Monday, October 6, 2014

Three Financial Lessons from my Parents

Growing up in a middle class home headed by two fiscally responsible savers profoundly impacted my views on money. My parents were excellent financial role-models whose influence helped lead me down the path to financial independence. Below are the three financial lessons my parents taught me that most shaped my fiscal persona.

1. Save Some of What You Earn

Starting at the ripe old age of 10, I got my first job as a newspaper boy, delivering papers to over a hundred houses twice a week. My pay cheques were a jaw dropping $29.50 every two weeks, which was more than enough money to fulfill my candy/hockey card buying needs. Enter my parents who suggested I deposit $15 of each pay into a bank account. I had no trouble living large off my pocket money, and never missed the half of my pay that went into the bank.  As I entered my teenage years, and began making bigger bucks as a fry cook at a fast food joint, I continued to save and even increased the amount I set aside knowing I’d have to pay for university down the road.  Looking back, my parents never questioned me when I made purchases with some banked savings…probably since they realized I was an incredibly fiscally prudent child (some less-enlightened folks might say “cheap”).

2. Saving is Good, Investing is Better

Every time my bank account burgeoned to over $500, my parents would suggest I consider buying a GIC or bond. Savings in the bank, even 25 years ago, paid virtually no interest.  Instead of letting money sit idly in my savings account, I could buy a GIC or a bond paying over 5% interest! I remember thinking that I was getting a great deal, as I had no immediate use for the extra money, and was amazed the bank or the federal/provincial government would pay me so much interest just to borrow the money from me for a while.  I’m still a firm believer in putting one’s money to work for them. Beyond maintaining an emergency fund to respond to unforeseen material expenses, I prefer to be fully invested.  Of course GICs and federal/provincial bonds are no longer my investment vehicles of choice, as neither pays enough interest to offset inflation.

3. The Miracle of Compounding

I’m not sure why (my wife would argue that it’s because I have a poor short-term memory), but I have very few vivid memories of my childhood.  Oddly, one vivid memory is of my mom sending me into a bank to buy an Ontario’s Savings Bond at the age of 14. My parents always encouraged me and my siblings to visit banks ourselves, and become proficient in dealing with our own money. On the occasion in question, my sister and I were sent in separately to buy bonds, and were to come back to my waiting mother’s car when done.  I went into the Bank of Nova Scotia, filled out the necessary paper work, but was stumped when the bank teller asked me if I wanted the annual, semi-annual, or daily compounding option. I figured since the bonds paid interest twice a year, I’d go for the semi-annual option. After returning to my mother’s car, when she immediately asked me which option I had chosen, she informed me that I made the wrong choice, and would have to go back to the bank to correct it.  Despite being mildly embarrassed, I corrected my choice at the bank without incident. Later that day I asked the obvious question - why would I want money compounded quicker? My mom informed me that the quicker money compounded, the faster it grew.  My older sister even showed me a compounding table from a math textbook. As a young teenager, very few things with the exception of the opposite sex excited me more than the prospect of compounding interest.  Fast forward twenty-some years, and before I sell any position in my dividend growth portfolio (where compounding returns are the primary objective), I ask myself if it’s worth the opportunity cost of lost compounding.

I’m very thankful that my parents shared their fiscal wisdom with me and wish more kids could benefit from a basic knowledge of personal finance.  When I have conversations about personal finance with others, I wonder how their upbringing contributed to their financial personas.  Despite the tremendous pressure from corporate America and peer groups, I still believe that basic concepts like saving for a rainy day, investing wisely, and letting compounding work for you over time are key to achieving fiscal independence. 

Thursday, October 2, 2014

Update on Investment Goals at September 30, 2014 (Q314)

My investment portfolio had another solid quarter, even with the North American markets declining in September. Many of my goals for 2014 have already been accomplished, and I expect a relatively quiet last three months of 2014.

Increase my portfolio value by 17% :
My portfolio increased in value by over 27% at Q314 compared to its value at the start of 2013.  I made my regular contribution to my non-registered portfolio, and then made my Q4 contribution ahead of schedule in order to buy shares of Bank of Nova Scotia before the ex-dividend date. The depreciation of the CAD relative to the USD has also helped my portfolio grow. 

With this goal accomplished, I'm not re-adjusting it, or increasing it for YE14. With the current market downturn, I'm focusing on buying stock in quality companies at a cheaper prices in order to increase my dividend income.

Total Dividends Received Up 25% (Revised from 18% at June 30th):
With my forward dividends up 26.5% since the start of the year, I've crushed my initial goal, and am even ahead of my revised goal.  Instead of focusing on increasing forward dividends even higher, I'm considering a transaction that would potentially decrease my dividend income, but save me on taxes over the long-term. I'll discuss it at a later date, but I might sell an investment trust I own in a non-registered account and possibly re-purchase it in my RRSP or TFSA. 

Maintain US Holdings at About 30%:
My US holdings accounted for about 28% of my portfolio at Q314.  As the CAD continues to depreciate against the US dollar, and with plans to continue to shift my RRSP holdings to US and international stocks, this number should drift up over time.  That said, I must admit that with the CAD at a year-low against the USD (about 89.5 cents today), I'm finding it harder to force myself to buy US stocks and pay the 15% premium my brokerage thinks is fair. My rising stream of USD dividends helps to remind me to follow through with my plan. 

Doubling Down on Comfortable Holdings:
I continue to make good progress against this goal. My plan for Q4 involves looking at buying opportunities to finish positions in Coke and Realty Income Corp inside my RRSP. 

Get rid of all companies who haven’t raised their dividend in the past 18 months:
My two exemptions to this criteria remain Riocan REIT and H&R REIT. Riocan would be a mega-tax headache to sell, but I have thought about selling H&R if they haven't raised their dividend by year end. I continue to believe in the long-term value of the company, but think they need to start living up to their mission statement of paying out a rising stream of distributions. 

Figure out what to do with cash in excess of $500 (especially in TFSA and RRSP):
Given the current cash-producing nature of my portfolio, I've decided against pursuing this goal. I tend to invest when I have above $1000 in cash in any of my accounts. I figure transaction costs of less then 1% are fair. Plus, I like having some cash in my accounts just in case interesting opportunities arise.

My portfolio continues to perform well-above any expectations I had at the start of the year.  I'm curious how long the current market correction will last, as I'd really like to take advantage of some buying opportunities. Plus, with my mortgage likely being paid off in November, I'll have more to invest in a stagnant, or hopefully falling market.