Happy Father’s Day to all the dads in heaven

My dad left us way too soon. He was far from perfect, in fact his was quite ordinary. I didn’t really appreciated him until I became a dad myself. Traditionally the dad’s job is to put food on the table, clothes on your back and a roof over your head. It is an important job that is often taken for granted.

I never realized how difficult it was for my dad to provide life’s bare necessities until I went back to Italy, his homeland. I can’t imagine leaving all your family and friends behind and moving to a foreign country. He was uneducated with no marketable skills, couldn’t speak English, hoping to provide a better life for his children.

So thanks Dad for coming to Canada, giving me, your grandchildren and your great grandchildren the opportunity for a better life.

Job well done!

 

I like to share my last years father’s day post for my new followers and my daughter’s reply :

what-money-lessons-did-you-learn-from-your-father

my-daughters-reply-what-money-lessons-did-you-learn-from-your-father

 

Happy Father’s Day!

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Robo-advisor vs. human advisor

The robo-advisor platforms offered by companies like Wealthfront and Betterment are gaining in popularity. The low cost of investment management services is very attractive when compared to fees charged by human financial advisors. It leaves me wondering if financial advice from humans is on its way out.

Advances in artificial intelligence has already replaced some money managers at companies like Blackrock. Last October marked the debut of an AI powered equity ETF. The exchanged traded fund is run by IBM’s Watson, in other words, the new portfolio manager is a computer program. Most ETFs are passively managed and follow indexes or specific sectors in the S&P 500. The AIEQ ETF is an actively managed security that seeks to beat the market.

Here are four advantages that traditional advisors have over robo-advisors.

  1. Human emotions

Robo-advisors only have one job, to use algorithms to manage your investment portfolio. They are not designed to manage the emotional component of investing and building wealth. For traditional advisors, this is a daily role they fulfill. When markets decline or clients experience an important financial event, the traditional advisor is there to talk them down off the proverbial ledge and help them make a rational decision void of strong emotions.

  1. Accountability

Many people are capable of holding themselves accountable on their own but having someone else committed to helping you in the endeavor only ups your chances of success. Computers are certainly capable of creating tasks and sending you reminders but they have little to no flexibility in helping you devise an accountability system that truly works for you and is tailored towards your specific goals.

  1. Flexibility

Let’s face it; over time our lives can change quite drastically. You get married, have kids, buy a house or become unemployed. The list goes on and on. Each of these events creates what we call “money in motion.” When money is in motion, planning, adjusting and taking thoughtful action needs to occur in order to ensure a positive outcome. Over time, many discussions are required during this process and having a human expert helps you adjust and adapt as needed.

  1. One-size-fits-all vs. tailored service

Part of why robo-advisors are cheap, relative to financial advisors, is due to the fact that they are a streamlined, automated service. As great as this can be, it also creates a lot of limitations. Rather than being built and catered specifically to you and your current financial situation, robo-advisors are designed to serve the masses. This means a somewhat cookie-cutter, one-size-fits-all approach in their offerings.

Traditional advisors, on the other hand, can tailor the services and investment management style they provide according to your unique financial situation. (Insurance coverage, debt reduction, tax plan & estate planning)

Having worked as a financial advisor, I am somewhat bias and prefer the traditional advisor over the robo-advisor. However, a robo-advisor provides a service to a select group of clients and financial advisors provide services to a different group. Each cater to the preferences of their unique clientele.

 

 

Both young & old should make a budget

Contrary to popular belief, money has no value what so ever until you spend it. It is what you spend it on that has value. The value we place on money is dependent on what we think we can buy with it. The money you are paid as a salary is just a number written on a pay slip or is deposited directly into your bank account in exchange for the service you provided to your employer.

Why is budgeting so important

Since the value of money comes from its buying power, planning your spending ensures that you have enough money for things that you need and for things that are important to you. A spending plan will also keep you from spending money that you don’t have or help you get rid of unwanted debt. (Not all debt is bad)

The buying power of money is determined by the supply and demand for goods in the economy. Inflation in the economy causes the future value of money to reduce its purchasing power. A budget helps you figure out your short and long term goals plus measures your progress.

