I really could use some feedback and help...

Asset allocation, risk, diversification and rebalancing. Pros/cons of hiring a financial advisor. Seeking advice on your portfolio?
gobsmack
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Re: I really could use some feedback and help...

Post by gobsmack »

OP, if I may ask, since your goal is not to beat the market as stated above, why are you taking the risk of borrowing all this money to invest in the private equity venture?
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Re: I really could use some feedback and help...

Post by fireseeker »

+1 on AR's advice!

The specific ETF choices are of minimal importance. And IMHO you definitely do not need a portfolio adviser. In fact, you found an honest one who said you could handle it yourself. That alone will put 1-1.5% a year in your pocket -- a return that dwarfs any difference between specific ETFs.

One final point on the DB withdrawal: Unless you have already taken this into account, the $250K commuted value may not be entirely shelterable. A portion may have have to be taken as current income, with tax paid at the top marginal rate.
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Re: I really could use some feedback and help...

Post by AltaRed »

fireseeker wrote: 22 Jul 2017 18:23 One final point on the DB withdrawal: Unless you have already taken this into account, the $250K commuted value may not be entirely shelterable. A portion may have have to be taken as current income, with tax paid at the top marginal rate.
Likely still better to take it even with a 5-6% CAGR in VTI or IVV in a LIRA or equivalent (and don't touch it and don't look at it for all that time). Will be worth about 4 times the commuted value in 25 years using the rule of 72. The DB plan becomes frozen in time...awaiting 20+ years to be tapped....with no change in metrics than exist the day he leaves.
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Re: I really could use some feedback and help...

Post by frankrom »

AltaRed - thank you for clarifying your point of view and I do respect your opinion.

Maybe I over analyzed the tax implications. I think I have a new prospective on it now.

I expect some of the commuted value to be taxable but I am on a leave of absence from work (the one with the DB plan) collecting 0 dollars and when I quit I'll be very small tax bracket as a corporation I have is getting paid my salary from the private venture. So my personal tax backet will be very small thus helping me to protect most of the taxable commuted value.


AltaRed - forget the whole borrowing and whether you agree with it or not. Knowing the situation now and if I were to consider or be open to a different asset allocation what would you consider? And if I did consider a different or a more complex allocation different from all stocks would there be a benefit in using a AUM advisor ?
Last edited by frankrom on 22 Jul 2017 19:07, edited 1 time in total.
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Re: I really could use some feedback and help...

Post by BRIAN5000 »

What are the general stats on the fourplex, mortgage rent? Any other assets or cash flow?

Looks like you're going to borrow about 70% on the value of your PR? When that PR drops to 1 million in the next few months instead of $1.4 million what will your position look like?

If I did something I thought was risky, the private equity venture (PEV) would seem risky to me, I'd like to hedge my bets. In my case have a big pile of cash as standby maybe that may be borrowing power for you don't use all your one million. For me I think I like the one or the other that AltraRed suggested but that would most likely be the private equity venture. Do that first see how it goes, protect what you already have, how much market appreciation would you lose by waiting to see how the PEV goes then start your equity portfolio. This will also give you some time to think about what you want as a portfolio. You say you don't want a perfect portfolio but from some of your suggestions seems like that's what you're trying to do. A three ETF couch potato would be simple letting you put all your thought and energy into the PEV.
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Re: I really could use some feedback and help...

Post by kcowan »

frankrom wrote: 22 Jul 2017 09:56Interesting ... but then you are forgoing 20% annual return on your contributions. I wonder what the future value of the tax deferred or tax savings would be vs forgoing a 20% return.
Not recommending that - just deposit $50k-17x$2500 now and get the tax-free growth for 22 years.

PS Do you need any help evaluating the private equity investment? Many of us have done those...
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Re: I really could use some feedback and help...

Post by AltaRed »

frankrom wrote: 22 Jul 2017 19:04 AltaRed - forget the whole borrowing and whether you agree with it or not. Knowing the situation now and if I were to consider or be open to a different asset allocation what would you consider? And if I did consider a different or a more complex allocation different from all stocks would there be a benefit in using a AUM advisor ?
You seem to be a smart enough guy to not need a % of AUM advisor. You already know about US withholding taxes, differences in MERs, maxing out RRSPs, TFSAs, RESPs, etc. At most, you might want to use a 'fee for service' advisor once a year to take a macro look holistically at what you are doing and your progress. Fee for service advisors look at plans from a return and risk perspective. They don't care about what products you pick...that you will execute using your own DIY discount brokerages. Fee for service advisors are worth $2-5k per year if you want an independent opinion.

