Tuesday, 9 May 2017
When I first began working in the financial reporting department of a publicly traded company in Minneapolis, U.S.A. many decades ago, my first assignment was to read the Plain English Handbook. It is a document published by the Securities Exchange Commission (SEC) on how to write annual reports and other financial information in plain (spoken) English.
I still have many fond memories of reading it over and over again. Warren Buffet, the second wealthiest person in the world, well-known investor and Oracle of Omaha is credited with helping SEC create this footprint for companies to write in simple and understandable English.
Things such as dangling modifiers, action verbs, run-on sentences are considered taboos by Buffet as he was amazed on how complicated, wordy, and utterly incomprehensible annual reports and disclosures were being written. As a result, when I was first talked with writing the draft Management Discussion and Analysis (MD&A) section of the annual report, I had to double and triple check my grammar. I have to always emphasize the use of personal pronoun such as “We” instead of using “The Company.” Instead of constantly using commas to join three sentences into one, I had to try and create sentences with no commas, semi-colons, and etc where possible (lawyers, please take note!).
Thirty years later, Warren Buffet, at the young age of 85, is still outsmarting everyone in the investment world. What I admire his most however, is his act of generosity and his simple way of life. He had pledged to give more than 99% of his wealth to philanthropic foundations. He has donated billions of dollars to the Melinda and Bill Gates Foundation.
Below are some of his famous quotes that I like to share with you not only because it makes sense from a financial perspective, but it also teaches me to be a better person and to contribute to mankind.
· Look for a job that you would take even if you did not need the money – His advice to the younger generation looking for advice on career.
· Be fearful when everyone is greedy, and be greedy when everyone is fearful – Buffet’s investment philosophy
· I will not bet against America - Spoken during the height of the U.S. credit market crisis in 2008.
· Rule number 1: never lose money, rule number 2: never forget rule number 1 – enough said!
· It takes 20 years to build a reputation, and only 5 minutes to ruin it.
· Price is what you pay, and value is what you get – another investment philosophy
· Only buy stocks that you would be perfectly happy to hold if the market shuts down for 10 years – Buy and hold strategy that almost always pays off. One exception may be IBM.
· It is difficult to compete with companies using high leverage and low equity - spoken recently on why Berkshire Hathaway is holding on to so much cash when interest rates are at historic lows and valuations are sky high.
· I buy expensive suits. They just look cheap on me –All his suits are made by a lady from China that he has known for many years.
· Risk is part of God’s game, alike for men and nations – General Re, his main insurance company, re-insures a lot of risky but carefully measured and calculated events.
· Diversification is only necessary if you don’t know what you are doing – The reason why the majority of portfolio managers never even beat the S&P 500 index.
· If you get to my age in life and nobody thinks well of you, it does not matter how big your bank account is, your life is a disaster – Well said, money is not everything!
at May 09, 2017
Friday, 7 April 2017
When planning for retirement, managing the amount of spending is key as income from retirement vehicles such as government and company pension (for the lucky few that are members of defined benefit plans), withdrawals and annuities from RRSP/RRIFs will be somewhat fixed.
Here are the different phases one can expect to go through…….
Phase 1 (age early 20s) - We found our dream job, work our tails off, pay off student loans, pay rent, climb the corporate ladder and hope to save enough for the inevitable down payment in a runaway, crazy real estate market in Toronto .
Phase 2 (age late 20s) - We get married, form a family with children, purchase a home and enter the debt accumulation phase where it felt like you would never be able to make ends meet with mortgage payment and childcare costs (assuming two working spouses) taking a huge chunks of your after-tax take home pay. It is estimated that it costs $250,000 to bring up a child.
Phase 2A (age mid to late 40s) – Kids grow up, enter university. Just when you think you have paid off most of the mortgage debt, you would now have to finance your kids’ education as well. You better hope that you have wisely contributed to the RESPs and that the earnings have been growing steadily, net of fees.
Although your career has continued to blossom, you may start felling tapped out and concern that the whizz kid that the company just hired may replace you soon. Anxiety creeps in. You probably weigh 20 or more pounds then you should. Your health also starts to suffer.
Phase 3 (age early 50s) - Finally, you pay off your mortgage and your kids complete their university studies… and you start thinking about retiring. But guess what, your kids can’t find a job in this ultra-competitive and specialized job market because they studied the wrong field of study. They moved back in with you (case of the boomerang kids)
Phase 3A (age early to mid-50s) – Congratulations! You survived all the previous layoffs and corporate restructuring, but unfortunately, you could not escape this one. You are faced with a dim prospect of securing similar employment with another company, and not having saved enough during all these years. I hope not a lot of people fall into this situation, but I personally know people who are experiencing this right now, and how painful it feels!
But please do not despair. There are a lot of social safety nets available in Canada.
