Feb 292012

Last year I invested heavily into 2 engineering firms. Most of that money went into SNC-Lavalin (SNC.TO) which is in Canada but with projects all over the world. The other is a large German company called Siemens (SI:NYSE.)  I chose SNC because of it’s strong balance sheet, large market cap (over $5 billion,) and its long track record of being in business for over 100 years. My other choice was Siemens because of its massive sales which resulted in over €6 billion in profit last year, it’s relatively low P/E ratio of 10, and I happen to like using their products. I don’t actually know how they pronounce Siemens in Germany, but it’s probably not the same way I make it sound like in English

Unfortunately earlier this month a couple of SNC executives left the company and then there were news reports about them conducting unethical business practices in Libya. Then yesterday SNC said its net income for 2011 will probably be 18% lower than a previous forecast. Part of this comes from an unexplained $35 million in expenses which they didn’t even know about. So right when they released this news yesterday, in literally a single day, my SNC stocks fell by 20%  ( ゚ Д゚)!!!

Either SNC will continue to spiral down or this minor setback is the perfect opportunity to buy some more. Judging by what those helpful financial analysts are saying, nobody knows yet what’s going to happen. SNC currently has a dividend yield over 2% and I bought it for the long run, so I don’t plan to sell it any time soon. They are 1 of the 10 largest engineering firms in the world and I hope they can make a comeback one day. Siemens on the other hand is doing pretty well, up 4% so far this year.

Today’s Lesson: Even large, blue-chip companies can have dramatic downswings and you can lose 20% of your money in one day. Buy an index fund if you can’t stomach this kind of volatility.


Switching topics now, my recent Stock to Cash giveaway contest ended today. Everyone made a great effort. I’m sure you all had some complicated formulas to calculate your predictions. But in the end there can only be one winner. Matthew came close. Just 28 cents off the mark which puts him in 2nd place. But the winner of the contest is R.


So congratulations Mr/Ms R!!! I have emailed you about how to claim your cash prize of $14.03 CAD. You have until the end of day on March 7th to get back to me. Thanks to everyone who participated. Since only 11 people entered, each person’s chance of winning was actually pretty good, for a giveaway contest. Maybe next time more people will join in.


Hey this is a leap year. They say strange things can happen on February the 29th. We got a few centimeters (1 inch) of snow in Vancouver today which is unusual for late February, but I didn’t see anything else out of the ordinary.

image source: http://megustamemes.tumblr.com/

Feb 262012

It’s Better to Invest than to pay down Mortgage debt

Many financial gurus will advise home owners to make lump sum payments on their mortgages and pay them down sooner rather than later. However I worry people may be under estimating the power of opportunity cost. Let’s work through the numbers and look at some facts instead of listening to main stream opinions.

Let’s say we won the lottery and became $100,000 richer! Let’s decide if we want to put this money towards the down payment for a house in order to have a smaller mortgage, OR, invest all our winnings in the stock market index and take on a bigger mortgage. Which option will likely make us richer in the end?

First we must find out what is the cost of borrowing $100,000. Assuming our mortgage rate was 7% every year, by the time we pay off a $100,000 mortgage over 25 years, we would have paid a total of about $210,000 (according to RBC’s calculator). Which means we will be paying $110,000 in interest alone. So if we increase our down payment by $100,000, we save $110,000 on interest in the long run.

mortgage, paying down mortgage

But now let’s see what happens if we invest all of that $100,000 into the stock market index instead. Let’s say over 25 years we make an average of 6% a year. In the end our $100,000 would turn into roughly $429,000. But since we invested our $100,000 instead of adding it to our down payment, we have to borrow $100,000 more for our mortgage. From the last paragraph we know the cost of taking on an additional $100,000 mortgage loan will cost us $210,000 total (including interest) over 25 years. So if we then take our stock investments after 25 years ($429,000), and paid off the extra cost of having a bigger mortgage ($210,000), we would still walk away with a $219,000 profit, in addition to paying off our mortgage as planned! Hey-Ooh! Below is a chart of our investment returns.

mortgage, don't pay down the mortgage so fast

In the first example we left extra capital sitting in our house doing absolutely nothing, except to save us 110% in interest over 25 years. In the second example, we invested that capital instead. Even though we had to pay the 110% interest over 25 years, we also made 429% on our investments during the same time using the same capital. So it’s pretty clear which choice is the clear winner.

The Simple Concept Behind Leverage

But wait a minute. What accounting sorcery is at play here? How does a 6% investment return dramatically outperform a 7% mortgage rate? Well maybe you’ve figure it out by now. Each time we make a mortgage payment, our principle decreases. It’s the opposite of compound interest, because we pay less interest each time (not more) until eventually the entire loan is paid off. But investment returns on the other hand are the exact opposite and actually compound and grow, giving us higher returns year after year (not less.) Annual Compounding x 25 years = major win.

