Monday, November 09, 2009

I hit the SELL Button last Friday, and I'm elated!

Last Friday, November 6 2009 I hit the 'sell' button. Not on our real estate holdings but on our RSP's and RESP's After the 'financial crisis' and market meltdown in the stock markets last September 2008 our RESP's and RSP's plummeted (as did most people) who were exposed to the stock market because their RSP's and RESP's were made up primarily of stocks.

Our entire stock portfolio dropped about 40% from a high in September of 2008 to a low in about April of 2009 I made a promise to my wife that when our RESP's and RSP's were back to or even close to or near pre-September highs, I would hit the sell signal.

I had set an arbitrary figure that if they reached that figure, we would sell. That figure was about 20% higher than our total contributions over the past 20 years or so in RESP's and RSP's, pretty sad return indeed in my opinion.

For anyone following the stock market's of late, the TSX and the DJIA are almost back to the high's of September, about 10% or so off the absolute high reached in late September 2009.

I set a fictitious figure that I would sell at and be comfortable and that figure "arrived" last Friday November 6, 2009. I called my financial planner Friday morning and said, "today is the day" and I called it ''freedom day', and sent in the sell signal.

The reason that I pulled all our RSP's and RESP's out of market linked mutual funds was because I was actually losing sleep over the ups and downs of the financial markets. Crazy isn't it?! I'm not fully retiring for about 14 years and probably won't need to use one cent of our RSP's for about 19 years from today, when I'm 70. That's plenty of time for the stock markets to rise back to historic high levels and likely surpass today's levels by 20 to 50 to 100% or more over the next 19 years. But, I just can't stomach the ups and downs of the financial and stock market's anymore.

We will begin withdrawing some of the RESP's beginning in about September of 2011 when our son begins university. These funds we just don't want to "gamble" with anymore. As you may know with RESP's in Canada, for every dollar we contribute the Federal Government contributes 20% It's almost a no brainer and a 20% return is guaranteed (almost). So for every thousand dollars we contributed that $1000 you would think in our RESP's would be worth $1000 plus 20% or $1200 plus the rise in the markets over the last 10 years or so which would make it about $1500 Not even close. We invested our RESP's into mostly US and global funds and we're sitting at about a total overall 10% increase over our personal contributions. Bleak, very bleak. Crappy investments, crappy market returns, crappy funds and crappy investment advice. Heck, if we only put the RESP's into GIC's over the same 10 to 15 years, every $1000 would be worth about $2000 today. But I was not wanting to be a wimp or a weak investor or a conservative investor because we had time on our side and I put it all of it into the markets to get that expected 10 to 15% per year. Again, not even close.

Hindsigh is 20/20 with everything, but with our RESP's we really blew it. If we were a conservative investor and only put them in GIC's we would have more than doubled our money. As of last Friday, when I cashed the RESP's we're up about 20%, not bad if you don't take into consideration the government 20% contributions, at least not a loss, but certainly not great.
You must be joking, that is crap, really crap, not a single % increase over 19 years of contributing, absolutely brutal when you think of it like that.

Financial planners and financial planners all say, that's good for the short term and besides, investing in the markets is a long term solution and you have to be aware and ready for sharp increases and decreases in your portfolio. What a crock. I'm done with that crap.

For example, with the RESP's Had we taken the same $1000 19 years ago when we began the RESP's or even 10 years ago and invested it in real estate, that same $1000 would be at least $2500 or $3000. It would have been leveraged investing and if we took, say $10,000 RESP and bought a $200,000 townhouse with it in 1999, that same townhouse would be worth about $275,000 today, so the initial $10,000 would have gone up by about $75,000 - significantly better than inside the RESP plan don't you think?

This same analysis can be found with our RSP's It's very depressing to think that we contributed all those funds over all those years and now it's not worth much more than 10 or 20% over all the contributions during the same period of time. Again, had we bought real estate 10 years ago with our RSP contributions rather than piled it into the markets we'd be up at least 200 to 300% because of the increase in real estate over the same period and the fact that it was leveraged investing.

Again, the pundits and financial planners will say that the RSP's gave a tax refund every year. That's true, but for self employed people like me, that only means we pay less tax in April, we don't get refunds. Regardless, for every $10000 I would have contributed in RSP's over the past 10 years, I would pay about $3500 less tax so for round figures contributions of 100k over the past 10 years contributions of $10,000 per year, that netted us $35000 in less tax paid, but I did not invest that 35000 that I gained, I just didn't have to pay it, and it got absorbed into our finances and spending.

