Personal Finance

Advices for a young investor atypical situation

  • Last Updated:
  • Aug 6th, 2010 5:51 pm
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto

Advices for a young investor atypical situation

Hi all,

I'm in a somewhat atypical situation for a young investor and am looking for advice. I have my own ideas about what to do, but I'm open to more experienced input.

Here are my important metrics:

Age: 29
Dependants: None
Cash on Hand: $375,000 (In a corporate account) and, 25,000$ (in a personal account)
Debt: $150,000 on condo purchase at 1.6% rate (condo is worth $350,000+)
Monthly Investment Contributions: $10,000+
Short Term Cash Requirements: $0

RRSP Balance: $2,500 (In a fidelity Mutual funds, -3% in the last 3 years)
RRSP Contribution Room: $13,000
TFSA Room: $10,000
Risk Tolerance: High

I'm comfortable with the technical implications of TD e-Series, ETFs, and several other financial instruments. So far, i have read many good books and internet articles that praise the benefits of a passive index investing strategies.

A 80% stocks / 20% fixed income sound good to me, something like this:

20.00% iShares CDN Composite Index Fund XIC
30.00% iShares CDN S&P 500 Index Fund XSP
30.00% iShares MSCI EAFE Index Fund CAD Hedged XIN
20.00% iShares DEX Universe Bond Index Fund XBB

Comments welcome ! :)
62 replies
Deal Addict
Oct 1, 2006
1883 posts
1023 upvotes
Montreal
patmanz wrote:
Jul 26th, 2010 1:06 pm
A 80% stocks / 20% fixed income sound good to me, something like this:

20.00% iShares CDN Composite Index Fund XIC
30.00% iShares CDN S&P 500 Index Fund XSP
30.00% iShares MSCI EAFE Index Fund CAD Hedged XIN
20.00% iShares DEX Universe Bond Index Fund XBB

Comments welcome ! :)
Your plan sounds good to me.

The only thing I would to different is to pay down the mortgage first and once this is done start investing in Ishares ETFs.
Deal Fanatic
User avatar
Oct 23, 2003
7545 posts
1215 upvotes
was about to say, mortgage out the window first, then max tfsa...and after that you got your own plan to follow.
Deal Addict
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Sep 26, 2007
3960 posts
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SC
seems like you are on the right track.
Sr. Member
Apr 11, 2003
608 posts
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Edmonton
Why pay off the mortgage first when it's at 1.6%? Surely any of those investments pay better returns than that, after tax. They're the better option, no? Sure, pay off the mortgage first when it's 5.25% and you're only earning 4% in bonds or something, but when it's reverse, why would you do that?
Deal Fanatic
User avatar
Oct 23, 2003
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netwise wrote:
Jul 26th, 2010 1:51 pm
Why pay off the mortgage first when it's at 1.6%? Surely any of those investments pay better returns than that, after tax. They're the better option, no? Sure, pay off the mortgage first when it's 5.25% and you're only earning 4% in bonds or something, but when it's reverse, why would you do that?
depends how long hes got it at 1.6 point is not to lose any money in investments and then not have enough to fully cover mortgage when it jumps.

for the time being though you're right. go with the flow. 1.6% is very low and good.
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
netwise wrote:
Jul 26th, 2010 1:51 pm
Why pay off the mortgage first when it's at 1.6%? Surely any of those investments pay better returns than that, after tax. They're the better option, no? Sure, pay off the mortgage first when it's 5.25% and you're only earning 4% in bonds or something, but when it's reverse, why would you do that?
i follow the same rationale

add to this, the condo is worth much more than i own and i plan to sell before the end of the mortage.

I already pay 40% more per month on that mortage and put a 20k downpayment last year.
Sr. Member
Feb 1, 2010
871 posts
173 upvotes
The mortgage is 1.6 after the latest hikes? That is low! If it is really 2.1 now, you might pay off the mortgage with the FI portion of the plan as it is the same result (paying off mortgage is same as buying FI as far as exposure to FI) while being more cost efficient. Otherwise, looks good.
Newbie
Nov 18, 2003
82 posts
6 upvotes
One item I haven't seen discussed yet in this thread yet is that the $375k cash is in a corporate account. Are you planning on implementing your iShare ETF investments in your corporate account?

I've heard conflicting information on the tax-treatment of investment gains within a corporation. I've been told by some people that at the end of the day the treatment is similar to investing personally and I've also been told it gets taxed more than personally. I really need to do some research on this and satisfy myself as to what the correct answer is.

Are you planning on trying to transfer this money to yourself personally over-time? All at once? (Tax implications) I'd recommend bringing out at least enough to use up your available RRSP contribution room. It may make sense to invest using TD e-Funds or something similar rather than the ETFs in the RRSP to reduce commissions.

I'd agree with your 80%/20% investment mix. Only comment is that you have no US stock component to your investments. Was this intentional?

I'm actually in a somewhat similar position (different $ values, mortgage rate, mortgage amount, etc) and I am trying to decide if I should try to bring out enough money from my corporation to pay down my mortgage, invest within my corporation, or something else / some combo.
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
sdw wrote:
Jul 26th, 2010 3:20 pm
One item I haven't seen discussed yet in this thread yet is that the $375k cash is in a corporate account. Are you planning on implementing your iShare ETF investments in your corporate account?

I've heard conflicting information on the tax-treatment of investment gains within a corporation. I've been told by some people that at the end of the day the treatment is similar to investing personally and I've also been told it gets taxed more than personally. I really need to do some research on this and satisfy myself as to what the correct answer is.
The bulk of the investments will be made in my corporate account.