Interest Rates Are Super Low

Our mortgage calculations are based on a 7% interest rate which is higher than average, even compared with long term historical rates. Not to mention rates are super low today. My current mortgage rate is just 2.6% as of 2014. So chances are we’ll probably end up paying a lower rate than 7% on average over the span of our mortgages. A cheaper borrowing cost means we’ll end up even further ahead.

Favorable Market Returns

We also used 6% for our investment returns to be on the conservative side. But North American equity markets have historically returned about 8% to 10% annually, and bonds average about 7% to 8% annually. Market returns are not guaranteed, but as long as we can average more than 3.1% return per year for our investments (since that will give us $210,000 which is equal to the cost of the mortgage) then we’ll be better off investing all of our extra cash, than trying to pay down the mortgage. The worst total return ever for any 20 year period in the history of the stock market is still a positive 3.1%, which was around the Great Depression years.

What do you think are the chances of a balanced portfolio averaging less than 3.1% annual return over the next 25 years when that has never happened in the history of North American stock markets before? And are you willing to miss out on such a great risk to reward opportunity.

Tax Benefits of Debt

It gets even better. The interest paid on the $100,000 mortgage loan can be made completely tax deductible. Just use the $100,000 as part of the initial down payment first. Then take that $100,000 out as a home equity loan to invest in stocks, and now the interest on the loan can be claimed for earning investment income proposes. So if your marginal tax rate in the 30% tax bracket like me then that 7% mortgage rate has just automagically dropped down to 4.9%. Meanwhile, our investment returns from capital gains and dividends receive preferential tax treatment (less than 30%) because they are not earned income. What a bargain! Even the tax man is giving us an incentive to invest because the interest we pay on a loan for investment purposes is tax deductible.

Inflation Helps Debtors

The rising cost of living can be a pain, but it can also be a blessing to people who have mortgage debt. If you owe the bank $100 for example, then by next year if you haven’t touched the principle, that $100 balance you owe will only have $98 of purchasing power (assuming a 2% inflation rate.) This means that $100 is now worth less, and it’s EASIER for you to pay it back. So a $100,000 mortgage, assuming a 2% inflation rate again, will only be worth $98,000 by next year. Wow, we just increased our wealth by $2,000 in REAL terms by simply sitting on a mortgage. 😀 Thank you inflation!

The more debt we have the more we’ll benefit from the devaluing affects of currency. The U.S. has over $16 trillion of national debt. And its growing by billions of dollars every day because its government continues to spend more than they take in. Inflation is a method used by many central banks around the world to deal with their nation’s debts. They print money so their currency won’t be worth as much. Inflation will slowly chip away at debt, which will decrease the debt’s real value over time making it easier to pay back 🙂 Debt is a depreciating liability, but real estate is an appreciating asset, so buying a home using debt is a double win!

Investing in Stocks While Having a Mortgage Reduces Financial Risk

A Pew research center study found that between 2009 and 2011, most American households experienced a decrease in their net worths. However 7% of households saw their wealth grow. 😀 What was the secret of these successful households? The study points out that the these 7% of households have most of their wealth held in stocks, bonds, and retirement accounts. But the other 93% of Americans have on average just 33% of their wealth in the markets, while half their net worth comes from their homes. We all know that between 2009 to 2011, stocks rebounded from the recession, however U.S. housing prices remained flat to negative. So if we make extra payments on our mortgages then we risk over exposing ourselves to the real estate market and deny ourselves the opportunity to properly diversify our investments. And diversification, as the study points out, was how the top 7% got wealthier.

If we want to become wealthy too we have to invest in stocks and bonds like the rich do. Some people may argue it’s risky to invest while still in debt, but they don’t realize that it’s also risky to aggressively pay down a mortgage and not diversify their asset portfolio. (^_-) If we only focus on paying down our mortgage with any savings we have then by the time our mortgage is paid off we’d have 100% of our money in a single asset class. It’s certainly not prudent to have all our eggs in one basket.

This is why we have to be diversified. If Canada’s home prices have a major correction in the future, at least we would have other financial assets to cushion the blow to our wealth. But here’s the brilliant part – even if real estate prices continue to increase we would still benefit because our homes will be worth more money! So it doesn’t matter if home prices rise or fall. We win no matter what direction the real estate market goes in 😀 Regardless of how aggressive we pay down our mortgage it will not affect the future market value of our home.

