Saturday, August 25, 2012

Standing out from the crowd

I've been reading far too many personal finance blogs lately.  And to be honest, a great deal of them start sounding the same.  They all talk about how debt is bad and how they struggle to pay down their student loans while budgeting for this, that, the other, new houses, new cars, new babies, and the unexpected.

They are in essence more of a personal journal than anything else. Now I suppose journals aren't all that bad and we all have our curiosities and fascination with how others who seem to be doing so well are actually struggling and are drawn to these sorts of things like a moth to a flame.

I too had my fair share of struggle with debt, budgeting, and the like.  But I did it on a heinously inconsistent income.  I often go months at a time (typically in summer) without getting more than a handful of cheques that any properly suited worker bee would bring home in a day.  But then I'm not surrendering 44+h a week to help some jackass build his empire while I languish unrewarded and not credited on the sideline.

But I suppose what this posting is really about is debt.  So many people out there see debt as this big scary evil monster that threatens their lifestyle of the not-so-rich and infamous.  And it most certainly can be if you go all willy-nilly with your credit cards and buy every toy, trinket, oohm-pah, and boom-pah on the shelf.

I use debt to buy assets.  What kind of assets?  Stocks, shares, units and contracts are my first choice for using debt. Now I can hear you shaking your heads; what kind of crazy fool would use borrowed money to play in the stock market?  You no doubt have akin the stock market to a casino and everybody who's in it all the time a gambling addict.

But, if this is the first time you've gleaned my blog, then I'll be blunt and say this:  You've been scammed my friend.  (Not for not reading my blog... but for believing the tripe and rhetoric that has been jammed down your gullet by the media.)  If you don't want to think about it then I could call you an idiot.  But that's not fair to idiots.  You're just a stubborn, pig-headed, jack-ass who's too entrenched in your ignorance to even consider that there's money to be made with just a few strategic transactions a couple times a month.

How do I do it?

Since I live in Canada in a large metropolitan city, I've kept my eyes open and noticed tiny little badges on swanky buildings in the downtown core.  These little badges reveal the name of the property management company, most of which are publicly traded companies called REITs.  (Real Estate Investment Trusts)  They are in the business of owning properties, owning buildings, and renting out the space.

Very simple business model that even the most pedestrian, ignorantly entrenched, non-investor can understand.  It makes it very easy when you ask them how is this any different than buying a rental property and doing it yourself?  (Aside from having WAY less risk, quicker ability to sell, no need to hire lawyers to deal with dead-beat tenants, or plunge toilets, or get caught up in legal process just because the furnace died on Christmas Eve, the house froze, pipes burst and the tenants are suing you for being a slum-lord.)

I wrote a guest blog article for "Modest Money" just about this very topic and that can be seen here:

These types of businesses are about half of my investment portfolio.  The current Total Return (TR) from the monthly rental payments AND the increase in property value is about 12-15%.  Since it only costs me 4% to borrow (tax deductible I might add!)  I'm coming home with 8-11% profit.

Yes, there is risk, but there is a physical asset that you can go see, kick, and spray with graffiti if you so desire.  There are also ways to mitigate that risk which I've discussed at length in older posts.

Stay hungry my friends!

Standard disclaimer: My words are not gospel.  If you follow my advise you do so at your own peril.  If you don't make informed decisions they why should you expect to blame ME for YOUR stupidity?  If you do not want to take responsibility for your own actions then please move back in to mom and dad's basement and leave me and the rest of society alone.  It will make the world a better place.

Monday, August 20, 2012

RESP confusion

RESP - Registered Education Savings Plan.

I had a bit of a Facebook exchange recently with a fellow starving artist who is somewhat younger and hasn't had nearly as many of her hopes/dreams/ideals crushed by life just yet.  We were discussing RESPs and her first thoughts after attempting to read through all the information published by the government that the whole thing was just a scam.

