Matt Latimer's Words

What is the opportunity cost of my investment?

matthewlatimer — Tue, 23 Nov 2010 02:59:20 +0000

If I were to compare purchasing a home versus investing those downpayment funds, which would put me ahead at the end of the day?

This is a question everyone asks themselves; is the insurance based segregated fund better than the straight corporate class mutual fund? what are the real datapoints that I’m comparing here?

I would start by looking at commitment period, and make a list including expense cost of the invesment to be maintained, risk of losing money (by type) as the biggest section so you have fully visualized those risks (which may include property value, vacancies, market crash, corporate bankruptcy, penalties for exiting the investment if required), possible upside (to examine the risk/reward profile), complexity of the investment, time required to monitor and maintain the investment, and more as you deem suitable.

Lets take for example a real property versus a financial investment in a mutual fund that invests in bonds, debentures, corporate notes and warrants.

Real property investment is a long term commitment, approximately 5% in fees for the agent when sold (occurring at the final total market value of the property, and requires a loan to purchase, taking a bite out of net expected returns; National Bank currently offers a fixed 5 year in the neighbourhood of 3.5% as an ongoing expense. Since people primarily invest in condos for their investments, I’ll illustrate a $225,000 downtown Toronto 1 bedroom condo for this example.

Downpayment of $45,000 (20%) to avoid CMHC insurance fees creates a $180,000 mortgage at 3.5% is a fee of (semi annual compounding excluded) $6300 per year, in addition to the condo fees of a conservative ($350 / mo) $4200. So in the first year the investment is $55,500.

Rental income for this hypothetical condo would be in excess of $1,100, with an average vacancy of 5% generates an income of $12,540 net.

To summarize: 6300 + 4200 = 10,500 in costs, with an income of 12,540 equals a return of $2040 or 1.35% (on 55,500).

That’s a lukewarm annual return. Bearing in mind that the income from which is added to your taxable income, and capital gains are charged against the property on it’s sale (as 100% investment property). And remember, I haven’t included land-transfer taxes or school taxes or any additional heating costs that may be applicable.

Verdict? 10 years for rent to pay the realtor fee excluding property appreciation.. it better appreciate!

VERSUS

Mutual Fund that is mostly safe, invests in bonds and fixed payment financial products that pays a modest 3% per year after expenses.

$55,500 @ 3% = $1665 in profit

Additionally, if you could borrow the same $180,000 as you did for the mortgage at 3.5% and then invest it in the above mutual fund yielding 3% the cost would be a half percent, or $900 annually.

$180,000 @ .5% = $900, or $75 per month.

Net return On this option = monthly cost of $75, minus cash distributions, dividends, and asset growth over time.

Time? Commitment? Risk? Effort? I think the choice is clear on this one. Take the 3% on the $55,500 investment and consider carefully whether borrowing to invest is something that suits your financial plan. Speak to your registered advisor.

A tip for pursuing financial strategies

matthewlatimer — Fri, 01 Jan 2010 17:25:15 +0000

It is a given that participating in a single financial product impacts the entirety of your household finances. For this reason, two things must be kept in mind when speaking with your advisor or contemplating new directions for your wealth building.

#1 Keep it Simple.

Using too many different products or more than one financial advisor; what I call the shotgun approach to finance is ineffective. Also, tying your finances in a knot to save on tax, or writing ten cheques a month are things to avoid. If it can’t be explained in a couple sentences, it isn’t a strong plan. It’s fine if the strategy is multi-part, but it’s not fine if you cant’ disengage in less than a week. Ask yourself: could I be doing better with a strip bond or mutual fund?

#2 Commit to the strategy.

Once you’ve decided to go ahead with a plan, stick to it. There is the opportunity-cost of having started this plan versus something else, and additionally the lack of your full attention will cripple the success of anything complex. Talk about it in advance, ask the questions you need, and trust your advisor. Do, or don’t; but definitely don’t waver.

Statements, statements, everywhere

matthewlatimer — Sat, 14 Nov 2009 14:00:19 +0000

Account Statements are a necessary evil of the investment world. We all get them, I choose electronic ones because its the green choice… But when was the last time you looked at the details or noticed that one was wrong?

In your mailbox each month you should not expect to receive anything, unless it is on the ‘quarter’ end of – march, june, september, december. These are the minimum legal requirements in Canada for account providers and product manufacturers. Currently dealer requirements under the MFDA are for a single statement per year, but that exception is going away by 2011.

