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!
We’re nearly halfway through 2022 and the year has not been kind to investors, to say the least. Global stock markets are suffering their worst prolonged losses in recent memory. The S&P 500 is down about 18.5%, international stocks are down about 17%, and emerging market stocks are down about 15%. Domestic stocks have fared better, but the broad Canadian market is still down about 4% this year.
Meanwhile, bonds have not been a safe haven as rising interest rates pushed bond prices down. A broad Canadian bond index is down almost 13% this year, while short-term bonds are also down about 5.5%.
What’s an investor to do?
For starters, stop checking your portfolio so often. Investors who focus too much on short-term performance tend to react too negatively to recent losses, at the expense of long-term benefits. This phenomenon is known as myopic loss aversion:
“A large-scale field experiment has shown that individuals who receive information about investment performance too frequently tend to underinvest in riskier assets, losing out on the potential for better long-term gains (Larson et al., 2016).”
Loss aversion is a cognitive bias – the idea that a loss is psychologically more painful than the pleasure of an equivalent gain.
Think of the your portfolio returns over the past three years (2019-2021). It felt good to see your investments increase by double-digits. Here are the returns for Vanguard’s Balanced ETF (VBAL) during that time:
- 2019 – 14.91%
- 2020 – 10.24%
- 2021 – 10.27%
Fast forward to 2022 and VBAL is down 10% on the year. Loss aversion tells us the pain of these losses is felt twice as powerfully as the pleasure of the previous years’ gains.
With myopic loss aversion, we focus too narrowly on specific investments without taking into account the bigger picture. You’ve experienced this if you’ve ever checked your portfolio a short-time after a recent purchase and cursed your luck if the investment is down.
Professor John List was a recent guest on the Rational Reminder podcast and he co-authored a paper on myopic loss aversion. The paper found that, “professional traders who receive infrequent price information invest 33% more in risky assets, yielding profits that are 53% higher, compared to traders who receive frequent price information.”
When asked how often investors should check their portfolio, List said, “as rarely as possible”:
“I would say once every three, six months is fine. But the reason why I don’t want you to look at your portfolio is, because when you do and you see losses, even though they’re paper losses. You say, “My gosh, that hurts.” And you’re more likely to move your portfolio out of risky assets and into less risky assets. And as we all know, just look at the data. The data over long periods of time, that’s the equity premium puzzle, is that you get much higher returns, if you’re willing to bear some of that risk. Now, if you look at your account a lot and you have myopic loss of version, you’ll be much less likely to bear that risk. So, you’ll move out and you’ll be in inferior investments.”
This applies to both novice and experience investors. I coach clients regularly on the benefits of sticking to their investment strategy and ignoring short-term market fluctuations. But it’s hard when the daily news headlines are screaming in your face about how bad the market is doing and why it’s only going to get worse.
My worst moment was during the March 2020 crash. I had just quit my job three months before, and my investments were down 34% in a short period of time. It was a rough time when even I was questioning what to do. It didn’t help that I had no RRSP or TFSA contribution room – so I couldn’t even “buy the dip” to make myself feel better.
Related: Exactly How I Invest My Own Money
What did I do? I stopped checking my portfolio. I had no reason to log-in anyway, since I wasn’t making regular contributions. I reminded myself that my investments were long-term in nature, and that markets go up most of the time. Periodic declines are the price of admission for risky assets like stocks.
For investors in the accumulation stage, I’d argue this market decline is a blessing in that the contributions you make today have a higher expected return than contributions you made 6-12 months ago. Take advantage of this opportunity to pick up more shares at today’s depressed prices.
For investors closing in on retirement, now is the time to prepare your retirement income plan, which should include having 1-3 years’ worth of spending in safe assets like cash (high interest savings) or short-term GICs. Give yourself a safe cash buffer so you don’t need to sell investments at a loss. You can even build this cash buffer with new contributions, rather than selling off investments. Retirement can be 30+ years in length, so you still need a reasonable exposure to stocks and bonds for the long-term.
