Monday, December 22, 2014

Final Status of the Protective Put

Recall that I was going to use a "Protective Put" option strategy in the rebalancing of my portfolio back in the Summer. The reason was that I had excess small cap stocks (ETF) in my portfolio and I did not want to sell until 2015 for tax reasons. The Protective Put allowed me to protect against the downside that small cap stocks decline before I sell in 2015, effectively allowing me to sell in 2014 without actually selling.

Here is the final status of the strategy, which seems to have worked. The small cap ETF has gone up (9/16), then down (10/10) then up (12/22) with the market, the PUT first declined in value, then rose above the purchase price, then expired worthless on 12/20. Net of all this, I am down $212, but I had insurance against the ETF falling in the meantime.  The only risk left is that the ETF goes down in the last few trading days of 2014, since the ETF expired on 12/20/14 and I will sell on 1/2/2015. 

Protective PUT for Vanguard Small Cap ETF (VB)
Before Option PurchaseOption Purchase 8/159/6/201410/10/2014Option expires 12/22/2014
200 shares VB$22,712.00$22,702.00$23,354.00$21,098.00$23,300.00
200 PUT options (Dec2014)$0.00$800.00$500.00$1,388.00$0.00
Note also that the $800 price of the options is tax deductible as a short term capital loss so Uncle Sam helped with the strategy.

Sunday, December 21, 2014

Intrerest Rates Rise Again

$$$ +++ %+++ $$$

In September, I wrote about the rate increase in the Ally Bank Online Savings account from 0.87% to 0.90%.  Well the rate has gone up again to 0.99%, a 10% increase.  So the overall rate increase in 2014 for this online savings account is 14%.

I don't know if this is due to the predicted rise in short term interest rates driven by the end of QE and predicted Fed rate increases in 2015, but it is a pointer that short term interest rates will likely go up.

Tuesday, December 16, 2014

American Convenience Versus Canadian Value

People often ask about the differences between the U.S. and Canada.  There are many societal and political differences, but one that is not often mentioned is the difference in consumer culture.  In Canada, the key thing is Value - getting the most and the best for one's money.  In the U.S., it is Convenience - getting what you want as quickly and easily as possible.  A lot of folks ask why, and I am not really sure, but perhaps Canadians have less cash due to high taxes and need to make the most of it and Americans work too much and need to make the most of their free time.

What are some examples of Canadian Value:

  • The most popular car: the Honda Civic - not too expensive, high quality, good gas mileage, room for the family, somewhat stylish, great trade-in.  A good value.
  • When you buy a car, you wait a few days to pick it up so the dealer can "prep it" and get the paperwork done.
  • The most popular restaurant: Tim Hortons - coffee tastes good, is inexpensive, lunch for around $5.  Starbucks is for the 1% people and special treats.
  • Shopping: Canadian Tire - hard goods store, lots of practical items at good prices, gives rebates in Canadian Tire money.
  • Cross Border Shopping - drive 2 hours and wait in line at the border to get inexpensive towels, clothes, electronics booze in the States and bring (smuggle) it back across the border, a great value.
Some examples of American Convenience:
  • When you buy a car, they expect you to drive it home right away.  Paperwork and dealer installed options will be added later, but by Thor, you get that shiney new car in your driveway now!
  • Drive through banks, pharmacies, grocery stores, beer stores (Texas), Dept of Motor Vehicles (Virginia), and of course fast food restaurants.
  • BBQ tank delivery to your home, can also be attached by the deliveryman to your BBQ for utter convenience.
  • Call ahead to get on waiting lists at Urgent Care clinics (Canadians would rather wait 5 hours but it's free).  Less waiting when you get there.
  • Next day measuring and installation of blinds, flooring, heating systems, air conditioning, artifical hips, and lots of other stuff that takes weeks  in Canada.
  • Amazon Prime, an American invention.

Monday, December 15, 2014

Reducing 2014 Taxes

I am still trying to reduce my 2014 tax bill.  An unwanted surprise was a 12% capital gains dividend from my Chinese Stock mutual fund.  This dividend does nothing for my net worth as the price of the mutual fund goes down by 12% leaving you back where you started, but with a tax bill to pay.  To counteract this, I am selling some mutual funds where I have a capital loss, like an energy stock mutual fund.  This sale also helps rebalance my portfolio as I am over target on large cap and small cap domestic stocks and under target on domestic bonds.

