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.