However, whether or not we invest in the stock markets today WILL have a direct impact on the future profits of our stock portfolio. If we miss an opportunity now to capitalize on the financial markets then that potential profit is lost forever. But if as long as we have a home, then 100% of it’s future market gains goes directly to us whether we have a huge mortgage on it or if it’s been completely paid off. This is why we shouldn’t underestimate opportunity cost. Besides, even by simply making the minimum mortgage payments, we are STILL adding equity to our homes anyway. So even if we allocate 100% of our savings to invest in the financial markets the real estate portion of our asset allocation will still be growing in dollar terms 😉

Take Advantage of Longer Amortization Periods

Finally, we used a 25 year amortization period. But think about how much more our investment returns can grow if we gave it 30 years to compound instead. A longer time horizon will also decrease our investment risk. For the record, my current mortgage is amortized for 35 years. The longer we spread it out the better our returns will be.

So when people say they want to increase their mortgage payments by $500 a month, or make a lump sum payment of $10,000, or aim to pay off their mortgage 10 years in advance, it all sounds good on paper, but I hope they understand just how much money they’re potentially NOT making, and how much asset allocation risk they’re taking on, by being overweight in real estate. 🙁

My mortgage in 2009 when I bought my condo was $215,000. Today, in 2014, the balance is only down to $200,000. So I’ve paid on average just $3,000 a year towards the principle which I made sure was the least amount possible. 🙂 I could have easily shortened my amortization period, doubled-up my payments, etc, to have a principle balance of just $150,000 today. But instead of doing that I invested every spare penny I saved. My condo is now worth $50,000 more than my purchase price. And I have over $100,000 in the financial markets thanks to the last several years of better than average stock market performance. My net worth would not be nearly as high today if I had aggressively tried to pay down my mortgage.

That being said, borrowing money from a home, or investing rather than paying down debt, could increase your financial risk. We are talking about leverage after all, which is what a mortgage is. So if you don’t want to risk losing your home, or not being able to finance the extra debt, then please pay off your house as soon as you can. But if you want to live dangerously like me and don’t mind the risk, then invest your extra cash instead of leaving it tied up in your home. Focus on investing and only make the minimum payments on your mortgage, and by the time you retire there’s a pretty good chance that you’ll be much better off than other home owners who only prioritize on paying off their mortgages. 😀 Good luck!

  • stock market index – A weighted average of some of the largest and most popular stocks. An ETF that one can buy to track this performance would be the IVV for example.
  • capital – Money which can be put to good use
  • 30% tax bracket – In Canada, if your annual income is between $40K and $70K then there’s a good chance your marginal tax rate is around 30%.
  •  leverage – Borrowing money to buy an investment
Feb 242012

I’ve decided to participate in the Yakezie Challenge, which is going to be a great way to network with other like minded folks and grow my blog’s Alexa ranking.Proud Member of Yakezie———————————————–

On another note. I finally had some time to add a blogroll under my “Best Reads” menu so you guys can know what kind of websites I read in my spare time.


On a final note. My RIM stock giveaway contest from earlier this week is now closed to new entries.  Only 11 people entered, but I was expecting more (>_<) Oh well. I suppose this means everyone who participated has a better chance of winning then (^_~) The table below shows RIM’s real time price (minus up to 20 minutes), and how close each entry’s predictions are. As the gap between their predicted price of RIM and the real price gets closer, it will turn greener. The final winner will be decided at the end of the month on the 29th. Good luck everyone..

[iframe https://docs.google.com/spreadsheet/pub?key=0Aog7OusUIUn2dEh2RXZ5bVd1MFNCNmZ3U2x5Q0s3MWc&single=true&gid=0&range=A29%3AC42&output=html 600 300]



Feb 202012

Last week I posted my 100th blog entry. To celebrate this milestone, I’m showing support for all my readers out there by holding a stock giveaway contest. Except, rather than giving away real stocks, I’ll be sending one lucky winner money instead.

I am giving away a RIM share, in the form of cash! Research In Motion is a company well known for creating the Blackberry smart phones but more notoriously, for major management problems last year that devastated their share price. Are their stocks a cell! cell! cell! or does the company just need some time to recharge?  confused  Here’s your chance to be a stock analyst. All you have to do for a chance to win is simply predict the closing price of (RIM.TO) on the last trading session of this month, February 29th 2012.  The closing price is the final price at which a stock is traded before the markets close for the day (4:00PM Eastern.) For convenience, the winner will need to have a Paypal account to collect the prize. You can sign up for free at paypal.com. Contest rules and details below…

How it Works.
The person with the closest estimate to RIM’s actual closing price on Feb 29th will win 1 share of RIM, in the form of cash, equivalent to the closing price. However, if the winner’s prediction is spot on, right down to the cent, then he or she will win 2 shares of RIM, double the amount in cash!
How to enter
Post a comment below with your prediction of what the closing price of RIM will be on Feb 29th. The deadline to get your entry in is 9pm Eastern, (6pm Pacific) on Thursday, Feb 23th. Any entries entered after that time will not count. This leaves RIM with 4 remaining trading days before the final closing time on Feb 29th.
How to win
The person with the most accurate prediction wins. It’s that simple. It doesn’t matter if they are over or under the final closing price target. This is a transparent contest because everyone can see each other’s entries in the comments section below. The winner will be announced shortly after the markets close on Feb 29st. After the announcement, the winner will have one week to contact me to claim their prize. If there is no response, the prize will go to the second most accurate estimate.