The other thing that regularly hits the mailbox is a trade confirmation, a record of transaction details, like a purchase. It includes the name and symbol of what you purchased, the date, price, total and taxes, and through whom it was purchased. Make sure the details are accurate, and if there is a different broker name or anything else amiss, compare it against the statement or call immediately- the fund company, broker/planner, dealer, or account provider, never let it sit as most firms have a 45 day rule for errors.

What you should be looking for? When your broker told you he would purchase, did he say next day or that same afternoon? Is it there in writing? Confirm the price against the day by going to www.globefund.com orhttp://finance.yahoo.com and putting the name or symbol in the search box.

If its a mutual fund that you bought, did the advisor hand you (or email these days) a document that describes the fund risks and investment objectives ….and did you read it? Did he talk about the risks involved with that*specific* fund before you signed on the dotted line? The document is called a prospectus, and you should always ask for one. If you told your advisor that you want to purchase a ‘socially responsible fund’ this is the only way to ensure you actually got one besides the name.

Is it posible to get less statements or an all-in-one? Absolutely. These are called self directed plans (even with an advisor) or sometimes wrap-accounts. They have small fees, 10-15 dollars per month like your chequeing account. Notably, when you have this type of plan with all your diversified investments in it, you only receive the one statement plus confirms for transactions, instead of one from every company you deal with. And keep in mind, you can expect to reasonably deal with a minimum of one fundco (if that’s what you’re using) for every 20-25 thousand invested for a typical middleclass individual. This is only a guideline, talk to a professional about your particular circumstances.

Don’t forget to compare your statements against each other over time to look at the growth rate on the holdings so that you are prepared in advance of your next portfolio review. This way you can derive the value and answers that you deserve from your advisor, and they will be encouraged that you are participating and involved instead of doing the annual complaint ‘why aren’t my returns higher?’ conversation.

Who owns your client information?

matthewlatimer — Sat, 31 Oct 2009 19:42:45 +0000

Privacy is on everyones mind these days, and with the complications to trust in professional advisory relationships brought about by high profile fraud events it bears discussing.

The advisor that you have selected to work with you on enhancing wealth is entrusted with the most personal data, from social insurance number to salary and health insurance details. If anything ever happened to him, what happens?

All of the information that you provide to your financial advisor is the property of the brokerage where he works, even if he works off site or in a home office. You should always know the name of the dealer and website or phone number, and keep it with your other important info. If you change advisors, update it.

The financial advisor certainly has use of your information while he is a member of the firm sponsoring his licence, but not otherwise. If the advisor changes firms, you could certainly expect a call from him to convince you to move your account to the new institution and maintain the advisory relationship. It would be out of bounds for any other data to be retained, statements or otherwise. There are exception to this rule, but if you are feeling uncertain, call the dealer and ask for compliance.

Tagged: client, information, privacy

Regulators in Canada

matthewlatimer — Fri, 30 Oct 2009 15:17:48 +0000

In Canada, not everyone can be a financial advisor. There are courses to take, exams to pass, and then you have to sign up with (become sponsored by) a dealership. Beyond that, the dealerships are overseen by the SRO (self regulatory organizations) which is in turn overseen by the individual provincial securities regulators.

Each level of oversight provides protection for the investor by various means, and although this doesn’t mean that fraud is eliminated entirely, it is certainly reduced because of it.

There are investor insurance pools against default (CDIC, IPC,CIPF). These funds provide significant individual coverage against investor loss due to bankruptcy and/or insolvency of the dealers and product providers. Please see their respective websites here, and they are also posted in my links section on the right. The coverages vary, so look into the details for each that apply to you.

Investor protection:
CIPF
IPC
CDIC

SROs:
MFDA
IIROC
AMF

Government bodies:
Ontario Securities Commission
Financial Services Commission of Ontario

Robust complaint handling processes are enforced through dealerships and product manufacturers right up through the provincial ombudsmans office.

It is frequently overlooked by investors that the markets have pricing risk; there is no one to complain to if the price of what you own goes down. No insurance protection against normal losses. These structures are set up against fraud and insolvency.

Tagged: advisor, client, insurance, protection, regulator, select

Dividends, making money in the market, the risk of leverage

matthewlatimer — Thu, 22 Oct 2009 14:53:20 +0000

There are a few things that need to be mentioned about being successful in the stock market. Not because you haven’t heard them before, but because of the greed/fear aspects involved with making trades and the instant nature of execution these days.

