Saturday, August 24, 2013

The Queen of Versailles

On the train this weekend, I watched a documentary called The Queen of Versailles. Released in 2012, it follows billionaires David Siegel and his engineer turned beauty queen wife Jackie as they embark to build the largest single family home in America starting in 2008. Siegel is the founder of Westgate Resorts, a large timeshare business. David's plans for his home and his business are rocked by the financial crisis, putting the putting the Versailles project on hold, and the sale of PH Westgate in Las Vegas.

Two financial lessons jumped out at me while watching.

1. The dangers of cheap credit.
During the movie, Westgate's business is highly dependant on credit, both for themselves, and for the people buying time-shares in their company. They sell time-shares to people, at low monthly payments, for long mortgages. Instead of setting up a sustainable business, they leverage the mortages into new projects. When the credit drys up, the business cannot make the payments, resulting in the company having to sell their flagship property in Las Vegas. Near the end of the movie, he says that he should have only had 15 properties, instead of 30.

2. The dangers of being too invested in your own company.
Although the Siegel's paid cash for their current home, they took out a mortgage on the property to invest back into Westgate. When the company runs into difficulty, the creditors demand that David take a pay cut, putting their current home at risk. At my company, I have the option to buy shares every year at a small discount. Many of my colleagues buy these and remain invested. So their employment, their pension, and their investments are all tied into one company. I buy the shares to gain the advantage of the discount, but then sell and invest in other companies.

The movie paints an unsympathetic picture of a slightly out of touch billionaire wife trying to cut back and economize (While still eating caviar for Christmas breakfast). There are also some interesting side threads as the movie explores the mind set of people who buy timeshares, and the impact of the financial crisis on ordinary people. I would recommend a watch if you have a chance to find this movie.

Thursday, August 15, 2013

What is a Trailing Stop?

Many investors, like myself, are primarily buy and hold investors. However, there are some slightly more advanced techniques, that can help to protect from losses, lock in gains, and remove emotion from investing.

One of the techniques that I use is a trailing stop. To be able to understand a trailing stop, first let's understand a stop or stop-order.

A stop is simply a request to buy or sell a stock at a certain price. If you own a stock, you can set a stop price to lock in profits, or limit losses. You set a stop below the current stock value and then if the stock drops, you will sell and be protected from losses. As the stock moves, you can adjust your stops to track the stock price, to lock in higher gains.

Which brings us to a trailing stop. A trailing stop automatically tracks the closing high, setting a stop a certain percentage below the closing high. For example, let’s say you buy a stock at $40 with a 10% trailing stop. So the stop (sell) price would be at $36. Then the stock rises to $55 over time. Then the stop (sell) price would be $50. The stock falls to $50, the stop is triggered, and you sell at $50, locking in a $10 dollar gain.

You can use this to follow a stock upwards. Let's say you hold a stock and you want to maximize your gains, but aren't sure if you should sell (or when you should sell). The trailing stop will lock in your gains as the stock goes higher, but then when it moves down, will lock in those gains.

The key is to set the trailing stop percentage wide enough that a sell won't be triggered by noise, but narrow enough to lock in a reasonable gain. You can either look back at the stock's history to get an idea of the variation.

You can set up a trailing stop with an investment account. In my case, I am with BMOInvestorline, and there is no cost to set-up a trailing stop, only commission to be paid if the stop is triggered. Also, it can only be done for stocks above $5, and in lots (a lot is 100 stocks).


This post is linked in: My Wealth BuilderMy Money Counselor

Saturday, August 10, 2013

Is Your Home An Asset?

For many people, their home is their largest source of debt (mortgage), and their largest asset. It can be the largest determinate of networth. But is the wealth derived from this kind of net worth real? In my opinion, no, because the home is a highly illiquid asset and one always needs a place to live. You can sell a stock or a bond at your advantage, but could you do the same with your home? Many people are buoyed by a rising house price, but it's difficult to derive a real benefit from this. If your home increased in a value by 10%, chances are your neighbour's did as well. And so even if you move, within the same housing market, you don't end up with any extra cash in your pocket.

Issues like these lead to the phrase house rich and cash poor. So how can you get real value from your home?

1. Move out of town. If you move from a higher value housing market to a lower value housing market, you can realize the difference. For example, a house in the city might be $500,000, but the same size place in a smaller community out of town might be $400,000 due to lower land costs and lower demand.

2. Downsize. Reducing your square footage, moving into a condo, will let you pocket the difference.

3. Renovate (then move). If you put some sweat equity, then you can make your house increase in value more than your neigbour's. You won't realize this gain, until you move.

4. Reverse Mortgage. By obtaining a reverse mortgage you can access the equity in your home. This is neutral on your net worth, as your liabilities also increase, but you change your illiquid asset of home equity into liquid cash.

Paying off your mortgage is a clear benefit. It reduces your interest and frees up cash for building your other assets. It has to be counted with your debt. But what about your equity. Should you count it in your net worth. In my case I do, particularly since the asset offsets the liability of the mortgage. (You can pay off the mortgage if you sell) However, I also track my assets excluding the home, to make sure that I am building up more liquid assets as well. I have two main financial goals, reduce my mortgage and build my liquid assets. My home equity is increasing, but I really don't get too excited, as I know that when I sell, I'll be paying that higher price to someone else when I buy a new place.

How much of your networth does your home represent?

This post was linked in: The Yakezie CarnivalAspiring BloggerFine Tune Finances

Friday, August 9, 2013

Networth 2013

I have a New Year's tradition. On Jan 1 I update my books for my overall networth. I track it monthly, but it usually fluctuates due to changes in the market, higher or lower spending. Looking at it year over year shows the progress.

I also look at how much my networth changed compared to my income, and how my assets are distributed.

Increase in Networth as a % of Income



Year
Increase in NW as a % of Income
2008
58.0
2009
41.6
2010
36.3
2011
35.9
2012
49.3
2013
49.0

For most years I have been able to keep my networth increasing by more than 40% of my income, which is well beyond my goal of 25%.

Asset Distribution (%)


Year
Cash
Non Registered
RRSP
TFSA
Real Estate
2008
37.3
40.9
5.4
16.4
0.00
2009
26.1
51.2
13.5
9.2
0.00
2010
2.3
12.7
4.4
4.8
75.9
2011
2.7
13.9
7.2
5.9
70.4
2012
5.4
15.7
9.3
6.7
62.9
2013
9.5
18.4
11.9
5.9
54.2
Goal
10.0
Balance
Maximize
Maximize
Minimize

For my assets, my goal is to keep 10% in cash, which also includes my emergency fund. I want to maximize my RRSP and TFSA. For real estate, I want to pay down my mortgage as fast as possible, but I don't want my house to be the primary contributor to my net worth. I don't consider my main residence as a real part of my networth, as the value isn't realized as long as you live in it. Rental properties or investment properties are a different story, but I don't have those in my portfolio yet.

What are your Goals for your Networth? How often do you track it?