Financial Planning Talk

[Slava]

Originally Posted by Cecil Terwilliger

And if you don't like doing any work go buy a balanced mutual fund pretty much anywhere. Most of the big 5 or your local credit union or whatever will have some stuff available with little or no commission.

My two cents is that while you have less than $100k or even $250 or $500k you are probably better off not paying large transaction fees. And if you're like most people ETFs or online brokerages seem daunting and can get you into a lot of trouble if you follow bad advice. A balanced fund, or something with 60-70% equity and 30-40% bonds and such, will probably do fine for most people who don't have a ton of savings/RSP/TFSAs and don't want high fees.

Yeah the MERs aren't exactly cheap but you'll probably avoid commission if you buy some front end sales charge at 0% commission. Even if there are some DSCs you can avoid them by holding the fund for a while, which won't be a problem if you have a decent portfolio fund that gives you Cdn/US/Int exposure and some safe stuff to keep you from getting all suicidal when the markets are down.

I just wanted to comment on this because I definitely agree with a few of the points you make. I also think that anyone, anywhere should be disclosing all of the fees that you will pay before you buy. Its required now, so you should know exactly what you're paying for fees and don't be afraid to ask!

[HockeyIlliterate]

Originally Posted by Regorium

What about when your 8% portfolio, because it's energy focused (because we're in calgary), craters 40-50% in a year, with no real chance for improvement?

A portfolio that is properly allocated, in accordance with one's need, willingness, and ability to take risk, should be able to survive a 50% drop. But if you can't survive a 50% drop, then your asset allocation is off and should be adjusted accordingly.

Originally Posted by Regorium

What happens when your house becomes worth a fraction of its value because the industry around it changes?

Well, your house isn't an investment, and so it shouldn't be treated as one. Furthermore, if you pay cash for your house (as I believe that one should), any loss in property value should have no effect on your income-producing assets nor on your need to draw from them.

Sure, your house should be counted as being part of your net worth. But it has no place in any determination of one's income-producing assets, since you can't eat your house and you have to live somewhere.

Originally Posted by Hack&Lube

You don't need a "rainy day fund" if you have the ability to move money in and out of a line of credit. I would recommend that vehicle to a lot of people as long as they still have consistent income. When I have money I can pay it down, when I need money, I can take it out.

In theory, I would agree with your statement.

However, as evidenced by what happened in the 2008 downturn, having a line of credit is of no use when banks start to reduce them (or even close them altogether) in order to reduce their own risk profile.

Quite frankly, access to a line of credit is typically only available when you don't need the line of credit. Once the bank realizes that your income has dropped or disappeared, the line of credit may soon follow. Which is why I believe that everyone should have a healthy emergency fund that is stored away in a (reasonably) high-yielding government-insured bank account.

Originally Posted by ranchlandsselling

But not only should $1.5 million be saved by 50 (I mean, you're a pretty bad "professional" if you haven't), but you should also have your house completely paid off too because that's how the $40k a year is do-able.

Well, yes. As I have mentioned in other threads (I believe it was in the American Politics one), I firmly believe that one should only buy a house when they can pay cash for it. So, yes, living off of $40K a year should be possible provided that your house is paid off.

Originally Posted by ranchlandsselling

Although he/she mentions US taxes, which if a US resident maybe they forget that Canadians can't write off interest on our mortgages which is a huge savings.

The mortgage interest deduction that is available to US citizens (and maybe residents, I don't know) is overblown. What is the point in spending, say, $3 in interest only to get $1 back as a tax deduction/credit? The debtor is still paying $3 upfront, and--even after taxes---paying $2 out of pocket.

Besides, unless the mortgage is a very large one, given the amount of the standard deduction, any mortgage interest deduction is not of any great value to most people, since the debtor is only benefiting (in a very loose sense) in regards to the difference between what their total itemized deduction amount is and what their standard deduction amount is.

Originally Posted by Peanut

Was it you in the other thread who mentioned that professionals by age 50 should have $1.5M saved up? Can you elaborate on that? For example, how have the people you know managed to achieve that (lifestyle, investment strategy, etc.).

In a few words: they save. They save, and save, and save. They save until it hurts, and then they save some more.

