Archive for the ‘Money Stuff’ Category.

New Home (Condo) Owners

The rumours are true, we’ve gone and done it. We’re now the proud owners of a unit at the Bauer Lofts, specifically the "P" suite.

Although I spent five years at UW and have been working full-time in Waterloo for over 2 years, I still feel very much a visitor to the city. When I hear the word "home" I picture Bayview & Steeles, not Victoria & Park; the entry in my cell phonebook reads "Home Waterloo", not "Home". So it should come as no surprise that I approached this purchase more as an investment rather than the establishment of some kind of firm roots (probably much to Bonnie’s chagrin).

Denoting something as an investment purchase removes the emotion (at least in theory), and discounts the qualitative, intangible factors (e.g. "I must have this place regardless of price because it’s a good, stable place to settle down and raise a family").

In the past few years, I’ve learned (mostly the hard way) that one of the cardinal rules of good investing is to never make a move unless the odds have been tipped in your favour[1]. If you don’t have some kind of edge, don’t try to force it. Sit on your hands and wait; lost opportunity is easier to make up than a "real", material loss.

In the case of the Bauer Lofts, there are several possible catalysts for rapid price appreciation in the coming years. The local Waterloo and Kitchener governments are injecting so much money into the area that the "scales have definitely been tipped" in our favour (though at the expense of the other local taxpayers I suppose). Here are the more cognizant of the arguments we’ve either heard or come up with:

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Last hoopla before turning 30… anyone still game?

So ends another successful cottage trip. There was much eating, golfing, and lounging to be had. It used to be an annual thing, but Calvin disappeared to HK last year, and even before that the fate of his family’s cottage was up in the air.

At the last one (in ’03), we devised a grandiose plan to go on a big group trip before we turned 30. This e-mail describes it:

Date: Mon, 01 Sep 2003 23:24:24 -0400
From: …
To: …
Subject: Last hoopla before turning 30

You are cordially invited to attend a luxury boat cruise to an
unknown, exotic location (Alaska probably doesn’t count) with your
fellow 29-year-old buddies in late May/early June 2008. Yes, this is
a serious invitation! And it would be great if everyone could go,
which is why this is being sent five years in advance.

After our last cottage trip ever (so sad!), the bunch of us got
misty-eyed and wanted to plan a future trip where we could do
something as a large group. Thus a cruise, where we can frolic on
land and sea and gorge ourselves to porky pigginess! It’s a chance
to sow your last wild oats before becoming middle-aged! Hopefully
in five years, most people will be out of debt and have at least
one week of vacation time to block off for this trip.

To encourage people to commit to this trip, we are asking for a
non-refundable deposit of $500. (Ha ha, oh great, now I sound like
I’m about to pull a scam.) We are planning to put all the money in
a bond or something similar so that we will have lots of pooled
cash to spend on the cruise and the daytrips. This means that if
you pull out, you’ll lose your money! Which is why you should make
sure that you can go! We have nominated Dave to be the treasurer
but if anyone else is interested in the job, let us know.

Just reply saying whether or not you are interested in going, and
you can reply all if you have any suggestions for the group. Thanks!

P.S. Spouses are welcome, but Dave and Bonnie have banned children
from this trip. Sorry! People with families will have to find

Suffice to say, nothing ever came of it. At the time we couldn’t really agree on a place to put the money, but in retrospect I should have just grabbed the bull by the horns and opened a joint trading account with someone. If we had put the money in an S&P/TSX60 index fund at the time like I was planning, we’d be up 50% by now (or 22% compounded annually).

Well there’s still 3 years… who’s up for it?

Random Update

I’m in an ADD kind of mood, so here’s a matching entry.

I got sick of moderating comment spam so I upgraded to WordPress 1.5 yesterday and chose a new theme. The latter part was way more difficult than it should have been; since getting this 20″ Dell 2005FPW widescreen LCD last month, most webpages are now huge portions of whitespace (i.e. a couple of centered, fixed width columns perfect for an 800×600 resolution, then huge columns of whitespace on either side). Out of the 50 or so available themes I could find, maybe 5 of them are actually variable width, automatically adjusting to the size of the browser window. Out of those 5, only one of them didn’t look like ass.

