Tuesday, December 17, 2013

Rule #32 Take Full Advantage of Employer Matches.

"Take free money." -Suze Orman

"Free is better than cheap." -me


There are two kinds of matches that Kim and I take full advantage of when available: 1. Company Share Purchase Matching and 2. Pension/RRSP Contribution Matching.  They are a different from each other, but both involve your employer paying you more than you are already getting paid.  Sounds like a deal, doesn't it!

1. Company Share Purchase Matching: When I worked for Super-Major Oil and Gas company, they had a program that encouraged employees to become shareholders by buying company shares, with the company encouraging this through a share match program.  For every dollar I put in, up to a certain amount, the company would match twenty five cents. This meant I was essentially only paying 80% of the value of the shares that I was buying each month.  The only condition was that I had to hold the shares for 1 year, and after that I could sell them if I wanted to.  Usually I didn't sell.  I like incentives like this. I liked (and still like) the prospects of the company long-term and anytime I can get free company shares with essentially no or few strings attached, then I can't think of a good reason not to participate.  The incentive for the company to offer such a plan is two-fold.  Its part of the Employee Value Proposition... which is what attracts and keep employees working at the company.  The other reason is that it aligns the employee interests with the interests of the company.  If the company does well, the employee also does well due to share ownership.  Strangely, only about half my employee colleagues that I discussed the topic with took advantage of this plan, and many who did, didn't max-out the plan like I did.  To me, I view this as free-ish money and unless a person really has no confidence in the company (where I'd question why they were at the company in the first place), I cant think of a good reason not to participate to the maximum amount.  You essentially have a 20% hedge against the company going down in any given year before you lose money.  Even borrowing money at say 6% interest in order to get the 25% top-up would be a no-brainer.  Part of my existing portfolio is still made up of shares from this previous employer, and most of those shares were purchased initially at a "discount" by taking advantage of the Company Share Purchase Plan.

2. Pension/RRSP Contribution Matching: Both Kim and I take full advantage of this matching program, but we're baffled at the amount of people who don't.  Many employers will offer a matching program for either a Locked-in RRSP type product such as a DC Pension, or will match personal contributions to your own RRSP.  These obviously have some strings attached such as if you remove money from your RRSPs, it will be taxed at your marginal rate, and if the money is "Locked-in" such as in a pension, you will have to wait 'til you are eligible to take it out.  Either way it is a good deal.  An example would be where an employer would match dollar for dollar, up to say 4% of your salary.  So if you contributed 1% of your employment income, your employer would match it with another 1%. If you contributed 4%, your employer would kick in another 4%.  The logistics don't get much easier than this.  The contributions go straight from your paycheque to your Pension/RRSP each pay period.  Its essentially paying your future-self first.  Its a very quick way to double your contributions for only a small contribution, and as we know those contributions pile up, they can make a big difference later on.    Both Kim and I have talked to numerous co-workers who don't take advantage of this employer matching, but say they will take advantage of it in the future when they can afford to part with up to 4% of their salary.  What? 4%? Really?  If your employer offers to match your DC pension or RRSP contributions to any amount, I think you are out of your mind not to take advantage of it.  Cut back on a few dinners out each month and that 4% shouldn't be too hard to come up with.  In 25-35 years from now, you will thank yourself.

Whether it be a a share matching program through work or a pension contribution matching plan, if your employer offers these employee incentives, taking advantage of these plans as soon as possible is relatively easy and will work to pad your investment/retirement account for your future.

Monday, December 16, 2013

Rule #31 Out of Chaos comes Big Opportunities. Be Ready!

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” - Warren Buffett


Remember the Financial Crisis in 2008-9?  The financial world was going in the crapper, housing values were collapsing in the US, mortgage defaults were on the rise and bond markets were shakey because of sub-prime loans bundled together and sold to investors.  Lending institutions were reluctant to lend to anybody, essentially paralyzing businesses that needed access to capital or individuals who wanted to buy necessities.  It seemed pretty gloomy at the time.  But companies were still paying their rent, people were still keeping their money in banks and the vast majority of Canadians were still making their mortgage payments.  On a relative basis, all was pretty okay in Canada and at Canadian companies in certain sectors.  

