Jun 152017
 

We’re Living Longer

I don’t know how the term “aging gracefully” can be a compliment. To me it just sounds like a nicer way of saying you’re slowly looking worse. 😛 When the government pension (CPP) was first introduced in the 1960s, the average life expectancy was about 71 years old. The idea was that most workers would retire at around 65 years old, and receive 5 to 10 years of CPP benefits in retirement. And that was the case for awhile. 🙂 But today, the average life expectancy in Canada is over 80 years old which puts more pressure on the CPP investment board to perform well. It’s not unreasonable to assume that my generation of workers (millennials) could have a life expectancy on average of 90 years or older.

According to a Telegraph article, we could witness in our lifetime a world where most babies will have a life expectancy of 100 years or longer! 😀 It’s nice that people are living longer than previous generations. But it’s also kind of sad to think about getting old. Can you imagine having sex when you’re 90? It’ll probably be like trying to shoot pool with a rope. 😕

Young adults are also starting careers later today than in the 60s. So with relatively less money going into the sovereign wealth fund, and more people withdrawing, many economists are worried about the future sustainability of government benefits on the local, provincial, and national level – not just in this country, but all around the world.

If generation Y folks are likely to live to 90 years old, then planning to retire at 65 may not be financially feasible unless a large amount of wealth is saved up first. For those who are planning to retire early like myself, it is even more difficult. Assuming I reach financial freedom by 35, I will have 55 years of living in retirement if I choose to. That sounds great. But the reality is I will most likely be working on and off, or on a part-time capacity throughout my 40s and 50s because there are only so many non-productive activities I can do before I get bored and start working on something economically productive again. 🙂

So instead of planning to live until 80 years old, most healthy people my age should be aiming for 90 as the starting point. And with that it means accumulating more personal savings for retirement. But also keeping in mind that there is no set retirement age anymore, so plan to be flexible with work schedules to accommodate a balanced lifestyle.

 

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Random Useless Fact:

Jun 052017
 

U.S. Unemployment Rate Drops to 4.3%

U.S. job growth slowed in May, which suggests the labor market was losing momentum despite the unemployment rate falling to a 16-year low of 4.3%. The problem with the unemployment number is that it doesn’t account for people who are out of the workforce because they gave up trying to find a job. Finding work usually isn’t very difficult, especially if one has some marketable skills. But finding the right one can often be difficult. In Canada for example, many have chosen to not accept a job that pays minimum wage because they think their time is worth more. Here’s a breakdown of minimum wage across the country.

  • Alberta ‑ Currently, the minimum wage is $12.20 an hour, but it rises to $13.60 this year and $15 Oct. 1, 2018.
  • B.C. – $10.85 now and $11.25 or more later this year.
  • Manitoba – $11, with plans to raise it every year along with the rate of inflation.
  • New Brunswick – $11. Adjusted annually relative to the consumer price index.
  • Newfoundland & Labrador – $10.75 rising to $11 on Oct. 1, 2017.
  • Northwest Territories – $12.50
  • Nova Scotia – $10.85. Adjusted annually April 1 based on the consumer price index.
  • Nunavut – $13. Adjusted annually April 1.
  • Ontario – $11.40.
  • Prince Edward Island – $11.25.
  • Quebec – $10.75, rising to $11.25 per hour May 1.
  • Saskatchewan – $10.72. Adjusted annually Oct. 1 relative to the consumer price index and average hourly wage.
  • Yukon – $11.32. Adjusted annually April 1 based on the consumer price index.

May was an average month. Stock market went up a little. I’m still waiting for the crash that some people have been talking about for years, but hasn’t happened yet.

Liquid’s Financial Update

*Side Incomes:

  • Part-Time = $600
  • Freelance = $700
  • Dividends = $700
  • Interest = $400
*Discretionary Spending:
  • Fun = $300
  • Debt Interest = $1100

*Net Worth: (ΔMoM)

  • Assets: = $1,120,000 total (+7,200)
  • Cash = $3,200 (-1000) 
  • Canadian stocks = $146,600 (-200)
  • U.S. stocks = $96,200 (+900) 
  • U.K. stocks = $21,400 (+700)
  • RRSP = $85,400 (+6500)  ~ purchased 200 units of BMO high yield bond fund (ZHY)
  • Mortgage Funds = $30,700 (+100) 
  • Peer-to-Peer Lending = $20,700 (+200)
  • SolarShare Bonds = $9,800
  • Home = $270,000
  • Farms = $436,000
  • Debts: = $491,500 total (-3,300)
  • Mortgage = $183,400 (-400)
  • Farm Loans = $189,300 (-500)
  • Margin Loans = $63,500 (-1100)
  • TD Line of Credit = $13,600  (-600)
  • CIBC Line of Credit = $25,500 (-500)
  • HELOC = $16,200 (-200)

*Total Net Worth = $628,500 (+$10,500 / +1.75%)
All numbers above are in $CDN. 

 

 

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Random Useless Fact:

Just because something is legal doesn’t mean it’s ethical.

May 152017
 

Different Priorities for People in Different Income Groups

According to the U.S. Bureau of Labor Statistics, people from across the income spectrum have different priorities when it comes to their spending. The graph below from npr.org shows average spending patterns for U.S. households in 3 income categories — one just below the poverty line, one at the middle of the income distribution, and finally one at the top of the distribution. 🙂

Here are some interesting notes to take away from this data:

  • Everyone pretty much spends the same ratio of their income on housing, clothing, shoes, and entertainment.
  • Poorer households tend to spend a larger share of their income on home cooked meals and utilities.
  • Richer households allocate a bigger chunk of their spending to education and saving for retirement.