This makes me so frustrated, angry, sad, and an array of feels-bad-man.jpg type emotions.  Why?  The shameful shameful lack of financial education in the curriculum in Canada and the general lack of knowledge, confusion, and lack of trust that ensues as a result.

Lets start from the beginning...  What is it?  It's an REGISTERED account that you can open at your bank AND/OR your brokerage to save and/or invest money for educational purposes.  Generally speaking it's best opened by a parent for his/her child, and like all investing, the earlier you start, the better your results will be.  Who does the account belong to?  YOU.  You are NOT giving your money to the government.  The government will give money to YOU if you qualify, or contribute some of your own.  Registered also means that the money inside the account(s) can grow tax-free.  (Rather than having to report it in your tax returns every year)  No tax = faster compounding.

The EDUCATION part is somewhat easier to understand...  The account is to be used to save/invest for post-secondary educational purposes.  (Not just tuition... room/board, books, and living expenses while the student is at school).

SAVINGS is a bit mislabelled...  It can be a savings account but more importantly it can also be a brokerage account.  So you can buy stocks, bonds, ETFs, mutual funds, and even write covered calls in the account.

PLAN is just the governments way of reminding us that it's not for now, and it has rules associated with it.  Rules such as, the plan has to be dissolved by the time your child turns 35.  So you can have this account open generating monies for educational purposes all the way through your doctoral studies.  If your child however doesn't go to school, then you have until they turn 35 to wait...  And then the rules say that you can't just cash it out.  Any government help you might have received for this account has to be returned but you can KEEP all the interest, dividends, profits you made while using their money.  Additionally, to exit the plan, you have to transfer it into your RRSP provided of course you have sufficient contribution room.  If you don't then you have to fold the plan and pay taxes on it.  Lastly, you can only contribute a maximum amount to each plan of $50,000.

NB: you as the parent are not the only person who can setup an RESP for your child.  Grammy and Grampy might do so too because they want to help provide for your child's education and they don't trust you enough with money to put it in your sticky fingers.  You will know that they might be trying to do this if they ask you for your child's social insurance number.  So if they contribute it takes away from the $50k maximum you can contribute.  (I'll now chime in and say, for probably most of my readership, hitting that limit will never be an issue)

As for the previously mentioned government help you can receive it works like this:  For most people who aren't "as-poor-as-f&#@" as my friend put it, you will be given up go $500 from the government EACH year provided you contribute $2500.  They will only do this for 7 years.  If you skip a year that's ok.  They will contribute when you do too.  All to a maximum of $3500.  (500 * 7)

So lets put this out in simple math... The government gives you an additional 20% on top of your contributions of up to $2500 per year.  YES 20% return just for opening an account and stuffing in some money.  Fat chance finding a 20% return on the money in your shoe-box or savings account.

For people who ARE "as-poor-as-f&#@" then you will qualify for the Canada Learning Bond. How do you know if you qualify?  You'll already be recieving the Universal Child Care Credit, AND the government will write you 2 times a year with RESP propaganda telling you you're elligible and will recive $500+(100*x) for the number of years since your child has been born AND you've qualified for the Universal Child Care Credit.  What is it worth?  They start you off by giving you $500 and then an additional $100 per year for up to 14 years.  So $1900 maximum.  (Provided your level of "as-poor-as-f&#@" continues for all of that time)

Here's the catch:  Most brokerages are not setup to do the CLB paperwork.  Why?  99.99999% of their clients don't qualify.  If you're really are that poor then you're probably NOT investing for your future as you have bigger choices such as heat OR groceries, or diapers OR your bus pass so you can get to work.

Additional catch: most banks will provide the necessary service to apply for the CLB, but they generally only offer savings accounts with 0.0000001% interest.

So what to do?

If you qualify for the CLB then you'll want to open two accounts.  One at the bank to capture the CLB and one at a brokerage so you can actually put money to work in a way that will beat inflation.

