Riding the Drop of Doom

The last few weeks have been a little nerve racking for just about everyone. I don't think many people like riding roller coasters that the markets have become in the last few days. Up 200 points by noon and closing down another 30 points by the end of the day. Or just up 50 points by 10 am and down 200 points by the end of the day and so on.

If you are sitting on a pile of cash it does present some tempting buying opportunities now and again if you can handle seeing your brand new investments swing around. I'm currently down to a small amount of cash and I'm thinking I'll sit here waiting for things to calm down a bit before I put in anything else.

This does present a good time for me to start my mortgage acceleration plan. As a 5% after tax rate of return is starting to look fairly good compared to the swing my RRSP accounts have been taking in the last while.

If nothing else I'm curious to see where the markets end up by the end of the year: up, down or just sideways.

Houston, We Have a Problem

Well actually there were several problems so far with changing domains over the weekend. So I'll be posting at the backup domain location until further notice.

Actually all these little technical issues reminded me of life in general, it doesn't ever seem to go according to plan. This is why many people often say you need an emergency fund. As many of you know I don't keep a fund, but rather a line of credit which I can tap into instead.

Why don't I keep a fund of cash? Partly it is I keep enough cash floating around various saving accounts that I have about $1000 slush fund at all times which can cover my insurance deductible if I truly have a major problem. Also because I don't consider the car or house insurance coming due an emergency. Actually I don't consider anything you can plan for in day to day life an emergency.

So what is an emergency? This will depend entirely where you live and possible costs you might face. For example, if you live in the US and have co-payment health insurance you are going to need a large cash fund to cover a major medical emergency. Yet in Canada the truly major costs are bulkly covered by health care, so if becomes a bit overkill to keep the same amount. Basically the idea of a one size for all emergency fund doesn't work, it depends on your own situation.

So what is an emergency you have faced and how much did if cost you? If you want to share leave a comment. My story went something like this. I had a baby come ten weeks early, a leaky house roof and my lease buy out on my car all within three months for a total of $17,000 (ok I had planned for the lease buy out but the other two wiped me out before I could pay for it, so it became part of the emergency).

How to Kill A Mortgage

Yesterday I had a comment by Telly asking if I intend to be mortgage free by 45 (my retirement date). Yes I do want to have that gone by then. I was actually playing with a few calculators earlier this week so I will outline a few different ideas.

1) Do Nothing

This first plan is the easiest. I don't pay down a extra cent until I turn 45 and then I pay out the remaining balance with some of my retirement savings.

2) Mild Acceleration

My current time line to be mortgage free is 19 years which isn't too far from my plan to retire at 45 (16 years). So another option is to save myself a lot of interest costs and prepay just enough of the mortgage to ensure it is gone by the time I'm 45. I estimate I would need to pay off approximately $9000 in the next two years which is completely doable.

3) Completely flatten the mortgage

Of course this option was a bit fun to figure out. If I put every spare cent I have against the mortgage I can be complete debt free in just over 8 years. Which also has some appeal since then my cost of living drops off the deep end and I could look at doing semi-early retirement perhaps by age 40.

Conclusion:

Right now I'm thinking about doing option 2, since I'm very close to trigging my mortgage equity plan with my bank. So if I drop the mortgage fast and decide I need some money to invest I can pull it out and if I use it to invest in a taxable account we can right off the interest against our taxes (Basically I could do a small version of the Smith maneuver).

I must admit option 3 also has some appeal. Yet for now I think I'll try for option 2 for now. Any one else been in a similar situation, if so what did you do?

Switching High Interest Savings Accounts?

Earlier this summer Royal Bank tried to tempt me over to their new high interest savings account yet at the time their rate was going to be dropping to 3.25% after the introduction period. So I told them no thanks I have a higher rate with my current ING account.

Now it is the opposite. Royal is now at 3.75% while ING is trailing at 3.5% and I recall the last time interest rates when up it took ING a very long time to raise their rate up. Royal also has the advantage of being my primary bank at the moment, so going over to them would be very easy.

