across different countries, sectors, and asset classes to see what’s up with your investments, if anything.

Stocks by region

Canadian stocks have held up fairly well compared to the rest of global markets. That’s mainly due to the performance of energy stocks, which we’ll get to later. Still, the broad Canadian stock market (represented by XIC – iShares Core S&P/TSX Capped Composite Index ETF) is down 9.67% year-to-date.

U.S. stocks had an incredible run from 2009 to 2021, which prompted many investors to change their equity allocation to only include U.S. stocks. Unfortunately, this year has not been kind to U.S. equities, and the S&P 500 (as represented by XUS – iShares Core S&P 500 Index ETF) is down 19.70% year-to-date. 

International stock returns have largely trailed Canadian and US stock returns over the past five years. This year, so far, international stocks (represented by XEF – iShares Core MSCI EAFE IMI Index ETF) are down 18.32%. 

Finally, emerging market stock returns have arguably been the weakest amongst all other equity markets. This year is not much better, as emerging markets (represented by XEM – iShares MSCI Emerging Markets Index ETF) are down 15.34% year-to-date.

Stocks by Sector

One active investing strategy involves rotating the investment portfolio in and out of different sectors. The idea being that one could correctly time the movement out of a falling sector (like technology) and into a rising sector (like energy). Let’s take a look at the year-to-date performance of different sectors and styles to see this in action:

Speaking of technology, these stocks were all the rage since at least 2019. The famous FAANG stocks led the way, but other tech stocks also emerged as the NASDAQ returned 37%, 45%, and 27% respectively over the past three years. 

But all good things must come to an end, and tech stocks have been absolutely crushed this year. The iShares NASDAQ 100 Index ETF (XQQ) is down 31.43% so far this year, which has contributed to the overall drag on the U.S. stock market. Even in Canada, Shopify briefly became the most valuable company in the country before its share price plummeted nearly 73% this year.

Canadians love investing in big banks as they are seen as safe, blue-chip, profit churning, dividend generating stocks. The iShares S&P/TSX Capped Financials Index ETF (XFN) holds 29 of Canada’s largest banks and insurance companies. It’s currently down 11.14% year-to-date, so it has underperformed the broad Canadian market by about 1.5%.

What about utilities? We all need to heat our homes and keep the lights on. The iShares S&P/TSX Capped Utilities Index ETF (XUT) holds 16 of Canada’s largest utility companies. It is currently down just 2.85% year-to-date, which is nearly 7% better than the broad Canadian stock market.

Energy stocks had a rough 2020 – remember when the price of oil briefly went negative for the first time in history? Energy stocks lost nearly 35% in 2020 before rebounding in a big way in 2021 – rising by an incredible 83%. So far this year, energy stocks have continued their strong performance with a return of 43.69%. That outperformance has started to slip, though:

It’s a reminder of the highly volatile nature of energy stocks. From June 2008 to April 2020, energy stocks were down a whopping 89.61%.

Dividends

Canadians also love their dividends. But how have dividend stocks held up in this market environment? In Canada, about the same. The iShares Canadian Select Dividend Index ETF (XDV) holds 30 of the highest yielding companies in Canada. It is down 9.22% so far this year.

iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) holds about 94 Canadian companies that have increased dividends for at least the past five years. CDZ has performed better than the overall market, but is still down 6.93% year-to-date.

On the U.S. side of the border, iShares US Dividend Growers Index ETF (CUD) holds 118 high yielding U.S. stocks that have increased dividends for at least 20 consecutive years. CUD is down 11.23% so far this year, which is about 8.5% better than the S&P 500.

Even better, the iShares U.S. High Dividend Equity Index ETF (XHD), which holds 75 high dividend yielding U.S. stocks, is down just 3.42% on the year.

Bonds

Rising interest rates have smacked bond prices in the face, leading to double-digit losses over the past 6-12 months. 

Short-duration bonds are less sensitive to interest rate movements and held up better than aggregate bonds and long-duration bonds. 

Indeed, the iShares Core Canadian Short Term Bond Index ETF (XSB) is down just 5.02% year-to-date. XSB has a weighted average maturity of 3.27 years.

Moving up the curve we have the iShares Core Canadian Universe Bond Index ETF (XBB), which was a weighted average maturity of 10.2 years. XBB is down 13.53% so far this year.