Once you get the CLB money, then have your bank/brokerage submit the "registered account transfer" paperwork to transfer the funds to your brokerage account.  Make sure to have them leave the account OPEN after the transfer so that the 14 years worth of $100 contributions continue to land in your hands.

So lets fast forward...  Your child is now 19 years old and on his/her way to university.  How do you get the money out?  You tell your bank/brokerage the name of the school (just part of the paperwork... nothing difficult) and then you can start making withdraws.  They are in the name of the CHILD and taxed in the hands of the child.

Since a student at university isn't working they have a taxable income of $0.00.  So any money coming out of the plan is essentially tax free. AND to top it all off, any tuition tax credits will help keep them UNDER the "base amount" on our tax returns.

So what does that mean?  ANY/ALL gains and grants/bond moneys used for school are TAX FREE.

I hope this helps some of you!

Saturday, August 18, 2012

what are my options?

I've been recently re-reading my older posts and as frightful as this may sound, my blog is becoming more of a journal rather than a helpful hand getting into the markets leading you to eventual financial freedom.  I had been hoping to avoid this, but I too have been growing both my assets as well as my investing knowledge.

It's now led me to the wonderful world of "options."  Please note, your options do NOT include fries and a drink.  This is a money blog!  At the same time, it shouldn't really include "under the mattress" either... Well... Not for all your money.  Seriously though, these are not the same options you might get as an employee of a big company.  These are contracts that trade on the derivatives market.  These contracts have a value unto themselves and are affixed to a specific stock or index.  Like a contract for employment they have terms and conditions, but unlike a contract for employment the money is paid up front.  (Unless you're a lawyer those people always want the money up front.)

I could prattle on and on as to how they work, but that's best described by other info sites since it's somewhat confusing at first as to why anybody would want to do this.  So lets skip forward to the good stuff! What have I done?  I've written several covered calls to enhance my returns. So far, my returns have been very small as I need to shake up my holdings a bit as I currently do not have too many holdings that are option-able.

So far I've been very modestly successful and collected a tiny bit of option premium for my efforts.  Only time will tell if I get "called away" from my positions, but since I've been dutiful selecting the term and conditions for these contracts I will only walk away richer than I am now.  I could lose only if the underling holdings completely explode.  Which isn't possible, but it's very very remote for the companies and options I've traded.

Trade activity: (number of contracts, strike prices and duration have been omitted)
sold - call(s)
sold BAC - call(s)
sold  F - call(s)
sold  SU - call(s)

Minus my commissions this added up to a hill of beans.  A small hill of beans mind you and not a hole in the ground.  If I get called away then great.  I've made money on that too!  If I don't, then I'll re-write new contracts on these positions and start the process over again.  It's extra money on top of positions I'm happy to hold for the next little while.

Now, why would anybody do this?  If you think the market is going to take off, then you can BUY (a call) and set your entry price and only get in if/when things start to move.  If it doesn't move, you don't hit the trigger price (strike price) and you don't wind up buying the stock.  This just cost you your premium but it prevents you from buying the stock that's not going up anyway.

Or, alternatively you can SELL (a call) to collect the premium.  If the market doesn't go up then you keep the stock and the premium, then repeat the process.  If however the stock price does go up to hit your strike price, then you *may* get "called away" (and get the face value) AND keep the premium.  Either way, you get the money up front.  If the stock doesn't go up much past the strike, you may not get called away either.  It all depends on how much the buyer paid for the contract.  Since with options you are buying/selling the RIGHT, but NOT the obligation to call away or put to somebody else.

Stay hungry my friends!

Do what I do at your own peril.  I've done my homework.  Have you?  If you don't want to stand up and take responsibility for YOUR actions what makes you think I should take responsibility for YOUR actions?   Don't make me say, "I told you so....  loser!"

Sunday, August 12, 2012

Gold - It's shiny!

If you think the government is printing money at an alarming rate, or the financial system is on the brink of collapse how on earth will you be able to exchange/barter/pay for goods and services?