Aside from that, I plan to pick up a book on how to reduce taxes in my new situation as the "backbone of America", "Job Creator", "Hope for the Future" i.e. small businessman.  I checked out the Fox Business website to see what advice they could offer since they love American small businesses.  They recommended that I join the Tea Party, support my local police, fly the flag, torture a few detainees, and never use Obamacare.  They also played a clip of one of their anchors saying repeatedly that the "USA is Awsome" in response to the recent torture report.  I think the Fox Business website is the same as the Fox News website with a title change.

Photo Credit: Flickr

Thursday, December 11, 2014

Will the Toronto Housing Market Bubble Burst?

As potential buyers of a home in Toronto, we carefully watch the news on the Toronto market from a distance.  Articles that say the bubble will burst cause our spirits to rise, but for the past 5 years or so, the prices keep going up.  We see the competing forces:

Bubble BurstingBubble Expanding
Prices rising faster than inflationImmigrants need housing
Affordability droppingForeign investors from China, Iran, Russia, India
Interest rates will risePhysical constraints on building (lake, roads, ..)
Commodity prices dropping, especially oilEconomy expanding

The bubble has inflated for 5 to 10 years.  But, having read about these forces for five years and competing news stories about the bubble bursting, growing, or there not even being a bubble, my conclusion is that there is only one factor that will cause the bubble to burst, deflate slowly, or stabilize prices.

That factor is interest rates.  Over the past 7 years or so the Fed has kept rates at or near zero, allowing Canada to have near zero rates as well due to the linkages between these two countries.  When the interest rate on mortgages rises, it will make housing less affordable and will drive down prices.  The big question is when will rates go up?

On the one hand, the Fed is going to raise their benchmark in the USA next year.  On the other hand, the ECB will likely implement QE bringing rates down in the EU.  What will happen in Canada?  Stay tuned, watch the Canadian rates, and I think we will see whether the Toronto housing market changes next year.

Sunday, December 7, 2014

Why is our Net Worth Higher Now Than When We Retired?

It seems counter-intuitive, our net worth is 5% higher now than when we retired about a year ago, why?

It is due to two things:

  1. We are spending about 4% of our net worth according to our budget.
  2. The return on a diversified portfolio in 2014 is over 12%.  For this, I looked at the return on the Vanguard Balanced Fund, which consists of 60% of an index of all US stocks and 40% of an index of US bonds.  Your return may vary, but unless you bought an undiversified portfolio of Russian and Gold stocks, your return will certainly be above 8%.  My return is about 9% because my portfolio is more conservative than Vanguard Balanced Fund.
The thing to bear in mind is that 2014 is not a typical year for market returns,  There will be years when your return will be -9% or something similar.  But if you are disciplined in your spending, the highs will balance out the lows and your probability of running out of money in retirement is low. 

For more detail on how you can plan for retirement with this in mind, see my previous blog post on Monte Carlo simulation.

Monday, December 1, 2014

Keeping Busy in Quasi-Retirement

Now that we have our consulting business underway, but the work has dried up, how do I keep busy?  It is interesting to see what suits your personality, marriage, health, and financial situation, and I am sure it is different for everyone.

Reflecting on what I do these days, I came up with informal estimates that I put into a table (being an engineer).

ActivityHow Much?Why?
Working out at the GymnSomeKeeps you physically and mentally healthy
Prospecting for Consulting BusinessLittlePossibility of interesting work
Doing ConsultingLittleInteresting, sense of accomplishment
Hobbies: Building and flying home-made drone, fixing up computers..Quite a bitChallenging, sense of accomplishment, interesting
Managing personal investmentsLittleInteresting, necessary
HouseworkSomeI am married
Home handyman workSomeHouses need maintenance, sense of accomplishment
TravelSomeInteresting and see family and friends
Online coursesSomeInteresting, but not as interesting as I thought initially
Writing blogsLittleInteresting, at least to me
Browsing Internet, reading news, reading booksQuite a bitInteresting
Meeting with FriendsSomeEnjoyable
Watching TVSomeBad habit, had it since childhood thanks to Captain Kangaroo, The Flintstones, etc.
Eating out with spouseSomeEnjoyable
Shopping with SpouseSomeI am married

The best activities seem to involve "sense of accomplishment", "interesting", "challenging".  These seem to appeal to me the most.

Photo Credit: Flickr

Monday, November 24, 2014

Costco - Do You Really Save Money?

As a Costco member, I used to wonder if it was worth the cost of the membership.  So I did some analysis of the cost of my "Executive" membership versus the benefits.  I looked at items we regularly buy at Costco and the discount versus normal stores (grocery, wine store..).

