Canada and US...Twin Stock Markets

The Canadian and US Stock Markets are for the most part, joined at the hip. Historically the degree of change varies a little but they run pretty much parallel.

Starbuck Follow-Up/News

The stock price continues to decline for Starbucks. Now at $22.50 and the P/E still at 26. Still a long way to go before the price makes business sense.

Today news came out about a problem with their thermos coffee cups burning people when the handle fails. Reminds me of a Seinfeld show.

This won't help the stock price.

Water Bill Caution

If you have a water meter, and if your home plumbing develops a slow water leak, one you don’t notice, your bill will climb. Keep tabs on the consumption on the bill, comparing it to normal. Otherwise you risk getting a big surprise on your water bill payment one day. A bill could easily be a couple of hundred dollars higher just for the leak, especially if your paying for both water and sewer when both costs are based on the water meter reading. Toilet leaks that run 24/7 are a most common cause of this sort of thing. Fortunately, you can hear toilet leaks during the night when the house is quiet if you listen while …well you know.

TD Bank...penny stock or blue chip?

This is such an interesting move by the price for TD Bank stock that I had to post it. It took the best part of the last 2 months to come down from $75 to a low of $64. Then, acting more like a penny stock driven by the power of a stock market bubble it regained $75, an increase of about 17 percent over the last four trading days. Now that is volatility!

Chart Game

While surfing the net I came across a site called "Chart Game". As I understand it, the purpose of the site is to allow people...to test their ability to predict stock price direction using just the information contained in the price chart. The charts are good quality and include both price and volume. The game allows one to play with "play money".

A significant limitation to the charts is that they only go back 24 months. For my type of analysis I need to see the entire available history for the chart because what may happened in the future is governed in large measure by what has occurred for the last 10 years or more. Limiting the data to only 2 years of history... in my opinion is not a valid test.

One needs to recognize that not all stock charts are useful for "good predictions". Indexes are always good but many stock charts are terrible candidates. In addition, there are periods of time when no one can make good long-term prediction.

I like the basic premise of the game and hope the site developer will take the idea further. I firmly believe that any one who thinks they can forecast anything be able to demonstrate that ability.

Sayward Photos

A couple of photos I took near Sayward on Vancouver Island.

Dow Theory Sell Signal...almost there

If you follow market news you will be seeing articles discussing if the Dow Theory has signaled a change from a long term uptrend (bull market) to a long term downtrend (bear market).

So far only the DJTransportation Average Index has developed a sell signal by declining below the August low near 4,450. The DJIndustrial Average has not yet done so and this confirmation is required before the Dow Theory sell signal is confirmed.

The DJIA must break below the August low near 12,500 points. It is not far away from doing so with a low of 12,725 today. Another ~3 % drop will take it below the 12,500 level and confirm the sell signal.

In comparison, the S&P/TSX must decline to below about 12,500 before it has developed the Dow Theory change of long term trend signal.

The S&P 500 and Nasdaq Indexes also have a way to go down before they would give a sell signal.

The fact that the DJTransportation Average Index has developed a sell signal...an early warning that a bear market trend may be underway, as opposed to just another small correction, is significant. This is consistent with the overall Dow Theory that expects the industrial slow down to show up first in the transportation industry. For example, before an industry can produce items made of raw products such as steel, these products must first be transported. If a slow down is under way it will then show up first in the transport of raw materials.

The fact that the Dow Theory sell signal seems to be within reach may have influence on some investors and lead to more selling...as people try to beat the gun to avoid getting caught in a fast moving down-draft of price decline.

The next few trading days will be interesting to follow.

Starbucks... The Stock Not The Coffee

I see that it is time for Starbucks to take a healthy correction. Down to $24 from a recent high of $40. Even at this price the P/E is still at 29 times. Definitely some Castle Building in the Sky has been going on here. It reminds me a little of the dot.com craze.

I would not be surprised to see $15 before this correction is over.

ps...I don't like their coffee but that's just me..too strong. But--most people do.

Bank of Montreal Going Lower?

In general... I see a high probability that markets will continue downward for some time to come.

For instance, BMO is looking very weak in the short-term. After sliding down from near $73 since late May 2007 it recently made a low of $56.44. I'm expecting BMO to go below $56, perhaps within a day or so. Chart link.

The Retirement Time Bomb

While on our little vacation I was in Chapters and found Gordon Pape's book, "The Retirement Time Bomb". It was this book that alerted me to the impact that early retirement has on the Can Pension Plan with the zero years reducing one's pension, to a degree, if they wait beyond age 60 to take it. Something that the Fed Gov't has yet to do.

Overall I think that Gordon's book is a good one. His chapters on CPP and OAS and related clawback is well done. My copy is from the Vancouver Island library...the best price in town.

He includes a good section on how to estimate your money needs in retirement, starting with a review of your lifestyle choices. On page 61, he suggests that to just maintain one's standard of living, one will need about 80% of their pre-retirement income. He also states that 60 % will give one a very modest retirement. The text refers to after-tax income, then it says gross family income so I'm not sure what one he intended.

Like all of us he has some fears and some biases. Intended or not, his book might scare many people into continuing to work longer than they really need to. He fears that the Baby Boomer's will have to pay part of their own health care due to the demands outstripping the country's ability to cope. He thinks that early retirement is a pipe dream for most people, most having to work to age 60 or later. The reasons include health care costs and the effects of inflation.

At one point he supports reverse mortgages, as long as the money is invested, but at another point he warns against borrowing to invest in the stock market in case one does so just before the next big Bear Market. He includes some good information comparing the different options available for using the equity in one's home.

All in all...a good reference book on the subject of retirement.

Canada Pension Plan - Be Aware of $0 Contribution Years

I just found out something new about CPP, something that is important for anyone considering retirement before age 60.

For each year one retires early, that is prior to age 60, one accumulates a $0 CPP contribution year. Your not working so you don't contribute to the CPP and you qualify for a smaller Canada Pension Plan.

Depending upon your work history this fact can have the effect of reducing the CPP that you will receive. In my case, dumb luck saved me once again, and although I retired a few years ago, at age 60 I will still qualify for just a hair under the maximum amount. However, if I delay taking it past age 60 - the $0 contribution years continue to accumulate and I start to get further away from the maximum I might otherwise have qualified for.

It occurred to me that anyone who plans on retiring really early such as at age 45 should be aware of this fact.

Mainland Trip Photos

I am posting a couple of photos from our recent trip to Vancouver and the Okanogan Valley. One is from Stanley Park in Vancouver on a rainy day...a horse drawn wagon, and the other was taken in Kelowna - showing the fall colours. As I post these photos it occurs to me that the one with the horse drawn wagon might make a great puzzle photo.

Back In Town

Just returned from a 5 day trip to Vancouver and Kelowna area. Spent some cash, did a little big city shopping and saw weather from pouring rain all day to sunshine with a little snow thrown in as we crossed the coast mountains. A nice change of pace. I will try to post a pic or two in the next little while.

I see the price of TD Bank stock is still dropping. Near $68 today. TD Bank still looks like it has more downside in the short-term. Will it go below the low of $64 in August?

Looks like my call for Royal Bank to hit $59 in the short term was ...wrong. It never went above $57. Fooled by randomness?

I'm more interested in the total market trend. Is the TSX in just a short term correction or in the early stages of a larger Bear Market?? It could go either way.

Black Monday Anniversary...20 Years Ago Today

TD Bank broke below $70 today...you can decide if I was just a lucky coin flipper or not. I'm expecting it to go lower yet.

The media have mentioned that today is the 20 year anniversary of Black Monday and compared today's market drop to that day in 1987. In terms of the numbers, today's drop (Friday) was much less of a decline in the indexes. It is interesting how the media plays a significant role in spreading the market news. Now everyone will likely become aware of it over the weekend.