We gave our first full-time offer to a female developer last week. We’re now also taking bets on which of us will be the first to be sent to sensitivity training.

I swear my car and I must be cursed or something:

  • Last weekend Bonnie and I were changing the tires on my car back to the all-seasons. Apparently one of the rear ones picked up a screw sometime last year, and I didn’t notice when swapping to the winter tires last November. Just like last time, it’s in a place that’s unrepairable. What are the chances, really?
  • A star-shaped, stone chip crack in my windshield also appeared all of a sudden. Apparently some insurance companies will completely waive the deductable on the ~$50 repair because it’s so much cheaper than the replacement option. Not my insurance company. Sigh.
  • My brakes have started squealing, though it’s a very high-pitched squeal. The next scheduled maintenance isn’t for another 6,000KMs or so, but I guess I should take it in anyway.
  • Apparently the natural resonant frequency for my front bumper matches that of my engine when it idles around 750RPM. Needless to say, there’s a lot of vibration once the car has warmed up and I’m waiting at a stop light. It’s apparently a known issue, complete with a technical service bulletin. I guess I’ll get that fixed along with the brakes.

Money Stuff

  • The University of Waterloo is expected to open a downtown Kitchener health sciences campus, consisting primarily of a School of Pharmacy in September 2007. It will be located at King and Victoria, which is coincidentally just down the street from where we’re living right now. Go one stop light south of the proposed campus and you’ll find the abandoned Kaufman Footwear factory, which is being converted into The Kaufman Lofts. Why is this of interest? Check out the expected demographic for the Pharmacy undergrads at the new school. 85% expected from outside of the Region of Waterloo, 75% female, 90% single, 65% over the age of 23. This is practically a landlord’s wet dream: 1) Mostly out of towners that require housing. 2) Single, meaning they are more likely to rent rather than plant roots and purchase housing in the area. 3) Long term leases (the duration of their undergrad program – 4 years?). 4) Females in their mid-to-late-20’s are not likely to seriously trash the place.
  • Since the beginning of March, stock markets have lost roughly 10% of their value. This has the nice effect of weeding people out such that prices drop low enough that they just give up and sell their positions at a huge loss because they think everything is going straight to zero. In the industry they call this “capitulation”, and it is also the best time to buy. People who are not usually wrong are predicting that this will happen in the next week or two, after a further non-trivial drop. Hopefully you’ve “kept some powder dry” to take advantage.
  • My sister bought me subscriptions to RealMoney and Minyanville as belated Christmas presents. The people that write for these sites tend to be more correct than the general media because there is no conflict of interest (you pay the subscription fee to read what they’re really thinking, rather than what someone has paid them to say). The value is not so much any specific recommendations that they make, but rather skimming through the articles to get a general feel for their sentiments at any given time. Hey, if you don’t have the time to do the work yourself, why not stand on the shoulders of giants? 🙂

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Why the rich get richer…

Continuing the financial theme from the last post (I promise the next post will be different!), I thought this graph would be a good illustration of why the rich get richer while the poor and middle class just kinda flounder where they are.

After Tax Income in Different Scenarios (Ontario)

The graph shows how after tax income in Ontario varies with gross income. First focus your attention on the blue and green lines. The blue line is the ideal and has a slope of 1 – i.e. you get to keep every dollar that you earn.

The green line is what happens if your gross income just consists of a paycheque from work, plus maybe some interest from GICs, Canada savings bonds, ING savings accounts, etc. In short, the primary sources of gross income for the low to lower-middle class.

This is fine at the low end of the scale because the slope of the green line is pretty close to 1. However, notice that as you move up the scale, the slope of the line decreases, meaning you earn more, but more gets taken away. In the highest tax bracket, the slope is almost 0.5, meaning you lose $0.50 of every additional dollar you earn. Not good. i.e. You’d probably have to work your butt off to go from a salary of $80,000 to $100,000, but your net income only increases from $60,000 to $70,000. Arguably not worth the effort. This is the area where the middle to upper-middle class flounders. They work harder and pull their purse strings tighter, but it doesn’t actually amount to much in absolute terms.