But the fear in the US had spread globally... to Europe, to Asia... and to Canada.  This lead to a correction in Canadian stocks that we felt was overdone.  A Commercial Real Estate company, $FCR that was trading at $16 were now trading at $10 after the drop. Canadian banks that were trading around $60 pre-drop, such as $BNS and $RY, were trading for $30 or below.  Upon checking these companies' balance sheets during Quarterly Earnings announcements, we didn't see a markedly big drop in earnings and the companies had enough cash to handily pay out their quarterly dividends.  Since the dividends remained the same but the stock prices were depressed, this meant the yields on these stocks had risen significantly.  Both the dividends on the RE company and the banks were about 7-8%.  Pre-financial crisis, these stocks were yielding about 3-4%. We saw this as a huge opportunity that complimented our dividend-investing style and decided to act.  Since we had a good credit rating and had access to investment loans, we borrowed at 3% interest rate and bought big into the Commercial Real Estate company and the two Canadian Banks.  Since the dividend yield to interest rate spread was 5%, this was the amount of income we were making on the leveraged investment.  This also doesn't consider the capital appreciation we expected to see when people cam to their senses on the value of these companies.  We weren't fussed about whether the stocks went up or down in the short term because over the long term, the cash-flow essentially paid for the investment.  We used the 5% positive cash-flow spread to help pay down the loan over the next 5 years and we recently paid the investment loan off.  Since making the purchase, the stocks have essentially doubled and we turned borrowed money into a fair-sized position within our portfolio.  

Imagine going back in time and loading up on quality stocks while they were on sale! Well, thats exactly what we did.  We didn't have the funds lying around, but we had access to the capital to make it happen and had the guts to pull the trigger when the stocks were undervalued.  We set up this investment loan arrangement with our bank before we needed the money.  This one financial move has probably had the biggest financial impact on our cash-flow and net worth.  We've told this story to a number of people and they think we took an enormous risk in making this move.  We, however, saw the health of the 3 companies, plus their commitment and stability of the dividend as the determining factors in our decision. 

Out of chaos comes big opportunities, but you need to be ready when the opportunity presents itself.  People often say they'd like to buy investments when they are on sale, but when things actually do go on sale, they aren't fiscally ready to execute or clam up and can't follow through fearing the investment will go even lower.  The "clam up" part can be difficult to be ready for, but getting your fiscal house in order so you are ready to act on a deal is certainly within most peoples control.  Since we have de-leveraged the borrowed funds from 2009, we are now ready for the next big opportunity that comes our way. 

Here is how we are ready to act on the future Big Opportunities: 
1. We keep our credit rating spotless.  If people want access to credit, they need to show they are responsible in paying back lenders, so make sure we pay our debts on time, and decrease the debt balance over time.  Having a lousy credit rating makes borrowing expensive and expensive borrowing can put the kaibosh on an opportunity.
2. Having some money on the side. I'm not necessarily suggesting people keep money in a bank account earning nothing for years and years waiting for an opportunity, but we set up a line of credit well before we needed it and then didnt use it.  Ours sits idle with a large unused balance in case we need it or see an opportunity.  If a small to medium opportunity came up tomorrow, we'd be able act on it.
3. We do our homework before the chaos starts. There are particular investments that I would like to make, but typically not at current prices.  I like a deal as much as the next guy.  I generally know that I want to buy certain investments at a particular yield or investment return. If I can't get the rate of return or yield that I want, I wait.  If the conditions are never right to make the investment, at least I have done the work to know what price I think would be reasonable, and what would be a smokin' deal.  

Some examples of opportunities that we would act on if they happened today:
1. If certain stocks drop based on fear and not based on financial metrics, then we would look to do exactly what we did in 2009.  
2. Housing Real Estate crash in certain cities. We would like to live on the West Coast some day.... Possibly within the next 5-10 years.  We will not be buying at current prices, but if we saw a 30%+ correction in housing costs, we would find a way to make it happen.  We're ready if a crash occurs. 
3. Commercial Real Estate in our current city.  I like commercial real estate in prime locations.  If a particular type of building came up in a prime location, we have the money for the downpayment.


Tuesday, December 3, 2013

What do I invest in?

I've had a few people ask what specifically do I invest in.  Here is my portfolio make up in a nutshell (you can click on the pictures to enlarge them).  The pie charts are a combination of Unregistered, Registered and TFSA accounts.  My US holdings are all in registered accounts to avoid the withholding tax and higher dividend taxation rates and my CDN holdings are mostly in my TFSA and Unregistered accounts to take advantage of efficient dividend taxation in Canada on qualified dividends.

The first chart is my raw holdings. I'll let you do the look-ups of the individual holdings.
The second chart is a pie chart showing the sectors for all my holdings. You can see by the size of the pie pieces which sector "buckets" I favour and the ones that I rarely or never invest in...  Note the absence of high tech, commodities and bonds and really small positions in consumer discretionary and mining.  Mostly those sectors just aren't my thing.

While I am quite fond of my portfolio mix, do not construe this as a recommendation to buy any of these names. You need to do your own look-up and research before investing in anything.