Yearly Analysis Costco
300 gals gas @ $0.20 discount$60.00
Claritin D generic @$10 off, 24 units$240.00
Bottled water @ $2 off, 26 cases$52.00
Executive Rebate$50.00
Coffee @$3 off, 20 bags$60.00
Wine@$2 off, 26 bottles$52.00
Total Benefit$404.00

The main take-away is that if you can find things that you buy regularly and are heavily discounted at Costco, like generic Claritin-D, you get a big benefit.

Friday, November 21, 2014

Consulting - Sell Sell Sell

Well I got paid for our first consulting engagement.  We also have our small business incorporated and ready to go.  I can now claim to be part of the backbone of the American economy, the creator of jobs, the much celebrated "small business man".  Unlike other small business men featured on FOX TV, I will not be burning an effigy of Barack Obama in my front yard, protesting about taxes and over regulation, and wearing a funny hat with tea bags hanging from it.

I do need to get out and sell our services.  It turns out that a lot of consulting is really selling, trying to find someone who needs your services.  Then there is the bidding cycle where you need to exchange lots of information, then, if you are lucky, you close the deal and get to work.

P.S. The guy in the middle looks like one of my neighbors.

Photo Credit: Flickr.

Monday, November 17, 2014

Savings Bonds - A Blast From The Past

In the 60's and 70's, when I was young, savings bonds were a big deal in Canada.  You could buy them through payroll savings or at the bank, there were yearly bond sales drives on TV and at work, relatives gave them to children for special occasions (graduation, christening..).  You could get them in denominations from $25 to $5000, they were delivered as fancy certificates, and there were coupons for interest that you could clip and bring to the bank to get cash.  Your parents kept your bonds in the family safety deposit box at the bank and bonds were only used for very special purchases like University education, a first house, a car, that special trip when you graduated, or something like that.

Somehow, they seem to have disappeared, at least here in the USA.  They are still sold, but no one buys them at work, the banks don't seem to deal with them, advisers never talk about them, and you never hear about them in the media.  They are sold through a government website called TreasuryDirect, which also sells treasury bonds.

What kind of an investment is a savings bond?  It is like a Certificate of Deposit, guaranteed by the federal government.  The interest rate on the I Series bonds (I for Inflation) is calculated as the greater of:
  • [fixed rate + (2 x inflation rate) + (fixed rate x inflation rate)]  This means you get about double the inflation rate (CPI-U).
  • 0%  This means you cannot have a negative interest rate if inflation is negative (deflation)
The fixed rate now is 0, but in the past, when I bought some of these bonds, it was 0.5% or 1%.  The rate you would get in the next 6 months is about 1.5%, and since they are government bonds, they are about as risk free as you can get.  The rate changes twice a year based on inflation.  This is better than most savings accounts and many CD's.  They are also protected against inflation and deflation, which is not a problem today but could happen in the future.  There is a penalty of three months interest if you cash them within the first 5 years of ownership, so do some thinking before buying.

So savings bonds are not dead, they are actually a decent investment given our low interest rates on deposits at banks.

Photo Credit: Flickr

Saturday, November 15, 2014

Time to Sell Those Losers

End of year is coming and it is time to clear up your portfolio and sell any stocks, mutual funds or ETFs that have a capital loss and are not needed for your asset allocation.  The capital loss reduces your taxes and you can buy back the stock after 30 days if you wish to avoid triggering a "wash sale", which would nullify your tax advantage.

In my case, I have an inflation protected securities mutual fund with a capital loss.  Inflation is not likely to spring up in the next 30 days so I can sell it now, buy another different bond fund, get the loss, and buy it back at least 30 days later if necessary.

Photo Credit: Flickr

Sunday, November 9, 2014

Three Signs the Economy is Improving

I am seeing three unmistakable signs the economy is improving in the USA:

  1. The obvious: help wanted signs in stores, restaurants, and other businesses.
  2. Inability to get a restaurant reservation on a Saturday night at 7pm.  I saw this in Texas and Virginia as we recovered from previous recessions.
  3. Longer commute times due to higher road traffic.  Again, an unmistakable sign in Texas and Virginia.

Friday, November 7, 2014

Don't Become a Trader When You Retire

A lot of our friends think that after I retired aka starting searching for a second career, I started actively trading stocks.  Since I am opinionated about investments and retirement planning, that is a reasonable assumption, but it is wrong.

