TDB909 – Canadian Bonds – $3,701 (22%)
TDB900 – Canadian Equities – $3,342 (19.9%)
TDB902 – US Equities – $4,953 (29.5%)
TDB911 – International Equities – $4,792 (28.5%)
Total – $16,789
Total Invested – $16,000

Despite the market volatility, the whole point of a portfolio such as this is to simply add money periodically while resisting the urge to divine which way the markets are headed. With that in mind, we’ll now add another $1,000 to the portfolio and rebalance it according to our original asset allocation — 20% bonds, 20% Canadian stocks, 30% US stocks and 30% international stocks — using this rebalancing spreadsheet. Here are the results:

Transactions

TDB909 – TD Canadian Bond Index (e-Series) – Sell units for $143.63.
TDB900 – TD Canadian Index (e-Series) – Buy units for $215.43.
TDB902 – TD US Index (e-Series) – Buy units for $383.48.
TDB911 – TD International Index (e-Series) – Buy units for $544.72.

Notice how rebalancing requires selling an asset class that has increased in value (bonds in this case) and buying asset classes that have declined in value (stocks in this case). It happens to be the mirror image of what we were doing earlier this year when the bulk of our contributions went to bonds which was the laggard asset class.

Related Reading:

• Sleepy Mini Portfolio Update
• Sleepy Mini Portfolio Q3-2009 Update
• Sleepy Mini Portfolio Q4-2009 Update
• Sleepy Mini Portfolio Q4-2008 Update
• Sleepy Mini Portfolio Q2-2011 Update

Sleepy Mini Portfolio Q3-2011 Update is brought to you by Canadian Capitalist — Helping you to invest & prosper.

• Staying with Zero Hedge, the blog is ruffling feathers north of the border again by suggesting that Canadian economists are out to lunch when they refer to negative Q2 economic data as “transitory”.

“Odd how the US used the transitory line for months until it all turned out to be permanentory,” the blog said. Its authors believe Canada is headed for a recession, while Canadian economists blame the -0.4% Q2 growth on declining exports and short-term issues such as the Japan earthquake and shutdowns in the energy sector.

• If you’re thinking of using a mortgage broker for your next real estate deal, Echo of Boomer and Echo has four reasons why you should do it on your own.

• If you’re debating whether or not you need (or should start) an emergency fund, Mike Holman at MoneySmarts blog offers his reasons for biting the bullet.

• Ever heard of the Permanent Portfolio? Canadian Couch Potato provides a rundown of the investing strategy that calls for investors to hold equal amounts of stocks, long-term government bonds, gold and cash. The secret is mixing volatile investments to create a low-volatility portfolio. Call it financial alchemy … a good read, in any event.

]]> http://www.moneysense.ca/2011/08/31/wednesday-roundup/feed/ 0 http://www.moneysense.ca/2011/08/31/nine-ways-to-save-money-at-school/ http://www.moneysense.ca/2011/08/31/nine-ways-to-save-money-at-school/#comments Wed, 31 Aug 2011 14:53:20 +0000 Gail Vaz-Oxlade http://www.moneysense.ca/?p=17823 Students are always broke. Have you seen what it costs for tuition and books these days? So finding ways to save while you’re at school makes good sense. Here are nine ways to spend less.

1. Sign up for a free chequing account. Savings accounts don’t cost anything, but chequing accounts can be expensive. Look for a bank that gives students a break: no fees. Then make sure you stick to the rules: no using someone else’s ATM. No NSFs. No overdraft.

2. Skip buying coffee. Yes, it’s nice to meet friends for a coffee and a gab. And you may even need a cuppa to get your motor running so you can make sense of your 8:30 calculus class. Make your coffee at home, put it in a travel mug and save. Two cups of regular take-out coffee, or one fancy coffee at $4 a pop, will run you to almost year’s worth of tuition. $4 a day x 7 days a week x a 4-year undergrad = $5,824. Make it at home and cut your costs by 80% to 90%.

3. Don’t buy bottled water. Make a habit of filling a large bottle 1/3 full and freezing at night. Fill it up in the morning, pop it in a plastic bag and stick it in your backpack.

4. Don’t grocery shop when you’re hungry. Everything looks delicious when you’re starving. You could find yourself spending up to 50% more on impulse purchases. Eat before you grocery shop.

5. Look for free events on campus and in your local community. Hey, I know all work and no play makes Jack a dull boy. But if you’re spending gobs of money on entertainment then you may not be dull, but you’ll be broke. Check local newspaper free concerts, festivals, and theatre. Go to movies on cheap nights or in the afternoon when tickets are less expensive. Eat before you go and don’t buy all the junk food. Hit the library for a movie and watch at home with a couple bags of microwave popcorn and some pals.

6. Cut the cable. You don’t have time to watch TV. You’ve got studying to do, and people to hang out with. If you’re paying for premium cable, you’re wasting your money … and your life.

7. Get Skype. You can use it to call home when you’re missing mom and dad. You can use it to coo at your boy- or girlfriend. You can keep up with your best friend who’s at the other end of the country. All for FREE.

