Apr 062020
 

Monitoring the Outbreak

Over a million confirmed people have been infected by the virus. Many countries are starting to see the curve flatten so maybe the worst is behind us. Even so, we should continue to practice physical distancing and regular hand washing. Make sure to stock up on food that won’t spoil quickly. Lately I’ve been telling my friends about the health benefits of eating dried grapes. It’s all about raisin awareness. 😎

Investment Performance

The TSX dropped 18% in March. In the U.S. the Dow Jones fell by 14%. It has been the worst Q1 ever in U.S. stock market history. Ouch. But that’s why we diversify. πŸ™‚ On March 1st only 40% of my assets were tied up in the stock market. I’ve also been buying companies at their recently reduced prices which lowers my overall entry cost. Furthermore, a higher U.S. dollar has resulted in certain parts of my portfolio making gains this month. As a result, my net worth only fell by 5.3% in March. I’m disappointed to see my net worth decline three months in a row. But it could have been a lot worse.

I’m expecting more volatility ahead. Just three trading days into April and the stock market is already down 4%. Oof.

On the bright side I am able to work from home so my job income isn’t at risk. And since interest rates have been slashed 1.5% I’m saving thousands of dollars annually on my mortgage and margin debt compared to last year.

Liquid’s Financial Update March 2020

*Side Incomes: = $4,800

  • Part time job =$600
  • Freelance = $200
  • Dividends =$1200
  • Interest = $1000
  • Rent = $1,800

*Discretionary Spending: = $1,600

  • Food = $300
  • Miscellaneous = $400
  • Interest expense = $900

*Net Worth: (Ξ”MoM)

  • Total Assets: = $1,455,700 (-$55,400)Β 
  • Cash = $42,500 (-111,000)
  • Canadian stocks = $266,000 (+56,700)
  • U.S. stocks = $128,300 (-5,200)
  • U.K. stocks = $17,800 (-2900)
  • Retirement = $150,100 (+10,500)
  • Mortgage Funds = $33,900 (-3800)
  • P2P Lending = $36,100 (+300)
  • Home = $331,000 (assessed land value)
  • Rental Unit = $450,000 (2020 purchase price)
  • Total Debts: = $529,400 (-3,800)
  • Home Mortgage = $182,900 (-1500)
  • Rental Property Mortgage = $314,300 (-700)
  • Margin Loans = $32,200 (-1600)

*Total Net Worth = $926,300 (-$51,600 / -5.3%)
All numbers are in $CDN at 0.71/USD

 

Rebalancing

I’m happy overall with my diversification strategy. But due to the recent correction I only have 34% of my assets in the stock market. I would like to increase this back up to 40% of my asset allocation. So for the near future I will be looking at investing my savings into equities, primarily blue chip Canadian companies that pay dividends. πŸ™‚ Here’s a pie chart showing the breakdown of my assets today.

Some people might be concerned to discover that Vancouver real estate makes up half of my total asset’s value. Doesn’t that seem a little risky? I have heard that real estate here is overpriced and we are due for a major correction any day now. But then I crunched the numbers for myself. Compared to alternatives, I realized that Vancouver home prices were actually justified which I discussed in detail last month. That’s why in December last year I bought real estate instead of stocks.

But of course these days the equity market is down 25% from the peak. So that’s why recently I’ve been loading up on high quality stocks at discounted prices, increasing my forward dividend income by over $7,000 a year.

And I’m not the only one shopping around these days. Other personal finance bloggers such as genymoney.ca have been loading up on dividend stocks as well. She increased her annual dividend income by 75% year over year.Β When assets go on sale, you buy more. πŸ™‚ It’s about finding bargains in a financial world that’s constantly changing. When the stock market’s P/E ratio eventually expands again, those who bought into the downturn will be glad they did. πŸ˜‰

 

Buy low, sell high and hold

A reliable path to reach financial independence is to build a stream of passive income to pay for all living expenses. No matter if it’s real estate, dividend stocks, or bonds – the basic premise is to buy income generating assets. Then simply hold them for their investment income. Re-invest the proceeds over time and investors will be greatly rewarded for being patient.Β  You don’t need a lot to get started. But you have to start to end up with a lot. πŸ˜‰

 

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Random Useless Fact:

No one was safe from the 1918 flu pandemic. No one.

