Author Topic: New Canadian MMM - Need advices with current investments  (Read 2245 times)

max9505672

  • Bristles
  • ***
  • Posts: 287
New Canadian MMM - Need advices with current investments
« on: January 05, 2017, 09:17:18 AM »
Hi everyone!

I'm a new member on the forum but been reading here for quite a long time and considering more and more seriously FIRE'ing as soon as possible (around 10 years). I have some questions about my situation regarding actual investments I have vs. investment horizon and best strategy to adopt.

First, here's an overview of my situations and investments/possessions/networth:

- Newly working 27 years old mechanical engineer. Been saving my whole life with student jobs and internships.
- Shooting for 20K$/year on 4%
- TFSA is maxed out until 2016 (max. investment of 46500$) now valued at 52770$ invested in mutual funds with crazy expense ratios (2.XX%).
- 15500$ is RRSP (on a possible maximum of 26500$) invested in mutual funds with crazy expense ratios (2.XX%).
- 5000$ in bank check account (that I'm planning to invest in TFSA in the next few days).
- Planning to max TFSA every year as well as RRSP to maximize taxes returns/savings and then investing what I have left in taxable account.
- No other valuable properties. Planning on invest in real estate in the next years as salary increases. Currently renting cheaply.

Regarding the total possessions I currently have, I am a little hesitant to withdraw everything I have and invest in index funds considering that I'm planning to invest in real estate in the next 3-5 years. Is it what would be suggested even with the quite short FIRE term and why? Should a more conservative mutual fund or index fund be used for a property cash down?

Some of those investments (mostly RRSP) are pretty recent and still subject to withdrawal penalties (around 3% if withdraw before 2 years). Should I withdraw those or wait until the penalties stop? 2 years at +/- 2.5% more expense ratio or direct 3% hit. The answer seem pretty obvious but maybe there's something I'm missing?

Thanks for the help!
Max
« Last Edit: January 05, 2017, 10:54:15 AM by max9505672 »

daverobev

  • Magnum Stache
  • ******
  • Posts: 3443
  • Location: France
Re: New Canadian MMM - Need advices with current investments
« Reply #1 on: January 05, 2017, 01:47:37 PM »
Investing and saving are NOT the same. If you are saving for a house, that should not be done in the market at all - not in bonds, not in stocks. It should be in a high-interest savings account (HISA).

You should be able to Transfer In Kind from your current providers to somewhere that doesn't charge ridiculous management fees. My default suggestion is Questrade; they will, I believe, pay one set of transfer-out fees. Anywhere else is better, though - if you don't want the complexity of an actual brokerage, TD eSeries is the second option - there, you can auto-invest into mutual funds with 0.35% MER or so.

2%+ MERs absolutely wreck your investment growth. If it is a case of a 3% fee vs keeping in at 2% MER for two more years, pay the 3%. If it's only 1 year, keep it in but move ASAP. It may be worth the extra percent to just get it done.

I'd recommend a review of Canadian Couch Potato. But the basic tenets are that the high MER shit wrecks your return (you only make the company selling the investment wealthy, for no risk to them), and to be passive - don't be your own worst enemy by switching your asset allocation all the time. It, almost, doesn't matter what the AA is - 20% Canada, 40% US, 20% rest of world, 20% bonds is completely arbitrary but will do fine.

I would advise avoiding investing in real estate until you are absolutely sure that you want to, know what you are getting into, and have MUCH more money invested elsewhere. IE, invest $100k in rentals after getting $300k+ in the stock market. One house is illiquid, not diversified, and very high risk. Ten houses in different cities much less so.

max9505672

  • Bristles
  • ***
  • Posts: 287
Re: New Canadian MMM - Need advices with current investments
« Reply #2 on: January 05, 2017, 08:32:16 PM »
Thanks Daverobev!

**First, I just realised I was mixing ETF's and index funds in my previous post, difference is now clear**

You are right, I think I was confusing investing and saving here.

I read quite a bit about Questrade (free ETF's buys) and CanadianPotatoCouch and will open accounts at Vanguard in the next few days. I just still have to decide first which part of my investments I transfer to the index funds or in a HISA, and then the AA (probably going to start with a CanadianPotatoCouch model portfolio).