Some expenses are more elastic than others. They take up a bigger piece of the household budget if the household has more access to money. Earning more income is generally a good thing for financial security. But if all new income is being squandered on entertainment then that’s not going to help someone in retirement.

Since my priority is financial independence here is how I like to use the information from the chart. The average person buys a bigger home when he makes a bigger income, as represented by the data. But housing is one of the largest expenses and does not need to be bigger than necessary. By living in my current home for the past 8 years while doubling my income I have effectively reduced my spending on housing by 50% over time. 🙂 I can use these savings to put towards my retirement portfolio so I can reach FI/RE sooner. The same concept can be applied to transportation and gasoline as well. Instead of upgrading to a gas-guzzling luxury SUV, I’m still driving my 10 year old hatchback.

The idea is to keep expenses the same, while increasing income, and investing the difference. 🙂 Of course there are times when it’s appropriate to capitulate to lifestyle inflation. When I start a family I will probably need a larger home and a bigger car. Knowing when to delay gratification, and when to upgrade is a personal decision that everyone is capable of making for themselves in their own way. That’s why personal finance doesn’t start with our money. It actually starts with our personal priorities and values, I think.

 

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Random Useless Fact:

Say what you want about North Korea, but they are better at celebrating Earth Day than any other country.

May 112017
 

Investment Outlook

BlackRock, Inc. based in New York City, is the world’s largest asset manager with $5.4 trillion ($5,400,000,000,000) assets under management, which is even more than what Vanguard has. Due to its power and influence, BlackRock is often referred to as the world’s largest shadow bank. So when this company releases a report, investors tend to pay attention. 🙂

Last month BlackRock published its Q2 2017 global outlook. Below are some highlights.

BlackRock prefers equities over fixed income in general. For the next 5 years, BlackRock believes global equities (except U.S.) and emerging market equities are the best asset classes to be in. When it comes to debt BlackRock suggests high yield bonds and emerging market debts are likely to outperform.
 .
However, high yield bonds can be risky for investors with shorter investment horizons. So BlackRock says it actually prefers medium to long term U.S. investment grade bonds.
BlackRock also likes emerging market and global equities. It also believes the U.S. financial sector can benefit from rising interest rates if the trend of monetary tightening continues in the U.S.
 .

You can download the full BlackRock report here. 🙂

How does this change my current plan? Not much. After seeing the second chart, I have decided to continue investing in high yield bonds since it’s one of the best performers in the model. The duration is also relatively short (around 5 years.) This lowers interest rate risk. The only fixed income asset that has a higher yield is Latin American government bonds. But I don’t like it due to tax reasons. I can shelter U.S. investments in my RRSP thanks to NAFTA. But Brazilian investments in my portfolio will be subject to the full brunt of taxation. What about diversification though? I do want Latin American exposure. But that’s why I have equity of companies such as BNS conducting business there, instead of owning debt directly.

 

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Random Useless Fact:

This is how to annoy a gamer.

May 012017
 

Home is where the house is, in a manor of speaking. 😀 Real estate is a popular topic, especially when a large player in the subprime lending market is under fire. Home Capital Group Inc. recently disclosed it has secured a large $2 billion loan, but is effectively paying 15% to 22% interest on it.  One explanation is that Home Capital is facing a liquidity crisis, and is desperate for funding. “Basically they blew up the income statement in order to save the balance sheet,” says David Baskin of Baskin Wealth Management. This is not a good place for any company to be in. Home Capital went from a $1.9 billion company a few months ago, to a market cap of just under $700 million today. 🙁

Surprisingly Home Capital (TSE:HCG) was still considered investment grade a few months ago. But in light of this new event, I wouldn’t be surprised if it gets downgraded soon to CCC or some other junk status by credit rating agencies.

Home Capital Group Inc.’s shares plunged about 70% last month after disclosing its financial situation. On the plus side, Home Capital stock is currently paying a juicy 13% dividend yield. 🙂 But with promising returns like that, there must be a substantial amount of risk. I think its dividend will be cut within the next quarter or so. I certainly don’t want to invest in HCG at this time.

But it’s important to separate the company from the assets it holds. Home Capital’s downfall is not related to its loan book. The company is in trouble for improper disclosure and possibly committing fraud. But the delinquency rate on Home Capital’s loans is only 0.25%, which is even “lower than the major Canadian banks,” noticed Marcus Tzaferis, a Toronto-based mortgage broker with MorCan Direct.

Worries about the general subprime lending market caused competitor Equitable Group (TSE:EQB) to fall 47% in April. This is a worrying trend. My public mortgage investment corporations (MICs) decreased in value as well, although by a much smaller amount of 5% last month. Furthermore, large Canadian banks are down about 3%. But I think this is temporary. Both MICs and the big 5 banks should bounce back by next month because I don’t see any real problems in the lending market itself.

At the end of the day here are some things to take away from this story.

  • Credit rating agencies are still as unreliable as they were in 2008. Don’t count on them to warn us of the next major market downturn.
  • Don’t concentrate too much on one asset class. If putting money into the mortgage industry, choose a wide range of banks, MICs, and other financial companies. Not just one type.
  • Mortgage lending companies may be in trouble, but relatively low delinquencies across various interest rate ranges suggest Canadians can still afford to borrow money for real estate and pay their debts on time. 🙂
  • Just because a dividend yield is attractive, doesn’t mean it is sustainable.
  • If you have a mortgage, consider paying it down as slowly as possible. This increases savings so you can speed up investing. This Reddit discussion goes into more detail. It looks like more and more people are starting to realize what I’ve been saying for years; when interest rates are low, invest, don’t pay down debt. And if we take this concept one step further then it turns into taking on more debt to invest, which is also known as leverage. 🙂

 

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Random Useless Fact:

Online ads are getting smarter.