From a very broad market perspective, the 1987 Bear Market was only exceptional because the market dropped so fast, then recovered the loss relatively quickly. Otherwise - it was not anything out of the ordinary. From a portfolio viewpoint, does it matter much if one sees the drop over 3 days or 1 year? It shouldn't for the long term buy and holders. Most Bear Markets take several years for the total decline.

The stage may be set for a Bear Market at this time and today's small drop was just part of it. The Bull Market has done really well the last 5 years - moving almost in a straight line for that period of time. A 148% total gain on the S&P TSX Composite and somewhat less for the DJIA. We shouldn't be surprised if many great buying opportunities appear in the not too distant future. If so...keep in mind it is not a problem...it is an opportunity.

I leave tomorrow on a short vacation to the mainland and may not post for the next week. Being retired--our travel plan is open ended and it will depend on the weather and how we feel that day.

It will be interesting to watch the market next week.

TD Bank Update Oct. 18, 2007

I continue to see weakness in the shares of TD Bank. It looks like a very high probability of a short-term (days?) price drop below the $70 level.

It appears to be declining in conjunction with US Bank stock weakness...all that pessimism about the mortgage stuff going on down there.

Lower price opportunities ahead?

Blog Action Day...Environment

Blog Action Day...an excellent idea.

Here's my post for blog action day.

I recently changed over from a 6 cylinder car to a 4 cylinder car. I also bike to the grocery store once in a while. So on this topic I'm not doing as bad as I was a few years ago. Here's a few random thoughts.

I was watching a show about Greenpeace a few days ago and Greenpeace members succeeded, at great personal risk, in bringing an end to the hunting of whales, by simply filming and showing the public what was going on. They ran around the whaling ships in small inflatable craft taking pictures of the hunting as it happened. One of their first films shown on TV around the world was a harpoon being shot at a whale.

Public opinion and political opinion soon changed as a result of those efforts. A simple but powerful idea....just show the pubic what people were doing. Bring our attention to it. Get peopole thinking and talking about it. I expect that after that event, anyone associated with whale products, buyers or sellers, started to feel a little guilty.

It makes me wonder if that same tactic could work for other "big city" things? For example, if Greenpeace were to film people doing things such as filling up a large gas guzzling luxury car at the pump or filling up a large motor yacht at the dock, would that help change things? Would people feel guilty owning such things?

I guess today...anyone with a digital camera could start doing it and just put the footage up on U-Tube. If the footage is interesting enough, especially if it is a well-known person, it may make it to TV.

TD Bank Update Oct. 9, 2007

TD continues to show short-term weakness, with an obvious decrease in volume over the last 4 days. In my experience - this is a classic sign of a further drop in price. The buyers at this price level, at this point in time, are running out and sellers will be forced to accept lower prices. It is a vicious cycle where each new lower level makes a new group of stock holders nervous.

In any event, this downturn is only temporary in nature.

Cheap Coffee for two at Tim Horton's

Now to be honest...I haven't done this for awhile, and it was originally my ignorance that let me discover a cheaper way to buy coffee for two at Tim Horton's.

Order their largest coffee, whatever they call it, then when the new hire (and they are always new it seems), hands you the large cardboard cup - ask for two real cups as well. You can then sit down and split the large coffee with a friend. It's cheaper than ordering two regular sized coffees.

I stumbled upon this money saving trick, while driving alone across western Canada, where Tim Horton's are easy to find and open 24/7. I travelled with a thermos, had one cup of coffee in the restaurant and put the rest in a thermos... one for the road.

Royal Bank Stock Going Up?

Every once in a while I stumble upon a stock chart that has some good forecasting patterns. I guess because I have some money in a Dividend Mutual Fund that includes Canadian Bank stocks such as Royal Bank - I follow the charts on a casual basis. This forecast will not change anything I do with money....it is just for academic amusement.

Contrary to what you might have heard, there are recurring patterns in stock price charts, and some times, they have predictive value. In this case, Royal Bank has been down for the last 4 months or so and the question is...will it go back up soon or what? I noticed that it appears to have just completed a bottom pattern that predicts a minimum increase to near $59. There's more... this apparent short-term bottom, and turn upwards, is consistent with the Elliott Wave Count. In addition, because the last high was $60, there's a good chance that a turn upwards, at this time, will carry on to new highs above $60.

The Bank of Montreal (BM), down from $73 for the last 5 months, may also be on the threshold of completing a short-term bottom and turning upwards pattern as well. This one needs a little more time to clarify.

I also see that the TD Bank recently completed a bottom pattern and rocketed to a new high. Yesterday's free-fall drop for TD is a normal reaction following a very fast advance...likely very temporary.

It will be interesting to follow what happens here.

S&P TSX Composite Index - 148 percent return

Observation
Over the last 5 years, since the end of the bear market, this Canadian Stock Market Index has risen from about 5900 points up to the last new high close to 14,600 points. That's a total increase of about 148 percent over 5 years which is also equivalent to an annual compounding rate of 20 percent. Not bad!

I determined the annual rate by using a trial and error method in the following equation.

Future Value = Present Value (1 + i) to the power of n, where i is the annual interest rate and n is the number of years. One could also use a table of values if they are handy. In this case the future value is 14,600 and the present value is 5900. You can check it by multiplying 5900 by 1.2 and repeating (compounding) for a total of five times.

Some might think that this bull market is getting long in the tooth both in age and in total returns.

2007 Expenses Jan-Aug

I updated my monthly cash flow spreadsheet the other day by adding in the last few months and thought I should share the information. Here are a few 8 month totals for two retired adults living on Vancouver Island.

Groceries $4,632
Restaurants $2,061
Entertainment $1,681

So far the actual totals generally agree with my estimated total for 2007. I estimated a total of about $38,000 for the year. This total includes a $2,000 - $3,000 savings toward the cash purchase of our next replacement car. Boating costs, a special retirement entertainment expense, is not included in this total. That has been running at about $3,000 per year. We own our home so there is only maintenance and property tax included in the $38,000 total.

A few times each year I compare our actual cash flow to my forecast. I find that having this cash flow information eliminates any money concerns both before and after retirment.

Trip Photos...100th Post!

We were out on the boat over at Desolation Sound for a few nights. Desolation Sound is located between Vancouver Island and the mainland about half way up Vancouver Island. Here are a couple of photos I took. Star fish are not just pretty decorations...they clean up the leftovers. This one, at Squirrel Cove on Cortes Island looked like it was slowly heading for the dead crab just above it. The tide is low so they are both temporarily out of the water. The tide change can be 10 feet over night so when we anchor the sailboat this has to be taken into consideration. The other photo is taken from the Curme Islands looking toward the mainland...where the Grizzly bears still run free.

Other than the base cost of owning the boat, whether we use it or not, we don't spend a lot of money while we are out cruising. It is like having a small waterfront cottage with a fantastic view. We are mostly at anchor so we don't use a lot of gas and there is no charge to anchor the boat. We use our dinghy with a small outboard motor or just rowing to explore while the sailboat is at anchor. We like to anchor near hiking trails if possible so we can get some exercise on shore.

Reading Other Blogs - September 6, 2007

I continue to be impressed with the quality of information available on the web. In the workplace, I always believed that if you encouraged people to think and communicate in a group environment, that everyone would learn together. The web is the ultimate communication tool for this type of thing. When I read the different blogs it is almost like being back at work and discussing investments over coffee break. In fact, it's much much better... since the quality of discussion is 1000 times better.

For Example
Canadian Dream posted his recent interview with Derrick Foster about his new book. Just yesterday I read on another blog that DF had written a new book. I expect to read both of DF books this winter. However, because of the information I found on the web about dividend stock investing and the tax breaks available, I have already invested some money in a dividend stock mutual fund.