Budget Categories

  1. Shelter – rent, mortgage, property taxes
  2. Utilities – heat, hydro, water, cable, internet, cell phone
  3. Food
  4. Transportation – bus pass, car payments, gasoline, repairs
  5. Clothes & Accessories
  6. Gifts
  7. Insurance – car, home and life
  8. Entertainment – including vacations
  9. Emergency fund
  10. General savings – major purchases, debt repayments, retirement

It is really important for seniors to have a budget. You don’t want to outlive your money and be a financial burden to your children. There are three stages of retirement, “go go”, “slow go” and “no go”.

You tend to spend more money in the “go go” stage since today’s seniors are healthier than previous generations. Plus, life expectancy has increased so seniors will also have more leisure time.

As more people are living longer, the “no go” stage in retirement can become very costly due to the increasing risk of health problems. The risk of developing a cognitive disease like Dementia or Alzheimer increases with age. Costs for caregivers, assistance living and nursing homes are not cheap. (The cost for my elderly mother’s caregiver is about $20,000 per year)

Why people don’t budget

  1. They’ve got the wrong idea. Budgeting’s got a reputation for being too restrictive; you work hard for your money, why shouldn’t you be able to spend it as you see fit? But it isn’t as terrible as it seems. In fact, when you stick to a budget, you’re likely to have even more money left over to do with as you please. Budgets shouldn’t be about making big restrictive changes. Rather, when you examine your finances, you see small ways to make changes that will have big effects.
  1. It is intimidating. Got a vice that you don’t want to give up? Scared that if you make a budget you won’t be able to stick to it? There are tons of reasons you might fear drawing up a budget, but that shouldn’t keep you from trying! When you create a budget, you’re enabling yourself to find and fix the financial mistakes you make, rather than ignoring them and hoping they’ll go away by themselves.
  1. It is time-consuming & boring.Unless you have a passion for spreadsheets, chances are that budgets bore you to tears. You might not want to budget because the actual act of budgeting just seems like row upon row and column upon column of money that’s no longer yours.
  1. They think they don’t need to. In today’s economy, not many people can say that they don’t need to budget because they have enough money. Even if this is the case for you, a budget can always help you to save more.
  1. They think a budget can’t help. Most of us have heard the adage ‘the first step to recovery is admitting there’s a problem.’ Debt is a very personal issue and it can be difficult to admit, even to yourself. There are a variety of ways to help clear your debt and drawing up a comprehensive budget is the best way to start doing this.

I just put the finishing touches to my 2018 budget, how about you?

Still doing tax returns for my adult children & their spouses

Every year I ask myself, should I continue to offer to do tax returns for my adult children and their spouses? All of them have university degrees and are smart enough to file their own tax returns. My daughter was willing to do it one year using tax preparation software with only a little help from me.

Part of my problem is Canadians are not even aware of how much tax they pay. Plus we keep voting for governments that buy votes using our tax dollars. The average Canadian family will pay 42.9% of their income in taxes imposed by all three levels of government in 2016. (Federal, provincial and local) Tax freedom day was June 7, 2016 if Canadians paid their total tax bill up front. Our U.S. neighbours tax freedom day was April 24th and they will only pay 31% of their income in taxes.

There are a number of reasons why I continue to offer to do tax returns for the whole family. Having worked as a financial advisor, tax planning is a key element when putting a financial plan together. My tax knowledge and skill comes from working many years with accountants and tax lawyers ensuring that my whole family pays the least amount of tax.

Plus, the Canadian tax system is very complicated and is constantly changing with every federal and provincial budget. For example: many tax credits that were given by the Conservative government have been taken away completely by a new Liberal government.

For the 2015 tax year, the Liberals cancelled income splitting for families, a maximum tax credit of $2,000 for transferring up to $50,000 of income to a spouse with a lower income if they had a child under 18 years of age.

