Financial Jungle

1. Do you think it’s possible to accomplish the same amount of work with fewer hours? Timothy Ferriss claims he’s doing just that by applying the Pareto’s law to his sports-nutrition business.
2. Gas is $1.36/L in parts of Vancouver. There are many gas-saving tips out there. Here’s an article to weed out the myths.
3. Ian McGugan, a MoneySense editor, is admitting to the world he is, in fact, an unethical investor.

I’ve been noticing that a number of bloggers - including myself - are topping up their BMO positions as the stock is rattled by commodity trading losses. Money Diva initiated 400 shares of BMO earlier in the week. My own BMO position grew to 250 shares last week with a new adjusted cost base of $63.20. BMO, to me, has the best balance of high yield and dividend growth. At $68.69, the stock is yielding a cool 3.99%, while its dividends surged from $1.20/share to $2.26/share over the past 4 fiscal years. At this price point, I think this is a window of opportunity for aggressive investors to snatch up some BMO with leverage, and still maintain a positive cash flow.

Continuing with my dividend tax calculation post, a BC resident in the 30.65% bracket wouldn’t pay any dividend taxes. If you leverage to buy BMO, you’d receive 3.99% in dividends tax-free and a small tax refund. The loan interest rate would be 5.75% from Interactive Brokers, but the interest is tax-deductible. If your tax bracket were 30.65%, your after-tax cost would be 3.99%, thus canceling the dividend yield. In other words, it’d cost you nothing to invest in BMO with borrowed money.

The reward is in the dividend growth. Granted that part of the recent growth came from rising payout ratio, but even with a modest projection of 6%/year growth, the yield can still overcome the interest rate by 1.35% in 5 years. The beauty of this setup is that you’re never forced to sell. Leveraging alone isn’t dangerous, as long as you can afford the interest.

80% of actively managed mutual funds under-perform the benchmark over a long period.

Although there is a truth to this adage, one has to peer beneath the surface instead of simply painting over the entire mutual fund spectrum with the same brush. There is always a flip side to a story. If you’re up to the challenge, read this long article on how closet index funds are contaminating the statistical finding.

Occasionally, the underperformance of fund managers vs. the index is trotted as evidence of the efficiency of the market. However, this confuses the absence of evidence with evidence of the absence. A new study suggests that closet indexing accounts for nearly one third of the US mutual fund industry. Stock pickers account for less than 30% of the market, yet they have real investment skill.

Before going further, I’d like to emphasize that I’m a proponent of passive investing. ETFs and index funds are the way to go if you’re looking for something easy, effective, cheap, and tax-efficient. While I don’t deny the merit of passive investing, I believe the market is very inefficient, and investors do get blind sided by the occasional market bubbles. Remember the TSX losing half of its value during the dot com carnage?

The correction taught us a lesson that performance isn’t everything. Let’s throw in a simple example of choosing between investment A and B. Investment A has a chance of making $100, but you must risk $50. Investment B has a chance of making $90, but you must risk $20. Investment A has a higher expected return, but investment B has a higher risk-adjusted return. Below is a comparison of TSX versus Chou RRSP over a 21 year period. You can see clearly that Chou RRSP’s line is much smoother. Since the manager, Francis Chou, is a renowned deep value investor, he builds a margin of safety on all his purchases. With this process in place, Francis Chou tends to give you a more consistent and steady return as evidenced by during the tech bubble. As a bonus, Chou RRSP did come out ahead of the index and with less risk/volatility.

This is not a post against passive investing. Remember that passive investing is not a religion. You can buy good quality actively managed funds like Chou RRSP without letting go your index funds and ETFs.

Disclosure: I have held Chou RRSP for 2 years, and am planning to pick up Chou Associates soon. This is not a recommendation to buy.

Source:
- Chou RRSP (GlobeFund.com)

I came across this funny little page to measure how much you’re worth. It’s not the typical Assets - Liabilities formula.

Ever wonder how much money you could get on the open human market? HumanForSale.com will attempt to place a value on your life using a variety of criteria in 4 basic facets of life. Among the criteria used include athletic ability, education level, income, amount of exercise, weight, and sense of humor. This is obviously a very subjective matter and is not intended and does not claim to be scientifically accurate. The more honestly you answer the questions, the more realistic the dollar value returned will be.