I hope the rules are pretty straight forward. This is my first giveaway.  If it turns out to be a fun experience for everyone I will consider doing more giveaways like this in the future (^_^)  How you pick your target price is completely up to you. The deadline to get your entries in is this Thursday evening, so don’t miss out. I’ve temporarily added RIM’s share price to the right sidebar of this page arrow so we can keep an eye on it as we approach the end of the contest.  Both your skills AND your luck will be tested (^_~) Good luck folks!


The fine print:

  • Cash prize will be in CAD
  • Winner must have a working Paypal account as this is the only method of payment
  • In case of a tie, whoever entered first wins
  • Limited one entry per household (multiple entries or spammers will be disqualified)
  • Once you’ve commented with your price prediction, you cannot change your mind
  • You can freely ask questions in the comments section or e-mail them to me
  • If you want to, feel free to explain your prediction in your comment
  • Contest refers to the shares trading on the Toronto Stock Exchange (TSX)
  • Closing Price will be determined by the price listed on Google Finance
  • Closing Price does not mean, or include, After-Hours Price
  • You must use a valid e-mail address when you comment (It will NOT be published)
  • There is a 15-20 min delay on the price of RIM on the right sidebar, as well as on Google Finance.
  • I reserve the right to cancel this contest at any time for any reason
  • I personally hold 50 shares of RIM, but am not otherwise affiliated with RIM or Paypal
  • After all entries have been submitted, a chart comparing how all the entries are tracking may be posted publicly
  • Cheaters will be disqualified
Feb 172012

Saving is important. Without savings, one cannot even invest. Most of my net worth today is thanks to my special saving method. Actually, there’s nothing special about it, but it works for me. Below is a chart of my after-tax income and spending history over the last 3 years. The difference between my income and expenses, as you can imagine, is what I save and invest. The trick is to increase my income faster than my expenses. The bigger the difference the bigger the savings!

Ignoring my part time job for now, I was making about 35 to 40 thousand gross from my main employer in 2009. Due to tough economic times, I managed to live off about 70% of my take home pay and saved the rest for emergencies. 30% of net income may seem like a big savings rate to some, but according to our government, the average Canadian in my age group (20-24) only made $20K per year or less. After reviewing my needs vs wants, I budgeted my spending in 2009 based on a $25K salary. Because if the average young individual like me is able to live off $20K a year, then there’s no reason why I can’t live off $25K. Since I was actually making more though, I just saved the surplus. If I don’t need the extra money right now, it’s probably best to invest it so I can spend it in the future on something important. However since 2009, my expenses have gone a bit.

Career changes, marriage, moving, increased social status, and starting a family are great reasons for lifestyle inflation, but none of those things have happened to me yet. I support lifestyle inflation when it adds value to our lives, but simply making more money shouldn’t be an automatic signal to increase spending. Sometimes we need to step back, and look at the world from a wider perspective to understand the bigger picture. Many “assume” that most people’s cellphones are smart phones today because you see them everywhere. But studies show the adoption rate is only 30% world wide, and maybe closer to 50% in US and Canada. It only seems like everyone has a smart phone because people with old cell phones like me don’t use ours as much in public, (^_^;). When I step back I also realize that my friends are not “average” because they earn and spend more than the typical working class citizen.

If we zoom out further and look at my situation from a global perspective, do I really have the right to complain about being underpaid when I have friends and relatives from over seas working longer hours than me but making just a fraction of my pay? Billions of people make less than $2 a day and have to grow their own food. I’m fortunate to have won the geographical lottery and live in Canada. That was pure luck and had nothing to do with my own decisions. But if I have a home, a car, internet, cellphone, clean water, delicious local eatery, and the freedom to pursue happiness, then I think my lifestyle is already pretty extravagant relative to most people in the world. Even compared to other Canadians, I have a pretty average life, and there’s nothing wrong with being average right?

image from friend’s tumblr blog

And that’s my saving strategy, basically just a reflection of the points below. It’s not a secret, just a simple mind set to follow. There’s no right or wrong to justifying a purchase, but your perspective makes it so.

  • Spending habits should be dictated by one’s values, not income. If people spend too much, they should tweak your values.
  • Don’t give in to lifestyle inflation unless it’s for the right reasons (which will be different for everyone)
  • View situations from different perspectives and only buy things that will add the appropriate value to your life.
  • Look at the bigger picture and understand where your lifestyle fits nationally, and globally