Firstly, keep the goal in mind. The goal is to take money out of the market. That is, money that you didn’t put into the market; extra or free money. Never forget the goal. It is easy to get lured into revenge trading, when you’re going to show the market what its all about. Even worse, you lose your nerve and pull everything out, who cares what the losses are. Remember that it is not a zero-sum game, the actual corporations involved are pumping dividends and sharees into the market all the time-if you win it doesn’t mean someone else lost.

Second, when you have wins in your account take a little off the table. Buy a GIC or real return bond from time to time. The interest you receive on these will grow over time, but if everythings in your trading account….. It is possible to leverage against your account assets to significantly increase your temporary assets, but if you do this please do something for me; make sure whatever you’re buying pays a dividend or coupon back to you.. And keep it in cash or use it to pay out the leverage, don’t just let it float out there, waiting to catch a knife out in the market. I’ve seen way too many margin calls go out in my time, and it isn’t a situation you want to be in. ‘Hi Mr. Johnson, please forward us $11,000 by Thursday’. Then you’re looking for an emergency line of credit against your house to pay for assets that you don’t own anymore, because they were sold at 50% of the price you paid three weeks ago.. And you still owe however much, say eleven thousand.

Be careful out there.

Tagged: dividends, leverage, save, stock, strategy

How do I pick a single mutual fund?

matthewlatimer — Fri, 16 Oct 2009 14:13:41 +0000

There are different selection logic that can be used to determine which fund is right for you. They start at a high level and get progressively narrower until the best one emerges.

Value / growth
Capitalization is the size of company that the fund purchases. Large Caps have a market value in excess of 1 billion dollars, Mid Caps are ranged between 500 million and 1 billion. Small caps are in the 100 million-plus space, and Micros under that. What size are you comfortable with? Tim Hortons is a small cap, while McDonalds is a large cap, along with Wal-Mart. There are enhanced growth opportunities amongst the smaller firms and therefore more likelihood of capital appreciation for you. But remember; if small-cap risk keeps you up at night, go medium cap.

Diversification (within the fund)
Mutual funds have many different mandates, to fill different investor needs. If you want to have indian companies in your selection, there are both india-only funds and global funds that just touch indian firms. That’s where the decision on risk/exposure lies. Putting all your chickens in an india only fund will kill all your chickens if its the only fund you own. Sooner or later all markets retreat. Diversification if the only free lunch, I’ve heard!

Sector(s)
Do you like the gold against ongoing US dollar/debt play? What about the china story, and the infrastructure that can’t get built fast enough? Do you see US residential construction firms bouncig back from the bottom and want to own some of that, or safe Canadian stability like Scotiabank? These are sector choices; gold, infrastructure, construction, financial. There are about 180 sectors available, and many firms in each. Your fund should provide you with no more or less exposure to each sector than you’re looking for. There are thousands of funds, so don’t settle. Also be aware that fund holdings change over time and can drift far from what they were holding when you first bought… Never be afraid to sell.

Manager(s)
Who’s managing the fund you’re looking at? Did they just fall out of the sky or do they have a track record on other funds or at other firms? What are the details of that track record, was performance volatile, did this manager stray from mandate? Why did they leave and could it happen again before two years passes? These are some good questions to answer for yourself while researching. Take a look at www.morningstar.ca and www.ific.ca for more data. There are also fund sections on www.globefund.com and http://finance.yahoo.com .

Performance is the second last major component to look at when considering a fund. These days, there are so many funds that performance is measured by which percentile their returns fell into; I.e. Top 25, second 25, third 25, or fourth 25 percent, called ‘quartiles’. So if your fund returned in 1st quartile of the last few years, that’s great. The performance can have other undesirable characteristics but the performance is among the best available during that period. Returns over late 2008 and through 2009 were bad across the board, but this measurement still provides good data.

Characteristics of performance to avoid include high churn rates, where the underlying portfolio of holdings turns over more than two times a year. Consider that a fund may hold a hundred stocks or more (easy) and that all those sells are creating taxable events- some of which will be gains that were achieved before you are an investor! So you can buy a new fund in december right before it rebalances all the holdings, receive no gains from performance, then receive a 2% taxable event on your holdings. Careful what you buy, and when. There is the ability of a manager to achieve outsized positive returns by concentrating too much, betting the farm on his best twenty picks, or fifteen…. The holdings can go up fast, and/or back down faster. The ideal is slow steady gains from a wide selection of good companies. If you are purchasing a small holding in a speculation play, then go ahead and take a dive into one of these, but don’t invest without being aware.

