A Canadian's random thoughts on personal finance

Oct 27, 2008

Bottom-up asset allocation

Over at Thicken My Wallet is an article on The Role of Cash in Your Portfolio. There, he gives an opinion how much cash is the right amount. It's decent advice, but it contains some numbers that seem rather arbitrary, as does all advice I've seen in this area.

My approach is different. I don't start from the top with a target percentage; I derive that percentage from my financial situation.

My allocation is based on two rules:

1. Never be forced to sell stocks. I want to sell them at a time of my choosing, when the market value is fair.

2. Strive for the highest possible return, subject to rule #1.

To handle #1, we keep our expenses down below our income, we have an emergency fund amounting to several months' expenses, and we have other savings accounts for anticipated expenses such as our next car. This puts us in a position where we'll only be selling stocks under extreme circumstances where getting the best value for our stocks will no longer be our highest priority.

Then, rule #2 amounts to investing the rest in a diversified portfolio of stocks. It also includes a small amount of bonds and cash to allow for rebalancing, since it has been shown that a portfolio with rebalancing can outperform every one of the individual assets in that portfolio. Paradoxically, adding some bonds and cash into your portfolio can help it outperform a portfolio of pure stocks over the long term.

I'm aware that maximizing returns, in theory, requires leverage. Personally, I abhor paying interest on debt, and I don't like the additional risk, so I'm not leveraged. I'll just have to live with the returns I can get from my own money in the stock market.

Oct 12, 2008

Rebalancing with a vengeance

Michael James asks, Do You Have the Nerve to Rebalance Right Now? My answer is a resounding "yes!"

At the start of this year, I calculated that we had a 57:43 split between stocks and bonds+cash, which I considered to be too conservative for us. However, the market being what it was back then, I thought stocks were overpriced, so I held off on rejiggering our assets.

My first rejiggering happened on September 9, after the TSX had fallen from 15,000 to 12,000. The second occurred on Friday, when the TSX dipped below 9,000. Now our ratio is 76:24, which is where I've wanted it for months; and I'm delighted that there are folks out there willing to sell me stocks at such bargain prices.

Oct 7, 2008

Ok, I don't own an SUV

Lest my faithful readers (and I flatter myself by using the plural) think I've lost my mind, I'd like to make perfectly clear that my last post was not about gas prices. It's about fretting over the price of an asset that you were never planning to sell anyway.

I'm in the stock market for the long haul, so lower prices just mean that my biweekly paycheque deductions are buying more shares than before. My May contribution bought me just 33 units of one fund I invest in, while the same contribution last week bought me 51 units. That suits me just fine.

Oct 6, 2008

I'm worried about falling gas prices

My SUV has a pretty big gas tank (150 litres), and I don't drive it much, so I don't need to fill it up often. It still has about 100 litres of gas I bought three weeks ago at $1.38 during hurricane Ike, and it's gut-wrenching to know that my $138 investment is now worth only $109.

My neighbour has made a modest proposal to buy this gas from me before its value drops any further. What do you think—should I take him up on it?

Oct 4, 2008

Open letter on the RESP tax deduction

As long as I'm re-posting old letters I've sent, here's one I sent to my federal representative back in March regarding the proposed tax deduction on RESP contributions:

Dear Ms Ratansi,

As someone who stands to benefit a great deal from a tax deduction on RESP contributions, I think I can be considered unbiased when I urge you to reject this alarming misallocation of federal tax revenues.

Nobody believes more strongly than I do that education should be subsidized. However, until the country can afford to make post-secondary education free to all Canadians, we must target our spending to benefit those who need it most. A tax deduction on RESP contributions is directly opposed to this goal in two ways:

  1. It pays more to those in higher tax brackets, causing most of the money to reach people like me, whose children are in no danger of being unable to afford tuition.
  2. It pays less to those who can't afford to put money into RESPs in the first place, offering the least support to those most in need.

If you choose to allocate a billion dollars per year to subsidize tuition, you have a duty to ensure the money benefits those who need it most—or, at the very least, benefits all students equally. An RESP tax deduction does neither.

I trust you will give this matter due consideration.

In the name of conciseness, this letter left other issues unaddressed. One issue is the fact that this tax deduction would strangely benefit the parents rather than the students. If we're spending a billion per year on education, it stands to reason that the money ought to reduce costs or improve quality. This plan would do neither; instead, it would hand cash back to the parents, whom we then rely upon to improve the child's education rather than buy a big-screen TV.