Friday, March 27, 2015

Canadian Housing Market Loonie Tunes?

According to a Yale professor, Vikram Mansharamani, the Canadian housing market is "loonie tunes".  He points to high levels of consumer debt in Canada, sinking commodity prices, reliance on foreign buyers such as the Chinese, and the divergence of the US and Canadian housing markets.

While I agree with his analysis, he is making the same points as many others have made over the past 5 years, yet the housing market in Vancouver and Toronto goes up and up, with no dips.  Now that mortgage rates are even lower in Canada, will the market finally rationalize, or will folks keep buying property?

Our experience indicates that the market will continue its dance with the devil.  In the past 3 years, we have tried to buy in Toronto, but are ultimately stymied by high prices and the crazy nature of the market.  Houses sell in bidding wars set up by real estate agents, who have become auctioneers.  Condos sell within a few days if they are priced "reasonably" - reasonable in Toronto meaning anything that is not judged absolutely crazy.  We saw one condo listed on Wednesday this week at $850K Cdn, we asked our realtor to go and see it, he got an appointment for Thursday, but it was then cancelled because it was sold, that means two days on the market!

As a comparison, I looked up condos in the Washington DC area.  The same square footage in a similar area, with more amenities, sells for about $800K US, with lower maintenance fees.  So it looks like the Toronto condo market costs about the same as Washington DC.  You can argue about currency differences, but it is still pretty similar.

In any case, props to Professor Mansharamani, but I would recommend he stay at Yale, as properties are more reasonable in New Haven Connecticut.

Saturday, March 7, 2015

Retirement Withdrawal Strategy

Retirement or semi-retirement reverses the process you followed for the first 50 or 60 years of your life.  Instead of spending and saving/investing money, you are spending and withdrawing money from savings.  It sounds easy, but I found it was not as straightforward as I thought.  How much money do I withdraw per month or per year, which investments or savings do I tap for the money, and what are the best mechanisms to get the money into your bank accounts?

There are many articles on the Internet giving advice on this subject.  My approach is a hybrid of a few of these.

  1. I have a budget for spending per month and per year.
  2. The goal is to keep about 9 to 12 months of this budget in a high interest bank savings account that can be easily transferred to my checking account in under 3 days.  I use Ally for my savings account as their rates are pretty good.  The reason to keep a buffer is so that you are not forced to sell investments on short notice, perhaps during a momentary market dip.
  3. In order to keep the savings account topped up to 9 or 12 months of spending, I watch the asset allocation of my investments.  When I need to top up the savings account, I look at where my allocation is over-weighted.  Today, that would be in domestic equities.  I also look at the market dynamics, if everyone is enthusiastic, I sell, if the market is down, I may wait.
  4. I look at capital gains exposure for the over weighted asset and find the investment that will generate the least capital gains and therefore the least tax.  Often, there is only one investment fund for that asset class so the answer is obvious.
  5. Then I sell an appropriate amount of the over-weighted investment, and transfer that amount to the high interest savings account at Ally.  Don't sell small lots of securities often, as you will incur unnecessary high brokerage fees.
  6. As needed, I transfer money from the savings account to the checking account in order to pay bills, usually once or twice a month.  These savings accounts usually have limits on the number of withdrawals per month (6 in the case of Ally), so you don't want to do this too often.
This seems to work for me but you can make your own decision on what works best for you.  Consulting your financial advisor is appropriate.

Thursday, March 5, 2015

Hack Is A Good Thing?

Growing up, the word hack had negative connotations.  Aside from its formal meaning of a rough blow to cut, it meant someone who was not skilled.  For example, a hockey player who regularly took penalties, did not skate well, and was overly nasty might be called a "hack".

In my teenage years, when I got involved in computers and technology, hack had a similar meaning.  When a circuit or program was badly written or modified, it was called a hack.  We might remark "..we did not have the time and tools so we hacked that circuit board to try and repair it.."

A little later, as computers became ubiquitous, hack was further extended, but still with negative connotations.  A person who broke into a computer system with malicious intent was called a hacker and the act of breaking into a computer was called hacking.

Lately, I get emails with titles like:

  • Great Android Hacks You Should Know (Android security is a concern)
  • Bicycle Hacks You Should Try (sounded like a bicycle thief's dream)
  • The Best Financial Hacks for Tax Preparation (this could trigger an audit for sure)
For a while, I deleted all these emails, thinking they were spam or malicious.  It did seem curious that they were so upfront with their intent to hack, but better safe than sorry, so into the bit bucket they went.

Then I found out that "hack" is now a good thing.  It is synonymous with tip or hint or how to.  The urban dictionary online defines it as "a clever solution to a tricky problem".  Who knew?  From now on, my posts with useful information will use the cool new meaning of "hack", like Second Career Hacks Every 50 Year Old Should Try.

Monday, March 2, 2015

Market Hits New Highs! Time to Rebalance

The equity markets and the bond markets keep hitting new highs in the US.  Good for stocks, not so good for bonds as the yields keep getting lower and lower.

Asset allocation is the division of your investments into various types like bonds and stocks in order to give you diversification and fit your needs for return and risk.  Asset allocation is a very important determinant of your investment success and risk.  If you use passive (index) investing, asset allocation drives over 90% of the variability in your investment returns.

People often ask how to determine your asset allocation?  It does depend on things like:

  1. Your goals - do you need money in the short (1-5 year) or long term (25 years)?
  2. How much risk can you tolerate?
  3. How much return do you need?
This website has a simple calculator that can be useful, or you can consult other online information or your financial adviser.  My asset allocation and deviation from target are shown below.

It is time to look at your asset allocation again - are you on track or off target?  Likely your equity percentage is high and you may want to reduce it.  There are a few ways to do this with advantages and disadvantages

  1. Buy and sell stocks or mutual funds to rebalance.  If this is done in a tax deferred account like an IRA, 401K, or RRSP, then there are no tax implications.  If you buy and sell in a taxable account, you may trigger capital gains and increase your taxes.
  2. If you have an automatic investment deducted from your paycheck, like a 401K or RRSP contribution, you can change the investments that are purchased.  For example, if you are over your target on stocks and low on bonds, you can change the contribution to be 100% bond mutual funds.  This will over time bring your allocation back on target, but it takes time.
  3. If you are regularly withdrawing form your investments, say to fund your retirement, you can change your withdrawal strategy to bring your allocation back to balance.  For example, if your stock percentage is high, then sell stock funds whenever you want to withdraw money, but beware of tax implications.
As always, beware of what you read on the Internet, like this blog.  Not everything is the truth like the US faked the moon landings.  Talk to your financial adviser before making financial decisions like this.