They pay themselves first, and primarily invest in low-cost index funds using an asset allocation that is appropriate to their need, willingness, and ability to take risk. The reinvest dividends and they make tax-efficient investments. They max out their retirement and tax-deferred accounts every year. If they are Canadian, they generally subscribe to the "Wealthy Barber" mindset and that discussed on the Financial Wisdom Forum. If they are American, they generally call themselves a Boglehead and follow the tenets discussed on the Bogleheads forum. Maybe they subscribe to the statement that you can shear a sheep many times, but you can eat it only once.

They live below their means. They don't buy too much house, and they keep their cars until the wheels fall off. They avoid debt. They appreciate good value, and not necessarily simply a good price. Keeping up with the Joneses is of limited interest to them. Instead of, as the quote somewhat goes, "spending money that they don't have, on things they don't need, to impress people they don't like or who don't care," they spend money on what makes them happy---which may mean not spending any money at all.

They make saving a priority, with an eye towards the long-term. They stay the course, and ignore the noise of the market. They realize that tomorrow their job could be gone in an instant, and that having money provides options and that it is never a bad thing to have options.

At the same time, however, they realize that they could die tomorrow, and so it is important to enjoy the moment as well. They are aware that although they may be able to have almost anything they want, they can't have everything that they want, and so they have to balance the here and now with the tomorrow and unknown. And so they do, and their prioritize in such a manner that provides each of them peace and the ability to sleep well at night.

Originally Posted by Sliver

It wasn't him. It was hockeyilliterate and it's an absolute fantasy to think that's achievable for anything other than a very small minority.

I disagree.

It is achievable for anyone who is willing to prioritize and put forth the effort necessary to achieve such a goal.

Maybe you are correct that such people are "a very small minority." But that doesn't have to be the case.

Originally Posted by Fuzz

Sitting around in Calgary 365 days a year isn't my idea of a happy life.

I've been all over the world. There is no finer city than Calgary that I have ever seen or lived in. To be able to live in or around Calgary 365 days a year would be paradise to me.

[Fuzz]

Oh, don't get me wrong, I love it here and coming home is often one of the best parts of a trip. But to never get to experience Asia, or Europe, or South America, or the Caribbean? Ugh.

[Fuzz]

Originally Posted by HockeyIlliterate

Well, your house isn't an investment, and so it shouldn't be treated as one. Furthermore, if you pay cash for your house (as I believe that one should), any loss in property value should have no effect on your income-producing assets nor on your need to draw from them.

Well I'm glad I was never given that advice earlier... Had I done that I would have had to save at least an extra $200 000 before buying(as that is what the value has gone up by) and my rent would have doubled. I'd probably never have enough savings to buy a house, and if I did, that'd be 20 years worth of money all put into a house. If you are going to be somewhere long term and have a reasonable down payment and make responsible purchase decisions, saving to pay cash for a house is really bad advice.

[GomerPile]

I am wondering how many people count their bonuses in the annual budgets. I am not working currently, but it always amazed me how many of my former coworkers were desperate to get their bonuses to pay for things they had already purchased. To them it was part of their salary, I always just brought up Clark Griswold. Getting a bonus, is exactly that. My wife and I have had some good bonuses and some not so good over the years. I think it is prudent to add this bonus onto the retirement pile, or the rainy day fund if you're in a topsy turvy industry.

Funny story - Our "bonuses" at a really small oil tool company that I worked for from 05-09 was always some cash in a Christmas card. The first two years I received $1000 bucks! I was pumped, but followed the advice of my parents and put in my RRSP. During the downturn the owner assured us in a meeting that the bonuses would still be paid. I was surprised by this given the situation was what it was. Few months later, open my card and whammy there was my bonus. $5.00. It was more of a joke then anything, and that was the one bonus that went straight to beer.

[Hockeyguy15]

Why would you pay cash for your house with current interest rates? Even if you could pay in cash wouldn't it make more sense to invest that money, as you would likely have a higher rate of return than the interest cost on the mortgage?

[OMG!WTF!]

You can't say a house is or isn't an investment. It totally depends on how you treat it. It's a commodity bought and sold in a market and is subject to normal investment parameters. If you take your house out of that market and never sell it or add to it or gain a return on it via rent then I guess it's not an investment in that particular case.

[ranchlandsselling]

Originally Posted by Fuzz

Well I'm glad I was never given that advice earlier... Had I done that I would have had to save at least an extra $200 000 before buying(as that is what the value has gone up by) and my rent would have doubled. I'd probably never have enough savings to buy a house, and if I did, that'd be 20 years worth of money all put into a house. If you are going to be somewhere long term and have a reasonable down payment and make responsible purchase decisions, saving to pay cash for a house is really bad advice.