I’m worth $1,675,000. I’m insulted!! (I guessed at some of the answers though.)

Check it out, and begin by selecting your gender.

For the past couple of weeks, FinancialJungle.com has been stuck at around 40+hits and 30 RSS feed readers. To increase traffics to the blog, I’ve implemented the following enhancements:

1. Migrated permalinks to display the post titles instead of the post ids. According to some experts, search engines incorporate the URLs into their indexing.
2. Made the RSS Feed icon larger, and placed it within the blob near the upper right corner of this blog.
3. Installed the autometa Wordpress plug-in to insert meta and Technorati tags, so surfers can find this blog easier.

Hopefully I will see a difference within the next couple of weeks. In the meantime, please feel free to drop me a comment if you have any other suggestions.

This is a short little post to remind readers and myself how to calculate the dividend tax credits.

Dividend Tax = (Grossed Up Dividends x Marginal Tax Rate) -
(Grossed Up Dividends x (Federal + Provintial Tax Credit Rates))

Step 1: Figure out the marginal tax rate
Follow this link to TaxTip.ca, select the province or territory, scroll to the bottom, and write down the marginal tax rate.

Step 2: Figure out the grossed-up dividend
Grossed-up dividend is 145% of the dividend received.

Step 3: Figure out the federal and provincial dividend tax credits
The Federal dividend tax credit is 18.97% of the grossed-up dividend income. Add this to the provincial tax credit here:

Example

• Personal income = $40,000 in BC
• Marginal tax rate = 30.65%
• Received $5,000 of dividends
• Grossed-up dividends = $5,000 x 145% = $7,250
• Federal + BC Dividend Tax Credit Rates = 18.97% + 12% = 30.97%
• Dividend Tax = ($7,250 x 30.65%) - ($7,250 x (30.97%) = $23

Not only do you receive $5,000 worth of dividends free and clear, there is a $23 tax-refund too.

Darren Rowse from ProBlogger is hosting another get-together among bloggers. The mission is to write a top 5 list on any topic relevant to the blog, and the winning price is a cool $1001. But more importantly, I want to elevate Financial Jungle’s presence in the blogging ecosystem, and mingle with fellow bloggers who share similar interests.

A discussion over at MillionDollarJourney prompted me to do a little digging into Market Growth GICs offered by Canadian banks. Many investors are risk-adverse, while not wanting to relinquish the growth potential of the stock market. This is why Market Growth GICs are so seductive. Investors’ original principal is guaranteed regardless of what the market is doing, while the performance is linked to the market indices tracked by the products. Being a cynic, I’ve investigated and uncovered the following five gremlins of Market Growth GICs:

1. No Dividends – They stole my precious!
Although Market Growth GICs do track the underlying index, investors forgo the dividends issued by the securities along with the juicy dividend tax credits. As an example, the iShares S&P/TSX 60 ETF rewards their investors with 1.66%, which isn’t available to Market Growth GIC investors.

2. Higher Tax Rate - Give it to us and wrrrriggling! You keep nasty chips.
Since Market Growth GIC investors don’t actually own a piece of the index, gains on GICs are taxed as regular income instead of the more favourable tax treatments from conventional capital gains. For instance, if you’re in the 40% tax bracket, you owe 40 cents for every dollar made in GICs, while you owe only 20 cents in ETFs.

3. No Tax Deferral - NO! That would kill us. Kill us!
Taxes are due each year with GICs, while you can defer capital gain taxes for as long as you hold the ETFs. Let’s do a quick example. If you start with a $1,000 GIC that returns 10% each year, you keep only 6% after tax. Compound this to 5 years and you’re left with only $1,338. On the other hand, you can zoom ahead with ETFs by deferring taxes until the very last year, and are left with a generous $1,488.

4. Capped Return – Don’t follow the light.
A five-year Market Growth GIC offered by TD Bank caps the cumulative return at 60%. This is an annualized compounded return of 9.8%, which is the approximate long-term return for stock markets. As a result, investors have no upside potential relative to the index, while the down side relative performance is –9.8%.

