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Open Book – Investments and Real Estate

Part of the motivation to become financially independent is seeing the success of others and learning from them. This is my first Open Book post and explaining my investments to you will be a good way for me to stay on course and for you to see what I am doing. I will share with you how I invest and why. For simplicity, I have combined some accounts that were of the same structure such as my employee plans and personal plan. I hope this will help.

 

Background

I am now 25 years old. I have been working full-time for a few years and about 3 years ago, I started saving and investing aggressively. In the beginning, I started off investing in individual stocks and options but I quickly realized that it took a lot of my time and the returns were not as good as long-term investing. I actively traded all my savings for about one year and after that one year, I was able to pay for a down payment on our first home. After the home purchase, I decided to change my investing strategy to a long-term approach and started reading a lot about financial independence. Starting in 2014, I focused on keeping my savings rate above 50% (getting it to 70% hopefully) and I am now planning for an early retirement in 10 years or less.

 

Real Estate

Before we bought our house, we used to live in a small condo in the downtown core and I would bike to work every day. This was a great way to stay active and live car-free. When choosing the house, we moved to the suburbs for a few reasons;

  • Lifestyle
  • Cost
  • Nature

I grew up in a single-family, detached, house and always preferred that lifestyle to downtown living. After staying in a 100-unit condo complex for a few years during my university years, I had my share of urban living. Buying a detached house in town was simply out of the question, price wise, and I did not mind the drive from the suburbs.

After contemplating renting or owning for a long time, I came to the conclusion that owning a well-priced house is more advantageous than renting. The first step to financial freedom is to live below your means and buy a house well under what the banks are ready to loan you. Using this great tool from The New York Times, I came to the conclusion that the house we purchased would be better than any rent above $703 per month.

rent or buy free toolSource: The New York Times

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financial independence carAfter getting this number, I compared it to listings in the city. At only $703/month, we could get an OK one-bedroom apartment out of the downtown core but nothing fancy. To be downtown we would need to pay around $1100 to $1500 for a small 500 sqft. one-bedroom apartment. If we were to rent around $703 it would mean we would have to live in another neighborhood than my work which means that I would either have to drive or take public transit. Of course, living in the suburbs also means that I would need a car but I think the costs are still justified.

Contrary to what many personal finance blogs say, I do not think a car is a huge burden on your finances. If you can ignore all the ads and forgo the brand new models, you can actually find great prices on used cars on Craigslist. All-in-all, I spent about $1500 a year on gas to drive 40 miles a day from the suburbs, $1000 a year on repairs, and only $300 a year on insurance. In addition, I paid $5000 for the car and knowing that I will drive it for the next 10 years, this comes out to a depreciation of $500 a year if my car is completely worthless after 10 years (which I doubt).

Adding all this up, it costs me $3300 a year or $275 a month to own a new-looking, reliable, fuel-efficient, old car.

To come back to real estate, I do not think it is worth it to live downtown to save money being car-free. Adding $275 to $703, this gives a monthly cost of $978 to live in the suburbs, which is still much cheaper than the downtown rents. In addition, this is not even taking into consideration the lifestyle benefits of a home or size of living space.

Comparing same age and style of construction (newer, clean, luxurious) you can expect to pay between $1100 to $1500 a month for a one-bedroom apartment downtown and around $300,000 to $400,000 for a nice 3 to 4 bedroom detached house in the suburbs, 20 miles away. The difference in lifestyle is astonishing for roughly the same cost. By shopping around and buying instead of renting, you can have much more space for the same, or cheaper, price.

Another big, big, thing for me was the simple equation that City ≠ Nature. We like hiking, biking, going on boat rides, and all these just cannot be done as easily when living downtown without a car. We can now bike 2 minutes to get into the forest or drive 5 minutes to get to a nice local hill for hikes. This, for me, is priceless. Having access to the hobbies you like is key. If you are into parties and bars every night or museums and art galleries, city living is your calling. For me, I preferred being close to nature. We discuss the real cost of housing more in detail here.