8. Take advantage of special offers for students. Hey, you can travel the bus system for less. You can buy stuff for less. Put on your poor student face and ask for a discount.

9. Get another roommate. If you can find a way to squeeze one more body into your house, you can come up with enough money to pay the utilities. That’s a cost you won’t have to shell out for. Speaking of which, turn down the heat at night. Unplug your electronics when you’re not using them. And turn off the frickin’ lights when you leave a room!

]]> http://www.moneysense.ca/2011/08/31/nine-ways-to-save-money-at-school/feed/ 2 http://www.moneysense.ca/2011/08/30/3-savings-nibblers/ http://www.moneysense.ca/2011/08/30/3-savings-nibblers/#comments Tue, 30 Aug 2011 14:34:27 +0000 Gail Vaz-Oxlade http://www.moneysense.ca/?p=17796 It’s amazing how the little things add up. If any of the following are taking you by surprise and nibbling at your savings, it’s time to eliminate the munchers:

1. Reward cards have sprung up like dandelions. While the appeal is obvious – get something back for all that money you’re spending – if you’re also paying an annual fee, you my not be getting your money’s worth. MoneySense has an online tool for helping you choose the right card for you.

Make sure that the benefits you’re deriving outstrip the costs associated with having a card. And do I have to say that no benefit is worth the interest costs if you’re carrying a balance.

2. ATM fees are a boon to the banking industry and a bane to your savings. Despite all the warnings from people like me about not using a banking machine that isn’t your bank’s machine, people are still racking up billions of dollars a year in ATM fees. If you use a machine that’s not affiliated with your bank, you could get dinged up to $4. And if you’re using the ATM like a wallet, paying a $3 fee to pull a $20, you’re a total idiot!

3. Here’s one that jumps up and bites people in the wallet: roaming fees. If you’re heading off on a biz trip or on vacation, call your cell phone provider and make arrangements for using your cell while on the road. If you don’t, roaming charges can climb into the hundreds PDQ. And if you’re also on a data plan and your email is coming through to your phone, you’ll be mighty unhappy when you come home and open up your bill. Have you got a smartphone? Download apps like Skype and Google Voice to make free or discounted domestic and international phone calls.

On Monday I introduced the Permanent Portfolio, an investment strategy created in the early 1980s by Harry Browne. It calls for investors to hold equal amounts of stocks, long-term government bonds, gold and cash. I recently spoke to Craig Rowland, the blogger behind Crawling Road, to learn more about the ideas behind the Permanent Portfolio.

What attracted you to the Permanent Portfolio?

My background is computer security, so when I test something I always start by trying to break it. And when I looked at traditional index fund portfolios, I noticed there were periods of time where they basically broke. By that I mean they either had significant declines, or they had extended periods where they didn’t have real returns after inflation. I noticed, for instance, that during the entire decade of the 1970s, a stock/bond portfolio didn’t even beat inflation. And I noticed that in other countries that type of portfolio failed over protracted periods of time. So I became convinced that the traditional idea of asset-class correlations was incorrect.

So I started looking at Harry Browne’s Permanent Portfolio, and honestly, at first I thought the guy was nuts. This idea of holding 25% of your portfolio in gold—I almost ignored everything he had to say. But I when I looked at the results and the economic underpinning of it, I said, “This guy is right.” What I mean is that he didn’t pick asset classes because they had some past correlations between each other. He picked the asset classes based on economic cycles, and that is really the secret.

Harry Browne broke up the cycles this way: inflation, deflation, prosperity, recession. Then it was a matter of figuring out which asset classes were going to do best during those conditions: gold for inflation, long-term bonds for deflation,  stocks for prosperity, and cash for periods of recession. And it doesn’t matter what caused the condition to occur: all that matters is that you hold an asset class that protects you from it.

I think one of the biggest wastes of space in financial books are pages and pages of asset class correlation tables. It is such a complete waste of information, because they don’t mean anything. People are puzzled as to why asset class correlations change over time. Well, they’re looking at the wrong pieces of information: the only correlation that matters is how that asset responds to what is going on in the economy. That is the only conclusion you can possibly reach.

So the idea is not that long-term bonds go up because stocks go down. It’s more correct to say that the economic conditions that cause stocks go down have some overlap with the economic conditions that cause long-term bonds to go up.

Exactly. And it’s not black and white: there are periods when economies are transitioning from one cycle to another and there is this murky area where the markets try to figure out what the heck is going on. In the fall of 2008, this is what happened. The stock market was collapsing and the long-term bonds didn’t pick up immediately: it took some time before the markets collectively realized that deflation was in progress. At that point, the long-term bonds went up over 30% by the end of the year. It wasn’t instantaneous—there is always this lag time.

That’s why I tell people not to look at their portfolio every day. I don’t look at mine very often: people would be very surprised at how rarely I look at my portfolio. The more you look at it, the more pain you are going to experience. Just let the asset classes do what they do.

The remarkable thing about the Permanent Portfolio is not so much its average annual return, but its low volatility. According to the historical returns on your website, it would have had negative returns only twice in 40 years.