You also seem to be a busy guy. Stick with Couch Potato and use your expertise and skillset making money rather than picking stocks. Whether the difference is a 5% CAGR or a 5.5% CAGR in a Couch Potato versus a skilled stockpicker does not matter much when you don't know if markets over the next 30 years will actually return 3% CAGR, 5% CAGR or 8% CAGR. Whatever will be will be.

I would use the KISS principle. Use VTI or IVV in your LIRA and RRSPs. It avoids the 15% withholding tax leakage. Put XEF and a Cdn ETF (or two) in your TFSA and non-reg.... Top it up with XUS if you can't put enough US allocation in your LIRA/RRSP. You might stick with Cdn equity in your RESPs simply because you don't want to be caught in a bad currency situation when your kids need to tap into it.

Since you don't seem to be interested in Fixed Income at all, I'd suggest you go 33/33/33 Cdn/Intl/US or 40/20/40 Cdn/Intl/US or simlar.

FWIW, my portfolio is currently 40/15/30/15 Cdn/Intl/US/fixed income and varies 5 percentage points either way depending on markets. My FI component is small because I have a 'smallish' DB pension which is the same as FI. The US and Intl components will likely grow as I move along into my 12th year of retirement and I generally do not tap into my ex-Canada stuff very much. That is fine with me. Canada is a tiny market globally and the Canadian component going down a bit suits me fine.

I have the time to stock pick Canada rather than ETF it like I do my ex-Canada stuff because I am retired. I wouldn't be doing that if I was still working in my career. Career time is more precious than picking stocks.
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Re: I really could use some feedback and help...

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AltaRed wrote: 22 Jul 2017 20:08I have the time to stock pick Canada rather than ETF it like I do my ex-Canada stuff because I am retired. I wouldn't be doing that if I was still working in my career. Career time is more precious than picking stocks.
:thumbsup:
ROI on invested time in the job always exceeded what I could do "on the side".

But how can an FA do justice with the private equity investment dominating the overall investment strategy?
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Re: I really could use some feedback and help...

Post by frankrom »

Great feedback. Lots to digest. Thanks everyone. When I have a moment I'll have to sit down and look at it all again in more detail.
kcowan wrote: 22 Jul 2017 19:42
frankrom wrote: 22 Jul 2017 09:56.PS Do you need any help evaluating the private equity investment? Many of us have done those...
It would be a lot to get into I think...

I am a real estate investor (recently liquidated most of my properties hence my financial situation), real estate agent, but career wise (with the DB plan) I am a police officer and been so for 10 years specifically computer forensics analyst dealing with child pornography investigations. I can't do it for 30 years as it wouldn't make me happy and I am too ambitious. I have an entrepreneurial spirit and I enjoy my real estate work much more (no I don't want to be a full time agent - not my thing. I do deals on the side for myself, friends and family etc).

I consider myself a street smart type guy... I don't have a lot of formal education (college - in computers and some business in ryerson university but never finished I was getting older and busy with my real estate and career couldn't balance it all), nor was I born with any natural abilities. I am more of a walk the talk than talk the walk type guy.

My point is... most career opportunities are closed for me (not that I care much as I don't really want a job job) as I don't possess strong formal education. I've been unhappy for some time ... many years and it has been depressing as it I couldn't find a way out.

A have a old teacher who I kept in contact with who has recently been extremely successful selling his last business to a major insurance company.

He is partnering with other proven successful people who've done the same and they are working on consolidating, innovating and adding value to an industry (don't want to get too detailed here). This is an opportunity for me to get in at an early stage.

Furthermore I'll be able to earn a salary, find an out of policing, be able to manage their real estate and acquisitions. Basically leaping me many many years ahead in the Commerical real estate game. An opportunity no one else would give me based on my experience at this time.

The end goal is to be a new main stream brand in the Canadian market in 10 years and go public.

Yes I know lots can happen. But sometimes in life you need to take a leap of faith. This isn't a venture where they are pouring money into building software and can piss everything away. They are buying profitable businesses
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Re: I really could use some feedback and help...

Post by kcowan »

frankrom wrote: 23 Jul 2017 09:14 Great feedback. Lots to digest. Thanks everyone. When I have a moment I'll have to sit down and look at it all again in more detail.
kcowan wrote: 22 Jul 2017 19:42PS Do you need any help evaluating the private equity investment? Many of us have done those...
frankrom wrote: 22 Jul 2017 09:56 <snip>
He is partnering with other proven successful people who've done the same and they are working on consolidating, innovating and adding value to an industry (don't want to get too detailed here). This is an opportunity for me to get in at an early stage.