Fees, as I’ve written before are not such a big deal. Everyone’s looking to save money when tims are tight, but like Robert Kiyosaki says ‘ Pay your professionals well’. -note that I’m appropriating, because he doesn’t believe in mutual funds or the stock market generally, just the realestate market.

Invest wisely.

Tagged: buy low, explanation, Mutual Funds, risk

Why do I need a financial expert?

matthewlatimer — Sat, 10 Oct 2009 14:37:09 +0000

Why do doctors have their own doctor? The first reason is that you are not a financial expert. If you were a financial expert, you would know that a clear eyed third party is mandatory. When you have an emotional attachment to the outcome, unfortunate decisions can and do occur. The professional will keep you focused and on the right track through both bull and bear markets.
The second reason is that you probably don’t spend all day every working day studying the latest financial data and products, and considering the associated tax, estate, and beta correlations… Wouldn’t someone that does do that produce a better result than you ever would? Bet on it.

Third reason, if you haven’t already run down the street to the nearest Investors Group, Edward Jones, Raymond James, Freedom55, or FundEx office is that without a professional at hand to bounce ideas around with, talk diversification or market outlook with and so forth you’re crippling your long term financial growth without even being aware of it.

Working with a planner is a dynamic, flexible, growing relationship that you define together. If you need to do some self directed trading then he/she can build an allocation for that in the scope of your financial plan. If you require professional referrals your advisor should have them at-the-ready.

The question isn’t ‘Do I need a professional to help’ the question is ‘Which professional will I choose to help me?’

Tagged: client, middleman, Mutual Funds, risk, stock

How do I buy a mutual fund?

matthewlatimer — Thu, 08 Oct 2009 12:34:13 +0000

They’re all over the news, everyone you know says they own one (or some). But if you don’t know where to get one, then you just don’t.

Mutual funds are available from several places: banks, trust companies, independent dealers, and private money managers. These companies all have salespeople working for them, advisors,brokers,planners, agents, etc. If you happen to be walking by an office that says ‘so-and-so, CFP’ on the door, that’s good too. Keep in mind that anyone in the industry will be happy to speak with you, and get you started on building your mutual fund assets.

Mutual funds are not exclusive to people that already ‘have money’ in fact, they are built by design to help grow wealth over time. That’s why they’re called mutual funds, because people invest together to create a large investment fund.

So all of the purchasers (or investors) are putting in a bit of money every month (or once per paycheque, or every other month, etc) over time building up their holdings. Anywhere from 25 to $500 is standard. If you decide to have a few different funds, then likely a smaller monthly amount goes to each one.

Easy!

*For an official list of registered financial advisors in Canada, see www.mfda.ca or for stock brokers, see www.iiroc.ca

Tagged: client, Mutual Funds, rsp, saving

What is an RSP loan?

matthewlatimer — Sun, 04 Oct 2009 21:57:08 +0000

When doing tax returns, I’m often asked by clients about rsp loans, a question which is more commonly phrased as ‘How do I pay less taxes?!’

Do I hear someone out there saying ‘that’s me’? It would be reasonable to estimate that thirty percent of the people I’ve done tax for haven’t heard the details on how it works, so you aren’t alone. Many Canadians do not know what an rsp is, so go ahead and feel better.

An rsp is an account where the government says you can save money for your retirement, and as a benefit, you do not have to pay tax on the dollars that you contribute to the account. The way that they manage this is to print you a receipt when you put money in (unsurprisingly called a contribution receipt). The receipt goes to the taxman, then to the Canada Revenue Agency. When the CRA gets it, they see how much was deducted from your paycheque and give it back.

So, two important things: 1 if you owe tax on other stuff, that will be subtracted first before you receive any ‘cash back’. The second, even more important, is that its ok to borrow money to make a contribution. That’s what an rsp loan does.

How can you benefit from this? The basic and best strategy is to borrow some money for your rsp account, and when you get your tax refund pay down the loan. This way the money is in your account collecting interest immediately, but you wait until the government refund cheque comes to pay down the loan. Note that the cheque will only be a portion, not the whole amount. You can make small monthly payments on the leftover amount.

To quote my colleague: “Easy Peasy!”

Tagged: build, loan, rsp, save, strategy