Michael James asks, Do You Have the Nerve to Rebalance Right Now? My answer is a resounding "yes!"
At the start of this year, I calculated that we had a 57:43 split between stocks and bonds+cash, which I considered to be too conservative for us. However, the market being what it was back then, I thought stocks were overpriced, so I held off on rejiggering our assets.
My first rejiggering happened on September 9, after the TSX had fallen from 15,000 to 12,000. The second occurred on Friday, when the TSX dipped below 9,000. Now our ratio is 76:24, which is where I've wanted it for months; and I'm delighted that there are folks out there willing to sell me stocks at such bargain prices.
Oct 12, 2008
Oct 10, 2008
Oct 7, 2008
Ok, I don't own an SUV
Lest my faithful readers (and I flatter myself by using the plural) think I've lost my mind, I'd like to make perfectly clear that my last post was not about gas prices. It's about fretting over the price of an asset that you were never planning to sell anyway.
I'm in the stock market for the long haul, so lower prices just mean that my biweekly paycheque deductions are buying more shares than before. My May contribution bought me just 33 units of one fund I invest in, while the same contribution last week bought me 51 units. That suits me just fine.
I'm in the stock market for the long haul, so lower prices just mean that my biweekly paycheque deductions are buying more shares than before. My May contribution bought me just 33 units of one fund I invest in, while the same contribution last week bought me 51 units. That suits me just fine.
Oct 6, 2008
I'm worried about falling gas prices
My SUV has a pretty big gas tank (150 litres), and I don't drive it much, so I don't need to fill it up often. It still has about 100 litres of gas I bought three weeks ago at $1.38 during hurricane Ike, and it's gut-wrenching to know that my $138 investment is now worth only $109.
My neighbour has made a modest proposal to buy this gas from me before its value drops any further. What do you think—should I take him up on it?
My neighbour has made a modest proposal to buy this gas from me before its value drops any further. What do you think—should I take him up on it?
Oct 4, 2008
Open letter on the RESP tax deduction
As long as I'm re-posting old letters I've sent, here's one I sent to my federal representative back in March regarding the proposed tax deduction on RESP contributions:
In the name of conciseness, this letter left other issues unaddressed. One issue is the fact that this tax deduction would strangely benefit the parents rather than the students. If we're spending a billion per year on education, it stands to reason that the money ought to reduce costs or improve quality. This plan would do neither; instead, it would hand cash back to the parents, whom we then rely upon to improve the child's education rather than buy a big-screen TV.
Dear Ms Ratansi,
As someone who stands to benefit a great deal from a tax deduction on RESP contributions, I think I can be considered unbiased when I urge you to reject this alarming misallocation of federal tax revenues.
Nobody believes more strongly than I do that education should be subsidized. However, until the country can afford to make post-secondary education free to all Canadians, we must target our spending to benefit those who need it most. A tax deduction on RESP contributions is directly opposed to this goal in two ways:
- It pays more to those in higher tax brackets, causing most of the money to reach people like me, whose children are in no danger of being unable to afford tuition.
- It pays less to those who can't afford to put money into RESPs in the first place, offering the least support to those most in need.
If you choose to allocate a billion dollars per year to subsidize tuition, you have a duty to ensure the money benefits those who need it most—or, at the very least, benefits all students equally. An RESP tax deduction does neither.
I trust you will give this matter due consideration.
In the name of conciseness, this letter left other issues unaddressed. One issue is the fact that this tax deduction would strangely benefit the parents rather than the students. If we're spending a billion per year on education, it stands to reason that the money ought to reduce costs or improve quality. This plan would do neither; instead, it would hand cash back to the parents, whom we then rely upon to improve the child's education rather than buy a big-screen TV.
Sep 22, 2008
The fallacy of large numbers
Today's post from Michael James just reminded me of a letter I sent to the editor of Money Sense magazine last summer:
In your recent article "10 Laws of Building Wealth", you scoffed at the investor that would choose a guaranteed payment of $3000 instead of an 80% chance of $4000. Your rationale was that the expected payoff for the latter is $3200, which is more attractive than $3000. However, the justification for using the "expected value" to compare alternatives is based on the Law of Large Numbers, which does not apply if we're given the choice just once. In that case, there's no way to combine risk and reward into a single neat metric, and the choice of $3000 versus an 80% shot at $4000 depends, quite rationally, on the risk aversion of the individual.
Sep 21, 2008
Frugal living for the visually inclined
Today I thought I'd put up a few diagrams I usually end up drawing in the air with my fingers when I talk to people about this topic.
If your expenditures always equal your income, you'll have a situation like this:
In this diagram, the green line represents your income, which (hopefully) will increase over time. The red line represents your expenditures, which will also increase as your standard of living grows with your income. In this scenario, you end up spending every dollar you make.
How can you improve upon this? You could increase your income more, but if your standard of living grows along with it, you still won't have any money left when you retire.
The most obvious way to improve the situation would be to reduce your expenditures:
To achieve this, always put away a fixed amount of your income toward savings, and live your life as though your income were a little lower.
The light-green area between income and expenditures is your savings. The larger this area, the more you have when you retire (ignoring inflation, investment growth, etc).
The next most obvious way would be to grow your standard of living a bit more slowly than you grow your income:
To achieve this, don't spend your raises when you get them. Instead, increase your RRSP contributions.
Finally, an easy one to overlook is just to delay your increases in standard of living for a few years:
To achieve this, hold off for a few years on expensive upgrades on your standard of living. You can still have everything you want; you just get it a little later. For instance, after you get your first real job, all you need to do is continue to live like a student for a year or two, and then grow your standard of living at the same rate as you would have done anyway. This is all it would take to have substantial savings when you retire.
For those of us planning to get rich slowly, the easiest way is through a combination of these three effects.
If your expenditures always equal your income, you'll have a situation like this:
In this diagram, the green line represents your income, which (hopefully) will increase over time. The red line represents your expenditures, which will also increase as your standard of living grows with your income. In this scenario, you end up spending every dollar you make.
How can you improve upon this? You could increase your income more, but if your standard of living grows along with it, you still won't have any money left when you retire.
The most obvious way to improve the situation would be to reduce your expenditures:
To achieve this, always put away a fixed amount of your income toward savings, and live your life as though your income were a little lower.
The light-green area between income and expenditures is your savings. The larger this area, the more you have when you retire (ignoring inflation, investment growth, etc).
The next most obvious way would be to grow your standard of living a bit more slowly than you grow your income:
To achieve this, don't spend your raises when you get them. Instead, increase your RRSP contributions.
Finally, an easy one to overlook is just to delay your increases in standard of living for a few years:
To achieve this, hold off for a few years on expensive upgrades on your standard of living. You can still have everything you want; you just get it a little later. For instance, after you get your first real job, all you need to do is continue to live like a student for a year or two, and then grow your standard of living at the same rate as you would have done anyway. This is all it would take to have substantial savings when you retire.
For those of us planning to get rich slowly, the easiest way is through a combination of these three effects.
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