Oh right, it's this guy again. I thought I recognized some of the ludicrous posting style. $1.5 million by 50 and you should only buy your house with cash.

I knew there was something I recognized in the posts from the other thread.

[Fuzz]

Ya, would be interested to hear the details of his personal financial journey. How much he makes, saves, when he bought a house for how much....I mean, maybe it is all possible to make $50 000 and do what he says, but I have my doubts how that would work.

[ranchlandsselling]

Originally Posted by Fuzz

Ya, would be interested to hear the details of his personal financial journey. How much he makes, saves, when he bought a house for how much....I mean, maybe it is all possible to make $50 000 and do what he says, but I have my doubts how that would work.

Or that random poster who's likely trolling is actually going to be forthcoming and said forthcoming post will be believable.

[Slava]

The truth is some of his points are sensible, and completely make sense. Others are a little out there. Specifically the "saving until hurts and then save more" kind of attitude. Its not that its something you can't duplicate, its that a lot of people don't want to just have money in the bank as opposed to experiences and a certain lifestyle. That's why so much of financial planning comes down to personal preference, and why the robo-advisor or set it and forget it falls short though. Customizing things for an individual isn't as straight-forward as just adding more bonds or whatever.

[Rathji]

Originally Posted by CaptainCrunch

my retirement plan involves a bottle full of heavy pain killers and a jump out the window of whatever company I'm working for at the time.

Hopefully I'm not working at a ground floor office.

I tell people that my retirement plan involves me dying at 70, when I plan on stopping work. It is partially in jest, but I am not the healthiest guy, so I don't expect to need 30 years of money to live on after I am 65.

I am currently on board with getting my savings in line now that I have realized that I couldn't put it off forever and seeing how hard my mom has it with her level of savings. I am pretty much going to be supporting my mom for the rest of her life now that she isn't able to work due to her health.

[CliffFletcher]

Originally Posted by HockeyIlliterate

Well, your house isn't an investment, and so it shouldn't be treated as one. Furthermore, if you pay cash for your house (as I believe that one should), any loss in property value should have no effect on your income-producing assets nor on your need to draw from them.

You realize that the median individual income in Canada is $27 k, don't you? Let's say we have a couple with typical incomes, so $55 k household income. And let's assume this couple takes your advice and lives within their means - so they decide to buy a dilapidated duplex in a sketchy part of a medium-size city for $180 k. Assuming this couple gets together at 25 (which is very young for this day and age), how long until they can save that $180 k and buy a house?

And what if they want kids at some point there? How does that affect your model? It costs $245 k to raise a child in Canada, and that's before factoring in university. So $500 k for two kids, and more like $600 k if you set aside the recommended amount in RESPs.

Originally Posted by HockeyIlliterate

Which is why I believe that everyone should have a healthy emergency fund that is stored away in a (reasonably) high-yielding government-insured bank account.

There's that word again. I have a feeling your social circle is fairly homogeneous (and small).

Originally Posted by HockeyIlliterate

They live below their means. They don't buy too much house, and they keep their cars until the wheels fall off. They avoid debt. They appreciate good value, and not necessarily simply a good price. Keeping up with the Joneses is of limited interest to them. Instead of, as the quote somewhat goes, "spending money that they don't have, on things they don't need, to impress people they don't like or who don't care," they spend money on what makes them happy---which may mean not spending any money at all.

You forgot "they earn a much higher than average salary and never suffer a sustained period of unemployment or underemployment."

Originally Posted by HockeyIlliterate

It is achievable for anyone who is willing to prioritize and put forth the effort necessary to achieve such a goal.

So is living on a strict diet of lentils, whole grains, and legumes, while competing in triathalons. Presumably, that doesn't describe you. So you must be lacking in discipline and self-control.

But what you're presenting is, in fact, impossible for most Canadians. It is possible for those who have well-paying jobs, extraordinarily strong self-discipline, and a spouse with the same traits.

[peter12]

Man, Slava gives a good pitch. I take back what I said about the 2.7%, it was an exaggeration!

[Enoch Root]

Originally Posted by heep223

Totally valid. Most "advisors" simply are terrible. Set it up yourself and use ETFs if you can, and rebalance one or twice / year. You can easily create a global portfolio across asset classes for like 0.1% in fees.

