It Isn’t So Bad

My goal of being financially independent by the time I’m 45 seems both outlandish and kind of a waste of time. The main question that I get when I tell people (which are few in number) is what am I going to do with extra 20 years compared to the conventional retirement age of 65. This kind of “break” from the normal isn’t something that most people even contemplate, let alone attempt, it’s just not really done.

I don’t fit into most moulds of what the majority of people would term an “adult” (I use this term loosely, because as a 35 year old, there aren’t that many people in my age group who feel that they are sufficiently grown up). I have absolved myself from the responsibility of parenthood with surgery last fall because I decided that having children really wasn’t my thing, and my wife was in agreement over this lifestyle choice. I would term myself as eccentric more than anything, mainly due to my non-acceptance of the “normal” life.

What I have tried to do is reduce the responsibilities in my life to a bare minimum. Most of the responsibilities I gave up just made sense either financially or timewise, but I’m glad I made the decisions I did. I have no debts, my monthly expenses are low enough that I could afford them on a minimum wage salary, and my wife and I have no dependents – we have simplified as much as we can, other than the fact we still need money to live.

So, that’s our current “project” – to accumulate enough savings to get rid of the final major responsibility we have in our lives – having to work.

The thing about our jobs is that neither of us mind doing them. The work isn’t overly taxing (we both work nice desk jobs) and it does keep us engaged on a day to day basis. The issue with the job is that it keeps us engaged way too long in a day. If I had a choice, my ideal work day would be about two and a half hours long, not the 8 to 10 hours it is now. It would be a much better thing to do if it was just another part of my waking hours, rather than taking up most of the time I’m able to do things.

In my next post on Thursday, I’m going to start looking at my retirement portfolio, and publishing my current project, which is tearing it apart, to hopefully make it better.


Cutting Through the Confusion

In the past, I was obsessed with reading anything and everything I could about personal finance and investing. I learned a lot about value investing, options trading and strategic option purchases, day trading strategies and just about everything in between. I like to learn and don’t think it’s a bad idea to educate myself about the different ways of looking at stocks as potential investments.

The problem with reading so many points of view is that it causes quite a bit of indecision when I look at buying anything. Having so many ways to review a stock or any kind of investment provides a myriad of reasons both for and against buying or selling a security in the exact same situation. I can completely understand why there’s so many books – it would be a pretty hard sell for an author to look at an original book written by Benjamin Graham and just completely agrees with every point that was made in “The Intelligent Investor” in 1949 without adding their own “spin” on a good strategy.

There have been lots and lots of books written to try to make investing simpler. Most of these books promote index trading as the safest way of doing this. On the flipside of these books are books that state that index investing creates a significant opportunity cost over their particular investment theory. While “Couch Potato” Investing is probably the easiest method of investing, and is very popular because of it’s ease of use, to me (and probably just me) it seems like I’d just be dusting the marketplace with cash, with no real expectation of what will happen to it, besides depending on the market to go up, forever.

So, what do I do? With various conflicting messages regarding investments I “should” be making, I scour for securities that fit the criteria I’m looking for that fit with what I’m trying to do – which is to generate enough cashflow to support my wife and I on an annual basis. In most cases, this plan means buying “expensive” companies or securities that provide me with a dividends that are slowly (very slowly) adding to my household’s annual income. While this method seems pretty inefficient to a value investor, it fulfills my requirements for investments and provides me with a return that I can see and count on (as far as anyone can count on any investment).

This strategy doesn’t mean that I don’t look for alternative investments that would provide a significant capital gain if they work out, these types of investments just make up a very small portion of my entire portfolio. I’m not adverse to any type of investment, I just prefer this way and have accepted the somewhat more risky and inefficient manner in return for financial independence in 10 years.

Seems Easy, Right?

I’m sure I’m not the only person that does this, but about once every couple of months, I run through the calculations that show me where I’ll be at age 45, and what kind of return my investments will need in order to “safely” be able to retire. I don’t really have a magic number, but ideally, I’d like to have somewhere around $20,000 coming in from investments at retirement that would easily cover all of the expenses my wife and I incur on an annual basis.

$20,000 per year is a reasonable goal to achieve. We don’t spend very much, and if we want or need anything else, we could pick up some casual labour for a period of time to supplement our “retirement” income. I will be the first to admit that I don’t have 100% confidence in my investing strategy, but I would have to invest in over 70% “dogs” to completely fail at this goal.

On the other hand, if I were able to achieve a reasonable 10% return every year for the the 10 years I’m hoping is the limit of my working career, things get quite a bit less tight financially, compared to a more conservative 5 to 7 percent per year that I’m actually counting on earning in the kind of short period of time that I’ve given myself to invest (I like to make things difficult on myself).