Four Pillars posted an overview of his investment plan. One point I liked is that he has limited his leveraging to a level he is comfortable with, currently about 10% of his investments. I strongly encourage anyone with a mortgage to take a hard look at the SM opportunities in conjunction with a financial planner. It is normal to be wary of leverage, but rather than do nothing and let the years slip by, one can follow FPs lead and start with a percentage limit on the leveraged portion of one's portfolio. I recall having trouble sleeping when I took out larger mortgages years ago but I quickly forgot about it. After a short while the extra debt "was normal" and I never gave it much thought. In the final analysis we all leverage our investment in real estate when we take on a mortgage.

The Financial Blogger is posting his real time experience with the SM. I look forward to following his progress. It is a good blog to read if your afraid of the SM. It doesn't sound very scary because the numbers start out quite small. It gives one a chance to "grow into it" over time.

Million Dollar Journey's blog has a great guest post by Melanie McLister that summarizes the SM and provides a link to a table of comparison for Canadian sources of special mortgages needed for this strategy.

Buy Order...TSX Index Mutual Fund on Sale Today

Anyone else buying into the downturn?

The market news this morning is on the negative side and my earlier expected drop below 12500 for the S&P TSX Comp Index is still a possibility. The volume continues to decline as the index climbs above the low made in August. However, a drop below 12500 in the near term is not guaranteed, so I bought a little more index-e fund at this time. A buy at this time builds in a 6.5 percent advantage compared to buying after the market recovers from this temporary setback. My plan is to buy more units if the index goes lower, averaging down.

I wouldn't do the same thing with a stock issue...that would hold too much risk for my liking but history teaches us that the index always comes back.

Canada Bank Rate History 1956-2006

Since the prime bank rate is such a key factor in many financial decisions, I found a history on the web and graphed the January Rate. The average prime rate over the 50 years from 1956 to 2006 was 7.58 %. The extreme range was a low of 3.5 % in 1956 and a high of 20.0 % in 1981. The highest stretch of rates was the seven (7) year period from 1979 to 1985 when the rate never went below 10.5 %. Talk about 7 years of bad luck!

Keep in mind that these are prime rates and fixed rate mortgages are always higher.

Smith Manoeuvre Review...September 2, 2007

I'm still reading the book and reviewing some comments on other blogs. It took me awhile to understand the basics. Not because I am older, and not because I am new to this kind of financial stuff, my resistance goes much deeper. It is contrary to my basic emotional programming. I guess I also thought that this sounds too good to be true.

I must admit that I am still trying to "get use to the idea". It makes a lot of sense logically and mathematically but like most everyone else I have been brain-washed with the working-class belief that debt is bad and that we should run away from it as fast as we can. Our beliefs come from our parents, friends, relatives, books and the media. Were all driven by fear. When I read other posts on the SM I know I am not alone on this issue.

Smith makes some excellent points beyond just using leveraging. That when it comes to investing in things that go up in value such as equities or real estate, "time is our friend". That is not a new concept, I have "know it" for many years. But Smith has found a way around the "big rock" in the stream, he shows us a way that we can overcome an imaginary obstacle, like the migrating salmon, we can jump over it. He gives us a solution that we never had before. It is positively brilliant.

It then follows that to wait "to invest", until the mortgage is paid off is not the best course of action. It is a "missed opportunity".

The reality of it all is that in order to become financially independent and retire at an early age, we need to own our own home and own other investments as well.

The SM is much more than just leveraging to buy investments. Smith also demonstrates the benefits of selling current investments like CSBs, Term Deposits or equities, using that money to pay down the mortgage, then borrow it back to re-invest. Many of us have a mortgage and money invested in other things at the same time. I was in that position for a couple of decades.

By simply re-arranging our financial house to take advantage of the tax benefit, we can keep our total debt the same, own all the same stuff, and get a big tax refund on top of it all. The tax refund can be used to pay off the mortgage sooner or to buy more investments. One's dollar level of debt never goes higher than the original size of the mortgage. And, with inflation, that debt actually reduces over time. A debt of $100,000 today is really less than a debt of $100,000 ten years ago. So one's debt level and amount of leverage actually reduces over time using the SM.

What about our fears...what if a bear market occurs? What if interest rates rise? These are excellent questions and I think one needs to go into the SM with eyes wide open and with "an emergency plan". Having an emergency plan reduces stress.

I don't know if my emergency plan ideas for the SM are the best ones, but here are a few initial thoughts.

Emergency Plan Ideas
If interest rates go crazy, like they did back in the early 1980s - and mortgages go above 20 percent, what can one do with leveraged investments? I can think of several options.


Owning equity investments, in addition to one's home, is not the same thing as owning a more expensive house. You can't sell half of your home quickly, easily or conveniently. In comparison, with the SM you have more control. Equity investments can be easily sold to reduce the amount of leverage.



Using the SM one owns the equity investments free and clear. They are not "bought on margin"(the old scary method) so you will never see a margin call that forces you to sell anything during a market crash. You won't be tempted to jump off a 10 storey building. You will therefore always have total control on the degree to which you are leveraged.





When and if it happens, you will have to weigh the pros and cons of selling equities and losing the tax refund. Higher interest rates will also bring higher tax refunds to your door to mitigate the situation. It may come down to whether or not one can meet higher monthly payments. Keep in mind that interest rates don't go from 6% to 20% overnight. You will have some time to consider your options.


During a long bear market one could sell some equities in the SM leveraged portfolio and replace them with interest paying things like Term Deposits, GICs or CSBs. During periods of high mortgage rates, these things would also be paying much higher interest rates. I can recall getting in-the-order of 18% on term deposits back when mortgage rates went above 20 %.

Another option may be to lock into a fixed interest rate loan for the investment account.

Smith also discusses the option of capitalizing interest. CI means borrowing more to pay the interest. Doing some of this would also be a way to control monthly payments.

The Smith Manoeuvre Review...September 1, 2007

I'm currently reading "The Smith Manoeuvre" by Fraser Smith, 2002. ISBN 1-55369-641-7.

So far I'm finding the book quite good and easy to understand. It is a quick and easy read if you don't stop to check the math. Theoretically, in hindsight, had I discovered the SM back in the mid 1980s, when the author first invented it, and had I implemented it on my mortgage, and had I understood the market, as much as I do today... back then... then I would be a lot richer than I am now. Hindsight is 20/20 and there are a lot of "ifs" in this statement!

One of my initial concerns was that the SM required one to take on additional debt. This doesn't seem to be the case. As I understand it, for the Plain Jane version, one's total debt never exceeds the initial amount of the mortgage for the life of the mortgage. That is less scary than taking on a mortgage plus additional debt for investments.

I also like the fact, that for young people, the investments grow slowly over time, giving one time to adjust to the reality of market volatility. It forces one to "dollar cost average" into the market. Even if one understands very little about the market, dollar cost averaging builds in a safety factor against really dumb moves. But be very careful here....dollar cost averaging alone is not enough to save one from big stock market mistakes.

The SM depends upon using financial leverage to help one grow their net worth over time. However, financial leverage can also make a bad move much worse. In general, the SM alone does not guarantee success and it could make things much worse.

When applying the SM one should have a solid understanding of how the stock market works and the historical pitfalls. "The Four Pillars..." book is a good primer on this issue. In particular, learn about the historical mistakes that keep repeating themselves with each generation. Each and every time market participants think "this time is different".

A worse case scenario for the SM would be where one invests a very large "lump sum" into the market, in the wrong (high risk) investments, at the worst possible point in time. This could happen with a mature SM account, where the owner gets caught up in a buying mania, sells and buys a large sum of investments within the portfolio, or where one begins the SM with a large lump sum borrowed on a home that had been owned free and clear before the SM.