Perhaps the only thing I would like to know from anyone with a RBC high interest savings account is how fast do the transfers take place? (I can't find anything on this on their website). Since that is the only thing that vaguely annoys me about ING.

Or perhaps I should look beyond Royal to someone else entirely? I can do the research into other options, I'm just curious for a current customers viewpoint on the service at each place.

Thanks for any feedback you can provide and have a good long weekend (no post on Monday).

A Personal Story of the Market Correction

Since I just did my last net worth update at the end of June I'm in a nice spot to have a good look at what the world wide market correction did last week to my holdings. So using my RRSP account as a model I had a value at the end June of $12,800.

The account current market value today is $13,200 with a book value of $13,300. I did recently add some money to this account in the last month. So overall I lost all my yearly profit and $100 of my own money during the correction. So I would estimate I'm down around $500 at the most or 3.8% in this account.

So given all the media coverage of the event and the coverage in various blogs you would think this correction was a bit bigger. Yet this is the reason you diversify your portfolio. So if the markets tank they will be hard pressed to take you portfolio too far down.

Overall my net worth change I would bet would be less than 2%. So next time they tell you the 'sky is falling' do try to keep the long view.

So You Want to Do Your Own Investing?

A comment on my last post got me thinking about how to determine if you can do your own investing. After all if your constantly chasing the latest 'hot' investment or selling off at the slightest dip, you can do a lot of damage to your own money.

So what do you need to do your own investing? Surprisingly not a lot, but it does require some honest self assessment.

Step 1 - Are you an active or passive investor? If you are stock geek and can honest say you will read every little bit information about every company you own (and any company that you are thinking about owning) and also be willing to do additional industry research. Then congratulations you might have the knowledge base to do active trading in individual stocks. Yet you will also need to assess your ability to handle loss and your emotional involvement. So if you can't sleep at night with a 10% loss to a stock you own then you should not be an active investor.

So if you failed the above test you are a passive investor. Don't worry this isn't a bad thing, its just realizing your own limitations and working with them. Your goal in being a passive investor is to use index stocks and ETF's to remove much of the emotional decision from buying a stock. I think every one likes to think they can be an active investor, but the reality is very few people can do it well.

I had a fortunate experience when I was a teenager to do a stock invest project in school where a group of us actually bought a penny stock and watched it come up and then crash down. So I learned the hard way. I'm not an active investor.

Step 2 - Research your strategy. Now investing weather it is active or passive can follow many different paths depending on your risk tolerance and your goals. Now you have to look into your local library's personal finance section and start reading. Your immediate goal is to read at least 10 books before deciding what will work for you (for suggested reading check out the book review posts on this site and other blogs).

Step 3 - Remove emotional issues. Review the strategy to remove as much emotional decision making out of it as possible. After all your number one enemy will be yourself in doing your own investing. That's why I use a series of index funds and balance them once a year. There is no emotion in the decision. I just sell and buy to get myself back to my original investment targets.

Obviously I can't cover everything about doing your own investing in one post, but for most people I think it can be a good thing for one main reason. No one in the world care more about your money than you. At the same time if you know you are emotional and lack the discipline to execute you own investment plan, then you should seriously consider using a advisor. After all those fees might be worth it if it keeps you from losing too much money.

Reader Question #6

I recently go the single longest email question I have ever got from a reader. It's so long in fact I've had to break it off into two parts and do a bit of summary on it.

Colleen a reader from Ontario got a bit of windfall of some money. She ended up investing with Financial Planner in Spring 2006 and is now has a large amount of money in DSC (Deferred Sales Charge) type funds. So if she pulls them out early she gets hit with a large charge to get out of under performing funds. That's the bad news. The good news is she has taken this lesson is learning about investing herself and getting educated. As such she has two questions. Today we will have a look at the following question.