I actually trade less now that I am retired than when I was working.  This is due to two factors:

  1. The difference in cash flow between working and retirement
  2. My investment strategy of buying and holding low cost index ETFs and mutual funds in a diversified portfolio
First lets look at cash flow.  When you are working, you are saving, investing in your 401K/RRSP, balancing your portfolio, and you generally buy investments. This generates trading activity.  When you retire, you are withdrawing money in a systematic fashion and keeping your portfolio asset allocation within your target.  There is also an aspect of minimizing tax through minimizing capital gains.  This generates few trades.

Second, there is the investment philosophy.  If you are already in low cost index funds and don't have new money to buy more, why do you need to trade?  The only reasons to trade are to balance your portfolio, generate cash for expenses, minimize taxes, and on the rare occasion when one of your funds no longer meets your needs due to higher expenses or change in makeup, selling that fund and buying another.

My statistics:

  • 28 trades this year, mostly to balance the portfolio
  • 378 trades last year, mostly purchases within 401K and investment account
Photo credit: Flickr

Thursday, November 6, 2014

How Long Will We Have Cheap Gasoline?

Gas prices are below $3/US gal in our area (below $0.75/l for Canadians).  This is caused by over-supply due to fracking, improvements in US automobile fuel mileage, and slow economies in Europe and parts of Asia.

Is this going to last longer than a few months to a few years?  Nope.

  1. They are not making more oil, and it is essential to modern economies.
  2. Eventually, the world economy will recover and demand will rise.
  3. The low price will reduce investment in new sources, reducing new supply.
So enjoy it while we can, get out that old gas guzzler, and it is probably a good time to buy oil producer stocks for the long term.

Monday, November 3, 2014

Is Deflation Good for Anyone?

There is talk again of deflation - a decrease in price levels in an economy.  Europe, due to misguided austerity, is facing deflation and it is already present in some of the bailout countries like Greece and Spain.  Japan has wrestled with deflation for almost 20 years since its real estate bubble burst.

Why is deflation bad?  Simply put, people don't buy goods and services today because they will be cheaper tomorrow, so demand goes down, which generally causes prices to go down further and unemployment to rise, and it becomes a self-feeding monster.  Assets like real estate are a special problem as they are leveraged (mortgaged) and the value of the asset keeps falling while the debt must still be repaid, and the real cost of the debt rises with deflation.  Europe and Japan are trying to stop their deflation cycle before it gets worse.

Generally, you want some inflation, but not too much, so people consume, and their savings return is higher than the inflation rate, and demand is increasing.  Hopefully you get full employment, happy people, etc etc.

Does anyone benefit from deflation?  I would argue that no one benefits, because an economy or society that is experiencing decreasing demand, loss of value of asssets like housing, and increasing unemployment is not a pleasant society.  However, retirees are better off than many other members of society as they have liquid savings which will go further in terms of buying power and they generally do not have leveraged assets like mortgaged houses that are decreasing in value.  However, retirees are just relatively better - "the tallest pygmies" in the words of an old boss of mine.

Wednesday, October 29, 2014

How to Fund Retirement

Now that I am semi-retired, I was curious about how my retirement plan works - what are the sources of income to pay for my retirement?  Recall that my plan assumes that we keep living approximately the same lifestyle in retirement as we did when I worked.

My wife and I do not have a company or union pension plan.  I cashed out my pension from Nortel when I left, which was fortuitous as the company went bankrupt and some of the pension plans were underfunded and not government insured.  All of our retirement income has to be paid from our retirement assets or by the government.

My first question was: What are the sources of my Retirement Assets or savings?  I have IRAs and RRSPs that had contributions from my employers as well as some where I was the only contributor. The cashed out pensions were entirely paid by my employers.   In addition, we saved after tax money from salaries, bonuses, etc.  The answer was that we saved about 80% of our assets, and employers contributed about 20%.  This was a revelation, I thought my employers were more generous.

My second question was: What are my sources of income after retirement?  For this, I looked at a year in my retirement plan when both my wife and I are collecting Canada Pension Plan (CPP) and US social security.  The answer was that about 16% of our income came from government pensions, and 84% from our retirement assets.  Not as much of a revelation as I assumed the government was not too generous.

So my conclusion is that if you do not have a generous company pension, you need to save a lot of your own money to maintain your standard of living.  Your situation will be different as you may choose a different lifestyle or you may get more or less from the government, but I think the basic conclusion still holds - you need to save a lot of your own money.

You should consult a professional for retirement advice, the information above is not warranted in any way to be correct.