Finally, the iShares Core Canadian Long Term Bond Index ETF (XLB), with a weighted average maturity of 22.73 years, is not surprisingly the worst performer of the bunch and is down a painful 24.10% this year.

Alternatives

Other asset classes, like REITs and gold, have long been thought of as inflation hedges and may have been considered as part of a diversified portfolio. But how have these alternatives to stocks and bonds held up this year? The results are mixed.

The iShares S&P/TSX Capped REIT Index ETF (XRE) holds 19 Canadian REITs. The fund had a banner year in 2021, returning 34.2%, but has struggled so far in 2022 and posted a negative return of 20.28%.

The iShares S&P/TSX Global Gold Index ETF (XGD) holds about 47 gold producing companies. The fund is roughly flat on the year, down 0.36% as of June 20, 2022.

Final Thoughts

One of the dangers of looking at past performance is that we fall victim to performance chasing. That’s what led people to abandon perfectly sensible globally diversified portfolios to invest solely in U.S. stocks, or to add an extra dash of technology stocks to their holdings, or to dabble in crypto and other individual stocks throughout the pandemic.

Listen, we can’t go back in time and capture past returns. All we can do is invest with future returns in mind. Do you know which regions, sectors, asset classes, or individual stocks will outperform in the future? I don’t. That’s why I hold a small slice of them all by investing in Vanguard’s All Equity ETF (VEQT).

Related: Exactly How I Invest My Money

Here are my takeaways from looking at what’s up with your investments:

1. Past performance tells us very little about expected future returns
2. Stock returns are mostly random
3. Cycling in and out of regions, sectors, and asset classes is a guessing game. Good luck predicting which investments will outperform over the next 6-12 months

Even worse is trying to time the markets in general by selling everything and moving to cash. The typical argument is that you’re going to wait until things “settle down”, but when is a market of risky assets that are priced daily truly calm and settled?

Don’t fall into the greed and fear trap:

In 2020 and 2021, this was characterized by investors plowing money into technology stocks. Now that tech stocks are getting crushed, investors are looking for the next thing. Today, that looks like energy stocks. But energy stocks are already up big (an incredible 425% from March 2020 to June 2022). Do you think your experience with energy stocks will be similar if you buy in today?

Manage your expectations. Vanguard’s VBAL posted double-digit returns in 2019, 2020, and 2021. It’s currently posting a negative double-digit return for 2022. The annual return since inception is 4.53%, which is pretty much exactly the expected return I use for a balanced portfolio in financial planning projections.

Similarly, Vanguard’s All Equity ETF (VEQT) posted double-digit returns in 2019, 2020, and 2021. It’s currently down double-digits in 2022. The annual return since inception is 10.21%, which is still much higher than the 6% expected return I use for an all-equity portfolio in financial planning projections.

What’s up with your portfolio this year?

I got a three-month head start on working from home after I quit my full-time job in December 2019. At first, I worked from a laptop at the dining room table. It wasn’t ideal, especially when our kids were sent home for online school.

We later carved out a section of the kids’ playroom and turned that into an office with two small desks, and then eventually upgraded our desks, chairs, and computers. It’s still not ideal, but it works.

We also turned a spare room in our basement into a home gym after our regular gym shut down. We have a bike, a treadmill, a bench, adjustable dumbbells, and TRX straps. We even installed some mirrors and put up a “Come With Me If You Want To Lift” decal on the wall to complete the vibe.

But, the gym is located right below our sunken living room and so I can’t lift my arms over my head without hitting the seven foot ceiling. Again, not ideal.

Like many people who’ve spent more time at home over the past two years, we have an ever increasing list of annoyances about our current living arrangements. That, plus our kids graduating out of their current schools next year, got us thinking about making a change.

We started talking to a local home builder that builds in a nearby community that we like. They have a beautiful floor plan with a custom office and gym that really suits our style and taste. After some back-and-forth we signed a purchase agreement last month. Looks like we’ll be moving in about 10 months.

Now, I know what you’re thinking. Why would you want to make a big move in this economy? 

Buying a home is as much a lifestyle decision as it is a financial decision. Our current house served its purpose for the last 12 years while we raised a young family. Now we’re in a much different place with different needs. From a lifestyle perspective, we need to make a change.