Q: Given recent creation of a Military Reserves Pension Plan, we have the opportunity to buy back all my husband's previous military service. For his twelve years or so of service, the buyback cost is in the ballpark of $70,000. The Financial Planner says to make sure we invest the money in our RRSP's first (through him of course) since we have the room and then transfer it to the military RPP. Reason being, we could take full advantage of deferring tax on that money through an RRSP. Now my understanding is that my own pension contributions through work defer taxes the same way. That is, whether in an RPP or RRSP, the contributions have the same tax advantages.

My concern is that this advisor has some financial incentive for himself in mind.

A: You are correct. When you put money into a pension plan your money has the same treatment as an RRSP for deferring taxes. So I would be questioning any advise this Planner is giving you as he seems to want to line his pocket with your money. If you feel the pension plan can offer a good rate of a return with low fees, then go for it.

Otherwise you might want to stick with a RRSP, but this time invest the money with someone else. You could start with a simple Couch Potatoe type portfolio made up with index funds from you local bank (shop around for who has the lowest fees (MER) on their funds) if you think you will be contributing on a monthly basis.

Either way I would stop giving your planner any more money and then have a hard look at the fee structure for the DSC and decide what would it cost you to get out of these funds sooner than later and take your money elsewhere. Often the emotional pain of living with those DSC funds can be an incentive to take your losses and move on to better things. After all if your funds are not doing well how much more money will you lose hanging onto them waiting for your DSC to drop.

I hope that helps. Any other ideas from other reader's would be welcome. I'll get to Colleen's second question about investing for her kids next week.

When Avoiding Risk is Too Much

During my last net worth update you might of noticed I had a fair amount of cash sitting in our ING account. The reason was I was expecting some news which would have let me use that cash in a private investment. Well that information was delayed and then delayed again, so I was talking to my wife about what we should do and she suggested just investing the cash elsewhere. She made one comment that really hit home for me "What's the worst that could happen? You lose some cash, but if you make a good return in the mean time you could off set that. At least it would be making more than the 3.5% in the ING account. " I was so focused on not losing that money I lost track of the bigger picture.

So we moved around $4500 over to her investment account and picked up some more EIT.UN shares last week with a yield of 12.5%. With that current yield being 3.5 times greater than the ING account we really only need about 2 months of distributions to break even as compared to the ING account (after trading fees). After that point, it is all increased yield (also note that about 40% of the distributions will be treated as capital gains when my wife sells the shares which will be taxed less than the interest in the ING account). Also this plan provides a nice investment right now in case the other one falls apart.

I also thought about the fear of lose of capital. If I'm truly that scared of it we can always put a sell order on the shares and get out if the value drops too much. Overall risk can be managed, you just have to know your objectives and what you can tolerate and then plan accordingly. Don't let the fear of lose cause you to make bad decisions like I was doing.

Living in a Hot Housing Market

Recently I ran into my real estate agent who sold me my house last July. I like the man because he is honest and to the point. He doesn't pull your chain or embellish the situation into something it isn't. So with all this in mind, he is one of the few people I feel that can honestly tell me what my house is worth. He told me and I had a hard time standing up.

According to him, and assuming I haven't done much to the house. I could list and expect the sell my house for at least $320,000 in the current market. Which would mean if I sold and cash out of this market I could, after all the fees, make $100,000 profit on my house or a 250% gain on my initial investment in just under one year.

I was excited about this information for exactly 30 seconds. I justed wanted to enjoy that feeling, but I know that in reality that information means nothing. I don't want to sell my house and even if I did I would have to buy back into the same market meaning I would not make much if any profit, since the profit on the first house would just go into the second one.

So my suggestion to anyone who lives in a hot market is to ignore it as much as possible unless you are selling and moving to another cheaper market. Yet for those who like to speculate in real estate a hot market does provide an interesting option to flip a house. If your even entertaining this idea, I will warn you. It is not an investment, so don't think of it that way. You are just gambling with a house.

PS: Sorry for no post last Friday. I was tied up with the family.

The Sky is What?

My wife complains that I’m too sound of a sleeper. I can sleep through any short of a nuclear explosion, with the exception of my kid crying for more than five seconds. Don’t ask why I wake up for my kid, because I don’t know other than perhaps some sort of primitive look after offspring instinct that lay buried in me until I had a kid. Anyways, apparently I can also sleep through a minor market correction. I didn’t realize the TSX had three bad days of trading recently until the Moneygardener mentioned it in his blog which I finally read last night.