Historically the first currencies on earth started with coins of gold.  Why gold?  It's shiny.  That's about it.  So you might speculate that we as a species are attracted to shiny things.  Foolish speculation aside, gold has been the global standard for money ever since money was created.  It has only been a very recent development that currencies are no longer backed by gold held in a federal treasury.

Skipping all the "useless" historical stuff, there is value in gold since it's quite laborious to dig it out of the ground.  (Gold companies harvest tonnes of rocks and unit of measure they use is grams/tonne...  Grams of gold per TONNE of rock they dig up, crush, and process.)  So once this gold is melted and pressed into pretty bars, or blended with other metals and worked into rings or other jewellery, it has and has had significant value ever since the dawn of recorded history.

So why buy gold?  It's value will be somewhat proportionate to the INVERSE of the rate at which the world governments are printing money.  (Devaluing their currencies)  Why do they do this?  They have to pay their bills some how and they just happen to be the owner of the printing presses!  Additionally, deflating the currency reduces the significance of any sovereign debt sold off by the government.  So, the faster governments print money, the more the value of gold goes up.

How do you buy gold?  You can easily buy gold from any of the big banks in Canada, but there are awful premiums on the purchase price because of the associated tasks of safe storage and transportation to you.  Most brokerages will let you buy gold certificates which may or may not be redeemable for the physical gold, but these certificates trade at the current gold market prices (+/- the bid/ask spread).  Since the bank already has the gold in their vault you're simply buying the "deed" to a certain amount.  There is a storage fee associated with the gold ownership that they pass along to you, but it's not nearly as stiff as the fees on the physical product if you have it delivered to you.   You can buy physical gold in VERY small amounts but the fees are huge relative to the purchase price.  And then you have to store the stuff.  I do NOT keep mine in my sock drawer.  If you go with the certificates, then your bank/brokerage will generally insist on a minimum order which in my case just so happens to be 10oz of gold which is about $17,0000 at today's price.

I don't have a large enough portfolio to even consider that.

So what's left?  Gold backed ETFs.  There are many companies that do this and the fees are generally quite low.  MUCH much lower than the previously mentioned methods.  AND much safer/cheaper because you don't have to deal with the security and transit or storage of either the physical gold or the certificates.

So until your holdings justify $25k or more of bullion, then stick to the ETFs unless you really want to buy some shiny bars or coins, and bury them in a strong box out in the back yard.

Full disclosure: I own 100 units of CGL.TO - ishares gold bullion ETF.  But I have an order on the board to sell at a price only a couple percent higher than today's price.  I'll be buying it back later.  Who knows when.  Probably when I'm older, more bitter, and much much more miserly than I currently am today.

Stay hungry my friends!

Standard disclaimer: I didn't tell you to do it...  It's not my fault if you lose everything.  If you don't do your own research and take responsibility for your actions why do you think I should take responsible for your actions?  Grow up already.

Thursday, August 9, 2012

Hello fellow bloggers/starving artists/low income people who are tired of financial servitude.  I would like to introduce you to Glenn Cooke.  The first GUEST POST author for my blog. My $0.02: As you may or may not know, and I'm sure many of you (the single ones) can agree, life insurance just isn't for you.  If you die, what do you care what happens?  

However, if you're a little bit older then "life happens."  You might have found yourself with a significant-other and a wiggling, giggling, screaming bundle(s) of joy, more monthly payments than you ever thought you could manage, and far far less sleep then you have ever experienced.

Life insurance is the key to keeping your beloved and prodgeny from having to move into the cardboard box under the freeway, or into mom's basement.  So if you do kick the can and haven't yet made your fortune and glory then this post is for you!  

Ideally if you could do it, you would buy a policy that would pay out enough to keep the family in Bugatti Veyrons, but if you're a starving artist/low income type like me, then keep reading to provide your family with the coverage they need to keep them off the streets.


How to really, really save money on life insurance.