For example, if an investor (gambler) made a lump sum purchase of dot.com stocks such as Nortel (NT)or Cisco (CSCO) or even the entire Nasdaq Index near the peak of ~5000 in late 1999 or early 2000. This was a classic case of "irrational exuberance" when many people treated the market like a gambling casino. Then, during the subsequent severe bear market, the investor/gambler "lost heart", gave up on the "buy and hold" philosophy because the pain was too great, and sold it all at a large loss. That loss would then be in the form of debt, debt that the investor/gambler must pay interest on until it is paid off.

One redeeming fact is that the interest on that debt is all income tax deductible. Also, if the SM had been in place for a number of years with significant profits accumulated, prior to the dumb mistake, these profits would help offset the big error.

Home Ownership Versus Renting

When it comes to the debate about whether to buy a home or rent, there are several benefits of owning your home, benefits that don't easily fit into a spreadsheet comparing homeownership with renting.

First, you can lend money, at mortgage rates, for investment purposes. This is a lower rate than other loan types. This makes the Smith Manueovre more attractive.

Second, you are "more secure" in a home because, if I recall correctly, under Canadian law you can't be evicted/foreclosed on until you miss three consecutive mortgage payments. People who own real estate have a higher status under the law.

Third, from an investment viewpoint, a principle residence is not subject to capital gains. You get to keep all the profits.

Virginia Tech Shootings

We are hearing about how fault finding is going on with the school.

I think a reasonable solution to the school shooting events of the last decade or so would be prevention. How can it be prevented?

First, all schools should have a "zero tolerance" policy on bullying. By this I mean, no verbal abuse or gestures are allowed. I expect most physical violence between students is preceded first by verbal abuse or unwelcome comments, sentiments expressed by gestures, strange clothing etc. This would include written comments etc on school property or books covers etc.

Second, all schools should have a respectful school policy. For example, a dress code guideline to prevent some students from expressing their rebellion against others through extreme cloths such as long black trench codes. School uniforms are not necessary just general guidelines, with a provision for special case decisions as creative students try to get around the rules. Just tell them they can dress any way they like when they are out of school. Anything that can be interpreted as being disrespectful towards fellow students or teachers must not be tolerated.

Third, extreme cases should be reported to the police. That's their job.

The parents should be asked to vote on these rules to gain their support so it is not "just the school authority".

TSX Going Below 12500...Aug 29th Observations

I don't use an alarm clock anymore since retirement unless we have something special going on. The sounds of the west coast were the first things I heard this morning. The first was the sound of the nearby fog horn at the light house. There must have been fog out on the Straight of Georgia this morning. The second sound I heard was the squawking of a Raven flying over the house.

I checked the stock price charts for RY (Royal Bank) , K (Kinross Gold) and PCA (Petro Canada) just now... well known examples of the Canadian in the banking and resource sectors. All three appear consistent with my impression of the TSX Comp index going lower. These three stocks all look like they will go below their lows of mid August 2007. All three have made recent rallies, since mid August lows, on decreasing volume.

BMO (Bank of Montreal) may have started its drop. Now at $65, I expect BMO to go below the mid-Aug low of $59 (-10% from today's price). BMO news out about large trading losses. The company fundamentals seem to agree with the chart. Another red flag.

If I was a gutsy gambler I would short BMO stock at this time. Selling short is an interesting experience. You sell the stock first, then buy it back later at a lower price (if your successful). It is still buy low and sell high. Unlike buying Put options there is no time limit to run out on your trade. If I owned a lot of BMO shares I could sell covered Put Options at this time. But I digress.

These individual stock charts are suggesting the same thing I see in the chart for the S&P TSX Comp Index. If my prediction is correct, this is the way it should be. When possible, it is always wise to look at something from at least two different viewpoints. If it walks like a duck, looks like a duck and sounds like a duck...it probably is a duck.

Average Retirement Age 61.5 Years Old

There are a number of news articles out there today based on a recent Stats Canada report(s).

Statistics Canada has recently reported that "the average age of retirement remained steady at 61.5" according to this on-line article.

Most baby-boomers are not seeing "freedom 55". Having retired myself just a few months after my 55th birthday I can understand why. It requires a lot of discipline to save more and spend less while everyone around you is spending their extra cash on winter vacations, larger homes and newer cars. Then there are all those who just need to continue working due to their low wage level.

Statscan also found that about one third of older boomers are taking their Canada Pension Plan money at age 60 but continuing to work. The majority are women.

The CPP has investments worth about $120 billion, with about 65 % of this money in equities. This money is one of the many sources that help guarantee that the TSX Comp Index "will always come back" after a correction, like the current one.

TSX Going Below 12500?

Once again I feel the urge to stick my neck out a little and make a stock market forecast.

Patterns in a few stock market (price and volume) charts suggest that the drop in the stock market, the one that started back in late July 2007, may continue, and that the current rally is just a correction in a longer term downward trend. If true, it means we will see the TSX Comp go below 12500 before the index recovers from this correction.

The pattern is present in the TSX Comp Index. Bank stocks like BMO, RY and TD also show a pattern of decreasing volume. This pattern is very pronounced in the chart for BMO.

The key information is that the current rally over the last 8 trading days is being made on decreasing volume. Decreasing volume is consistent with a "correction" or pause in an overriding longer term trend.

The decrease in volume means that the volume of buyers is diminishing each day. If the crowd of buyers continues to shrink, to the point where the sellers outnumber the buyers, the prices will begin to drop (basic law of supply and demand at work here).

What value does this forecast have? If your a "buy and holder"...continue to be patient. If your trying to time the market and buy low, there may be better bargains ahead.

Don't Listen!

The media is making a big deal over the current stock market correction. A few thoughts.

1. This drop is normal for the stock market. Three steps forward and two steps back.
2. For every seller there is a buyer.
3. The panic sellers are referred to as "weak hands" in the investment literature.
4. Take a longer term view. The TSX Index drop so far is well within "normal limits". Check the previous drops on the chart. The DJIA Index is similar.
5. If it wasn't the US Credit Crunch it would be some other excuse for the sell off.
6. The "strong hands"...those who are buying now have the right idea.

I'm not checking the balances of my investment accounts. How about you?

TSX Index Funds On Sale Today - 10 % Off!

Because the index always comes back after a decline, S&P TSX Index Funds are on sale today for a discount of at least 10 percent minus any fees. Over the last few weeks, after reaching a peak of 14,646 in July, the TSX Index has now dropped back to near 13,300 today. In the future, when this index recovers back up to the previous 14,646 level, this will be an increase of 1,346 points or 10 percent (1.1 * 13,300 = 14,630).

If market history teaches us anything...it is that the index will recover those points at some point in the future. It may take 2 months, 6 months, a year or longer but it will occur. Need, greed and fear guarantee it. The probabilities favour a shorter time frame for recovery.

We can't know when the low is reached, there may in fact be a much better sale price later on...in any event a net profit of perhaps 9.5 percent is available today for anyone who has the courage and funds to buy the dip.

This approach is not valid for individual stocks or for narrowly focused "stock picker" type mutual funds. Only the index fund comes with this 10 % guarantee.

When the 10 % increase occurs a number of stocks in the index will increase more than 10 % but we can't know which stocks they will be. More importantly, some stocks in the index will continue the downward trend or increase less than the 10 percent. Some stocks may never recover. An index fund guarantees average market performance in return for giving up the opportunity for "stock picking".

If I buy more index fund today I must accept the possibility that the index can go lower, perhaps much lower before I see my 9.5 percent profit at some time in the future. Part of the price I pay is having to live with the discomfort of watching my investment drop in the short term.

Planning For Retirement Study - Are Canadians Saving Enough? University of Waterloo

The on-line report does not contain all the calculation or data details.

Some key points include:

They used data from Stats Canada.

A two senior Canadian household, in 2003, spent $43,717 on food, shelter, clothing, transportation, health care, energy and taxes.

Two thirds of Canadians are not saving enough to retire at age 65.

Assuming one starts at age 40, the required savings rates for a $40,000 income household, for age 65 retirement are 14-20% for one person and 30 % or more for a couple. These savings include the increases in home equity, in some form.