My selective ignorance plan is working very well. Case in point. Look at a one month chart for the TSX.

Ok, a fairly big shift, then change to the five year view. Can you even see the correction at this level?

Yes, but looking back there has been a hell of a lot worse. Therefore, it is nothing to worry about.

When the sky is falling burying your head a little under the sand will keep you happily asleep until the big parts start falling in and wake you up so you can truly decide if it is important to deal with.

The Enemy Within

Despite my best intentions I find my mind wondering at times if I should be doing something different with my investments. Perhaps it is the engineer in me that constantly wants to improve things or perhaps it is all the personal finance blogs and books I read that give me ideas.

Regardless of the source one of the single biggest enemies to your portfolio doing well is yourself. If investing was completely a numbers game it would be easy to do, but instead we have a market place where real people react to things with their emotions and that drives all the dips and peaks in the market on the day to day basis. Over the longer term there is a certain reward for companies that do well as value investors deem them worthy of their price.

So how do you keep on track and not fall victim to changing your investment plan constantly? You have two main options for defense: ignorance and keeping yourself busy.

Creating a selective ignorance around the financial market is actually a very good idea. You don't really need to know everything that each company you own is doing every second of every day. So if you can limit yourself to checking out news only once a week you will find yourself with more time to do other things and you will sleep better not knowing every little thing about the market that just happened. Perhaps the only exception to this approach is if you are watching a stock for a specific buying opportunity, otherwise you really don't need to check your portfolio's performance on a daily basis.

The second method of defeating yourself consists of keeping yourself busy with other things. Some people find if they drive that restlessness towards something else it tends to go away. So when your mind if wandering try filing your papers or checking your bank to see if you can lower your fees or even spend some more time with the family.
In the end, you have to be honest with yourself and find what works for you. Each person is a bit different, so if you've got another idea I didn't touch on please share with a comment.

The Dividend Retirement Myth

It seems to me that several people are planning retirements using at least some dividends to provide part of their income. This is a good idea, the problem becomes when you take it too far and try to pull off a Derek Foster and live off only dividends.

Let me say I do like dividends. They get great tax treatment from the government if you are lower income (see here) and if you pick good companies they will provide a nice raise and likely keep up with inflation. Yet people tend to ignore their dark side, the low yield.

You see in this over inflated market of nearly continuous record breaking highs for the TSX index the actual yield on most dividend paying stocks is very low. When most dividends are around 1 to 4% yield you end up needing a lot of cash to generate your retirement income. Let me provide an example.

Let’s say you need about $25,000/year in retirement income for a couple. If you buy all dividend paying stocks and manage to get an average yield of 2.5% you would need $1,000,000 to get your income since you are paying no tax. Yet if you use a more balance portfolio and get your income half from capital gains and half from interest income and pull off a 7% yield you need $475,950 to generate $25,000/year after taxes or $28,500 before taxes between the two of you.

So in the end you need about half the total amount of money. So remember not to get so hung up on tax advantages that you lose sight of the overall picture. The point is to retire early and to get there you need a higher yield than 1 or 2%.

The Early Retirement Portfolio

It occurs to me that I need to do some more planning about how my portfolio is going to look in early retirement. I specifically need to be conservative with that money that is going to bridge the gap between 45 to 65.

Currently most of this money is in index funds with the following allocation:

25% Bond index
25% TSX index (Canada)
25% SP 500 index (US)
25% International index

This is what I'm thinking about using when I turn 45:

60% bond index or other fixed income
15% Real Estate Income Trust or similar
10% TSX index (Canada)
10% S&P 500 index (US)
5% Cash

At the same time I'm unsure about dropping the international portion of the portfolio. Despite being subject shifts in the currency exchange international markets does offer some diversification outside of North America just in case there is an economic slow down just in our local markets.