There are a lot of articles on the internet on how to save money on life insurance. Heck, I've written a few of them myself. Yet when I came across The Starving Artist's blog, I saw the opportunity to present some tips for those seeking to really take this over the top.
Take the example of a starving artist with a family. We'll assume that the need for life insurance exists with a few kids running around and probably car payments, daycare expenses, and all the other things that come with the young family life. And we're going to further assume that daily cash outflow is limited to such an extent that we need to chop anything we can to reduce expenses today - even if that's at the expense of additional costs in the future.
With those assumptions in place, here's some tips to get the absolute lowest life insurance premiums today.
  1. Find a broker that shops more companies. This sounds obvious, but most agents and brokers only work with a few companies. If you can find a broker that has 15-20 companies (pretty much all the competitive companies in Canada) you increase your chances of finding a lesser-known company that's cheaper than the brand name companies. Example, 30 year old couple, $500,000 of 10 year term life insurance each. The least expensive companies are Transamerica, Equitable, Wawanesa, UL Mutual, SSQ, Foresters, Western Life and Desjardins with premiums starting at $40.50/month and all from smaller companies you may not have heard of. Canada Life, Manulife, Great West Life and RBC have premiums ranging from $46 to $47/month. Sticking with the brands in this case will cost you over $70/year.
  2. Corollary to 1, don't care about company. All Canadian companies are financially strong, well backed by the other companies and very well monitored and regulated by the government. Neither strength nor cheapest premiums are well correlated to company size; on any given day the cheapest premiums could be from a small company nobody's heard of, or the largest company in Canada.
  3. Watch your age change. Insurance companies don't use your birthday, they use the middle of the year or your 'nearest birthday'. In the life insurance world you become a year older six months earlier than you'd expect. So if you're going to apply, apply sooner rather than later to avoid the surprise 'insurance birthday' party.
  4. Disclose everything during the medical exam. As most people are fairly reserved about their medical information this advice is a bit counter-intuitive. However you'll find you'll get better decisions out of the insurance company if they have an application filled with volumes of details about every little thing that's every happened to you. It's as easy as underwriters feel more comfortable giving better rates if the application is pages long rather than a brief synopsis. Don't leave them guessing and having to assume the worst case scenario.
  5. Buy a shorter period of term. Life insurance premium guarantees come in different time periods - 10 years, 20 years, or your entire lifetime. If you're cutting costs today, then go with a shorter term. For most of us, that will be 10 year term. In doing so, you're deferring paying higher premiums until later when you're 10 years older. However I did a study on this a while ago and it turns out that buying 10 year term life insurance every 10 years (and taking the associated medical exam) is actually cheaper than locking in your premiums for longer terms. Again, this is counter-intuitive. Careful though - if you take this approach, make sure your term policy has a feature called 'conversion' that allows you to jump to permanent insurance without a medical exam. (aside: some companies actually have a mini-conversion where you can jump from 10 year term to 20 or 30 year term in the future if your needs change).
  6. Quit smoking. And while you're waiting for a year to pass (required for insurance companies to consider you at nonsmoking premiums) then go with a 10 year term and lock into a longer period after you've been tobacco free for a full year.
  7. Conversely, cut your insurance amount last. The first thing most consumers want to do to reduce premiums is lower the amount of insurance. In fact, this isn't the first thing you should do, it's the last thing you should do. If you die (which is what you're preparing for when you buy life insurance) the only thing that matters is how much insurance you had. So make sure you have enough. If the 'right amount, right type, right company' doesn't fit your budget, ask your broker to chop everything else they can before they cut the amount of life insurance.
  8. Avoid no-medical exam life insurance. The TV commercials show you how easy it is to apply - and that's true. They seem to have neglected to mention how the ease of application normally comes with higher premiums and reduced benefits. No medical exam life insurance policies should be used as a last resort. Take a medical exam, prove your health, and get the best premiums possible.
Glenn Cooke is a life insurance broker and president of

Wednesday, August 8, 2012

Financial Advisers or DIY

So you've decided you'd like to invest and you don't have a lot of money to start with.  If you've read any of my other articles on this blog then I'm left with only one question: WTF is wrong with you?!?!