Again, had I taken that $10,000 per year in RSP's contributions over the past 10 years and contributed it towards, for example, two townhomes, one townhouse purchase in year 3 (after 3 years of 10k per year equaling 30k in RSP's savings) which would have been 7 years ago or 2002 and another after 6 years of contributions, ( again, another 30k after 3 years of savings), that would have been a second purchase of a townhouse in 2005, the increase in value is absolutely astounding. The first townhouse purchase in 2002 would have cost us about 210,000 ( I just checked and that's what townhomes were selling for, for example, at 5305 Glen Erin Drive during 2002) and it would sell for about 275000 today, a gain of about 60,000 and the second purchase at, say the same complex, would have cost about $245000 in 2005 and selling
today, our gain would have been about $30000 so our total gain of our two investments totaling $60,000 investment would have been $90,000 (60,000+30,000) or about 1.5 times the initial value investment or 150% return, plus we would have the $40,000 in cash for the last 4 years that we did not invest and saved to buy a third townhouse.

Now, and here is the real kicker to why buying real estate is a great investment, during the 6 years that we owned the first townhouse and the 4 years we owned the second townhouse in the analysis above, the tenant helped pay off our mortgages in the amounts of about 40,000 for the first townhouse and 20,000 in the second townhouse. So our equity position increased by about 60,000 for a grand total increase to about $250,000 versus the $150,000 in the stock market RESP's This is the truth what people and financial planners don't tell you.

To summarize the analysis in the paragraph above:

- for the RSP option, over the same 10 year period of investing the same $10k per year for a total of $100,000 plus $30,000 less tax paid, plus a gain of $20,000 we would have a grand total of $150,000

- over the past 10 years we invested $60,000 with a net gain of $90,000 plus the $40,000 we continued to save from year 6 to 10 plus the $60k in equity increase we would have a grand total of $250,000

The above analysis is 'real life' no BS, just the facts.

The downside to real estate investing is that there would have been tenants to deal with and maintenance and other issues, but this analysis is very real and very accurate. Some of my clients will say, just buy REIT's and get the best of both worlds, how many of you did that?

Now, back to the RESP's and RSP's that I sold last Friday, the main reason I did it was to be able to sleep at night and to stop having to listen every hour to 680 for financial market updates etc. and reduce my stress level.

The other reason I had the nerve to do it was that I finally found a solution of where to put our investments. RBC has a market linked GIC where the initial contribution is guaranteed and the teturn is equal to 40% of the value that the TSX 60 index increases over the same period. RBC get's 60% of the gain (big surprise! LOL). So, if the TSX 60 index increases 100% over the next 10 years then our RSP increased 40% At least we can't lose any more than our initial investment and I can now sleep!

This was a very long post, but I wanted you to get a general idea of our thinking and why we sold our RSP's and RESP's and got out of the stock markets with our retirement funds. This may only be a temporary solution while we live in such turmoil and I may go back into the market's with our RSP's in the future, but this is what we are doing now.

As an aside, we've opened up an account at TD/CT that will allow our future RSP's to be in mortgages, we will give this a try and see how it goes, just another option that many don't know exists.

My plan is now to contribute future RSP's to bond funds and save enough every year to purchase a townhouse and hold for 10 years until retirement.

Only time will tell!

I wish you all the best!


  1. Mark,

    I hear you, it is heartbreaking to see no returns after such a long period of time. I think your decision makes sense, but with regard to real estate. I think there is more to consider when you make your calculation of the return. If you really want to consider real estate as an investment and you only putting down lets say 10K, you will face expenses such as property taxes, closing costs on the mortgage, maintanance costs of the property, utilities, interest payments on the mortgage, selling cost when the property is sold. if you rent this property you can face vacancy periods, etc. Also this is one coin of the scenario. Leverage is a great tool if there is a cash flow and you can cover your mortgage payment, but if you over leverage and lets say real estate prices decling you can loose a lot more than 100% of your original investment.

    Lets not forget that the last 10 years in real estate has been really good even in US as cheap money and lax lending stardards inflated the real estate market.

  2. Yes, I understand what you are saying. My analysis was simplified and there are many other issues when investing in real estate, but it was more of an analysis comparing the two options and real estate certainly has outpaced the markets.

    As a matter of fact, and I will have to check and confirm this, but real estate has out performed the markets since at least 1981 and maybe even longer than that period.

    At any rate, let's hope that all markets don't run away too fast and high because this often leads to a dramatic and fast drop off the edge.

    All the best,