Another issue I'm a bit unsure on is how do I convert the one portfolio over to the other? Do I just wait until I'm a few years out and start to slowly pull back from the markets into bonds? Or do you just wait until I'm three or two years out and change over the entire thing?

I'm still a bit unsure on the international idea, but I think I've got a way to handle the portfolio conversion. I would use that old rule of thumb of having your age as your percentage of bonds in your portfolio. Therefore on Jan 1, 2008 I should rebalance my current portfolio to have 29% bond index.

I'm still working all this out so any ideas on how to handle all this would be appreciated.

Juggling Priorities

Let's face it saving money itself is fairly easy to do, the problem is what am I going to do with those savings? You can pay down debts, invest in your kid's future, save for retirement, save for buying/starting a small business, save for a second property or save to buy something you REALLY want (car, trip, shoes, TV, computer...).

So how do you balance all those issues or juggle those priorities? You have to have a plan and then stick to it. Here's how I do it.

1) Pay off all non mortgage debts - Debt is just a dead weight you have to carry around so the sooner you get rid of it the easy things become for the rest of your savings.

2) Save for a rainy day - Once you are out of debt having a small amount of savings for when things go wrong is typically a good idea. Start small like $1000 and then play around to find the amount that works for you. (I personally don't do this, but I run my finances with a large amount of spare cash).

3) Save for retirement - You know the best thing you can do for your kids beyond loving them is making sure you are not a dead weight to them when you are older. So save the base amount for your regular retirement first.

4) Save for the kid's future - Now you can save something for those RESP accounts. It doesn't have to be a huge amount, but try to save at least $2000/year to get the maximum education savings grant from the federal government.

5) Save for yourself - Now this doesn't have to be the last thing you save for. It depends on what you are saving for and how good you have been about everything else. I tend to treat myself once in a while if nothing else to keep the rest of my saving in perspective. I would also classify my early retirement savings as saving for myself since it is more of a personal goal than a socially responsible thing to do for my kid.

So what would your savings order be? If you feel like sharing leave a comment.

Passive Income

During some point in every retirement plan someone comes up with the idea that passive income is king and it should be strive to the exclusion of everything else. The unfortunate thing about this is it often doesn't work for most retirement plans without some series drawbacks.

Passive income classically comes from the following main sources: investment income (interest, dividends and income trust distributions), real estate (a rental apartment or house), and a business in which you own a portion or completely (yet you don't handle the day to day operations of).

Generally I do believe passive income can be a significant portion of your retirement savings, but I don't typically suggest you plan your entire retirement around it. Why? It ties up a significant amount of capital to generate its cash flow which often results in people saving too much money for retirement. Yes if your truly paranoid about dying broke or wanting to pass along your entire savings to your children it can be useful. The other obvious exception to this guideline is if you have a low income and your all your investment income from dividends. In this case you have a significant tax advantage that makes it worth while to use.

To demonstrate what I'm getting at I'm going to use an example. Let's say I've got two people, A and B, who both want to retire 10 years early at 55 and need an income of $25,000/year. Person A wants to use passive income to pay for those years while person B isn't going to.

Person A is a adequate investor and manages to assemble a portfolio that pays a 5% yield to generate his $25,000/year (which is actually a fairly high amount of yield given the current dividend yield of most blue chip stocks). So total portfolio value should be $500,000 ($25,000 x 20).

Person B on the other hand is going to draw down his savings to cover those ten years. After that a combination of government benefits and pension income should cover the rest of his retirement. In his case he earns a 6% yield on his portfolio but his is also drawing down on the principle. So using this calculator he plays around and determines how much he needs to generate that savings by inputing a negative monthly savings rate of $2083.33 (or $25,000 per year). Overall $200,000 should provide 10 years of income and still have about $22,500 left over to cover an poor investment return years.

So overall person B can do the same thing as person A (ie: leave work ten years early) on $300,000 less in savings. Obviously more detailed analysis is required to account for taxes and changes to other parameters like yield, but generally I think more people are planning something like person B rather than person A.

Procrastination Pays?