Do talk to a social worker , ask for help, be humble. I doubt if anyone dies of hunger in Canada because he or she cannot afford to buy food or seek shelter.
I thought of finishing here because it gets too discouraging, but let me re-write the script with a slight twist and some self-promoting that have a happy ending.
Revised (do read the adds/changes in RED)
Phase 1 (age early 20s) - We found our dream job, work our tails off,
pay off student loans, no loan to pay since you have been paying your school expenses with
earnings from co-op jobs while at school, pay rent, stay at
home to minimize rent expense, climb the corporate ladder and hope to save
enough for the inevitable down payment in a runaway, crazy real estate market
Enjoy, but also start to plan ahead by investing wisely. Take advantage of TFSA, RRSP, company matching plans, work with a financial advisor , who is a CFP like myself, continue to further your education (at company’s expense), and finally spend wisely. And if you have not purchase any life insurance policy up to this point, do consider buying one as it is a lot cheaper to buy when you are young and healthy.
Phase 2 (age late 20s) - We get married, form a family with children, purchase a home and enter the debt accumulation phase where it felt like you would never be able to make ends meet with mortgage payment
and childcare costs (assuming two working spouses)
taking a huge chunks of your after-tax take home pay. It is estimated that it costs $250,000 to
bring up a child.
You and your significant other are able to put a large down payment (no CHMC insurance for down payment higher than 20%) on your starter home. You also use your Home Buyer’s Plan (maximum $50,000 per couple). You get your parents and in-laws to help out with childcare. Both of you continue to build equity on your home as well as your investments. You continue to work with your investment advisor, who advises you to review your life insurance and other financial needs. You and your spouse continue to be active in work as well as enjoying working out in the gym.
Phase 2A (age mid to late 40s) – Kids grow up, enter university. Just when you think you have paid off most of the mortgage debt, you would now have to finance your kids’ education as well.
You better hope that But since you
have wisely contributed to the RESPs since your children were born and
that the earnings have been growing steadily, net of fees, you need
not worry. Although your career has continued to
blossom, you may start felling tapped out and concern that the whizz kid that
the company just hired may replace you soon.
Anxiety creeps in. You probably weigh 20 or more pounds then you
should. Your health also starts to suffer. Because you have taken care of yourself, both professionally through
continuing education as well as keeping healthy, you shrug it off. Everyone
feels threaten as this age. It is only natural, but you have to focus on the
positive side of things. Ask for a lateral move to another department or position
to rejuvenate your career.
On the positive side, you and your spouse are well on your way to a stable retirement life, having manage your finances well. Your investments are growing at an average rate of 5% after inflation and fees, your home continues to grow in value at an average rate of 5% (none of the Toronto crazy real estate prices applies in this example). Your CFP financial advisor tells you that you can probably retire in a couple of year if you choose to and discuss some tax savings strategies.
Phase 3 (age early 50s) - Finally, you pay off your mortgage and your kids complete their university studies… and you start thinking about retiring.
But guess what,
your kids can’t find a job in this ultra-competitive and specialized job market
because they studied the wrong field of study. They moved back in with you
(case of the boomerang kids). Your kids
are off on their own starting Phase 1 of their life (note the revised version).
You and your spouse decide to retire early, but continue to live in your
Both of you travel extensively. Because you have invested well, you can count on a steady stream of passive income from your RRSP and TFSA accounts. To supplement the income, you decide to work part-time as well with none of the corporate stress. When you turn 65, you start collecting your government and company pension as well as review your estate planning. Here’s to a Happy Retirement Ending!
Sunday, 2 April 2017
How much is enough? Headline grabbers such as senior executives from Hydro One and Bombardier defending 50% pay increases and compensation in excess of 100 times the average earnings of Canadians continue to baffle me. While the peons like you and me have to suffer the brunt of corporate restructuring, massive layoffs, lack of job security, continuing cost cuts, the few executives in C-suites are sitting back and counting their mega-millions stop options and bonuses. While our government are quick to defend that world class corporations requires world class leaders, and hence world-class compensation, in reality it is not difficult at all to do the job.
First, how often do you see the executives in office? If they are not jet-setting the world in luxury settings or playing golf, they are of hardly any use at all.
Second, do you ever see a senior executive answering customer’s call at time of crisis? Or if there an issue at the production floor, do you ever see them rolling up their sleeves trying to fix the problem? The answer is that they hire people to do the job and only reap the rewards at the end. It is also a no-lose situation for them. If they do a half-decent job, they are rewarded immensely. If they screw-up, which is more often than not, they get the golden handshake and walk away with millions of dollars, while leaving the company in a mess.
Third, one trick I often learned whenever there is a problem, the executives would always ask questions first and never answer any. And whenever a question is asked, the executive would look around and ask what you think instead?