CPP is in excellent financial shape for the next 75 years.

They dealt with home ownership equity by assuming the home was sold at retirement and converted to an indexed annuity so home ownership could be viewed as retirement income (If I understand this correctly).

Income sources included Old Age Security, CPP or QPP, Workplace Pension Plan and other savings such as RRSP and money from home ownership equity.

My initial questions/thoughts:
How good is the $43,717 number?
One car or two?
Newer or older cars? This makes a big difference.
Any vacations included?
How did they obtain the cost of shelter for households that own a home? If it was just total income, then the cost of shelter would only be operating and maintenance costs.
I'm very skeptical about the two-thirds of people not saving enough for retirement.
By their definition...How many retired people don't have enough for retirement now?
No mention of government income over and above OAS and CPP such as supplements.

The home ownership component is the part that I find difficult to fathom. It is a large component and one must be sure to make a valid comparison between the $43,717 spending in 2003 and the required retirement income that translates into a required savings rate. This was a big part of our savings for retirement. The $43,717 per year for a couple, seems to be in-the-ball-park, especially if a couple owns their own home.

Okanogan Trip

We spent a week visiting relatives in the Okanogan Valley... quite a contrast to the East Coast of Vancouver Island. A hot and dry desert country and a different kind of beauty.

A lot of traffic in places like Kelowna. A lot of beach eye-candy there near the August long weekend...not that I ever enjoy that sort of thing. Everything is booked for the long weekend and rates are the highest of the year.

To have your pick of hotels in Kelowna it costs at least $200 per night. Trying to save a few bucks we stayed a few nights at a Super 8 Motel for about $110 per night. This included a help-yourself continental breakfast. We booked weeks in advance and got the senior’s rate for a room poolside. Part of the price we paid was having to wear earplugs to block the traffic noise. Not the best way to save a buck!

We also spent a few nights at a B&B in Summerland. That was excellent value at $125 per night with a nice view of the lake and no traffic noise. Lots of California Quail (photo) around and we were lucky enough to see a coyote during one of our early morning walks.

ps...ferry was $63 each way for the car and two adults.

Boating Pics

A "Midden" on the shore of Sandy Island Marine Park near Comox. A Midden is a collection of shells left on the shoreline at the site of an old First Nations Village. They ate a lot of clams, oysters, and so on, and the discarded shells remain to this day. The shells sound quite crunchy under foot when you walk up the beach.

The old and the new at anchor in Tribune Bay on Hornby Island. An expensive motor yacht and a replica of a "Tall Ship". The Tall Ship was full of teenagers. A beautiful beach at Tribune Bay.

On Summer Break

I haven't quit this blog...just taking a break. Its hard to find the time and motivation to post during the summer. That's a good thing when your retired. Winter will be back soon enough.

So far this summer we have spent several weeks out on the sailboat. A nice change - a very simple life. There is something nice about dropping anchor in a beautiful place and watching the world go by. Leisurely breakfasts on quiet sunny mornings. Doing all the dishes by hand. Electric lights on a 12 volt battery. Water is heated on an alcohol stove. Its really basic camping. Waterfront all the way. Other boaters you meet are generally friendly.

Going to and from shore for a hike or just exploring the shoreline in the dinghy. Mostly by rowing but sometimes using the small outboard when its too far to row. Visiting islands we haven't been to before. So far this summer we have been to places with interesting names like; Secret Cove, Smuggler's Cove, Jedidia Island, and Pirates Cove. You can find more info on the net. Some of them are Marine Parks. Even the busy harbour of Naniamo made for an interesting change of pace.

We had one large school of Dolphins over-take our boat, dive under just in time to avoid a collision then surface again a head of us. A fantastic site to see and hear. They are extremely fast and make a large splash each time they surface and dive under again.

At other times when we get out in a strong wind...things are quite different. The boat is readied for a rough ride with all loose breakables on the floor of the cabin. At these times you really know your alive. As the boat moves up and down in very large waves from the side, you feel it in the pit of your stomach like being on an elevator. We don't do a lot of that.

When were out on the boat we don't spend a lot of money. Perhaps less than we would staying at home. Not that boating is cheap in any sense of the word. There's moorage, insurance and maintenance. Perhaps $3,000 per year averaged over 5-10 years. Basic sailboats equipped for over-night trips start at about $15,000 and go up from there. Many of the boats we anchor close to are over $75,000.

Market Timing

Still working my way through "The Four Pillars of Investing". I have read it once through and now I'm down to making some notes and trying to see if I've learned anything new.

Bernstein believes that no one can make a sustained profit from timing the market. He believes in the "random walk" theory of how the market works.

He refers to studies that found that stocks/mutual funds that have good returns for a number of years then mean revert and do poorly. So, using past performance to predict future performance is usually wrong. However, at one point in the book, he refers to a study that found that in the short term past performance is a good predictor of future performance.

This short-term prediction data is perhaps what draws the public to the market, like a moth to a flame, during the periodic bubbles. You don't have to be a math expert to see "the correlation".

Over the last few years the stock market has done great. For example, the last year has seen returns in the 20-30 % range for Canada and the US. If you take only that data set (its called data mining), pick short time periods at random, and use them to forecast the future returns, I expect the results would show a high correlation. Hindsight is 20/20.

So here we seem have conflicting realities. Short term data is a good predictor but longer term data is a bad predictor. I guess this means that the farther one gets from the beginning of a bull market the less confidence we can have that it will continue. The market moves from being a "good investment" towards being very speculative (a gamble).

One of the easy ways to measure this phenomenon is to look at P/E ratios for stocks. P/E is often shown on charts. For example, the Royal Bank is near a P/E of 15. Not extreme but not a great investment. Farther afield, looking at Research in Motion (RIM), it now has a P/E of 47. That is considered very speculative by any standard.

The reality is that the stock market changes over time. Sometimes it is a great place to invest but at other times it is like going to the Casino.

As the P/E ratios increase, the probability of a "Black Swan" appearing on the horizon increases.

It's not simple math. The equation changes over time. Maybe P/E or similar measurements needs to be brought into the prediction equation. Maybe it's not just "a random walk". Perhaps it is just a problem yet to be solved.

Market Corrections

I was reading Canadian Dream's blog this morning. His post and the comments by others got me thinking.

The TSX market has had a few down days and that will make some people take notice. If your at all interested in the stock market its hard to avoid this type of news. The media is "part of the system" that drives the markets.

Some people will take action. Some people will just get nervous. Some will actually sell shares. Some will see it as a buying opportunity and buy more shares. At this point we can't know whether the market will continue to drop lower or whether it will quickly resumes its upward climb.

The most normal human reaction is to be a little nervous when one looks at the chart. The TSX has done very well lately and a larger correction may be over due. Running at the first sign of danger is a trait that has saved many humans over the ages. It is at times like this that one learns whether they are cut out to believe in the "buy and hold" investment philosophy.

The best buying opportunities lie somewhere ahead...when the next large correction occurs. And it will occur...we just never know when. It may be very sudden and almost overnight or it may be a slow dragged out process. We can't know when it will happen and what triggers it could be something that never happened before.

It is very important to understand that market corrections are more of a risk to those who have a lot of money invested in a few stocks.

The TSX Comp Index will always come back. You can bet the farm on this. Yes, for larger corrections, it may take years, but it will come back. The 2000 to 2006 was the last good example. It took about 6 years for the correction and subsequent recovery. I wouldn't be surprised to find out that most private investors sold at least part of their holding during this bear market period.

In sharp contrast, some individual stocks never recover. One of the nice things about the index is that it benefits from "survivorship bias". When the price of a share drops below a minimum threshold value the stock is dropped from the index. This important fact can mislead people into thinking that any and all stocks perform like the index.