Most of the time in personal finance issues it doesn't pay to procrastinate on anything. If you want to pay down your debt, save for your child's future or even save for a vacation it is almost always better to start right now rather than waiting.

I recently had an experience where it paid to procrastinate. Literally. I mentioned earlier this week that I had started transferring my old pension over to a locked in RRSP. What I didn't touch on was the fact that my estimated worth of the transfer amount was dead wrong. The original amount of the pension transfer was around $10,000, so I had estimated about a 5% rate of return for the last 3/4 of a year (so hence the $10,500 estimate in my net worth). When I called to get the new amount I almost dropped the phone. My rate of return for the last 3/4 of a year was 17% (or 25.5% in an annualized rate).

So the point of all this is for every 'rule' in personal finance, there is always going to be exceptions where it either doesn't apply to your specific circumstances or you just get lucky. The trick of coarse is to being able to recognize dumb luck over a shrewd decision. In my case, it was merely dumb luck.

Have a good weekend,
CD

Analyzing my Current Asset Allocation

Welcome readers to the second Canadian Tour of PF Blogs. I hope you enjoy this post and I encourage you to check out the other blogs. For a complete list head over to the Money Diva's blog.

I know I've been guilty of this myself for a number of years. I tend to focus on each account separately rather than looking at the macro or big picture of all the accounts. I for some reason have a hard time seeing the forest because I'm staring at the trees.

So out of my most recent net worth ($131,500) let me break down where it all is:

1) Primary Residence Equity $91,600 or 70%
2) Canadian Equity $13,950 or 11%
3) Canadian Bonds $3200 or 2%
4) US Equity $3200 or 2%
4) International Funds $3250 or 2%
5) Old Work Pension (?) $10,500 or 8%
6) Cash $5800 or 5%

Well that was an useful exercise I had no idea I was that heavy into Canadian equities. Also it looks like I'm very heavy into a real estate with a huge 70% of my net worth tied up in my house. I'm also a bit embarrassed to say I have no idea where my old work pension is invested. There is a good reason I'm going to the bank soon to get that transfered into a Lock In RRSP.

What is interesting about this was I just broke this up into broad categories, but if I break it down further I suspect I'm holding onto a lot Canadian bank shares since they seem to be a big favorite of most mutual funds.

Now the issue stands, how do I fix this mess of accounts into a bit of order. I'm not sure how I'm going to do it yet, but if you have an idea please share.

The Carbon Age

After working for months (or was it stalling) the Canadian federal government finally rolled out the details of their air pollution/climate change plan. The main focus was on big businesses which generate about half of the pollution in Canada (for a quick summary see here).

There was lots of interesting points in the plan and everyone is already lining up to say 'it's great' or 'it's horrible.' Some like the 55% reduction target of air pollutants like sulfur dioxide (acid rain), nitrogen oxidizes (smog) and particulate. While others dislike how vague the plan is on reducing carbon dioxide being released into the atmosphere and how Canada will not meet its Kyoto targets.

Perhaps not realizing what they have done, the most important thing the government gave industry was the number: $15/tonne of CO2 tax starting in 2010. You see industry has seen this coming. Despite all the rhetoric to the contrary they have not had their heads in the sand. They have bought studies, funded R&D and attended conferences getting to know their options for CO2 reduction. The biggest problem with all their efforts was the economics. How much was avoiding producing a tonne of CO2 going to be worth? Now they know and now the real work begins.

In the next several months we are going to see two things happen. One a lot of current projects will be canceled since they are no longer economically feasible. The second thing will be a series of announcements on new projects starting up. Why? Well to actually engineer, fabricate and construct most of what the facilities required to clean up the emissions to the new standards will take at least four to five years. The deadline of the first phase is 2012 meaning most of these projects will have to start not six months or year down the road, but NOW.

So in the end, Canada has turned the corner and entered a new age: the carbon age. The old rules are now gone for power generation and oil & gas. The entire economics of any major construction project have just changed overnight. So what is an investor to do?