Mar 302020
 

This financial crisis appears to be getting worse by the day. The economy is stalled and millions of workers have lost their jobs. πŸ™ Did you hear about the man who was fired at a coffee factory? They say he had no filter. 😎 But there is a silver lining here. As the stock market sinks the dividend yields rise. πŸ™‚

Value investing with dividend stocks

Warren Buffett bought 4.3 million shares of Suncor (TSE:SU) last quarter when the stock was trading at roughly $40/share. Today TSE:SU is trading at just $16/share. Buffett is a value investor who only buys profitable companies that have promising growth prospects. Anyone buying SU today would be getting in at a 60% discount compared to what Buffett paid in late 2019. I don’t give stock tips, but I’m just sayin’. πŸ˜‰

Similar to Buffett I’ve been on the lookout for bargains lately. I purchased many dividend growth stocks throughout this month. In today’s post I will disclose which stocks I bought, why I bought them, and how I have grown my forward dividend income by $7,200 per year. Wowzers! πŸ˜€

dividend investing pays off

 

Narrowing down my options

There are thousands of stocks and ETFs out there. So how did I choose? Well first, I determined which type of investment account to use. This will ensure maximum tax savings. I don’t have much contribution room remaining in my TFSA and RRSP. So most of my new purchases will be in a fully taxable account. This means looking at securities that pay eligible dividends which can benefit from the Canadian dividend tax credit.

I personally like to buy and hold companies that consistently increase their dividends over time. These are known as dividend growth stocks.

 

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Mar 232020
 

Temperament is everything

Investors can often get in their own way. It can be hard to stomach a bear market. But it’s especially important at challenging times like these to keep our emotions in check, or else we could make mistakes and lose our shirts.

There are three types of investors during a stock market crash – those who sell, those who do nothing, and those who buy more. Which type are you? If you don’t already know then this can be an expensive time to find out. We learn the most about our investment behaviors when the market is tanking, not when it’s rising.

The global influenza pandemics of the 1950s and 1960s killed more than 1 million people each time. But eventually the world moved on and financial markets recovered. It’s a bit counterintuitive, but profits are made when you buy, not when you sell. This is because the price you pay for an investment is the main factor that will determine your future profit.

 

How to buy into the dip

If panic selling is not a good idea, then what can we do? Here are a few common strategies to consider:

  • Rebalance approach
    Although most securities are down, government bonds and other fixed income funds like (VSB.TO) have gained. Sell some of these low risk assets to buy beaten down stocks. But do it gradually. This also helps to rebalance your portfolio to your previous asset allocation.
  • Gradual nibble approach
    This requires you to have some cash saved up first. Every time the market falls by 10%, you put more money into the markets. Start with 20% of your cash balance. Go up to 30% of your remaining balance the next time. Then 40%, etc. This ensures that each additional time you buy, you are picking up stocks at lower prices.
  • Wait for a bottom approach
    Sit on the sidelines and wait for a sustained rally using technical analysis. Save and accumulate cash in the meantime. Store this cash in a high interest savings account or short term bond fund so it can be liquidated relatively quickly. Once market momentum starts going up again use 75% of the cash to buy stocks on the rise. Gradually buy more with the remaining 25% over time.

I don’t know which method works the best. But here’s what I’m doing:

As posted in my latest net worth update, I had about $150,000 in cash at the beginning of March – a very fortunate position to be in. πŸ™‚ I’ve already spent about $80,000 of that buying into this bear market over the last few weeks. My most recent stock purchases were Suncor (SU.TO), Pembina Pipeline (PPL.TO), Canadian National Railway (CNR.TO), and Fortis Inc (FTS.TO). I’m buying even as prices continue to fall because the stock market is down 32% from its high so far. Historically 32% is the low point of the average bear market. Although stocks could fall further, investing about half of my cash savings now guarantees I don’t miss out on the upswing in case we are already close to the bottom.