If your like me... you missed the last great buying opportunity. In hindsight, if I had borrowed all I could and invested it in the market index at intervals throughout the 6 year correction I would be a lot richer today. My excuse today is ignorance at that time. If I fail to catch the next great buying opportunity my only excuse may be a lack of courage and conviction.

Stocks and Bond Returns 1900-2000

Here's an interesting chart from Bernstein's book..."The Four Pillars of Investing". Two things stick out, that stock returns have been superior compared to long-term and short-term (bills) bonds, and that every so often the stock market crashes. The 1929 and 1973-74 market corrections are very evident on this semi-log scale. The worse case scenario for a new retiree, one who is totally dependant upon a personal portfolio, would be to retire just at the beginning of a large market crash. This is a low probability sequencing of events but it can happen. Therefore, it is preferrable if one's retirement income/spending plan is robust enough and/or flexible enough to weather a possible large stock market crash storm event. A safety factor is is good idea.

To see more detail of the graph (photo) click on the image.

Nortel and TSX Comp Index - The Impact

One of the things I think I have learned about how the stock market works, is that individual stocks can do extremely well for a period of time, then crash and burn, with little hope of ever recovering their former peak price. For this reason, investing (betting) on individual stocks is a real crap shoot. In contrast...it seems that betting on the market index to always comes back and exceeds it's former peak a much safer and profitable bet.

What happened to Nortel and the TSX Comp Index is an extreme example of this important aspect of how the market works. According to a back issue of "Money Saver", Nortel accounted for about 33 percent of the TSX Comp Index when the Tech Bubble Peaked. That's a lot!

Nortel achieved a peak price of $120 in late 2000 as part of the Tech Bubble that took the TSX Comp Index to a high of ~11,500. The Tech Bubble burst, Nortel fell to $0.75 and the TSX fell to ~5,800.

Since then, Nortel has recovered to ~$27 but the TSX Comp Index has surpassed the "Tech Bubble Peak" and is now at ~13,800. Today, 6 years later, Nortel has recovered to only 23 percent of it's former peak price. In contrast, the TSX Comp Index has recovered completely, and has exceeded it's former peak and is currently at 120 percent of it's peak level.

More and more, I have come to agree with those who believe that chasing the next hot individual stock is a fool's errand.

Chart Links:
TSX Comp Index 10 Year History
Nortel 10 Year History

PS...Now that "boating season" has started my posts will be less frequent.

70 % Question

From time to time I run across references to 'the 70% of pre-retirement income being needed to maintain one's standard of living in retirement". I also see references to 'perhaps 50% is all that is needed'. I don't recall ever seeing the calculations and assumptions behind the 70% estimate but someone likely did it years ago. I expect there is some logical rationale behind this percentage estimate.

I wonder...did those calculations include "an equivalent income" from a home that is owned during retirement?

In many cases, the rent one would have to pay to replace one's home is not a small sum, and it should therefore be considered in the "How much do I need for retirement?" question.

When financial advisers are giving conservative advice to the general public the 70 % estimate may not be that far off the mark if one's home is included as part of the income. There may also be a bit of a safety factor in the 70% estimate.

For example, if one owns a $200,000 home, this "net worth component" could be sold and the money invested. It would provide perhaps $14,000 per year ($1,167/month) before tax at 7%.

The Four Pillars of Investing by William Bernstein

I'm currently working though a book I picked up at the library. I'm impressed with it so far and would recommend it to anyone who has money to invest. It is not an easy or quick read, but it contains critically important information for the investor. With respect to small investors, Bernstein points out that they (we) fail to understand the relationship between risk and reward, and that we fail to stay the course when things get tough.

I agree that ignorance about how the markets work and inexperience with the psychological aspect of being invested in the market, are important obstacles to overcome. Like Bernstein, I feel lucky (in a way) to have experienced a good sized bear market. I watched as co-workers got excited about the dot.com stocks soaring to ridiculous heights. It was a real time lesson in human nature during the building of the dot.com bubble. The media did a great job of cheer-leading everyone on.

It was difficult to keep from getting caught up in it all. One would have had to live like a hermit in a cave not to be effected by it. I must admit that in 2000, I owned shares of Nortel for about 10 days when it was at $65, before I came to my senses and sold. Crowd psychology can draw you in even when you know at an intellectual level that it is a dumb move.

Holding on to stocks during a bear market must be the most difficult. I have not experienced it first hand but saw the effects on others. During the dot.com bear market I was selling short and buying Puts. I didn't make any money, in fact even though I had a number of profitable trades, on balance I still lost a little, but I did have more fun than those who stayed in long positions.

Alcan Update May 24, 2007

Further to my last post about Alcan, it has now jumped up above the $90.00 level. Now...does my forecasting method work or was I just a lucky coin flipper?

Alcan Chart

The Smith Manoeuvre

I have requested Smith’s book from the library for further research into this concept. Although I own my home mortgage free I’m curious to see what I might have done.

If I understand it correctly…the basic premise is that the house title in one’s name gives one the power to make a big loan. Rather than just pay down the mortgage, the Smith Manoeuvre goes one step further.

As the principle is paid off each month, use this increment in growing home equity as collateral for a second loan and use the loan for investment. The mortgage payment and original loan amount remains the same and your equity in the home continues to grow as under the normal approach.

The interest on the "new loan" amount is then income tax deductible. I guess, in general terms…if one makes 10% on investment, pays 7 % on the "new loan" and has a marginal tax rate of 50%, then the after tax cost of the new loan is 3.5 %. The net increase in net worth is 10-3.5 = 6.5 %.

One of the main benefits is that rather than waiting 25 years, while paying off the mortgage, then start investing, one starts investing much earlier in life. This time factor is one of the biggest obstacles to becoming financially independent.

Alcan Update May 11, 2007

In my recent first post about Alcan I indicated that I expected the price to continue sideways for a time while the trading volume became lower and lower... then break out above the recent price peak near $90.

The price has not broken above $90 yet, but it continues to shows signs of likely doing so. The daily chart shows how the volume has continually diminished since the price peaked near $90. The price and volume pattern continues to follow a pattern that I have seen many times before.

In most cases, when I see a stock price move generally sideways and the volume continually drop off, it is a signal of a strong upward price climb coming next. The same thing can happen upside down when the price is getting ready to drop lower in a longer term downward price trend.

The literature on the stock market includes a theory that the stock market is a "random walk" meaning that one cannot predict the future. I agree that to a large extent one can not predict the future except on the basis of just being a "lucky coin flipper".

However, I continue to believe, that "on occasion", patterns of price and volume become apparent that increase the odds of being correct in predicting price movement. Unfortunately, for me at least, the existence of these patterns has not translated into the ability to make "sustained stock market profits". It is also a lot of work to find and track individual stocks that exibit such patterns.

These days I just make predictions for the fun of it and keep my money in safer harbours.

Alcan chart link.

"Top 5" Things To Achieve Early Retirement

I've decided to take on the "Top 5" challenge, as much to see what I could come up with this morning, in addition to being eligible for the random draw for $1001 USD being given away by Problogger.

So here goes.

To help you reach early retirement...however you define "early retirement" I can recommend the following five concrete actions.

1. Buy your own home and ensure that you can have the mortgage paid off before your early retirement date.
2. Monitor your cash flow by whatever method works for you. See my earlier post on this one for the easiest way I know how to do this.
3. Don't let your job be your entire world...view it as just a means to an end- just a way to generate cash flow. Do an excellent job while your there, but be able to walk away from it.
4. Drive a used car to avoid the heavy depreciation costs during the first few years of new car ownership.
5. Always live "below your means". Save by paying yourself first and continually look for ways to enjoy life while spending less.

S&P/TSX Composite Index

I'm not sure what is going on but I'm making a little money on my index funds these days. Up a couple of percent since April 20th. That beats the heck out of safe havens like GICs.