The problem with an early retirement plan is that instead of 40 or so years to invest (from 25 to 65, which is how you’re supposed to do it) I only have the 10 years to do it. It means I’m much more open to a downswing in the market, as I don’t have the long-term certainty of probably increases in the stock market seen over history. The short window of investment is somewhat concerning, but if it comes down to it, our solution would be to work until we felt we had enough money to retire – either on a full time basis to continue investing, or part time to allow the funds invested to accrue.

I think that for my wife and I, it has paid to live fairly frugally. I read in an article last week that more important than huge amounts of exercise that people use to lose weight, is the volume of food that is consumed. Living frugally (to us anyways) is the same thing to my wife and I – we’ve been able to first pay off our entire house fairly quickly, and then begin our road down investing towards an early retirement exit.

DIY Investment

A couple of months ago, I went to a talk given by Larry Berman, a celebrity commentator on BNN where he takes part in a weekly show called “Berman’s Call”.  The “free” event was put on by BMO and as part of the event, there was a bit of a sales pitch put on for Larry Berman’s managed fund, which is called the “BMO Tactical Dividend ETF Fund”.  Being a somewhat lazy person, I really liked the sounds of this fund, which touts the following investment objectives:

Provide long term capital growth and current income by investing primarily in a diversified portfolio of exchange traded funds that invest in income producing securities.

These are the strategies the portfolio manager uses to try to achieve the fund’s objective:

  • Invests up to 100% of the fund’s assets in securities of exchange traded funds and/or other mutual funds, including funds that are managed by us or one of our affiliates or associates.
  • Invests primarily in exchange traded funds.
  • Considers asset class and sector investments based on fundamentals and the economic and markets outlook.
  • Uses technical indicators when implementing portfolio rebalances.
  • May invest up to 100% of the purchase cost of the fund’s assets in foreign securities.
  • The fund may use derivatives to implement the investment strategy.

The portfolio lists the following holdings:

Company % of Assets

BMO US HIGH DIV COVERED CALL ETF                             12.8%

BMO S&P/TSX Ladd Pref Index ETF                                     12.6%

BMO Short Corporate Bond Index ETF                                12.5%

BMO Covered Call Utilities ETF                                             11.2%

BMO Covered Call Canadian Banks ETF                              11.1%

BMO US Dividend ETF                                                               9.0%

BMO Canadian Dividend ETF                                                  6.6%

BMO S&P 500 Index ETF                                                           6.4%

BMO MSCI Eur Hi Qlty Hdg C Inx ETF                                   2.5%

BMO International Dividend ETF                                           2.5%

On a whole, I would buy this ETF – the blend of international / US / and Canadian securities, as well as the philosophy of the holdings makes sense to me and allows for as good of a method of diversification and protection of investments.  If I was to select a diversified portfolio to go along with individual stocks, this one would work as well as most, and has been performing well since inception.

My issue with funds like this, as well as most managed mutual funds is the reliance on the manager to create the results.  What happens if this “financial celebrity” decides he doesn’t want to oversee this fund anymore?  Realistically, he has probably handed off much of the work to underlings, but what if the fund manager leaves – will the remaining managers continue with similar returns, or will the fund collapse?

I would prefer to understand the mechanics behind these kind of investments and take on a more Do-It-Yourself approach so that I understand how my portfolio is built and why it requires adjustments.  I don’t want to depend on a “guru” for my financial future, no matter how well the fund has done historically.  Doing it myself when it comes to looking after my financial future (even as an untested amateur) makes me feel much more comfortable than blindly following a fund manager’s picks, and also allows me to carry on with my strategy into the future because I don’t have the ability to quit like a mutual fund manager.
I guess you could say I have relationship anxiety with my money – I’d rather not “get into bed” with someone carrying out investments plans that I don’t completely understand, no matter how awesome they seem.



Removing the Obsession From Retirement Planning

As of today’s count, I have 3,475 days until my 45th birthday. I selected this day over five years ago as the point I hope to be financially independent. At the time, 15 years out seemed like a good period of time to set up our household’s financial plan in a quest for financial independence, with really no basis of the target other than a date pretty far out. I didn’t set up amortization calculations or had any specific idea whether or not 45 is actually a viable exit date compared to 42 or 50. When I was 30 and setting out on my current path, I was more focused on actually setting a goal and working towards that over time.