Well let's follow the money. First you will need lots of engineering for these new projects, so check out any publicly traded engineering firms such as SNC-Lavalin. Then materials to build everything such as steel (from Ispco for example) and concrete. Also there are typically a fair amount of chemicals involved in these processes so you might want to look at Dow Chemical. Then there will be the other big winners of all this: alternative energy production like wind turbines, solar panels, ethanol and biodiesel (there is so many different companies involved in these I'll leave you do your own research). Perhaps the most interesting change of all for potential investments will be the construction of a Canadian carbon credit exchange. Will the public be allowed to trade? Is so will the credits be in high demand or will the market be flooded and have the price crash like it did on the European exchange?

The other issue swirling around all of this is the fact Canada is currently run by a minority government. So if the opposition really dislikes this plan it might trigger an election and drop Canada back into limbo with its climate change plan. Hold on to your seats, this could be an interesting few weeks.

Canadian Content in an RRSP

During the 100th post contest I got a great series of ideas for topics from the readers, one I've been thinking about from Cardero was how much Canadian equities exposure should we have in an RRSP?

Prior to 2005 this was a simple question. We had to have 70% Canadian content in our RRSP account to not exceed the foreign content limit. Now with the flood gates wide open you have have up to 100% in foreign content, which provides Canadians a significant opportunity to invest outside of Canada. This is a good thing after all Canada only has 0.5% of the world population and something like 3% of the world's market (I can't seem to find that statistic this morning).

The issue to investing in foreign content is your not only investing in bigger markets, but also in foreign currencies. You end exposed to more than you plan on which is fine during a long time frame, but somewhat problematic if you need the money any time soon. So with all this in mind here is what I suggest people do at different time frames.

Over 20 years to retirement: Keep you Canadian equity content to no more than 33% of your portfolio. You have time you don't keep too much money in Canadian equities.

Five years or less to retirement: Now should start to reduce your equities in your portfolio and covert them to more stable fixed income. Also at this time you will want to pull back a bit from foreign markets. Depending on what you want for a fixed income/equities balance, for example 60% fixed and 40% equity, you want about half your equity in Canada. So in this case 20%, but if you want a 70/30 split you would reduce your Canadian content to 15%.

Less than 20 years and more than 5 years: Now your into a bit more of personal risk territory of what you can handle. In my case I'm holding around 25 to 30% in Canadian equities, but I plan on scaling that back as time goes on.

The exception to all of the above is if you planning on a Derek Foster style retirement where you live off of just dividends. In this case you want a lot of Canadian content to reduce your tax load to near zero, since low income Canadians don't pay tax on Canadian dividend income.

That's my take on the question. What do you think? I would love to see what other people have been doing and their opinions.

100th Post Contest Winner and Lock In RRSP

Congratulations to Dan who's comment was selected as the winner for the 100th post contest (Dan please send me an email with your full name and mailing address so I can send you your prize). To celebrate Dan's win I'm going to cover his suggested topic of the Lock In RRSP.

The obvious place to start with an Lock In RRSP is a definition. A lock in RRSP is also referred to as a LIRA account and comes about when you leave a company with a vested pension. When you leave the company you are offered typically two choices:

1) Take a partial pension age the regular age of your pension plan (often in your 60's) or
2) Take a lump sum transfer to a LIRA account

Now a LIRA account can be either just mutual funds, a self directed account or just about anything an RRSP can be invested into. The trick with a LIRA account is you can't withdrawl the money until the age specified by your plan or your provincial Pension Act (often around 55 at the earliest) or add money to it unless you get another pension lump sum payout that has vested.

So Locked In accounts provide a interesting challenge to your investing. You know you may not going to be adding to the account ever, so you have to pick your choices wisely based on the amount of money you got deposited to your account. Depending on how much you get for a lump sum, ETF might be a great choice since you would have very low fees for a long investment horizon. One last thing to note is if you get a small amount look up your provincial Pension Act, you might be able to un-lock small pension amounts and move it over to a regular RRSP account.

I personally like a Lock In RRSP since I can take my pension money with me after I'm vested with a company and not have to worry about the company making changes to the plan after I'm gone.