The TSX both comp and venture appear to be on jet fuel lately. I really don't care why...oil, banks, whatever. Maybe it's just month end buying by mutual fund managers or pension fund managers. I guess they have routines like all of us.

Those guys, the one's receiving all the savings from the "soon to be retired baby-boomers" have a lot of money to place somewhere. For one reason or the other additional money is going into the markets. It all works for me.

TSX Comp link
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=CA%3A89199000&sid=46938&o_symb=CA%3A89199000&freq=1&time=7

Update: I heard later in the day that a run on Alcan was responsible for the increase in the TSX Comp today (Monday). However, Alcan does not explain what happened to the index prior to today.

The chart for Alcan is interesting. (Link below)

I will not be betting any money on this prediction... but the Alcan chart strongly suggests a further price increase. The volume is decreasing as the price moves sideways near $90.00. Once the shares available for sale near $90 are sold any motivated buyers will have no choice but to pay a higher prices. There may also be some buy stop orders sitting just above this sideways price, aimed at riding the next wave upward. This could cause further gap ups. It will be interesting to watch.
http://bigcharts.marketwatch.com/quickchart/quickchart.asp?symb=ca%3Aal&sid=0&o_symb=ca%3Aal&freq=7&time=3

Short Vacation

We spent a week visiting people on the mainland in Vancouver and Kelowna. This houseboat on Granville Island, very close to the heart of Vancouver, caught my attention.

I have no idea what the moorage fees are for this home but I expect this residence is a lot less expensive than living in one of the many hi-rise condos (in the background) that surround False Creek where Granville Island is located. I understand the condos are worth in-the-order of half a million dollars.


An interesting way to reduce housing costs.

Dividend Tax Rate

After completing my income tax I used QuickTax to do a few "What If?" calculations.

I currently have no direct income from dividends but I expect to get into that as time goes on. My current marginal tax rate is 21 percent. This means that if I was to earn money from employment or have additional interest income, I would pay $21 tax on the first $100.

I knew that dividend income had a better tax rate. Both the federal and provincial levels of government in Canada want investors to buy shares in companies that pay dividends so they give "tax credits" for any dividend income. A tax credit is code for a lower tax rate. Companies that pay dividends include the major banks such as TD Bank, Bank of Montreal, Royal Bank and so on.

I added several amounts of additional dividend income on Schedule 4, line 2, to see how much additional tax I would pay. The results are interesting.

$100, $4 additional tax , 4 % tax rate
$500, $28 additional tax, 6 % tax rate
$1000, $58 additional tax, 6 % tax rate

The 2006 tax rate for the additional dividend income is only 4-6 percent. This is quite low relative to my 21 % marginal tax rate for other types of additional income.

Sweet!

ps: I will be away for about a week so I will not be posting.

Update, May 7th

I went back and tried adding "eligible dividend" income in line 6 of schedule 4. In this case, believe it or not, I would actually pay less tax than I do without the additional income. The combined federal and provincial tax credits exceed my marginal tax rate. For example, if I had $1,000 in additional "eligible dividend" income I would pay $97 less income tax!

A Loan By Another Name?

Putting money into things like CSBs and GICs, earning low rates of interest, is "safe"... but at what cost? When one looks at the stock market over the long term it is quite a comparison. It can make a big difference. Lately, I have been spending more time looking into mutual funds and have been surprised by the impressive returns. Its not that difficult to find 10 year average rates of 10 % per year or more.

The other day it occurred to me that when we put our money into safe GICs etc we are really "giving the bank a loan" at a guaranteed rate of interest. Then, I guess...the banks turn around and invest the money in mortgages or the stock market, depending on mortgage rates, and that is how they make their profit. It also explains why the interest rates for "safe investments" like GICs go up as the "lock in time period" increases. It has to do with market variability and probability.

I expect that a probability analysis of the return rates in the stock market or for most stock market mutual funds would show that the probability of making say more than 5 percent increases quite a bit as the time period increases. It is likely a pretty safe bet for the banks.

Eagles In Love

Two Bald Eagles sitting side by side is not something I have seen before. Normally, if they are that close together, it is a fight in mid-air.

There is a story behind this photo. This eagle tree is on a path that I ride every few days. For a few weeks I noticed there was one eagle in the vicinity. I recall seeing it perched on a rock near the water's edge, alone and looking out to sea. At other times in was in the tree. I suspected it was waiting for its companion to arrive since it was near the start of the mating season. I also know that they go their separate ways only days after the young are out of the nest.

Each time I went by I was waiting for the second one to arrive. This photo was taken on a very windy day the first time I saw them together. Click on the photo to see them in more detail.

Obsession Tag

Money Diva from A Canadian and Her Money has tagged me to admit to my most obsessive thoughts. I would have to admit that I am obsessed with frugal living in that I seldom spend more than I need to for anything. Many would say I don't spend enough on many things. I drive an old car but I could buy a new one anytime I wanted. I guess some would also say I'm obsessed with saving money.

When I was younger, I went through periods (years?) of obsession with different money making or money saving past times. There was the searching for a rental property obsession. I got so good at it that when I called up a real estate agent about a new listing they would ask me what real estate company I was with. There was also the stock forecasting and trading obsession period - not sure if I'm completely free of that one yet. I went long, sold short, bought Puts and Calls. I continued to trade through the bear market that started in 2000. The only thing I haven't done yet, and yet is the key word here...I didn't sell options.

I now get the right to tag other bloggers and I pick Mike who has left comments on this blog. Mike if you read this...your "it". :)

Canada Pension Plan #3

Continuing on from my first two posts about CPP.

The CPP rules allow a lot of flexibility. So I must decide if I want to accept a lower amount, for life, starting as early as age 60, or wait until age 65 and receive the maximum I qualify for, for life. For me, the age 70 option is a non-starter. My original retirement plan was based on the assumption that I would take it at age 60.

Now its time to ask myself...Is that best? What difference would it make?

Summary

My calculations below show, that if one lives to age 80 it doesn't matter what choice is made, the total dollars received are the same. The break-even point is near age 80. Therefore, taking the pension at age 60 appears more attractive on the basis that age 80 is an average life estimate and one would enjoy the benefits of extra income between age 60 and 65. Even if one lives until they are 100 years old they only receive about 13 percent more money overall. An important consideration is the intangible benefit of receiving more money when you are younger compared to receiving more money later in life.

Calculations

Let's consider an average pension amount to get a feel for the numbers. The average CP at age 65, is $473 per month or $5,677 per year. The age 60 average pension, reduced by 30 percent (0.5 % per month) is reduced down to $3,974 per year. The penalty for taking it 5 years early is $142 per month or $1,703 per year.

From a simple cold blooded accounting viewpoint...at some point in time, if one takes the reduced pension amount at age 60 and they live enough, there will be a break even point. At the break even point it does not matter which option one takes, the total money received is the same. My question is - what age does that happen?

I am aware of two possible ways to compare the options. One is to compare two cash flows brought backward in time into present day dollars. Another approach I have seen is to view the early pension option from age 60 to 65 as a loan that must be paid back.

The big "unknown" in this decision is life expectancy. For these calculations lets "guess" that the pensioner lives until age 80. This puts an upper limit on how much money is received depending upon the choice.

The pension is indexed to the Consumer Price Index to make up for inflation.

So the boundaries are; one cash flow stream at a lower amount starting at age 60 and ending at age 80, and the other stream is a higher amount that starts 5 years later, at age 65 and ending at age 80. So we are comparing apples to apples, we can bring both cash flows to equivalent sums at age 60.

The indexing to the Canadian Price Index (CPI) means, that inflation is accounted for, so a future amount will always have the same value at age 60. If we assume that the money is spent in the year it is received, then any investment benefit can also be ignored.

Age 60 Option

30 percent less for life, from age 60 to age 80 (20 years).
Reduced pension comes to $5,677 (0.70) = $3,974/year
20 years ($3,974/year) = $79,478.00 present value at age 60.