For those reasons, we chose to put a considerable portion of our net worth towards our home but if you do decide to rent, I suggest you invest a portion of your portfolio into a REIT such as VNQ. The Vanguard REIT ETF (VNQ) will diversify your portfolio and give you the opportunity to participate in real estate at very low costs.

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RRSP (401k) Investments

indexing with vanguard vtiSince I am Canadian, we have Registered Retirement Saving Plans but the concept is similar to the 401k where you can invest pre-tax monies, grow it tax-free, and only pay income tax once you withdraw. My investment style is now long-term; mainly indexing with a small portion in dividend-growth investments. I automatically fund this account every paycheck and invest in a set asset allocation.

To save on commissions every time, you could use a commission-free broker like Questrade or Vanguard. If you are not sure about investments, you can read my post about indexing here.

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VTI ♦ 27% of this account is invested in the Vanguard Total Market ETF since it offers great diversity at a super low cost. With large-, mid-, and small-cap equity diversified across growth and value styles and an expense ratio of only 0.05%, it is hard to beat VTI for indexing. If you live in the US, I suggest you look for the Admiral Shares (VTSAX) given the low fees.

VCN ♦ 25% of this account is invested in the Vanguard FTSE Canada All Cap Index ETF since I live in Canada and do expect to retire in Canada, I invest in Canadian currency. The logic behind this is to have access to your home currency once retired. I still keep a globally diverse portfolio to avoid home bias.

VEA ♦ 19% of this account is invested in the Vanguard FTSE Developed Markets ETF to diversify into the international markets with super low management fees of 0.09%.

BND ♦ 5% of this account is invested in the Vanguard Total Bond Market ETF to have smoother downfalls without compromising total returns too much. I was debating whether bonds still have their place in portfolios but an article by Paul Merriman got me thinking. A table in the article compares the performance and risk of portfolios with various stock-bond mixes using historical data dating back from 1970 shows how having the majority of your holdings invested in the markets yields better returns. If you look at the standard deviation column, you can see how bonds will smooth out the ride but might affect your annualized return.

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Annualized return Standard deviation Worst 12 months Worst 60 months
100% fixed income 6.9% 4.6% -4.8% 14.1%
10% equities 7.5% 4.6% -5.3% 14.3%
20% equities 8.2% 5.1% -11.6% 10.1%
30% equities 8.8% 5.9% -17.5% 5.9%
40% equities 9.4% 6.9% -23.1% 1.6%
50–50 9.9% 8.2% -28.5% -2.7%
60% equities 10.5% 9.5% -33.5% -7.0%
70% equities 11.0% 10.8% -38.3% -11.3%
80% equities 11.5% 12.2% -42.8% -15.5%
90% equities 11.9% 13.7% -47.1% -19.7%
100% equities 12.4% 15.1% -51.1% -23.9%

Source: Paul Merriman

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BNS ♦ 24% of this account is invested in the Bank of Nova Scotia given their strong fundamentals and high dividend. I also chose BNS because of their strong presence globally with their subsidiaries and recent acquisitions of online banks (which, I believe, is the future of banking).  I need to admit that this is a big position in my portfolio and this goes against my dedication to diversification, but this individual stock is still a small portion of my overall portfolio once all accounts considered. With a dividend yield of 4.41% at the time of posting and a steady history of dividend increase, Scotia Bank is a great dividend growth play. On the fundamentals side, they have a very healthy profit margin at 29.74% on a $20.7B revenue. I accumulated this position by selling my employee stock option (from another bank) and buying BNS after the stock had taken a big hit but I am not suggesting you buy individual stocks.