Fourth, in difficult times, they always engage consulting companies to do the dirty job and to identify areas of improvement? Why are companies spending millions of dollars engaging consultants to tell them what the problems are when in fact, they should already should already know the problem and how to resolve them.
Fifth, it is true that the number of ‘qualified’ people is in short supply because the very people (Board of Directors) that hire them are also senior executives themselves. It is a very close circle of people who look after themselves first. Look at the number of executives who are also member of Board of Directors at other companies. I sometimes wonder where in the world they have so much free time to sit on other board (with huge compensation, too!). Somewhere in the world, they must be more than 24-hours in a day!
To say that I have lost faith in the ability of senior executives to lead effectively is truly an understatement. A monkey can do a better job. Just as in stock picking, the number of active fund managers underperforming the market is an astounding 80% or more on a consistent basis.
Wednesday, 15 March 2017
For someone facing the choice of receiving a fixed monthly pension income from a company or in the form of an annuity from an insurance company, versus receiving a commuted value and having to invest the amount oneself does present a dilemma.
Let’s look at the details using some very realistic numbers assuming one is indifferent between monthly pension income or annuity.
Monthly Pension or Annuity (Option 1)
Commuted Value (Lump Sum) (Option 2)
Amount per month
$600 fixed, guaranteed for 5 years
$130,000. Invest conservatively in fixed income to yield 4% or $433 per month
Principal remaining at end of life
About $167 more than option 2
Guaranteed by insurance company for 5 years, or in the case of private company pension, guaranteed by PBGC
Default risk if company goes bankrupt. Can opt to invest in Government of Canada bond, but yield 1% less . Also face reinvestment risk if rates are lower. However, rates are at historic lows and can only go up.
Some companies may tie in health benefits with monthly pension
May forgo health benefits if opt for CV
Dependents/(or surviving spouse)
Monthly benefits may be reduced (assuming company pension and opting for Joint and Survivorship).
If opting for annuity, once guaranteed period ends, $0 for dependents or surviving spouse)
Dependents or surviving spouse can inherit the principal balance if included in will
Taxable income; annuity may have some tax advantage
Taxable income or capital gains at a lower rate
Based on mortality tables, would be advantageous to receive monthly amounts if expected to live a long life (above 80 years of age)
So what is the conclusion? It all depends on the person’s situation. If I were a betting person, have a spouse or dependent, and can tolerate some risk, and assuming that we are in a historically low interest rate environment, I would choose Option 2. I would choose to accept a lower income now, wait for rates to go higher (or at least above the $600 per month in Option 1), and then invest the whole amount and obtain more than $600 per month in later years. When I pass on (hopefully many years later), my surviving spouse or children can still inherit the principal amount of $130,000.
If one is in need of income and also cannot tolerate any risk, then choose option 1. Mind you, in addition to this pension ,there are also other government benefits such as CPP (current maximum per month -= $1,114.17 at January 1, 2017) and also OAS (current maximum per month -= $578.53 at January 1, 2017)
There are other options that I can think of, but for now, I do think that this opportunity warrants further discussion with your financial advisor before making a decision. Because rates are at historically low, and we are starting to see the U.S. Federal Reserve Bank beginning to hike interest rates, CV or lump sum payouts may never be this high again and one can reinvest the CV or lump sum to one’s advantage.
Thursday, 2 March 2017
I can’t seem to recall when was the last time all the stars were aligned in the world of investments. We currently have a roaring stock market reaching new highs almost every day (at least in the United States), higher interest rates , which is good for retirees or people contemplating retirement, and a irrationally exuberant real estate market (mostly in the Toronto area and part of United States).
When will this come to an end? Or is this the start of a wonderful era? I seem to recall back in November last year, the world was coming to an end once the results of the United States Presidential election were announced. If only I had a crystal ball then. Hindsight is always 20/20.
With that in mind, I would like to take a moment and put on a reality check hat and use my financial training to properly chart a long lasting and sustainable retirement plan for my clients as well as for myself.
See my assumptions below and if the situation applies to you , and if you need further assistance, please contact me at Razorback2628@gmail.com for further assistance . For full disclosure purposes, I am Certified Financial Planner professional (CFP) based in Toronto, Canada.
Assumptions (very conservative):
Age and Family: Somewhat Irrelevant, willingness to relocate is a plus!
Total Net Worth of $1 million and upwards consisting of home in Toronto or GTA (depending on your equity, approximately $750K and upwards), other financial holdings such as RRSP, TFSA ($250K and up).
List your home, expect multiple bids, and sell for at least 30% above your wildest expectations. Pocket $800K net after commissions and other expenses .
Relocate to another city, preferably Ottawa and the long lasting winter comes to my mind. It has been ranked the number 1 city to live n in Canada for the past couple of years. Purchase the same type of home for $300K. Net savings $500 to invest.
Start looking for a job, preferably with the federal government or at a municipal level. Ideally, start the process before you move. You could potentially be earnings less (or more), or if you are retiring , does it really matter?