Furthermore I'll be able to earn a salary, find an out of policing, be able to manage their real estate and acquisitions. Basically leaping me many many years ahead in the Commercial real estate game. An opportunity no one else would give me based on my experience at this time....
Thank you and I appreciate your desire for secrecy. Just sit down with your partners and define the contributions of each. The other guys are investing their own equity and you are investing the equity in your PR on margin. That is a key difference. Plus you are quitting your job so you are definitely "all in".
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Re: I really could use some feedback and help...

Post by deaddog »

frankrom wrote: 22 Jul 2017 12:49
I am not trying to beat the market. I am simply trying to be the market over the long term that is all. That is because I won't need the money for a long period of time.

I am not trying to argue. I feel as if there are very smart people who have more life experience chiming in here and I am trying to encourage a healthy conversation while trying to ensure my thoughts are clear and my point of view is articulated well to you guys so you get the full picture.
Then take Buffets approach;
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Re: I really could use some feedback and help...

Post by cashinstinct »

You did really well to be in this situation at 32 years old. I am close to your age. I have similar RRSP/TFSA/RESP, but my house is worth little and my pension is worth less than yours. Good job.

______

You have to be honest with yourself: you want to hit a home run.

You are trying to beat the market by investing in a private equity opportunity.

How long can your leave of absence be at your current job before "losing" it? You are taking a huge risk by working full time and investing so much money. With big risk can come big reward ... or not.

I understand the need for change and would not suggest staying there forever.

_____

I don't get why you would borrow the full 1 million against your house. Because you can borrow 1 million you want to do it?

What about borrowing only what you need for the private equity deal?

You would be adding $330,000 to $430,000 in investable assets after around 7 years of bull market. What about waiting a little for that?
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Re: I really could use some feedback and help...

Post by gobsmack »

Perhaps one way of reducing the risk of the overall plan would be to sell the house and free up some equity this way.
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Re: I really could use some feedback and help...

Post by frankrom »

Is the general consensus that if you had the equity... it would be better to max out an RESP from day one and forgo the 20% CESG for 18-20 years of tax free growth?
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Re: I really could use some feedback and help...

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frankrom wrote: 24 Jul 2017 08:42 Is the general consensus that if you had the equity... it would be better to max out an RESP from day one and forgo the 20% CESG for 18-20 years of tax free growth?
I don't believe this to be the case. After all, you would be foregoing the CESG contributions which are risk free. But the government does allow you to put more in the RESP above and beyond the contributions that trigger the CESG (up to a max of $50k). Basically, you would need to calculate $50k minus what you plan to contribute every year in order to get the CESG. This extra contribution room can be filled today without missing out on the CESG.
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Re: I really could use some feedback and help...

Post by kcowan »

I can't speak to the consensus, but I do recommend you add $7500 to your next contribution and then dribble in the remaining amount of the $42500 at $2500/yr to get the 20% match of "free" money.

I also share the concern of others that you should focus on the private equity opportunity exclusively and defer the other stock investing on margin until you have confidence in that venture. If that one proves itself, the returns from the other will seem tiny by comparison.
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Re: I really could use some feedback and help...

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I'm a conservative person. I wouldn't ever put my primary residence at risk. Anyway, even if I had this idea, my wife would just not agree to it, ever (I've used nice words here; more colorful vocabulary would better describe her reaction). We've worked so hard at paying off the mortgage; there's no way we're going back.

Also, I would never count on future income, specially the income of another person (such as my wife's) to get out of debt taken for a risky venture. Too many adverse things can happen in life.

If it was me, I would sell the rental plex and use the proceeds for the private venture. If that was not enough, I would sell the primary residence and rent, instead of taking on debt. This way, if the private venture fails, I'm not left with a humongous mortgage and it would be quite easy to move into a lower-cost rental. Compare that to the private venture failing, the house market crashing at the same time, and future anticipated income disappearing (due to divorce, etc.); the risk is just too high.

If selling the primary residence is not an option and there's not enough money without putting a mortgage on it, then it's a clear signal, to me, that the venture is too risky.

Conceptually, putting a mortgage on the house, or selling it, is pretty similar. Putting a mortgage on the house is like selling it to the bank and agreeing to buy it back from the bank for today's price, regardless of the house's future price. As you can see, there's more risk in putting a mortgage on it, as there are strings attached. Selling the property is a much cleaner transaction.

Of course, it could feel much worse to sell the property; this is because it exposes the risk that's hidden in the mortgage. That's the lure of leverage; it hides huge risks.
Last edited by longinvest on 24 Jul 2017 11:08, edited 3 times in total.
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Re: I really could use some feedback and help...