Investors already in retirement may be experiencing the most stress. That’s because they’re already in withdrawal mode and feeling the sting of portfolio losses. Nevertheless, it’s a great time to check in on your financial plan and zoom out to see the big picture.
Look at your buckets of income. You may have guaranteed income from a workplace pension and/or government benefits. Maybe some rental income or earnings from a part-time job. Do you have a cash reserve to top-up your income, or are you relying on portfolio withdrawals? Can you spread out your portfolio withdrawals or take them later in the year?
Are you withdrawing solely from an RRSP or RRIF, while leaving your TFSA intact? Consider pausing your TFSA contributions or taking a small withdrawal so you don’t have to dip further into your RRSP/RRIF.
Do you have a planned one-time expense that can be pushed down the road to 2023 or 2024? This could include a vehicle replacement or home renovation.
The point is, no matter what age and stage you’re at there is likely an obvious solution or at least several steps you can take to stop obsessing over your investment portfolio and its short-term performance.
Investors with a sensible plan that takes into account their short and long-term goals shouldn’t worry about their investments. That’s because they should already be invested in a risk appropriate portfolio. If that portfolio was sensible in 2021, it’s still sensible today.
Do yourself a favour this week and stop checking your portfolio. Your mental health deserves a break. Take comfort in the fact that markets do go up over the long-term. Better days are ahead.
I recently coached a client through the process of transferring her existing RRSP, TFSA, and non-registered investment accounts away from high fee managed mutual funds and over to a self-directed investing platform. The goal was to reduce investment fees from an average of 2% on her balanced portfolio down to 0.25% with a balanced asset allocation ETF.
The asset mix wouldn’t change – both portfolios likely hold the same underlying assets – but the fee reduction is significant. It’s helpful to convert the percentage into a dollar amount. The combined portfolio size was roughly $1M, so at an average of 2% her fees were costing $20,000 per year. The new self-managed ETF portfolio would cost just $2,500 per year.
To be clear, switching to a low cost ETF portfolio is not a panacea for improving investment performance, especially in the short-term. A broadly diversified balanced portfolio is still down nearly 10% year-to-date. But by switching to a low cost ETF portfolio this client is all but guaranteed to outperform the similar high fee mutual fund portfolio over the long term.
You’d think the idea of saving $17,500 per year in investments fees would compel more mutual fund investors to make a change. But money is as much psychological as it is about the numbers. There may be a long-term relationship with the existing advisor mutual fund salesperson. He or she may even be a close family friend. Breaking up is hard to do.
When coaching clients through this process I always remind them that there’s no need to “break-up” with their advisor. The transfer of funds actually happens at the new financial institution. That’s right, if you want to move from “red” bank to “green” bank, you go to green bank and initiate the transfer from there.
Open an account at the new institution, then open the appropriate account types that mirror your existing account types (RRSP, TFSA, non-registered, spousal RRSP, LIRA, etc.).
You’ll eventually get to a section that prompts you to fund your new account with new contributions or by transferring funds from an existing account. Select that option and enter the account details from your existing institution (have a recent statement handy). Some platforms allow you to upload a statement, while others make you fill out the details manually.
Once the transfer request is accepted it can take about 10-14 business days for the funds to arrive. Your new institution contacts your existing institution to request the transfer on your behalf.
You can transfer funds “in-kind”, meaning the portfolio moves over exactly as-is, or “in-cash”, meaning the existing institution will liquidate your entire portfolio and send a cheque to the new institution.
Transferring in-cash is likely the preferable option in a registered account. That’s because there are no tax implications for selling your existing investments inside a registered account (RRSP, TFSA). This is not a withdrawal and a deposit – it’s a direct transfer between institutions where your funds remain in the same tax-sheltered account.