Ideally you want some way to push the line up, which brings our attention to the red line. Capital gains are what happens when you sell an asset (e.g. a stock) for more than you paid for it. Those gains are counted as gross income, but are taxed at a much lower rate. The important thing to notice is that not only has the red line moved up compared to the green one, but its slope is also more positive. You win twice. Plus, the more your gross income comes from capital gains, the closer the line gets to the blue one both in terms of distance and in slope.

So the red line represents half of gross income coming from capital gains, which might be kind of mind boggling. Imagine earning as much buying/selling stocks as you make at your day job. Not as difficult as it sounds if you have a high savings rate. My theory is that the rich tend to have higher savings rates because the cost of living doesn’t increase linearly with net income. A higher savings rate translates into more money available for investment, which makes it easier to obtain large capital gains that rival what you earn from your paycheque.

Like Skeletor and her lover in the last post, if you’re able to increase your savings rate far above the average, that extra money should be going towards attempts at capital gains. That way you move along the red line (or even better). If you instead put the extra money in GICs, ING, money market funds, etc., you’re moving along the green line, which is really much more work than it’s worth.

Pfft… Financial Facelift

One of Bonnie’s former classmates, let’s call her Skeletor (because she’s so bony), went for a “Financial Facelift” with her lover. It’s this thing where The Globe and Mail matches you up with a financial advisor, and well, you get advice on what to do with your money. The Globe then publishes your story in the paper and on the web. You can read about their “facelift” here.

For those too lazy to read the article, allow me to summarize:

  • The two of them are recent graduates, and they entered the workforce with upper-middle class starting salaries. They earn much more money than they were used to as poor, starving students.
  • So much in fact, that they don’t know what to do with it. Their after-tax savings rate is something like 55%, which amounts to roughly $4,000 per month. As a comparison, the typical North American has a negative savings rate (thanks to credit cards), and financial advisors usually tell you that you’re ahead of the game with a 10% savings rate. The Japanese are considered highly abnormal with their roughly 40% savings rate.
  • The pair have a couple of short term goals: 1) Save $20,000 for their wedding in two years; and 2) Save $50,000 for a downpayment on a house in 3-4 years.
  • Their long term goal is to have $1 million for their retirement fund.

The story started out interesting because Bonnie and I are in a similar position in terms of salaries and savings rate. It had my undivided attention until the “financial facelift” started to sound more like “financial sabotage”. Summarizing the advice:

  • Skeletor should put her portion of the savings into a money market account to work towards the short term goals.
  • Her lover should maximize his RRSP contribution, since his employer matches 50% of it.
  • They should drop their “poverty mentality” and spend the remaining money, because long term goals are too difficult to plan for – plans change, so why bother?
  • Besides, their company pensions, government pensions, and old age security will serve them quite well in retirement.

To quote a guy at work, “I was both shocked and awed” after reading all that. Seriously, people make a living giving out advice like this? Here’s what’s wrong with it:

  • At their current savings rate, their first short term goal would be reached in 5 months, and the second in 13 months – both way ahead of schedule. That leaves a hefty surplus for them to play around with.
  • Putting the surplus in a money market account is just about the worst thing you can do. At best a money market account will grow your money at the rate of inflation. My grandparents on a fixed income take on more risk than that!
  • Instead, Skeletor and her lover should be taking large, controlled risks with their surplus. They’re young and childless with no debts – what better time is there to be heavily invested in equities? Certainly not when there are mortgage payments and little Skeletors to feed.
  • Long term goals may be difficult to plan due to unforseen circumstances, but at least you can move in the right general direction. What boggles my mind is how the guy says they should spend instead of invest.
  • Company pensions? Does anyone nowadays plan to work long enough at any one company to save up a decent sized pension? A lot of places either don’t have pension plans, or they disappear if the company goes under or you’re laid off. Not exactly something you should be relying on.

I wonder if the shoddy advice has anything to do with the advisor being from Halifax. The east coast is the leech of the country. Government pensions and old age security indeed.