Do you happen to know if there are some good discussions on the forum regarding renting vs. buying? Basically, with salary increase over time, my plan would be to either buy a home or a condo and rent a part of it while also living in it and trying to pay it on the shortest timelapse as possible. I know, there are a lot of variables here, and your advice about investing 300K$ in the stock market before investing bigger amount in real estate makes sense. But is the same situation with real estate you live in?

Heckler

  • Handlebar Stache
  • *****
  • Posts: 1346
Re: New Canadian MMM - Need advices with current investments
« Reply #3 on: January 05, 2017, 09:05:16 PM »
Province? Just wondering what your local property market is like.  If houses are cheap, I would move my savings to low cost index funds for long term growth and save up the minimum down payment in cash. You don't seem to have any problem saving - good work!

max9505672

  • Bristles
  • ***
  • Posts: 287
Re: New Canadian MMM - Need advices with current investments
« Reply #4 on: January 06, 2017, 06:44:33 AM »
Province? Just wondering what your local property market is like.  If houses are cheap, I would move my savings to low cost index funds for long term growth and save up the minimum down payment in cash. You don't seem to have any problem saving - good work!
I'm in Montreal, Quebec. Local property market is nothing like Vancouver or Toronto, but is still pretty expensive. I could go a little further in the suburbs, but the prices are still quite high.

I think I'll keep renting for the next years while I concentrate on increasing my 'stash. I'm having a hard time convincing myself to buy a house on a minimum down payment and long term mortgage.. It would have to be an income house..

daverobev

  • Magnum Stache
  • ******
  • Posts: 3443
  • Location: France
Re: New Canadian MMM - Need advices with current investments
« Reply #5 on: January 06, 2017, 07:21:58 AM »
Thanks Daverobev!

**First, I just realised I was mixing ETF's and index funds in my previous post, difference is now clear**

You are right, I think I was confusing investing and saving here.

I read quite a bit about Questrade (free ETF's buys) and CanadianPotatoCouch and will open accounts at Vanguard in the next few days. I just still have to decide first which part of my investments I transfer to the index funds or in a HISA, and then the AA (probably going to start with a CanadianPotatoCouch model portfolio).

Do you happen to know if there are some good discussions on the forum regarding renting vs. buying? Basically, with salary increase over time, my plan would be to either buy a home or a condo and rent a part of it while also living in it and trying to pay it on the shortest timelapse as possible. I know, there are a lot of variables here, and your advice about investing 300K$ in the stock market before investing bigger amount in real estate makes sense. But is the same situation with real estate you live in?

You don't open accounts *with* Vanguard in Canada; you can only buy their products through a brokerage.

Rent vs buy is, *rationally*, a purely mathematical problem. You can just google "canada rent vs buy calculator". But of course life isn't purely mathematical; owning has benefits, and renting has benefits.

For a long time, most of my money was tied up in a single house. It worked out ok for me (house was in the UK), but honestly when you go... hmm... net worth (just say) $300k, equity in home $250k, pension $50k, nothing elsewhere... in hindsight it's not great. Not much freedom - you HAVE to work to pay the mortgage.

Buying somewhere and renting a room out is a great plan. Owning the place you live vs owning a rental or rentals is a bit different, too - but the home you live in is an expense just like renting.

Currently I am living in a house that is... um... 1/3 my net worth? A bit less I guess. But it's only half "mine". I am in the process of selling my final rental - risk vs reward is just not there, and the liquidity is terrible - and the transaction costs (to buy or sell) are crazy. IF you are going to do RE, it HAS to be a long term deal - or you have to be lucky in a rising market.

Thing is, if RE goes sour you are FUCKED. And I don't say that lightly. I have a friend who bought something and it's now worth perhaps 60% of what he paid. I picked up a couple of very very cheap houses in the US a few years back and they are just too much hassle - everybody makes money consistently, except you (that's how it feels - you pay all the bills, you fix all the problems). The numbers were good on the houses I bought but I just find it too painful each month, wondering "will I get rent in or a bill out because the tenant left a tap on somewhere?". And that's in a good time, with a pro-landlord state. Don't get me wrong - I've done ok with them - but that's in the good times.