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TFSA (Roth IRA) Investments

free investment tipsAgain, in Canada, we have the Tax Free Savings Account which is similar to the Roth IRA where you can invest after-tax monies, grow it tax-free, and take it out without any tax consequences. In my TFSA (Roth IRA) I have similar investments to my RRSP (401k) and again, I take a long-term approach. The amounts invested in this account are much lower than in my RRSP (401k) simply because of the tax implications. I prefer maxing out my RRSP (401k) to get the tax break on today’s income since I know I will have a smaller income once I am retired and therefore, I will pay fewer taxes in the end. In addition, investing pre-tax monies gives you a huge advantage in the long run. If you have $1000 to invest today, it will grow much more than if you were to invest only $700 of after-tax monies. Below is a breakdown of my TFSA (Roth IRA) portfolio but I won’t repeat the reasons for investing in each securities as it is almost all the same holdings.

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VTI ♦ 73% of this account is invested in the Vanguard Total Market ETF.

VCN ♦ 5% of this account is invested in the Vanguard FTSE Canada All Cap Index ETF.

VEA ♦ 16% of this account is invested in the Vanguard FTSE Developed Markets ETF.

TD ♦ 6% of this account is invested in the TD Bank given their strength and US market presence. Being the second biggest bank in Canada, with a market cap of $104.4B, TD has the strength and history I am looking for before investing. Canadian banks are great dividend payers and I like to play around with a small portion of my portfolio. I purchased it in a downturn when the P/E ratio was under 12 but again, I do not suggest you buy individual stocks. Stick to indexing with low-cost funds.

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Non-Registered Accounts

I used to use margin a lot to trade but I completely stopped since switching to a long-term approach. Margin (borrowing to invest) can greatly increase your gains but it also puts you at risk in any downturn. It allows you to borrow against your securities and increases your purchasing power but when your portfolio drops, you will then need to cover for those borrowed funds or sell your positions immediately.

I currently invest solely in registered accounts since I still have a bit of room for the year. Once I do max out both accounts above, I will invest all overflow in a non-registered account without using margin.

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The Grand Totals

All in all, I keep a strict asset allocation that I rebalance yearly and always re-invest my dividends. Most of my investments are done automatically, at each pay, into my various accounts (Employee stock option, Employer match accounts, Self-Directed accounts). I keep the breakdown fairly simple and easy to rebalance:

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  • 40% ♦  US Market
  • 40% ♦  Canadian Market and Canadian shares
  • 15%  ♦  International Market
  • 5%    ♦  Bonds

 

To tie this up with the beginning of my post,  I have a good chunk of my net worth in real estate but I think the lifestyle is worth the expense. On the investment side, I try to keep a clear asset allocation divided between my home country, US, international, and bonds. I hope this enlightens you a bit and you should also look into my investment suggestions if you are just starting out. Be Happy, Xyz.

 

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6 Comments

  1. Hi, great article and good you start to invest early in your life.

    Most probably you weren’t affected by the recession in 2008, but let me tell you it was ugly.

    Market are cyclical and we are in a consolidation phase, next is a recession. Your portfolio will suffer heavily.

    Keep up the good work.

    Check out the couch potato investment or permanent portfolio which can limit the volatility in the downturn but still remaining invested.

    Feel free to contact me if you need some helpful article to plan for your portfolio.

    • Xyz

      July 11, 2016 at 3:05 pm

      I am fully aware that my portfolio will swing and be highly volatile in times of recessions but I’m ok with that. I know that a 95% equity portfolio will suffer in downturns but it should also outperform over the long-term. Thanks for the comment.

  2. The New York Times tool is amazing! I do this calculation annually when I decide whether I’ll buy or rent for the coming year. This tool will save me hours during my lifetime.

    Great read by the way!

    • Xyz

      September 26, 2016 at 10:29 am

      It is really well done and accurate! I used it as a tenant, landlord, home owner… Thanks for stopping by and sharing 🙂

  3. Does it bother you that Canada is included in VEA or with it being such a small percentage of the fund, is it not really an issue? Is there a reason you have avoided emerging market countries?

    • Xyz

      November 15, 2016 at 1:53 pm

      VEA was the only option for that account. If you check out my latest update on my Open Book series you will notice that I did buy VWO (Vanguard FTSE Emerging Markets) to supplement. Thanks

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