Transferring a non-registered (taxable) account requires more thought. That’s because selling your existing funds and transferring in-cash is considered a taxable event, triggering a capital gain or loss on each security sold. In this case, transferring in-kind may be a better option.
Now, once your existing institution receives the transfer request then you should expect a phone call or email from your existing advisor asking what’s going on. Don’t be surprised if your advisor tries to talk you out of this transfer, or at least offers some parting words of wisdom.
It’s because of these often uncomfortable and awkward exchanges that I recommend initiating the transfer first before having the break-up conversation. You’re less likely to un-do what you’ve already done.
Related: Breaking up isn’t hard to do. How to transfer your RRSP.
Still, if you’re set on having the conversation ahead of time I’d recommend preparing a list of reasons why so you can respond to your advisor’s playbook of rebuttals.
Go to Morningstar and look up your mutual fund performance versus its benchmark index and other funds in its category.
Mention the simplicity of an all-in-one portfolio and how it automatically rebalances for you. Talk about the diversification and how you’re staying invested in a similar asset mix with similar underlying holdings.
Finally, the closing line:
“It’s not you, it’s your fees.”
This Week’s Recap:
It has been a while.
Last week I suggested it’s time to check in on your financial plan.
Earlier this month I looked at using annuities to create your own personal pension in retirement.
I was happy to be included as a panelist once again for MoneySense’s annual ETF All Stars. No surprise that my “desert island” pick is Vanguard’s All Equity ETF (VEQT).
Listen for me on an upcoming episode of the Rational Reminder podcast where I’ll be chatting with co-hosts Cameron Passmore and Ben Felix about breaking up with your mutual fund advisor and some of the incredible (and demonstrably false) rebuttals I’ve heard over the years.
Promo of the Week:
Interest rates are ticking up and yet some of you still have money parked in a big bank savings account earning a pitiful 0.01% – 0.10%.
It’s time to switch to EQ Bank’s Savings Plus Account and earn a healthy 1.50% on your emergency fund or other cash savings.
Remember, EQ Bank offered rates as high as 2.45% in March 2020 before emergency rate cuts kicked-in. As rates rise, expect some more upside here and a return to ~2% by the end of the year.
I use EQ Bank for my own emergency savings. I like that I can connect the account to my main chequing account and transfer funds within a day. I also like the fact that I can pay a bill or make an e-Transfer from EQ Bank and that there are no account fees.
Weekend Reading:
Worried about stocks? David Booth, founder of Dimensional Funds, explains why long-term investing is so crucial.
Retirees fear this falling stock market, but Andrew Hallam says our reactions to fear are more damaging than anything the markets or inflation could ever hit us with.
As Rob Carrick explains, nothing happening with stocks and bonds lately will matter when you look back a decade from now.
Jesse Cramer explains why you’re probably using the 4% rule all wrong:
“You probably shouldn’t eat too much candy.” Is that an aggressive admonishment? Or a conservative suggestion?
If you’re a 9-year-old on Halloween, it’s aggressive. Don’t limit me! I want to eat all the candy!
But if you’re a paranoid dentist, it’s conservative. Why leave the door open to any candy consumption? Don’t you realize one mini Snickers can cause a cavity?!
The 4% rule is the same.
A must watch video by Preet Banerjee on how to manage your emotions when investing:
A really important white paper by PWL Capital’s Ben Felix on finding and funding a good life. It’s an overview of the non-financial considerations that deserve consideration in financial decisions.
Here’s Charlie Bilello on the biggest mistake an investor can make.
Crypto is a solution is search of a problem – or problems. So what is the point of crypto?
“People in the crypto space argue that it’s still early. We’re about 13 years in. At a time when technology changes rapidly, how early is that, really?”
Michael James on Money asks why do so many financial advisors recommend taking CPP early?
Finally, the great junk transfer is coming. A look at the burden (and big business) of decluttering as Canadians inherit piles of their parents’ stuff.
Enjoy the rest of your weekend, everyone!