I plan to deploy another $50,000 into the market after technical indicators improve. There are two primary signals I’m interested in.

  • I’m waiting for the 10 day moving average to reverse direction from down to up.
  • I’m looking for the MACD signal to improve.

These indicators can be applied to individual stocks, sectors, or entire indices. For example, below is the S&P/TSX index. We can see it is not yet time to buy.

TSX drops 32% in just a few weeks

A new bull market should start once we see price momentum swing up. πŸ™‚ But this is speculation. Even after a short term bounce, there could be more downside before things actually start to turn around.

 

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Mar 162020
 

Opportunity for the well prepared

Well it’s finally happened. The record breaking 11 year long bull market has come to a screeching halt as stocks tumbled more than 30% in the fastest pace ever recorded. Last Thursday the TSX dropped 12% in a single day, the most in recorded history. But this should come as no surprise if you’re an avid reader of this blog. We saw this coming miles away. πŸ˜€

I began warning fellow investors two years ago explaining the early signs of an economic downturn. But since there were no red flags I didn’t expect an immediate market correction. Here’s an excerpt from that 2018 post.

Playing a strong defense game

So how did I prepare? Well last summer in 2019 I shared my thoughts on which asset classes would likely perform relatively well in a low interest rate environment. I wrote that adding defensive investments would make a lot of sense going into 2020.

So I had called out bonds, real estate, and precious metalsΒ as good assets to have, at least in the short to medium term. This is partly why I started to look for a rental apartment to purchase last fall.

Finally I warned readers several months ago of 10 signs that an economic downturn was just around the corner. My suggestion was not to sell everything and wait for the crash to happen, but instead to rebalance and reduce market risk. Here’s the final paragraph from that post.

planning ahead can protect the downside

Which brings us to the present. Both Canadian and U.S. stock markets are down about 20% year to date. Oof. πŸ™

It’s a good thing we had time to prepare for this downturn since the signs were plenty and hard to miss.

So let’s see how my prediction and planning paid off so far. πŸ™‚

  • As of writing this post gold is up 7.5% so far this year in $CAD.
  • Bonds have done well. The iShares Canadian Universe Bond ETF (XBB.TO) has returned +2% year to date.
  • Real estate is on the rise. We can use the Canadian Apartment Properties REIT (CAR.UN) as a proxy for residential real estate in Canada. This REIT has gone up 4% year to date. Personally, my new real estate purchase is earning me 6.25% a year in net rental income, after all expenses. Furthermore, the median rent price in the city of my new condo is up 15% this year. πŸ™‚

As I said last year, governments will go deeper into debt, print more money, and all of this will benefit holders of bonds, precious metals, and real estate. Owning these types of assets – which I have about $500K in right now – will add stability to a portfolio during a major stock market correction. The key is to use economic data to align my investments in order to limit downside risks. πŸ™‚

 

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Mar 092020
 

There are lots of low rise condos like this popping up around the lower mainland

Owning a piece of the suburb

The recent stock market mayhem is a crucial reminder of how important it is to maintain a well diversified portfolio. After selling my farm last year I was too overweight in stocks so I decided to rebalance. πŸ˜‰ At the beginning of this year I welcomed a new investment property into my growing portfolio. πŸ™‚ It’s a one bedroom apartment in a low-rise building – less than 10 years old. It features an open floor plan that measures about 650 sf, and has a large balcony.

In today’s post I will explain why this purchase makes financial sense for me, and break down the numbers.

Why invest in Vancouver real estate?Β 

In a previous post I explained how to improve investment returns by primarily focusing on broad asset class trends instead of analyzing individual assets. In late 2019 I was trying to find the most undervalued asset class. At the time, stocks were at record highs. The expected return for the TSX index was just 5% a year. Likewise bond yields were a joke – and still is today. So nothing looked attractive. πŸ™ I was starting to lose hope.

But then I looked at the real estate market. To my surprise the expected return was 10% or higher. Hey, now we’re getting somewhere. πŸ˜€ I have discovered an undervalued asset class with terrific return potential. Ka-ching!