You’re right, the volatility is very low, and this is something that Harry Browne noticed as well. He worked in the financial industry and he knew that volatility scares people off their investment plan. If you can have a portfolio that has lower volatility, even if it might have lower returns, you’re more likely to stick with it. And if you stick with it, those lower annual returns are probably going to deliver better long-term results than a very volatile portfolio, because when people experience big swings up and down, they’re probably going to quit. Or they are going to sell out at the wrong time and miss the recovery.

Having low volatility in a portfolio should not be underestimated. It’s very important, if only for your own sanity. You want to be able to control your emotions, and the Permanent Portfolio with its low volatility, I think helps control investor emotions. That is just as important as overall returns. It is easy to look at a spreadsheet and get excited, but when you are living through that market where you have 20%, 30%, 40% losses, but spreadsheet is not going to help you much.

The asset mix in the Permanent Portfolio really is a remarkable example of Modern Portfolio Theory in action, because you’ve achieved this very low volatility in the overall portfolio by using three extremely volatile asset classes.

I think Harry Browne really captured the essence of Modern Portfolio Theory. It’s like in chemistry—I can take very volatile elements like sodium and chlorine. By themselves, sodium is quite explosive and chlorine is toxic, but if you mix them together you get salt, which is benign. It’s kind of the same thing with this portfolio. You take different components that by themselves are extremely volatile, but when you put them together the result is actually low volatility.

A lot of people don’t understand that. They want to look at each asset in isolation, and I was guilty of that initially, too. When I first read about the 25% gold, I thought Browne was nuts, and then I read about 25% long-term bonds and I thought he was really nuts. But I have looked at it every way, and I’ve looked into every criticism, because my own money is at stake. But what I have decided over the years is that I sleep like a baby following this strategy.

This whole idea about the US and the debt crisis—everybody is writing me about it, and I’m telling them to just ignore it. You can’t do anything about it, and you’ve got a 25% slug of gold, so you’re going to be OK. And if everything gets fixed, and the gold goes down, well, you’ve got 25% in long-term bonds that are probably going to do well. So don’t worry about it. That has always been my attitude.

We’ll continue the discussion with Craig Rowland on Friday.

#10. Dave ditches the “novel” format and goes with the pick-any-chapter-and-you’ll-be-done-in-20-minutes format.

#9. Stories such as the one in which race horses star in an investment plan or how two cookbook authors stalked Dave into making an investment in their venture. Facts are sometimes stranger than fiction.

#8. The Conclusion. A farmer tells Dave his financial plan: live below the means, save a lot, invest it wisely. That’s all there is to it, really.

#7. If it’s so simple, why can’t everyone do it? The answer, Dave explains, is in our minds. And he offers a number of tips on how to “nudge” ourselves into becoming more financially responsible.

#6. Lest you think this is yet another tome that repeatedly hammers the “save more” theme, Dave has some insights into how to spend more meaningfully too.

#5. Quality Control. Dave’s PF hacks are all extensively tested in the field. They may not all work for you but you are certain to find some that will.

#4. It’s hard to change one’s mind even in the face of overwhelming evidence but Dave has no such problem. What about the advice in the earlier book about picking a mutual fund with a good long-term record and successful management team, eh? Nope, doesn’t work, says Dave.

#3. Dave’s endorsement of low-cost, broad-market index funds will help in spreading the message among every-day Canadians. He’s even coined some slogans: “Average is the new fantastic!”, “Be the most average you can be!” and “Average is its own reward.”

#2. Personal finance is often, well, personal. Dave explains the nuances of perennial PF questions such as “pay down debt or RRSP” or “RRSP or TFSA” or “how much should I save?” brilliantly.

#1. Humour. The book has some really funny parts. One example: Dave explains how one a trip to cancun, a hot tub purchase or a finished basement can all be rationalized as “emergencies”. Yeah, I’ve done that too.

Other reviews:
Larry MacDonald praised the book for making “personal finance less intimidating for the average Canadian and may get many of them to save instead of borrow and spend”.

Ellen Roseman liked Dave’s “psychological insights and humour”.

Dave was kind enough to include my quote in the book: “Brilliant! I liked it even better than The Wealthy Barber. If we incorporate even a couple of Dave’s ideas into our financial lives, we’ll be much richer for it and not merely in monetary terms.”

Related Reading:

• The Wealthy Barber is Returning Soon
• Book Review: Findependence Day
• Christmas Gift Ideas
• This and That: The Wealthy Barber, Aeroplan and more…
• Interview with Margot Bai – Part I

Book Review: The Wealthy Barber Returns is brought to you by Canadian Capitalist — Helping you to invest & prosper.

Case in point: the Canadian Automobile Association calculates that a husband and wife can spend $140,000 over five years making the one-hour commute between Hamilton, Ont. and Toronto in separate Chevy Cavaliers.

Add to that the stress of sitting in traffic and the opportunity cost of spending less time with family and friends, and the higher cost of real estate in the city suddenly looks less disagreeable.