Some changes for 2017 include the elimination of the following credits:

  1. Education and textbooks credit
  2. Children’s fitness credit
  3. Children’s arts credit
  4. Public transit tax credit

Now, most retired Canadian seniors who don’t have a pension from their former employer are not even aware of a $2,000 pension credit. It requires opening a RRIF account, transferring $2,000 from their RRSP and then taking it out. They don’t have to wait until they reach the age of 71 in order to open a RRIF account. Plus, RRIF income can be split with your spouse if both of you are 65 years of age which could potentially add up to $4,000 of income tax free per year.

The Federal Liberal government will introduce a new budget on March 22 and there are rumors of more tax increases. Three things that Canadians should worry about;

  1. Higher capital gains inclusion rate from 50% to 75%
  2. Reducing the dividend tax credit
  3. Taxing your principal residency 

I will end this post with two well known proverbs. ” In this world nothing can be said to be certain, except death and taxes.” & “A penny saved is a penny earned.”

 

Dollar-cost averaging using an option strategy

options

Most investors are familiar with dollar–cost averaging as a wealth building strategy. It involves investing a fixed amount of money at regular intervals over a long period of time. This type of systematic investment program is commonly used in company sponsored pension plans.

I use a similar approach by selling call & put options to build a stock portfolio. At first glance it sounds really complicated, but the math is simple as long as you can subtract and divide.

The two types of options: calls and puts (Investopedia)

A call gives the holder the right to buy an asset at a certain price within a specific period of time. Calls are similar to having a long position on a stock. Buyers of calls hope that the stock will increase substantially before the option expires.

A put gives the holder the right to sell an asset at a certain price within a specific period of time. Puts are very similar to having a short position on a stock. Buyers of puts hope that the price of the stock will fall before the option expires.

My strategy involves selling options and collecting a premium which will hopefully reduce the cost of buying a stock. For example: I recently wanted to add 200 shares of Royal Caribbean Cruises (RCL) to my stock portfolio.

Here is the math: I bought 100 shares at $72.22 on Oct 11th

Sold 1 call option Nov $72.50 for $3.40

Sold 1 put option Nov $72.50 for $3.65

Now both these options expire on Nov 18th, so the buyer of the call option can force me to sell my 100 shares for $72.50 and the buyer of the put option can force me to buy 100 more shares at $72.50 depending upon the share price on Nov 18th.

Scenario (1): What happens if the shares of Royal Caribbean are trading below $72.50 on Nov 18th?

The call option expires worthless and I will buy 100 shares that will cost me $72.50 – $3.40 (the call premium) – $3.65 (the put premium) for a total share cost of $64.45. If you add the cost of the 100 shares that I bought for $72.22 to the 100 shares for $64.65 and divide be 2, my dollar cost average per share is $68.84

Scenario (2): What happens if the shares of Royal Caribbean are trading above $72.50 on Nov 18th?

The put option expires worthless and I have to sell my 100 shares for $72.50 but the cost of my 100 shares that I bought for 72.22 have been reduce to $65.17 ( $72.22 – $3.40 call premium – $3.65 put premium), my net profit on the trade would $7.33 divide by $65.17 or 11.2 % in just  38 days. (Excluding trading commissions)

In order to use this strategy, you need to have a margin account with a discount broker and be approved for cash secured put option trading. The added bonus of this strategy is you can use it to buy most index funds and some EFTs, you don’t have to buy individual stocks. However, the option premiums on index funds & ETFs will be much lower because they are less volatile than individual stocks.

I like this strategy because it removes some of the emotion out of investing. In the past, I would take half a position in a stock but I found it hard to commit to buying the other half when the share price fell. Plus I would kick myself for not taking a full position when the share priced increased in value. I found averaging down or up was very difficult. In reality the decision of buying or selling is sold to the purchasers of the options for a fee. An additional benefit, option premiums are taxed as capital gains, as long as you are not making a living as a day trader.

Stay tune; I will post the results of this trade next month plus an additional trade based on which scenario unfolds.

Disclaimer: This post is for educational proposes and not an investment recommendation.