5. No Capital Tax Loss Saving - Stupid fat hobbit, it ruins it.
In the event the market is still down after five years, the principal protection feature kicks in and you recover your loses, however you waive the tax-loss saving to offset capital gain taxes of your other investments.

Principal protection to me is an illusion, because inflation alone will erode the future purchasing power, which is ultimately what you’re trying to protect. If maintaining purchasing power is your objective, stop fooling around with Market Growth GICs, and buy a traditional a 5-year GIC instead at 4.47%. If you still want some exposure to the stock market without exposing yourself to market setbacks, segregated funds are good alternatives. Even though they’re somewhat expensive, you’re compensated with other benefits, which include estate planning advantages, automatic reset of death benefit guarantee, and creditor protection. An example of a segregated fund is CI Signature Dividend GIF which has a price tag of 4.18% MER.

Further readings:
- TD Canada Trust Market Growth GIC.
- How Segregated Funds Protect Your Investments (CI)
- How segregated funds work (Million Dollar Journey)

ps. thank you Canadian Capitalist for bringing this event to my attention.

Tourists have to plan many things like car rental coupons or rent a car by mail. Online surfing for travel information shows many companies offering many things which travelers demand. Discounted and cheaper national car rental facilitates it travelers by all means. Others like hertz car rental and quick car rental suggest advance booking online or through mail for the travelers ease.

I had so much fun writing the Top 10 Reasons For Dividend Investing post that I decided to do another one for the Top 10 Exciting Semi-Retirement Jobs.

Many folks don’t know what they want to do with their retirement, but semi-retirement is a fabulous way to phase in by sampling the various possibilities out there. Is it really work if you enjoy doing it? If you’re passionate about a hobby, why not turn it into a cash cow 10 years ahead of your scripted retirement? If you can’t think of a hobby, I have some good news for you. Below is a list of potential semi-retirement jobs which I compiled with help from a couple of forums. The list is sorted by a complex-proprietary algorithm, and is subject to change.

Without further ado, here’s my Top 10 Exciting Semi-Retirement Jobs in reverse order:

10. Geek Squad Agent - Geek Squad needs you to lead their “fight against computer upheaval: a critical mission in their goal of obtaining world domination.” Faint at heart need not apply. You’ll be recognized by your short-sleeved white shirt, black pants, shoes, belt, clip-on tie and your Geek Mobile.
9. Bartender - Have a craving to entertain and get tipped well for it? For as little as $199, you can register for a bartending academy to learn advanced pouring and mixing techniques and how to create an engaging atmosphere. For the adventurous ones, toss, flip and spin your way to hugh tips through the process of flair bartending.
8. eBay Entrepreneur - There are plenty of resources on the web to help you identify a niche market, and to get your business up and running. A great place to begin is to read the articles on Entrepreneur’s eBay Center.
7. Pet Sitter - Some people live for the moment of opening the front door to reveal the little pooch doing the dance of joy. For pet fanatics, consider running a pet sitting business. If your home is pet friendly, it doesn’t take much capital to get the business going other than the business insurance and some supplies. The basic services include picking up and dropping off pets, walking them around the neighbourhood, grooming, organizing play groups, visiting the vets for check-ups and taking pictures.
6. Golf Course Ranger - I know a few buddies who can barely type an email without alluding to their next golf trip. If you can’t drag yourself off the golf course, look into becoming a golf course ranger as Frank Reed did.
5. Musical Band - We had a few music enthusiasts performing during our company Christmas parties for the past 2 years. One of them even setup mini-studios at home to practice. If you have a talent in music, you might want to read Nirv4ever’s tips on starting a successful band.
4. Retail Sales Associate at Home Depot - Do you have a green thumb or a nose for home renovation? Home Depot is looking for people like you to fill vacancies across Canada.
3. Blogger - Pick a subject that you’re fascinated about and blog about it. Can’t figure out how bloggers make money? Check out this excellent article by ProBlogger.
2. Photographer - I love taking pictures of little bugs. With my portfolio starting to look respectable, there may be a chance to show case my work in iStockPhoto.
1. Explorer - My #1 exciting semi-retirement job? I want to dance around the world with Matt Harding, and blog about it to fund the trips.
   