You can do just fine with RE, no doubt about it; and I have. But. A house can cost you money (sink hole somewhere that insurance doesn't cover it? Uh-oh). ETFs are extremely unlikely to go to zero, and cannot cost you money.

pumpkinlantern

  • 5 O'Clock Shadow
  • *
  • Posts: 75
Re: New Canadian MMM - Need advices with current investments
« Reply #6 on: January 07, 2017, 07:03:52 PM »
I think maxing out TFSA and RRSP are a no-brainer as a first step.  I wouldn't buy house if you can't do those things first.  I agree that it's good to have a little stash before buying a property, especially if you have good cheap rent.  Once you have a stash, it compounds over time even if you don't touch it, while you're working on paying off your house.  If you bought the house first, especially on mortgage debt, then your debt compounds and your (non-existent) investments don't.  My guess is also that Canadian housing prices will generally decline as mortgage rates start to creep up and some of the federal regulations start to affect people.  Of course, you'd pay more interest in a mortgage, but hopefully you'll be doing it over a short period of time.

max9505672

  • Bristles
  • ***
  • Posts: 287
Re: New Canadian MMM - Need advices with current investments
« Reply #7 on: January 07, 2017, 10:52:05 PM »
I think maxing out TFSA and RRSP are a no-brainer as a first step.  I wouldn't buy house if you can't do those things first.  I agree that it's good to have a little stash before buying a property, especially if you have good cheap rent.  Once you have a stash, it compounds over time even if you don't touch it, while you're working on paying off your house.  If you bought the house first, especially on mortgage debt, then your debt compounds and your (non-existent) investments don't.  My guess is also that Canadian housing prices will generally decline as mortgage rates start to creep up and some of the federal regulations start to affect people.  Of course, you'd pay more interest in a mortgage, but hopefully you'll be doing it over a short period of time.
Good advice. For now I'll concentrate on growing my stash as much as possible. RE might come later when I get more knowledge on that subject.

max9505672

  • Bristles
  • ***
  • Posts: 287
Re: New Canadian MMM - Need advices with current investments
« Reply #8 on: January 19, 2017, 10:32:21 AM »
Investing and saving are NOT the same. If you are saving for a house, that should not be done in the market at all - not in bonds, not in stocks. It should be in a high-interest savings account (HISA).

You should be able to Transfer In Kind from your current providers to somewhere that doesn't charge ridiculous management fees. My default suggestion is Questrade; they will, I believe, pay one set of transfer-out fees. Anywhere else is better, though - if you don't want the complexity of an actual brokerage, TD eSeries is the second option - there, you can auto-invest into mutual funds with 0.35% MER or so.

2%+ MERs absolutely wreck your investment growth. If it is a case of a 3% fee vs keeping in at 2% MER for two more years, pay the 3%. If it's only 1 year, keep it in but move ASAP. It may be worth the extra percent to just get it done.

I'd recommend a review of Canadian Couch Potato. But the basic tenets are that the high MER shit wrecks your return (you only make the company selling the investment wealthy, for no risk to them), and to be passive - don't be your own worst enemy by switching your asset allocation all the time. It, almost, doesn't matter what the AA is - 20% Canada, 40% US, 20% rest of world, 20% bonds is completely arbitrary but will do fine.

I would advise avoiding investing in real estate until you are absolutely sure that you want to, know what you are getting into, and have MUCH more money invested elsewhere. IE, invest $100k in rentals after getting $300k+ in the stock market. One house is illiquid, not diversified, and very high risk. Ten houses in different cities much less so.

I called about withdrawal penalties:

Transferring the totality of the investments I currently have would cost me 740$ (thanks to the 3 years exit fees....).

Most of this 740$ come from the 15000$ I recently invested in my RRSP (November 2016).

Any suggestions on weither I should keep the RRSP there until the exit fees are over transfer everything now?

The MER's on those are approx. 2.5% vs. approx. 0.25% in ETF.

So if I withdraw :

15000$ * (2.5%-0.25)/year * 3 years = 1012$ which is more than the 740$ exit fees.

Naturally, this is without taking in count any yield.. but who can predicts the next 3 years in the market?