Oh, and make sure your better half and your kids are on board as well. I recall my daughter asking for a pony when we had to relocate for a job once.
The additional $500K can be invested in a combination of low cost ETF and laddered GIC and earn 5% a year almost guaranteed. You will be surprised at how few so-called experts financial managers fail to even attain this return. In addition, the same amount pocketed will l take one approximately a lifetime to save assuming one saves 10%-15% of his or her paycheck each month, continue working at your dreadful job, and pray to God that the market returns (before fees!) are in line with the mutual funds with huge fees that the financial advisors at the bank sold you. If you are onboard with my analysis so far, you can essentially retire early (or at least continue to have one person working while the other one stays home (notice that I did not refer to either “He” or “her” in this equal opportunity world.
Contact me at Razorback2628@gmail.com if you are interested!
Wednesday, 9 November 2016
The worst fear has materialized as a Trump presidency has become a reality triggering a massive selloff in the global financial markets. Dow Jones Industrial Average futures are down by more than 800 points or 5 percent. The Mexican peso is down more than 11 percent.
This rare event called Black Swan in a book by Naseem Taleb talks about rare event as such with low probability of occurring but high risk or tail events in statistical terms. In addition, financial markets are mostly ill-prepared for such event as can be seen by the huge selloff. Brexit is another Black Swan, but the impact may not be as significant as the U.S election.
What did the political pundits who have been calling for a Hillary Clinton victory, albeit a narrow one, miss? Even key swing states such as Ohio, Florida and Michigan which y were supposed to be safe for Democrats evaporated into solid red Republican strongholds on election night.
I think one exit poll said it the best. Most Americans, especially the have-nots, mostly male, White, non-educated, have suffered a lot economically in the past decade. As companies shut down plants and shutter production to low-cost labour countries such as Mexico and China, these people have not been able to transition to the new knowledge-based economy. We only think of how much wealth is generated by Facebook, Netflix, Amazon and the likes, but the wealth is only concentrated in a few hands. And for the majority of the rural folks who have been left behind, Donald Trump represents the last hope of bringing back the jobs and the glory days. We know this is not going to happen. But when you are down, you don't think rationally. Hence the vote for Trump represents a hope for change.
I believe the email issues surrounding Clinton and the allegations about Trump's sexual abuse of women, may just be big red herrings clouding the real issue, as voters already made up their minds long ago and wanted change. Don't get me wrong, though, as I am totally against what Trump had allegedly done. My hope is that cooler heads can prevail and his advisers can charter a much more realistic path for his presidency.
Another lesson learned...... or not . This will go down in history books as one of the most fascinating presidential race.
Monday, 7 November 2016
Fact: In 1970, the average price of a house in Toronto was $30,000. Forty year later, the average price of a detached home in Toronto is well over $1.2 million. For all homes including condominiums, townhouse and semi-detached houses, the average price in Toronto in 2016 is well over $600,000.
Conclusion: Based on the $600,000 figure, the average rate of increase is about 7.6% annually.
Projection: It is estimated that by 2056, the average price of a home in Toronto would cost well over $3 million assuming a 4% average increase per year. I think I will include this article in my will to be handed down to my children and my grandchildren to see if it materializes. Better yet, put it in a time capsule to be opened on December 31, 2056 long after I am gone or if I am still alive at 92 years of age.
Fact: Over the same 41 year period from 1970 to October 31, 2016, the S&P 500 returned an average 10.2% , including dividends reinvested.
So, one can conclude that it would have been better to invest in the S&P 500 instead of real estate, right? If one had rented instead of owning a home (with mortgage and interest payments, maintenance, and etc.), the math can get interesting. I have yet to figure out how to best present the analysis, but have concluded that Investing in Real Estate by purchasing a home beats renting and using the down payment and additional costs of home ownership to invest.
And the difference is due to …… leverage.
Assume you put 20% down payment or $100, 000 on a $500,000 property . If the property appreciates 7.6% per year, which is what the Toronto market experienced on average, you gained $38,000. But on a $100,000 investment. So, the true gain is 38%, which beats the 10% average return on the S&P 500.
The opposite would also hold true if the property lost 7.6% in value, and you would have lost 38% on your initial $100,000 investment or down payment. As in most financial literature, I assume no transaction costs and ceteris paribus (everything else remains equal).
See link to the Toronto Real Estate Board historical prices.
When I first began working in the financial reporting department of a publicly traded company in Minneapolis, U.S.A. many decades ago, my f...
For someone facing the choice of receiving a fixed monthly pension income from a company or in the form of an annuity from an insurance com...
I can’t seem to recall when was the last time all the stars were aligned in the world of investments. We currently have a roaring stock ma...
I am a big fan of reading early retirement blogs. Since there are too many great ones to talk about, I will let you use your investigative ...