Age 65 Option

In this case, present value must be calculated in two steps. First to age 65, followed by taking the lump sum back in time from age 65 to age 60.

100 percent for life, from age 65 to age 80.
Pension amount is $5,677 per year
15 years ($5,677/year) = $85,155.00 present value of at age 65.

This sum must then be discounted for 5 years, assuming a 2 % inflation rate, to find the equivalent sum at age 60 for comparison. This step is like asking... What lump sum would I have to have on deposit, compounded at 2% per year for 5 years, so it grows into $85,155.00?

From the table, the discount rate is 0.906 for 2 % for 5 years. You can check this answer with a calculator by multiplying (compounding) $77,150 by 1.02 a total of 5 times.

$85,155 (0.906)= $77,150 present value at age 60.

Because the numbers are about the same, $79,000 versus $77,000, these calculations suggest that the break-even point is somewhere near age 80. After age 80 the winner will be the wait until age 65 option.

But how much is the pensioner losing if they take the lesser pension at age 60 then live past age 80? Someone else may ask...what does it matter after age 80?

Lets consider the average pensioner living until age 100;

Age 60
$3,974 (100-60 years) = $158,960.

Age 65
$5,677 (100-65) =$198,695
$198,695 (0.906) = $180,018

So, if the average pensioner lives to be 100, this means an extra $21,000 or 13 percent by waiting for the larger pension to start at age 65.

The Loan Point of View Type of Analysis

Lets look at this from a slightly different viewpoint and call the early pension between age 60 and 65 a loan, one that must be paid back from age 60 to age 80. The loan payments are deducted from the pension.

In this case, the amount of the loan (the principal) is $3,974 (5 years) =$19,870. The payments come to $142 per month or $1,703 per year. If we simplify this, by assuming the entire amount is received at age 65, then $19,870 /$1,703 = 11.7 years. 65 + 11.7 = 76.7. This suggests that the break even point occurs in the vicinity of age 77. A similar result to the cash flow view point.

Is it better to get $20,000 between age 60 and 65, or take nothing during that period, and receive $21,000 more between age 80 and age 100?

I think I could make better use of the money at a younger age. Based on this rationale, the age 60 option looks pretty good to me.

Saved $200

I was out on the boat about a week ago, just a shakedown cruise to see if I still remembered how to do stuff and to see if everything still worked. I discovered that my handheld GPS had lost the ability to track satellites. Not a good condition for a GPS machine!

We use it when crossing open water and are still too far away to see with binoculars. It saves time steering straight to a destination. It is also handy to have if there is a little fog and you can't see destinations that would otherwise be visible. In addition, the GPS tells us how fast we are travelling and estimates our trip time. Its not a necessity - just a nice little luxury to have on board.

I got out the manual and tried everything they recommended but got nowhere. I talked to a shop that sold new ones and they suggested that the software may be obsolete for communicating with satellites. This sounded like a reasonable explanation. I checked the Magellan site on the net and determined that they stopped making my model 310 about 4 years ago. I priced new ones and they started at close to $200.

As a last resort I called the 1-800 number for Magellan, half expecting them to say it was too old and obsolete, but to my surprise they gave me instructions over the telephone that cleared the memory. These instructions were not in the manual. This worked like a charm and the little guy now tracks 8 or 9 satellites, more than I ever recall seeing last summer.

Sometimes us frugal guys get lucky and get to keep the old stuff going for a while longer.

If I'm ever looking for a new GPS I will certainly start with Magellan.

ps Always keeping one eye on the market... I see that the DJIA is primed to make a break out above the last peak. I also see, that it took 7 years for it to recover completely from the bear that started back in 2000.

OK - I Admit It!

I like checking on how my investments are doing on a daily basis. This is not something new that happened to me because I am in early retirement, I did the same thing every day at work. I spent most days chained to my desk and when the PCs and the Internet were invented I make good use of them.

I am sure that I am not the only Canadian who likes to watch their investments grow. Why do we do it...is it just the gambling gene that all seem to be born with or is it something more noble like being a responsible investor? Is it just a bad habit?

For example, I put a couple of thousand dollars into the TD Canadian Index -e fund starting back in March and it has now increased by $41 to $2,041. That is a 2 percent increase in about one months time. Not a lot these days for the market, but a lot compared to say a GIC or CSB that might be paying 3.5 percent per year.

Intellectually I "know" that I can't count on continued growth forever. I am well aware of the dips and know that it is just a matter of time before the Canadian Stock market will change to a period of sideways or downward movement for a period of perhaps several years. The most recent episode, that many would define as a bear market period, started back near the year 2000. It took about 5 years for the S&P TSX Composite Index to recover back to the year 2000 level.

When the next big bear market period happens my habit of checking every morning will work against me.

On the other hand, I am also certain that the index will come back and make new highs eventually. All I need to do is be patient and keep reminding myself of this fact. And if I can find some extra cash...buy more with both hands!

Kyle MacDonald and Beating The System

When it comes to achieving early retirement, one has to; go against the grain, beat the system, observe what everyone else is doing and do something different. You have to accomplish something that many people believe to be impossible. Kyle MacDonald has nothing to do with early retirement but I think he can be an inspiration to any young person who wants to become financially independent at a young age.

Kyle accomplished a feat that conventional wisdom would have said was impossible. I must admit that had you asked me a few years ago, I would have thought it was impossible.

In only 14 trades Kyle MacDonald traded a red paperclip into a 3 bedroom house in Kipling, Saskatchewan. Kyle used a new technology...the Internet to find his trading partners. I call it new because I think society is still learning the limits of this new way to communicate.

Not only did Kyle help himself but more importantly he is an inspiration to others. Kyle's feat is proof that someone can beat the system.

I saw a TV program today and the latest news is that Kyle has sold the rights to his story to a major movie studio. At the official ceremony in Kipling, Saskatchewan - Kyle molded the paper clip into a ring and asked his girl friend to marry him. That brought tears to the eyes of many present.

What a story, I look forward to seeing the movie.

Congrats to Kyle!

Kyle's website link.

Canada Pension Plan #2

In the not to distant future- I will decide when to start receiving my Canada Pension Plan (CPP).

The Canadian Human Resources...website states,

"The age you start your pension makes a difference... forever.

The normal age that you start receiving a CPP retirement pension is 65. However, you can start receiving your pension as early as 60 or as late as 70. If you start your pension before 65, you must stop working or earn less than a maximum amount for a required period of time.If you start your pension early, it is permanently reduced by 0.5 percent for each month that you are under 65. If you start your pension later, it is increased by 0.5 percent for each month that you are over 65, up to the age of 70. "

The benefit rates, at age 65, range from a maximum of $864/month or $10,365/year (2007) to an average of $473/month or $5,677/year (Oct. 2006). The payments are not automatic, one must apply for this pension. and they recommend applying at least 6 months in advance of one's start date.The rules allow some flexibility. So one must decide to accept a lower amount, for life, starting as early as age 60, or wait until later and receive a larger pension, for life.

The "for life"part part is important. I guess pension plans in general are a crap shoot, in that those who live longer get more and those who die at an early age receive less. Death benefits and survivor benefits offset this fact to some degree. I believe Canada requires that a surviving spouse receive at least 50 percent.

When it comes to life expectancy...its a little bit like a roulette wheel picking an age. I recall a number of guys that never even made it to retirement. Some only lived a short time after retirement and others lived past age 80.

If one enjoys a physical activity, then one of the realities is that as we age we get less bang for our buck . For many people, if not for most, they can expect to have less energy and less enthusiasm. It doesn't mean that extra money cannot be spent on other things one thinks are worthwhile. Maybe you want to leave a larger estate to relatives or more to a charity.

I'm crunching some numbers for comparsion and will post them in the future.