But now that you clearly know my bias for DIY investing, I'd be happy to reveal the pros and cons of doing it yourself vs the cons and cons of hiring somebody for your small account.

Don't get me wrong, if I were rich, then I would be very much inclined to take on a wealth management firm to help manage a portion of my money so I could spend more time enjoying life with my family.

So what does a financial adviser do for you and how much does it cost?  In an idealized world they would be altruistic individuals who are out to help better mankind one investor at a time.  They would thoroughly discuss the options with the investor, the advantages and disadvantages of each and then implement a plan that made them both money.  The reality of the situation is however much more bleak.  They wanted a job.  They needed a job.  They wanted a job that pays them a set fee regardless of their performance.  They are encouraged to perform better of course because it leads to better returns for their clients and better income for them.  But when your account is small, generally do not give you the time you need.

They generally will recommend craptackular mutual funds that pay them a legal kick-back for selling you "the product."  (aka fund units)  Why?  It's easy, it makes them money, and it attempts to sell you into the investing world.  (Full disclosure: I started exactly this way.  My money did nothing but stagnate and disappear over 10 years all thanks to the high fees from the legal kick-backs and the costs of maintaining the account)

Why will they gloss you over?  New investors have a lot of questions as they do not understand anything as to how the market works, how are the ways in which you can invest, and what sort of offerings do various companies provide for these purposes.

How will they sell you on these crappy products?  They will no doubt prattle on and on about diversification to remove risk and talk about mutual funds pooling your money with others' as to improve the choice, tell you that you can contribute as much or as little as you like on a regular basis and this will do this magic thing called "dollar-cost-averaging" if (WHEN) the value of the fund units go down.  If you do ask about fees they will no doubt lead you down the garden path when it comes to these mutual funds.  They will say since you're pooling your money, you don't need to make many expensive trades yourself.  Which is based on truth... But the real truth is that most mutual funds have so many things in them that the costs on the fund of all the necessary trades does add up to a significant amount.

Why do they suck?  If the fund isn't completely horrible then it will have a blended basket of stuff in it that approximately resembles the market.  Then if the stock market goes up, the value of the units go up MINUS the fees.  Generally speaking they can be as high as 5%, if you add up the costs of maintaining your full-service account plus any commissions your adviser took plus the management fees of the products they sold you PLUS any "performance fees" that some of these crappy funds charge.  (If the fund does too well, they charge you for that!)  So: the market went up 5%, your money?  0%  If the market goes sideways then you're down 5%, and if the market goes down 5% then you're in the hole 10%.  When the market recovers that 5%, then you'll still be down 5%.

Sounds great doesn't it?

Now when you do start accumulating more money in your investment accounts, an adviser worth his/her salt will start recommending individual companies to buy and at which point you may start actually making a bit of money.  But when they do the trades for you, the commissions are ruthlessly high.

The pros and cons of doing it yourself?  You can actually pick stocks directly and trade them quite inexpensively thanks to the multitude of discount brokerages where you can do everything yourself online.  The downside?  You'll need to do your own research and make your own picks.

So it costs you time, but at the same time you have a much better chance of actually making some money.  If you're a completely underutalized starving artist like myself, you'll have the time you need to research.

And of course, if you buy an Enron and don't keep on top of things then you can lose a chunk of change.  But with some tips and tricks that you may or may not learn from reading more of my blog then you stand a good chance of avoiding this kind of fiasco, or at least getting out of the burning building with a good chunk of your money.

I highly recommend you watch Market Call/Market Call Tonight on BNN.  (Owned by Bell/BCE.  Full disclosure: I do NOT currently own shares of Bell/BCE.  I might buy some in 6-12 months)  Watch this 30min/1h long program either on the tube or online.  Watch it for a few months and you'll start to get a feeling for what to buy and why.

Stay hungry my friends!