Post by gobsmack »

I agree with longinvest but people are different. Each to his own.

What concerns me most is whether the OP realizes how much risk he is taking. I wonder whether he has stopped to really think this through. I hope the OP doesn't take offense but his posts seem a bit erratic to me. It almost feels like he is desperate for a change in his life and this may not be the best frame of mind to make this kind of decisions. If he does take this leap of faith, I hope he does extremely well. I wish him the best of luck.
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Re: I really could use some feedback and help...

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gobsmack wrote: 24 Jul 2017 10:59 I agree with longinvest but people are different. Each to his own.

What concerns me most is whether the OP realizes how much risk he is taking. I wonder whether he has stopped to really think this through. I hope the OP doesn't take offense but his posts seem a bit erratic to me. It almost feels like he is desperate for a change in his life and this may not be the best frame of mind to make this kind of decisions. If he does take this leap of faith, I hope he does extremely well. I wish him the best of luck.
Know what... If i wasn't smart enough to know i opened myself up to public scrutiny I would find this highly offensive... though I respect everyone's feedback and thank them for taking the time to give it... to suggest I am ignorant, or desperate, or flat out didn't even think this though would otherwise be highly offensive. Especially since you don't know my personal details.

I've read my fair share of investment articles ... and read a lot of those typical save x% of your income, don't buy this and don't that, Instead of a starbucks coffee buy instant coffee etc. Save the money, invest it in the market and in 40 years with compounded interest you'll have a million dollars blah blah...

I don't follow any of that rubbish. I have built a net worth of about 2 to 2.2 million at 32 years old starting with a student line of credit... In my opinion no real wealth is going to be built that way... that is simply savings in my mind. I want to build wealth and yes I am going to take chances, and do things others won't do so I can live and do things others can't do later.

Majority of people carry mortgages into their retirement... I had enough equity to pay down my mortgage to create a debt swap strategy with equity in my house. If i even lose the majority of the equity in my house i'd still be left with a house with a mortgage and 350k in registered investments with 30 working years left.

Maybe this forum tends to have more conservative views when it comes to investing but had i been conservative I wouldn't have done any of the things that got me to be having this discussion. I guess no one really sees it from the perspective i see it. I don't expect you guys to see the PE venture the way I do as you are not directly involved as I am.

I'll put a reminder in my calendar to come back to this post in 5 years and give an update! :thumbsup:
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Re: I really could use some feedback and help...

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Before you get too offended, remember this forum is 'where Canadian investors meet for financial education and empowerment' and our very own financial wiki, i.e. finiki, is designed to provide all the basic knowledge for the vast majority of Canadians to build investment portfolios for retirement. It has never been intended to be a basis for opinions/recommendations/advice on anything remotely resembling private equity ventures aka Shark's Tank or Dragon's Den.

We don't have any threads or sub-forums on that topic nor necessarily a critical mass of members with material experience in those areas. Those kinds of 'opportunities' are for a minority of individuals with the right temperment. We don't respond well to betting the farm as a pathway to success. You could have left out any discussion on mortgaging your bedroom to fund an entreprenurial private venture and your presumption you might become another Prema Watsa. Speaking for myself, I don't care. Period.

If you recall correctly, you came looking for input on conventional investment strategies. I think you got that, did you not?
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Re: I really could use some feedback and help...

Post by frankrom »

Absolutely AltaRed - and I appreciate the feedback. I enjoyed the discussion... I am surely going to remain a member here!

Thanks
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Re: I really could use some feedback and help...

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Question - SPY or VOO? VOO MER fee is .05% less than SPY but SPY is way bigger and way more liquid. My gut tells me this isn't worth PAYING for and that VOO is liquid enough especially as a buy and hold ETF.

Thoughts? You agree or am I missing an angle?
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Re: I really could use some feedback and help...

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Lower MER makes a splitting hair difference if you are into 2 decimal points. 5 yr trailing return. SPY=15.04% NAV, VOO=15.13%
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Re: I really could use some feedback and help...

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AltaRed wrote: 27 Jul 2017 13:45 Lower MER makes a splitting hair difference if you are into 2 decimal points. 5 yr trailing return. SPY=15.04% NAV, VOO=15.13%
When things are approximately equal, I always use Vanguard products in order to reward them for pioneering ultra low cost investing, and forcing other companies to follow suit.

Bonus points for actually being in front, MER-wise and return-wise.
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Re: I really could use some feedback and help...

Post by AltaRed »

I generally agree, all other things being basically equal, on supporting Vanguard.
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