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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
Cash$0.00-$800.00-$800.00-$800.00-$800.00
Total$22,712.00$22,702.00$23,054.00$21,686.00$22,500.00
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.

Wednesday, December 17, 2014

A $550 Retirement Gift For YOU From Abdullah bin Abdulaziz Al Saud


Did you send that thank you card to King Abdullah bin Abdulaziz Al Saud, the King of Saudi Arabia yet?  No?  I thought not.

The King has sent all Americans and Canadians a gift to help you with your retirement: lower gasoline prices.  The Saudis refused to lower their output, which is driving down the price of oil and gasoline.

The average American will save $550 per year in 2015 according to the US EIA.  Canadians may save somewhat less due to taxes, but still an appreciable amount.  Other products like food will also be reduced in cost due to reduced transportation costs.

If you invest your $550 gift from King Abdullah in a retirement account (IRA), it will grow tax free at about a 6% rate of return and will be worth $1301 in today's dollars in 30 years assuming a 3% inflation rate.  So don't blow your gift on a tattoo of Taylor Swift or new UGG boots for the whole family, save it for retirement.  Reduce your monthly budget by $550/12 = $45 and put the savings in an IRA.  The King would like that.

My Thank You Card is shown below:



Photo Credit: Flickr

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