I also plan to max my RRSP/TFSA.

Regarding your comments about tax-treatment of investments return, i have no information regarding anything "special" when it come to calculating tax for an individual vs corporate, excep that regarding the dividend Tax Credits.
sdw wrote:
Jul 26th, 2010 3:20 pm
Are you planning on trying to transfer this money to yourself personally over-time? All at once? (Tax implications) I'd recommend bringing out at least enough to use up your available RRSP contribution room. It may make sense to invest using TD e-Funds or something similar rather than the ETFs in the RRSP to reduce commissions.
I do plan to transfer this money to myself, from what i have seen so far the mechanics of doing this efficiently is quite complex. A financial advisor tried to push a "Universal insurance" to me to facilitate this but it sounded like your typical "financial advisor" ******** sale pitch.

There already enough in my personal account for RRSP.
sdw wrote:
Jul 26th, 2010 3:20 pm
I'd agree with your 80%/20% investment mix. Only comment is that you have no US stock component to your investments. Was this intentional?
The XSP track the SP 500 but is hedged in CDN.

http://ca.ishares.com/publish/content/r ... XSP_EN.pdf
sdw wrote:
Jul 26th, 2010 3:20 pm
I'm actually in a somewhat similar position (different $ values, mortgage rate, mortgage amount, etc) and I am trying to decide if I should try to bring out enough money from my corporation to pay down my mortgage, invest within my corporation, or something else / some combo.
I would be happy to learn what you finally do.

For myself, like you, i am still at the planning stage, trying to benefits from what older/wiser people have to say :)
Member
Apr 13, 2009
258 posts
122 upvotes
Kelowna
netwise wrote:
Jul 26th, 2010 1:51 pm
Why pay off the mortgage first when it's at 1.6%? Surely any of those investments pay better returns than that, after tax.
Surely?

I don't think any of those investments are a sure thing - a lot of people would argue that most markets are overvalued right now, bond returns are low and have even become more volatile. Plus, it's probably 2.1 on a variable mortgage, not 1.6.

That 2.1% would be guaranteed after tax returns, plus that rate will probably go up.

If you really think that it's worth piling money into index funds right now then another option would be to pay that mortgage off, reborrow against the property to invest and at least it becomes tax deductable.

My personal opinion: sell your condo now before it loses over 20% of it's value in the next couple years. Invest conservatively right now (much less than 80% stocks, more like reversed 20/80) and slowly up that ratio (i.e. don't try to time it completely, but do some form of dollar cost averaging to reduce your risk to a big hit to your lump sum).
Deal Addict
Jul 28, 2005
3237 posts
23 upvotes
Any particular reason for using hedged funds?


Hedging does cost money and reduce returns. If you need access to the money soon, a decent argument can be made for hedging the US fund, but the argument becomes weak if you are planning to hold it for a long period of time. And hedging a large basket of currencies in the international fund has always seemed silly to me.


Or did you just buy the hedged funds because iShares Canada doesn't have enough selection, and you aren't interested in buying foreign-based ETFs?
Deal Addict
Feb 17, 2007
3190 posts
200 upvotes
Not sure he got enough money for a Hedge Fund.


Investing in Canada is a good hedge against USD lol. If you want hedging against USD, try to invest in companies that have International Sales.
It works like this, when USD is down, I do mean way down, your International Sales will be magnified into huge profits with the currency translation. Which in return boosts your underlining profits, then your company's share price goes up.

I don't believe in Gold and Silver when hedging against USD.

Just invest in US companies with high International Participation.
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
asdfvcx wrote:
Jul 26th, 2010 3:49 pm
Any particular reason for using hedged funds?


Hedging does cost money and reduce returns. If you need access to the money soon, a decent argument can be made for hedging the US fund, but the argument becomes weak if you are planning to hold it for a long period of time. And hedging a large basket of currencies in the international fund has always seemed silly to me.


Or did you just buy the hedged funds because iShares Canada doesn't have enough selection, and you aren't interested in buying foreign-based ETFs?
I didnt buy anything yet ;)

The main reason i decided to go with hedged funds is because i had the idea (may be wrong) that most brokers charges fee's when you invest in a US ETF with CDN$.
[OP]
Newbie
Jul 2, 2010
66 posts
Toronto
amyandjason wrote:
Jul 26th, 2010 3:45 pm
Surely?

I don't think any of those investments are a sure thing - a lot of people would argue that most markets are overvalued right now, bond returns are low and have even become more volatile. Plus, it's probably 2.1 on a variable mortgage, not 1.6.

That 2.1% would be guaranteed after tax returns, plus that rate will probably go up.

If you really think that it's worth piling money into index funds right now then another option would be to pay that mortgage off, reborrow against the property to invest and at least it becomes tax deductable.

My personal opinion: sell your condo now before it loses over 20% of it's value in the next couple years. Invest conservatively right now (much less than 80% stocks, more like reversed 20/80) and slowly up that ratio (i.e. don't try to time it completely, but do some form of dollar cost averaging to reduce your risk to a big hit to your lump sum).
I confirm its 2.1%.

The money is in a corporate account, and i dont see any logic of borrowing (and paying interest) when i have 300k+ sitting and looking at me...

Add that i can "only" pay 20% of that mortage per year due to limitation in the contract, this leave me 3-4 year...

Regarding the drop's in condo price, thanks but no thanks, i want to keep my condo :)

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