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It’s Friday, and you know what that means…Reader Study Time!
Today’s reader has a few questions for us, but the main one is one that’s been asked a lot lately: When is a good time to enter the market? So without further ado, onto their email!
I am single and in late twenties in Canada. I am wondering how I best allocate the $95k (and growing monthly) I have sitting in the chequing account & any additional suggestions.
- Based on what I have had read the stock market seems highly valuated (higher average PE ratio, with lower future projected returns)
- Hence I am a bit sceptical of going all in into my td e-series mutual funds by increasing it’s monthly allocation and maybe waiting for a more favourable PE valuation
- But have read that market timing should be avoided
- At some point I did like to get financially independent (have passive income cover my expenses), maybe an annual income of $40k or so but am flexible.
- Currently not interested in buying a house/car and am renting with roommate and taking the transit.
Below is my current financial snapshot:
Gross/net annual income
- Annual salary: $54400 (+ covered with good health benefits)
- Annual performance bonus: $2000
- Dividends (from 2 Canadian stocks): $1200
- Totals: 57600
Monthly family spending:
- Rent ($450)+Food ($200-300, cook home)+Transportation ($100, bus pass) +Cell Phone ($17) = $867 (max 900)
No Debts/Fixed Assets
- Stock 1: $2,665.26 (previous employer)
- Stock 2: $24,360.23 (current employer, employee share purchase plan – I contribute 10% of my paycheque and company matches %25 of my contribution)
- TD E-series mutual funds:$6424.74 (target allocation of 25% each across Canadian Index Fund, US Index Fund, International Index Fund & Canadian Bond Index Fund)
- Adds $100/month across the 4 index funds ($25 each, started initially just to get used to investing)
Chequing account: $95000
Registered Pension Plan (RPP): $21000
- I contribute 6% of my paycheque and company contributes 5.7%
- Target allocation of 25% each across Canadian Index Fund, US Index Fund, International Index Fund & Canadian Bond Index Fund
Ok so where do we start? First, let’s address AA’s burning question: What should they do with the money they have sitting in a checking account?
DCA, DCA, DCA
This question has been quite popular in our inbox lately, and it’s been a pretty funny given what’s been happening in the stock market over the last couple of months:
- Pre-October 2018: Stock markets are unattractive because of high P/E ratios/Fed policy/a roaring economy. Now’s not a good time to buy.
- October 2018: Stock markets are finally correcting! It might be a good time to buy, but not yet. It still has more room to fall.
- December 2018: Stock markets have entered a bear market! We might be going into a recession! Shit shit shit! The economy’s crashing because of the Fed/Trump/Trade War! Hoard your cash!
- January 2018: This is just a dead cat bounce. The REAL trouble’s just around the corner. Don’t buy yet.
- February 2018: Stock markets just had the best January in decades. I’ve missed my chance and now stocks are over-valued again. Don’t buy.
See how that went? The funny thing is that if you were to pull up a chart of the S&P 500’s recent sharp drop and subsequent recovery, you’d be able to point at the lowest point in the trough and go “Well, OBVIOUSLY that was the best time to buy. Duh.”
And yet at no point during that period did it ever “feel” like a good time to buy. That’s the underlying fallacy of trying to time the market. You have no idea when the right time to buy is, and anybody who says they know is just guessing.
We actually had some blog/book advance earnings that we shovelled into Portfolio B that we needed to invest. You know how we did it?
We divided it up into 3 equal piles, and are planning to do a buy on January 15, February 15, and March 15. Easy peasy, lemon squeezy.
That’s what I always recommend. Don’t try to time the market. At best, you’ll stress yourself silly trying to hit the optimal inflection point. And at worst, you’ll get paralyzed and leave it all in your checking account forever, like AA seemingly has.
For smaller amounts (less than $50k), split it into 3 piles and invest it over the next 3 months. For bigger amounts, do it over 6 months. That’s Dollar Cost Averaging (DCA).
Investing In Your Own Company
Another thing we noticed is that AA has quite a bit of money invested in their own company. This is because AA’s company has a stock purchase plan, which allows you to buy shares of your company’s own stock at a discount, in this case 25%. This is great since it’s free money, but over time you end up with a substantial holdings in your own company’s stock, which puts you in danger in case something happens to said company.
In our Investment Workshop, we advocate against owning individual stocks since individual companies can and do go bankrupt, so if you own a substantial amount of one company that could have an outsized negative effect on your portfolio. The jeopardy goes even higher if you also work at that company, because you could lose your job on top of it!
I actually had one of these programs at my old company too, and my director actually gave me a pretty useful thought exercise. Instead of being given $5000 of company stock, pretend they gave you a $5000 cash bonus. Would you take that money and buy the company stock? If yes, keep the stock units. If no, immediately sell it and pocket the money.
And since I’m a firm believer in Passive Indexing, every time my company shares vesting period rolled around, I would get the stock at a 25% discount, immediately sell it at market value (and capture the 25% gain), then turn around and plough it into my Index funds. Worked out great for me!
ETFs for the Win!
And finally, a third point of note: AA is investing in TD e-series funds. Now to my non-Canadian readers, the e-series funds are mutual funds that track the various indexes that we use in our workshop portfolio, and in terms of mutual funds they ain’t bad. We used them way back in the day because of their relatively low MER’s (0.33% to maybe 0.5%) and the fact that you don’t have to pay commissions to buy or sell.
However, these days better options have become available. Like Questrade (full disclosure, that’s an affiliate link), who charge nothing to buy ETFs, and a commission of $5 to $10 to sell. And given that the ETFs we use to track those same indexes have MER’s of around 0.05%, there really is no reason to use the e-series funds anymore.
Time to Math Shit Up!
So now we get to my favourite part, the numbers.
To recap, here’s AA’s summary.
|Income||$54,400 (we'll just count base salary since the other income types fluctuate)|
|Expenses||$900 a month, $10,800 a year|
|Net Worth||$27025.49 (stocks) + $6424.74 (mutual funds) + $95,000 (cash) + $21,000 (pension) = $149,450.23|
OK so right off the bat here, we notice that his expenses are crazy low. If he were to stay at this spending level, it would only take $10,800 x 25 = $270,000 to finance that lifestyle forever. And given his already impressive $149,450 net worth, he’ll get there in…
Juuuust a little over 3 years.
Now, that being said, he’s doing this by living with a roommate, cooking, and seemingly never going out. That’s fine for now, but will AA be wanting to do that for the rest of his life? Probably not. He’s asked for passive income at the $40k level, which would require a portfolio of $1M, so let’s see how long he takes to get there.
Now, AA’s still early on his career, so lots of stuff could change. A promotion or two would really have a big impact on his time-to-retirement, not to mention if he gets married, etc. But so far a combination of simple living, good earning power, and a complete disinterest in buying an overpriced house (high-five!) means he’s headed for a retirement in his early 40’s, which is pretty damned good.
Now all he needs to do is get his cash off the sidelines and making that 6% ROI he needs to make this work.
What do you think? Let’s hear it in the comments below!
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