   

Now that you’re done with the list, I hope you’ll get off your chair and start beating your chest, because now you can conquer your life. It is your turn to share. Did you re-discover your old passions, or at least spark a few new ideas?

Please remember to visit on Monday for the second Canadian Tour of Personal Fianncial Blogs. You can find the list of participants at the Money Diva financial blog. Did you notice that Ellen Roseman from the Toronto Star is on the list too? There are a number of other top guns, such as The Canadian Capitalist, Million Dollar Journey, Investoid, and Canadian Finance DIY just to name a few. I’m really looking forward to read their articles. It’ll be a blast.

Two of my most admired personal financial blogs are pressing the hot button on a very sensitive topic: leveraged investing. To read more on the lively discussions, check out The Canadian Capitalist and Million Dollar Journey.

The pro-leverage group believes that when done properly, leveraging is an effective way to build wealth. The anti-leverage group advocates the old fashion method, which is to pay off your mortgage and invest with cash. It is not necessary to leverage your portfolio in order to reach your financial goals. As The Canadian Capitalist put it:

If you are like me, you want to pay off your home, save for retirement, send your kids to University and eventually, not having to depend on a paycheck. You are not aiming for a spot on the Forbes 400 and couldn’t care less about the list. Do you need leveraged investments to achieve your goals? Not really. A far simpler and less-risky path is to spend less than you earn and invest the difference in a low-cost, diversified portfolio. Why take more risks than you need to?

Just to throw in my two cents. I pick the middle of the road. Most investors concentrate on capital appreciation, but my investment strategy is cash flow centric. Since time is on my side, a moderate amount of leverage is safe as long as I’m getting a positive cash flow out of the portfolio. In Canada, investment loan interests are tax-deductible, while dividends are tax-free for most people. If you’re in the 33% tax bracket, a 3.85% dividend yield is enough to cover a loan interest rate of 5.75% after-tax assuming you leverage your entire portfolio. At the moment, my portfolio has about 17% cash in a high interest saving account, but I’m comfortable with up to a 15% leverage. There’s still plenty of free cash flow left for reinvestments, or paying down debts.

How many times have you been reminded of this adage? Presumably, the cheaper homes will somehow drag down the higher priced home. Or, cheaper homes have more room to catch up. When you think about it, expensive homes are expensive with good reasons. Perhaps they are situated on more desirable lots or constructed with marble stones. Maybe they have more square footages, more bedrooms, tiled roofs or double garages. Since homeowners relish these extra features, shouldn’t these homes command a premium price over the inferior ones?

Let’s go ahead and test this myth with a numeric example. Suppose we have two houses. The smaller one is worth $350k, while the bigger one is $400k, and they appreciate 6% and 3% per year respectively for the next five years.

As you can clearly see, this isn’t an optimal pricing between these two houses, because the smaller home now costs more than the bigger home. The market will soon realize the mispricing, and new buyers will automatically re-adjust the market value accordingly.

Another myth is to buy the least expensive home in the best neighbourhood rather than the most expensive home in a lesser neighbourhood. It is incredibly difficult to judge which neighbourhood will appreciate faster, unless you have a crystal ball. Both homes are already priced in relation to the net of all collective features. To assume that one will appreciate faster is a form of double counting. We can also create another table as above, and it’ll demonstrate that a consistent higher appreciation of one neighbourhood over a long period will put the price ratio out of whack between the two houses.

I believe individual buyers must decide based on personal tradeoffs instead of following these real estate myths. If you like a home for your own reasons, the impact is felt right away, but nobody knows which neighbourhood will appreciate faster comparatively.

• Norm Rothery reveals a list of Canadian stocks that Benjamin Graham might like.
• Construct a will for free online.
• A quite mathematically detailed and negative critique of Canadian Universal Life Insurance programs.
• TSX Group will have to compete with a new trading system in 2008. I’m not pleased about this announcement as I hold shares in TSX Group. A discussion group is happening here.