The problem with a 15 year old plan is that (obviously) it takes 15 years to complete. I have a pretty short attention span and struggle to maintain interest in something for more than a few months at a time, so staying on top of my financial plan is sort of a struggle. I have competing thoughts that I’d like to carry out this large list of things to do around our finances while at the same time thinking to myself “it doesn’t REALLY matter, does it – we can just do this next week” (I like think that this would be described as the mantra of the perpetual procrastinator).

I’m trying to work out a balance of vigilance and forgetfulness – to make my financial plan a priority, while not thinking about it every single day. I look at my retirement plan the same as I do most of the hobbies I’m involved with – I allocate time to my financial plan during the week, to research new investments as well as to review the stocks and other securities I’ve purchased, or read the odd book that may help me in the future. In the same way I try very hard not to become overly obsessed with a hobby (which I am mostly unsuccessful with during the summer golf season), I just stop thinking about finances most of the time, taking the approach that I’ve done what I can and hope that my hypotheses were accurate in the case of single stock purchases.

This is my balancing act of hopefully successfully managing my early retirement plan. Obsessing over it for the next nine and a half years isn’t overly productive, but neither is hoping that it will happen without doing anything about that. The major thing I don’t want to have happen is to regret either the excessive amount of time, or the lack of time I spend on this “project”.

It Would Definitely Make it Difficult

I’m not sure how overblown the newest Toronto housing report is, which says that the average detached house in the city is going for $1.15 million. Considering I bought my condominium townhouse for less than 20% of this total 6 years ago, I’m not sure how people would even go about deciding to jump into this kind of marketplace. There are jobs and houses in other places to live that don’t cost this much, I would probably decide to not work and live there. Maybe wages are higher in the “Big City”, but given the kind of forced lifestyle inflation seen over the past decade, I’m not sure you’d be that much further financially ahead living there compared to a smaller area in the province.

$1.15 million dollars is more than double the amount of money I’m hoping to save for retirement – I can’t even understand putting all of that money into something that continues to cost money to maintain and live in. The interest and CMHC fees would be more than any mortgage payment I made on my house, and I was paying down a 35 year amortization in 5 years.

If you look at the house as an investment, anyone who bought real estate in the city had an amazing return in this inflationary period for housing. The problem remains that you need to live somewhere, and “buying up” to house a growing family, or “stuff” (if you’re like me) is becoming more and more expensive. Ideally, you would hold onto one of these hyper-expensive houses, get a good chunk of it paid off and then move somewhere that allows for an arbitrage of value – keeping some of the million dollars you’ve paid for.

There’s been tons of articles written by all kinds of media that these high real estate values are in a bubble that will eventually bust wide open. I would have said that the prices seen 3 years ago were crazy, so what do I know. From an early retirement perspective, I think that choosing to live in the city where home and living costs are so high is like playing a video game on “extra hard”.

Low Interest Exposure

Last week my wife and I received notification of our condominium corporation’s annual meeting, along with a copy of the corporation’s financial statements. For now, my wife and I have no plans to move, so I take an interest in reviewing the audited numbers provided. If our house was a short-term investment, we would care only what the next 3 to 5 year’s fees were looking like, not how closely our condominium board has followed the projected 20-year maintenance schedule. While I read the financial statements, I have only been to one out of the 6 annual meetings since we moved into our place. Our one appearance turned into some moderately passive aggressive attacks between neighbours, and questions that really couldn’t be answered by the board of directors (mostly centred around placement of garbage cans).

One thing that I’ve noticed over the past few years is the slow reduction in interest rates that the corporation has had to endure. As of December 31, 2014 our condo corporation had around $200,000 invested, in 4 separate longer-term GICs. The average rate of return on these GICs was under 3%. When we first moved into our house, the average yield was above 6%. As these higher yielding investments expired, our company has been forced to invest cash in much lower yields, which is having the effect of increasing our condo fees gradually.

Similar to the condominium, my company defined-benefit pension plan is very tied to the bond market. Due to the risk associated with the stocks, no pension fund management company would leave themselves over-exposed to the market, and instead put a large amount of their portfolios into investments in debt. This lower return on a large portion of the pension portfolio due to steadily decreasing bond coupon prices over the past half decade or so is costing me money. My employer only has so much money to pay, and if they’re forced to fund the pension due to sub-par returns, I don’t get much of a raise anymore.

Most of my exposure to the marketplace right now is through these two investments outlined, as my own portfolio is small in relation since I really just started investing into stocks and bonds last fall. I am much more risk tolerant right now than these two other investments I am involved in and invest accordingly. I am willing to take the risk in order to have a chance at not having to work anymore. To a certain extent, this higher risk investment attitude is being balanced by the strict investments being made in my name through my pension and condominium corporation.