Check out this website:

http://canadiancouchpotato.com/model-portfolios-2/

I'm sorry but I can't let this go.

Your basic argument here is that professional advice is bad, so you're better off with non-professional advice. Great advice!

Just reading through this thread should be enough proof for anyone that most 'advice' is terrible and most people really don't know much about financial planning and are mostly unable to take proper care of it on their own.

Who is providing the best information and advice in this thread? The professionals, like Slava. Who would have guessed a crazy thing like that?

To your direct statements about building a portfolio of ETFs: that is actually a very sound starting point for a diversified portfolio. And is not dissimilar to much of my professional philosophy and strategies. However, there is more to it than that. Slava pointed out a couple issues, and while a discussion forum is no place for a wall of text explaining some of the shortcomings, I can assure you there are many.

But more importantly, the biggest problems stem from ourselves as individuals - human behavior is the largest impediment to successful investing. Building a diversified portfolio is easy (ignoring the fact that building a good one is substantially more difficult). The bigger issues are: understanding whether that portfolio will meet your needs and goals going forward; and being able to stick to the plan and not make mistakes at critical times (among many other issues).

The single most common mistake individual investors make - and the primary reason why most investors substantially under-perform the markets - is that they are prone to making emotional decisions at the most critical times. And emotional decisions are almost invariably bad.

An advisor's job isn't just to build you a portfolio that will meet your needs and achieve your goals, it is also to help you understand the challenges ahead of you, help you plan for them, and (among other things that are too numerous to list here) the most important thing is to provide discipline and keep you from making emotional (read: bad) decisions.

People, in general, are too confident in their own abilities. It's human nature. We're all good drivers, we're all well liked, we all have a good sense of humour, etc.

And we all think we can avoid basic human behavioral pitfalls. "I won't make those mistakes.' 'I'm smarter than that.' Sorry, but yes you will, and no you're not.

Telling people not to get professional advice is just about the worst advice you can give someone.

[polak]

Originally Posted by Fuzz

Ya, would be interested to hear the details of his personal financial journey. How much he makes, saves, when he bought a house for how much....I mean, maybe it is all possible to make $50 000 and do what he says, but I have my doubts how that would work.

Didn't it come out in another thread that he got a big inheritance or something?

[ranchlandsselling]

Originally Posted by CliffFletcher

You realize that the median individual income in Canada is $27 k, don't you? Let's say we have a couple with typical incomes, so $55 k household income. And let's assume this couple takes your advice and lives within their means - so they decide to buy a dilapidated duplex in a sketchy part of a medium-size city for $180 k. Assuming this couple gets together at 25 (which is very young for this day and age), how long until they can save that $180 k and buy a house?

And what if they want kids at some point there? How does that affect your model? It costs $245 k to raise a child in Canada, and that's before factoring in university. So $500 k for two kids, and more like $600 k if you set aside the recommended amount in RESPs.



There's that word again. I have a feeling your social circle is fairly homogeneous (and small).




You forgot "they earn a much higher than average salary and never suffer a sustained period of unemployment or underemployment."



So is living on a strict diet of lentils, whole grains, and legumes, while competing in triathalons. Presumably, that doesn't describe you. So you must be lacking in discipline and self-control.

But what you're presenting is, in fact, impossible for most Canadians. It is possible for those who have well-paying jobs, extraordinarily strong self-discipline, and a spouse with the same traits.

What you're forgetting on top of those good points is that someone like the above example likely gets off on being frugal. They get satisfaction from it. So, in some instances it doesn't take "extraordinarily strong self-discipline". Just like the lentil-eating-triathlete you mentioned, who actually enjoys doing that sport and competing. And there's always the satisfaction of a drive-by humblebrag that likely provides additional satisfaction.

[pseudoreality]

My father is 70, is earning two good pensions, is presently working full time, and looking what to do next. Starting next year he has to convert his RRSPs to RRIFs. He works because he likes having something to do and being valuable. My mom on the other hand does a ton of volunteering in her retirement. I think I will be somewhere in the middle in my old age. I never see myself fully retiring and will always have some project on the go. I was Engineering Consultant for 10 years before I went government and there will always be little contracts for me do until I die.

That being said I am definitely investing lots so I don't have to work late in life. In fact, I fully plan on being richer in retirement than now (mid-30s).

