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June 26, 2019 | The Needy

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Regular addicts will know this blog never shutters. Seven days a week, 52 a year. Just like the corner jug store, but with dividends. And dogs. Plus all the merchandise is free. And the hosts let you write stuff on the wall before you leave. It’s the 11th year now, mirabile dictu. And while a lot of people come here just to be prickish and pick a fight, other needy souls wander in seeking guidance.

So a tad more regularly we’ll be turning over space to these questions. Now, here’s Michael to kick off today’s version of The Needy.

First of all, thank you for sharing your wisdom with us – I’ve been a regular reader for a few years now. I have a question regarding portfolio rebalancing. Specifically rebalancing with new cash. I transfer saved cash to TFSA and RRSP on a monthly bases and rebalance the portfolio twice a year by buying ETF shares to restore 60/40 weighting. By buying shares with accumulated cash at every rebalancing cycle I never really have to sell any winners to restore weighting, instead, I just end up buying less additional shares that went up in price and buying more stuff that went down in price.

Question – is it a valid rebalancing strategy or you think I should change something? My concern is that I never end up locking profits from shares that went up in price.  Hopefully, you will find a minute to respond or address this topic in the blog (if someone else has a similar question).

In any case, thank you very much for all the time spent writing the blog and information you shared with us over the years. It greatly influenced my perspective on some things.

Mike, this is a very valid approach. Rebalancing is essential to the health of any portfolio, yet ignored by most people. They cannot find the courage to sell winners and harvest gains (as with US equity ETFs right now) nor the guts to buy unloved, losing assets when they’re on sale (like preferreds).

When there’s no new cash going in, investors need to restore that 60/40 balance (which shifting asset values inevitably throw out of whack) through trades. But with routine contributions, just pump cash into the ETFs needed to re-establish correct weightings. No sales means no capital gains in non-registered accounts, which is also cool. Good job, M.

Now, here’s Ryan, another irritating young professional with a satchel of cash. But he’s also caught up in the Mars-Venus debate. Let’s listen.

Love your blog, been reading for a decade. Wife and I have decided it’s time to start looking at buying. 2 young kids and we do like the idea of having a paid-off house in the somewhat near future as opposed to renting.

We live in Calgary, I’m in tech sales, she’s in HR and we make ~$300K combined. Have $1.4 million in liquid net worth (maxed rrsps, tfsas, and investment accounts – all balanced ETFs). We are now planning on building a down payment fund of $100k to get a place (looking at around $500K). My question is: should we keep the $100K in cash, earning nothing in a savings account, or should we throw it into investments to make more while we take our time to find a place? She says cash, i say invest… she’s the smart one with money – what is your advice?

Such First World problems. What possible benefit is there to establishing a separate jar of money for a down payment? If your plump portfolio is correctly invested, it’ll always throw off cash in the form of interests or dividends (preferreds are now churning out 4.75%), and you can dip into it for a hundred grand with impunity.

Having a segregated DP account is 100% psychological and emotional, not practical. If the forever house doesn’t come along for a few years, you’ll have eschewed growth and accumulated taxable interest. No benefit there. And if financial markets sag because of a recession in a year or two, so will house prices in Calgary. Invest the money. Venus loses.

Now to Alex, with a unique situation but a common question:

My Mom’s house burned down a few months ago, she was insured so a new house is being built.  She wants to put me on the Title (I’m her only child) and she figures it would be less hassle for me when she dies.  It would just be the two of us on the Title and the mortgage will be paid off very soon.  My wife and I have never owned a house but we hope to buy something one day.  Her concern is that if we buy our own place and I’m already on the Title to my Mom’s place, would that pose any concerns?

Mostly this is a bad idea. First, your mom’s house will be her principal residence and the proceeds of it sale therefore free of capital gains tax if she retains full ownership. She can pass it on to you through her will (if that happens) without a tax obligation, or your being on title. Second, it costs money to have your name placed on the deed, and when the property is ultimately disposed of, more fees. Wasted money. Small probate charges are cheaper.

Third, if you’re on title and don’t live there, further increases in the market value of the property may no longer be tax-free. After all, you own half and it ain’t your principal residence. So why would you get the PR exemption?

Third, what if you and your wife split? In going after her share of your assets, suddenly mom’s house would be in play. That could cause major economic upset in your life, plus your mother would probably kill you.  There are more reasons. But I think this is enough.

Tune in soon for the next episode.

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June 26th, 2019

Posted In: The Greater Fool

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