Dec 082016
 

Once again North American stocks continue to impress. My liquid net worth (net financial assets) climbed 2.5% over the course of November, nearly $8,000 of gain on its own. Many people including myself thought a Donald Trump win for the presidency would trigger a stock market correction. Although the Dow Jones fell 800 points (about 4%) in pre-market trading the morning after election day, it quickly recovered and went on to hit all time highs in subsequent days in mid November. And just yesterday, the Dow Jones, S&P and transports closed the day at record highs again, climbing more than 1%. What an amazing time to be an investor. 🙂 I feel euphoric! But this is also a time to be diligent because bull markets tend to last 6 to 8 years historically speaking, and we’ve been in this current bull market for 8 years now. Uh oh.

Stock valuations certainly appear to be stretched at this time. The fact that investor’s margin debt is near record highs also concerns me because over-leverage has lead to stock market drops and economic recessions in the past. Investing in the stock market is like toilet paper; sometimes you’re on a roll, but other times you can find yourself in a crappy situation like the crash of 2008. 😄 Nobody can know for sure when the market will peak again, but I decided to take a break from buying stocks in November and paid down some debt. I also contributed $4,000 to my retirement account (RRSP) to buy some Baytex Energy bonds. Overall it was a great month. I hope everyone else enjoyed it as well. 😀

Liquid’s Financial Update

*Side Incomes:

  • Part-Time = $700
  • Freelance = $800
  • Dividends = $500
  • Interest = $200
*Discretionary Spending:
  • Fun = $200
  • Debt Interest = $1200

*Net Worth: (MoM)16-12-networthiq_chart-nov

  • Assets: = $1,037,800 total (+8,300)
  • Cash = $19,500 (-4000)
  • Stocks CAD =$130,100 (+4200)
  • Stocks US = $80,200 (+3800)
  • RRSP = $75,300 (+4300)
  • Mortgage Funds = $26,700
  • SolarShare Bonds = $10,000
  • Home = $263,000
  • Farms = $433,000
  • Debts: = $482,100 total (-2,800)
  • Mortgage = $186,000 (-400)
  • Farm Loans = $192,400 (-500)
  • Margin Loans = $59,300 (-700)
  • TD Line of Credit = $17,500  (-1200)
  • CIBC Line of Credit = $9,500
  • HELOC = $17,400

*November Total Net Worth = $555,700 (+$11,100 / +2.04%)
All numbers above are in $CDN. Conversion rate used: 1.00 CAD = 0.75 USD

I was waiting on a cash refund from a financial institution before investing in any more stocks. The cash was finally returned earlier this week so my plan for December is to purchase 5 figures worth of stocks in Great Britain to take advantage of the low Pound Sterling currency. 🙂 This is exciting because it probably means I’ll be adding another line item to my asset column next month.

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Random Useless Fact:

16-12-bob-marley-money-quote

Dec 052016
 

Finding the Appropriate Work-Life Balance

Benjamin Franklin once said that “time is money.” I think he was being metaphorical. Otherwise ATMs would also be called time machines. 😄 But time is certainly like money in many ways. When we have it, we don’t know what to do with it all. And when we don’t, there’s a million things we need it for.  😀

In the corporate world we certainly treat time as money, which is why overtime means more money. 🙂 But finding the proper work/life balance can be challenging for many people. If a new mother wants to stay home to look after her baby for 3 years then she could potentially leave $500,000 or more on the table.

Consider an American who starts working at age 22 and then takes a 3 year break from her career, where her salary is $50,000. According to this marketwatch article, “that 3 year break would cost her roughly $506,000 due to a combination of lost wages ($150,000 over those three years), lost retirement and Social Security contributions ($158,000 over the life of her career, assuming she retires at 66) and lost future wage growth ($198,000).”

Studies show a household with at least 1 stay-at-home parent is the ideal environment to raise children in. Many parents also feel their kids are better off if their first 5 years are spent close to their mothers. But on the other hand, $500,000 is a lot of money to pass up. 😕 Often people face the difficult decision between making more money or spending more time with their children.

16-12-playing-catch-with-children

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Dec 012016
 

More Millionaires 

The best way to make a lot of money is to work for the mint. 😄 But even if you don’t, chances are your finances have been improving. About 25,000 Canadians became millionaires in the past year according to a report released last week by Credit Suisse. The bank claims that there are currently 1,117,000 individual adults with net assets exceeding US $1,000,000. 😀 We normally see studies of Canadian millionaires based in $CAD, but this study uses $USD to define millionaire status. These kinds of wealth studies are telling, but they tend to underestimate real net worth because participants may forget, or choose not to disclose particular assets such as their precious metals, art, collectables, jewelry, etc. Many of these items such as gold can be acquired anonymously with no paper trail. I think the real number of millionaires is quite a bit higher.