Mr. Krabs is my role model

The next step was figuring out where to buy real estate. For tax purposes I planned to stay within Canada. I also wanted to buy in a large city with steady population growth. After looking at Montreal and Toronto I ultimately decided to stay around Vancouver due to the following reasons.

  • Prices in Vancouver recently pulled back about 12% from all time highs in 2018.
  • The capitalization rate has greatly improved over previous years.
  • Insanely low vacancy rate of just 1% helps keep rental rates high.
  • Relatively high population growth.
  • Home city advantage. I can manage the investment myself instead of paying a property manager.

Choosing the right investment property

The last step was to narrow down my choices by making a list of criteria – such as the price range, rental restrictions, building age, capitalization rate, etc. The capitalization rate is a measurement of profitability. It’s the net income generated from the property divided by the property’s price. A good cap rate in Vancouver is 3.5% or higher.

A couple of years ago Vancouver was a terrible place to buy rental properties because the projected returns were abysmal. According to Colliers International, the cap rate here was as low as 2%. Ouch. Here’s the data for Q1 2018.

Low rise condos have higher cap rates than high rise condos

However, things turned around over the next 2 years. By the end of 2019 the cap rate climbed as high as 4.25% in some segments of the market. πŸ™‚ It’s still not as lucrative as in other cities, but it’s comparatively better than before. Here’s the data for Q4 2019.

An investment property in the prairie provinces would have a high cap rate

At this point I knew exactly what I’m looking for. So I was finally ready to head out and find me some prime real estate. πŸ™‚

finding the right investment property requires a good realtor

I started searching in October on the website zealty.ca. I also hired a realtor to help me filter listings and write offers. By the way, if you’re looking to buy or sell I recommend finding yourself a British real estate agent. They’re all about the proper-tea. πŸ˜€

Anyway, in the beginning all my offers were falling through. Then one day in December I came across a very promising condo in Burnaby, a vibrant city east of Vancouver.

Burnaby has about 250,000 residents and the population is growing fast

I attended the open house and liked the property right away. It satisfied about 90% of my buying criteria which was excellent. πŸ™‚ The asking price was also reasonable. The market was heating up so I knew I had to act fast. I made an offer shortly after viewing the place. After some back and forth an agreement was reached, and I paid a small deposit – or as I like to say, a condo-minimum. πŸ˜€ I removed my conditions after getting a home inspection and mortgage confirmation. A few weeks later the property was mine. πŸ™‚

Rental Property Criteria

So here are the reasons why I like this condo.

  • Low strata (HOA) fee which works out to just $0.28 per square feet.Β  (See fee schedule here)
  • High cap rate of 3.6% to 4.0% range according to comparable rents in the area.
  • Built by a reputable developer.
  • High walk score and transit score – over 80% for both. This makes it easier to find renters.
  • Safe neighborhood, with a relatively young demographic.
  • Area has a high level of education and high median household income (~$110,000 according to StatCan.)
  • Unit not facing south or west so it doesn’t become a sauna in the summer.
  • No upcoming special assessments or deficiencies in the building.
  • Friendly neighbors.

Now here are some things I don’t like the about property.

  • The underground parking spot is a bit far from the elevator.
  • Can be a little noisy due to construction down the street.

So there’s not much to complain about. Overall I’m very happy with this purchase. πŸ™‚

In any case it was finally time to make some money from my new investment. Do you know how many ants you’ll need to fill an apartment? The answer is tenants. πŸ˜€ I showed the apartment to more than a dozen potential tenants. There were a few goofballs who didn’t show up to their appointments. πŸ˜•

But eventually I found a young, middle class couple with a cat. One of them (not the cat) has a credit score in the high 700s, – surprisingly good for someone in his mid 20s. They moved in at the end of February and pay a monthly rent of $1800 – which they can easily afford on their combined gross income of $100,000/year.

This puts my rental unit’s cap rate at 3.9% – which is on the high side for a Vancouver area condo according to the Colliers table shown above. πŸ™‚

 

Breaking down the numbers

From the beginning I wanted an investment property that would be cash flow positive. A conventional 20% down payment wouldn’t cut it. So instead, I decided to proceed with a 30% down payment.

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