I also want to put my 2 cents in about your home being an investment. I don't think its wrong to think that way, but just don't have it as your only investment or your largest asset. Like any other investment it could go up or it could go down and you need to prepare for that. Garth Turner has a rule of 90, where your age plus the percentage of your net worth in real estate should not exceed 90. That's a good starting point, but the formula falls apart when you are overly leveraged on your home.

[heep223]

Originally Posted by Enoch Root

I'm sorry but I can't let this go.

Your basic argument here is that professional advice is bad, so you're better off with non-professional advice. Great advice!

Just reading through this thread should be enough proof for anyone that most 'advice' is terrible and most people really don't know much about financial planning and are mostly unable to take proper care of it on their own.

Who is providing the best information and advice in this thread? The professionals, like Slava. Who would have guessed a crazy thing like that?

To your direct statements about building a portfolio of ETFs: that is actually a very sound starting point for a diversified portfolio. And is not dissimilar to much of my professional philosophy and strategies. However, there is more to it than that. Slava pointed out a couple issues, and while a discussion forum is no place for a wall of text explaining some of the shortcomings, I can assure you there are many.

But more importantly, the biggest problems stem from ourselves as individuals - human behavior is the largest impediment to successful investing. Building a diversified portfolio is easy (ignoring the fact that building a good one is substantially more difficult). The bigger issues are: understanding whether that portfolio will meet your needs and goals going forward; and being able to stick to the plan and not make mistakes at critical times (among many other issues).

The single most common mistake individual investors make - and the primary reason why most investors substantially under-perform the markets - is that they are prone to making emotional decisions at the most critical times. And emotional decisions are almost invariably bad.

An advisor's job isn't just to build you a portfolio that will meet your needs and achieve your goals, it is also to help you understand the challenges ahead of you, help you plan for them, and (among other things that are too numerous to list here) the most important thing is to provide discipline and keep you from making emotional (read: bad) decisions.

People, in general, are too confident in their own abilities. It's human nature. We're all good drivers, we're all well liked, we all have a good sense of humour, etc.

And we all think we can avoid basic human behavioral pitfalls. "I won't make those mistakes.' 'I'm smarter than that.' Sorry, but yes you will, and no you're not.

Telling people not to get professional advice is just about the worst advice you can give someone.

This is all fine and dandy. I don't disagree with any of it.

The one most important point that you miss though, that makes it all moot, is that "professional advice" in this industry, in 95% of cases, is coming from sales people with very little actual knowledge of investment principles, conflicts of interest all over the place, and no fiduciary responsibility. Which is what the poster I was responding to was talking about and he was bang on.

You guys are going to have a very difficult time convincing me with rational argument otherwise. I should note that I work in the industry and I'm a CFA charterholder. That doesn't mean anything per se other than the fact that I have in-depth knowledge and experience in this industry and I've seen multiple sides of it.

Not to say the industry isn't getting better, with the emergence of index products, more transparency, better and easier access to markets, fees coming down, more fee based advice. But 90% of the industry is still based on the conventional model that is broken.

So, I will continue to argue that the best way for the average retail investor to manage their portfolio is to educate themselves, keep fees very low, build a passive diversified portfolio and stick to it.

[HockeyIlliterate]

Originally Posted by Hockeyguy15

Why would you pay cash for your house with current interest rates?

Because I believe that debt should be avoided at all possible costs, as it ultimately restricts your options and reduces your opportunities.

As a simple example, if you do not have any debt and you only need X amount to live and you do not like your current job, you can conceivably quit your job and go do something else that pays X+1 (or just X; or nothing at all, and live off your dividends, interest, and capital gains to recreate X). But if you have debt, you now need an amount equal to X+debt-service-amount in order to live, and the debt-service-amount can be such an amount that makes other lower-paying, or non-paying, jobs not realistically available to you.

Originally Posted by Fuzz

Ya, would be interested to hear the details of his personal financial journey. How much he makes, saves, when he bought a house for how much....I mean, maybe it is all possible to make $50 000 and do what he says, but I have my doubts how that would work.

I'll tell you this much:

I started working when I was 25, and I'm 39 now. I've worked every year during that period of time, except for about a year when I backpacked around the world and then came back home to look for work (a trip that was paid for in cash entirely out of my own savings). During the period of time in which I've worked, I have consistently saved at least 50% of my gross income (or 70% of my net income) each and every year.