Based on its forecasts in the growth of Canada’s GDP and equity market capitalization, Credit Suisse expects the number of millionaires to increase by 50% to 1,680,000 in 2021. I hope one of those new entrants will be me. 🙂

But 2021 is still five years away and a lot can happen since then. I believe low interest rates are the main cause of asset price inflation which has resulted in so many new millionaires in recent years. But a pull back could be right around the corner. Let’s take a look at history.

16-12-snp-500-index-chart

Between 1988 and 1990 much of the world was in recession with riots breaking out in the UK. 10 years later between 1998 and 2000 we had the Asian financial crisis and the dot-com crash. 10 years after that between 2008 and 2010 we had the great recession with the Lehman and AIG panic, and European banking crisis. They say history doesn’t repeat itself, but it rhymes. And I am certainly seeing a pattern here. 🙂

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Nov 282016
 

The Sunk Cost Trap

We all try to make rational decisions based on the future value of objects, investments and experiences. But the truth is that our decisions can sometimes be tainted by the emotional investments we have put into them over time. The more we are invested in something, the harder it becomes to abandon it. This is known as the sunk cost fallacy.

16-11-sunk-cost-fallacy-fry

It’s what a lot of gamblers do. They throw good money after bad, thinking they can turn their luck around. But it usually doesn’t work out for them. Whenever we buy stocks there’s a chance that our investments will drop in the future because the business has fundamentally changed. This is especially true for tech companies like Nortel or Nokia. Both companies fell from grace for different reasons. When investments don’t work out some investors pull out, while others continue to hold on hoping their shares will bounce back some day. Knowing which is the wiser decision can make all the difference.

In dilemmas such as this, it’s best to consider the current circumstances and opportunities. And then make a decision based on forward looking expectations. 🙂 By estimating the economic consequences of holding or selling an investment at the present time we can eliminate our emotional biases accumulated from the past.

Similarly in economics and business, a sunk cost is a cost that has already been incurred and cannot be recovered. Some business owners will mistakenly refuse to mark down their older inventory because they don’t want to sell it for less than what they paid for themselves. But the original cost of the goods is now a sunk cost, which means the money has already been paid and is irrelevant to making present decisions. Instead of focusing on selling the inventory at a loss, they should think about the opportunities cost and the best alternative strategy going forward. 😉

Some people even double down on their investments or ideologies when faced with evidence that goes against their previous actions or beliefs. This can be very self destructive if they don’t realize what they’re doing.

Sunk cost applies to many other aspects of society as well. For example, some unhappy couples feel like they’re stuck in a bad situation because they’ve already invested so much time into their relationships. But if they’ve already tried and can’t make things work then similar to investing, maybe it’s better to cut their losses and bail. As the comedian Louis CK once said, “One day one of your friends is gonna get divorced. Don’t go ‘Oh, I’m sorry!’…No good marriage has ever ended in divorce. If your friend got divorced, it means things were bad. And now, they’re better.” 😀

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Random Useless Fact:

16-11-immortal-jellyfish-lobster

Nov 242016
 

Comparing Finances

Money is like a lot like religion or politics; everyone has a passionate opinion about their own personal finances, but it’s not always easy to talk openly about it without social consequences. For example, the company I work for discourages open discussions about compensation and benefits. This makes sense from a corporate point of view because of the loss aversion theory. Psychologists and behavioral economists have found that we tend to feel loss about twice as intensely as we experience gain.

16-11-loss-aversion-theory-graph

We can imagine how this will play out if two employees were to find out that one of them was making more than the other. The worker making less would feel twice as bad about his job as the other worker would feel good. So this would lower the overall morale in the workplace and create negative sentiment towards management. 🙁 Furthermore, some people have a cognitive bias known as the Dunning-Kruger effect where they think they’re more competent than they really are, which could lead to misunderstandings.

This is why income, net worth, and other topics related to personal finance are often seen as taboo. We are told to not compare ourselves with others. But pretending to live in a bubble can alienate us from the rest of the world and become self destructive over time. In reality it can be very advantageous to compare our income, investments, and expenses to everyone else around us. Here are some reasons why comparing personal finances is useful.

  1. You can get the best deals. You compare employee benefits when choosing whom to work for. You compare prices when shopping. You compare company profits when choosing which stocks to buy. So by knowing what your co-workers are earning you’ll get a better grasp of what your labor is worth. By knowing how much your friends spend on cars you’ll have a better idea of where to find the best car deals for yourself.
  2. You can see the big picture. By comparing your finances with others, you will be able to determine for sure if things are really expensive, or you’re just poor. 😛
  3. You can improve your own finances. By comparing your financial progress to others you will be able to learn from different people over time. You will know who’s really good at budgeting, and who is the most successful at investing. You can then apply newly learned practices to your own life.

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