Financially, we need to start with a reasonable budget for the house and determine how we’re going to fund it. How much are we going to put down, and what will our new mortgage payment be? Can we handle the payments if interest rates rise above 5% or 6%? 

We had our financing approved specifically so we don’t have to sell our current house before we move into the new one. But what if we can’t sell our house, or the real estate market drops by 10-20% (or more)? Do we take the price hit and sell, or do we rent out the house for 1-2 years and wait for prices to recover.

The new house comes with a draw schedule for deposits. We’re using a portion of our own funds, a portion of existing home equity, and a portion from a new draw mortgage.

We decided to use the funds in our TFSAs rather than withdrawing more from our business. Mercifully, we transferred our TFSAs from an all-equity portfolio into an EQ Bank high interest TFSA in January. We’ll tap into those funds first for the initial draws before we dip into the line of credit and new mortgage.

We still have more than $650,000 in retirement savings invested across our RRSPs, a LIRA, and our corporate investing account (that number was much higher six months ago), so we’re not at all jeopardizing our retirement plans.

Our new mortgage payment won’t cut into our travel budget or stop us from saving more for retirement (you better believe we’ll fill up our TFSAs again).

While we’re excited about this new transition, we’re also nervous about interest rates and inflation, stock markets, and real estate prices. But I also remind myself that we have a financial plan, and this transition fits within our plan and still allows us to live the life we want to live (including raising my arms over my head in the gym). 

Besides, buying a home is a transaction typically measured over 10-25 years. It’s not reasonable to expect the economy to be perfectly sound throughout that time. Interest rates will move up and down. We will experience a recession or two. House prices will rise and fall.

We can’t time that with any precision, so we make the best decision we can (both lifestyle and financial) and move forward.

I’ll be sure to share more about our home building experience and my thoughts on down payments and mortgage terms and everything else housing related as we get further into the process.

This Week’s Recap:

Last week I told you to stop checking your portfolio and I think that’s good advice to follow for the foreseeable future.

My commentary is featured in this article on why young investors shouldn’t focus solely on dividend stocks.

From the archives: Addressing major gaps in your retirement plan.

Promo of the Week:

I used to meticulously study the rewards credit card market looking for the best card to use for groceries, gas, dining, travel, etc.

The golden age of credit card rewards are long behind us, I think, and so now I focus on having one core Visa and MasterCard, which are widely accepted everywhere, and then I also hold a suite of American Express cards for their much richer rewards.

The Amex Cobalt card is my favourite. My wife and I each hold one and aim to spend $500 each on groceries with the Cobalt card every month. The Cobalt card pays 5x points on groceries. Those points can be converted to Aeroplan miles, which I value at 2 cents per mile when redeemed for flight rewards.

$12,000 spent on groceries each year gives us 60,000 Membership Rewards points. We transfer those to Aeroplan (1:1, so 60,000 Aeroplan miles). 60,000 Aeroplan miles are worth $1,200 in flight rewards. So we’re technically getting a 10% return on our grocery spending. No brainer.

In the first year that you hold the Cobalt card, you’ll get 2,500 bonus points for every month you spend $500 (up to 30,000 points in a year). So, if you follow our spending pattern, you’d earn 30,000 points for your regular spending, plus 30,000 bonus points in the first year. Not bad!

Sign up for the Amex Cobalt here.

Weekend Reading:

A couple of good reads from Dimensional. First, is there a light at the end of the inflation tunnel?

Next, a look at market returns through a century of recessions.

Ben Felix explains why dividends are irrelevant as a predictor of differences in expected returns:

A nice piece by Michael James On Money who explains what you need to know before investing in all-in-one ETFs.

A question I get from time-to-time: Should you borrow to invest with the Smith Manoeuvre? I suggest doing a risk assessment that includes the possibility of interest rates rising, stock markets falling, you losing your job, and changes to rules and regulations.

I loved this article by Adam Collins on why perfectionism ruins portfolios.

Justin Bender reviews the pros and cons of two of the most boring portfolio assets – Bond ETFs and GIC Ladders:

A shocking CBC Go Public report showed that Canada’s big banks are more likely to upsell racialized, Indigenous customers.

Finally, a look at why more retirees are choosing to go back to work.

Have a great weekend, everyone!