A charitable solution

What with tracking the minutiae of my financial life around here, it's easier to get superfocused on the monitoring and accumulation of assets than it is to think about how I want to dispense them.

I've been thinking a lot about charity of late and I've decided that I'd like to start getting more seriously involved in donating some of my money, and hopefully some of my time, to charitable causes. I suppose being relatively young, I have a built in excuse for not giving much back -- it's hard enough to get a start in life without giving away a chunk of your meagre salary. Thus far, my only significant charitable contribution was the $10 a month I donated to Amnesty International for several years when a pledge-girl won me over on the street (what can I say? Hiring cute girls with nice smiles to fundraise anywhere near me is a surprisingly effective strategy…)

But I've decided that just doesn't cut it anymore. Sure, I'm still saving for a house, but as my cash pile grows, I want to start spreading it out to people and causes I believe in.

The question is, how much? An arbitrary number I've come up with in my head as a start point is $1000. I must admit it's a daunting number to look at (it's about 3% of my after-tax income) but I think it's the minimum threshold for making a tangible amount of difference to the world around me. I toyed with the idea of donating that in one fell swoop to one organization, but the more I think about it, not only would that be harder for me to swallow from a financial perspective, but I think I'd feel better about spreading it around to more places and people I believe in in smaller packages.

To that end, I made my first $100 contribution yesterday. I pledged a colleague who's doing a charity run to raise money for prostate cancer. He seemed very grateful for the pledge, as it brings him closer to his goal. I have a few ideas for more causes to support but I'm open to hearing suggestions. (Long term, I'd love to set up or help fund some sort of scholarship for high school students, but that's going to require a bit more capital and time to get off the ground I think.) In the meantime, If you know of any worthy causes that have a relatively painless way for me to send them some money, feel free to make your pitch in the comments section.

Carnival time

Thanks to Lazy Man and Money for hosting the Carnival of Personal Finance this week.

What blindly filling out my March Madness bracket taught me about investing

Diversify your holdings...
I know nothing about college basketball, and only marginally more about the stock market. That fact alone tells me I don’t want to be hitching the entire wagon of my stock portfolio or bracket to any particular equity or team. Sure there’s a slim chance you’ll look like a genius -- just don’t count on it.

...But make sure your portfolio has a solid core to build on
Despite the fact that I’ve signed up for approximately 972 separate NCCA pools this week, the final stretches of all my brackets look remarkably similar. Sure I may have brief flirtations with Holy Cross, Virginia Commonwealth University, Marquette and Old Dominion in the early rounds, but at the end of the day it’s still coming back to my blue chippers in the end -- Georgetown, North Carolina, Ohio St., Texas, UCLA, Kansas, and maybe a little Florida action in there for good measure. So similarly, while I allow myself to play around on short-term penny stocks for quick gains, in 30 years’ time I know I’m more likely to still be gazing lovingly into the eyes of those Royal Bank shares than I am to be thanking my lucky stars I put it all into Spider Resources Inc. when I was 25.

Act on facts. Not emotion.
We all, at times, go through phases where we’re sweet on a particular company. We read the breathless press release about how some startup has reinvented the wheel. You gawk at that impressive 400% earnings growth. You want to take those voluptuous sales estimates out for dinner. You want to bring their amazing product home to meet your mother. But really, just as in sports, some stats can easily be played around with to conceal the truth of the matter -- that tech startup you like, or that Brazilian centre you’re thinking of drafting in the third round of your fantasy draft, is a stiff. Stay away. I don’t care how many rebounds he racked up in a crappy European league, and it doesn’t impress me that the company tripled their EPS from 2 cents to 6. If it doesn’t have steady earnings and a nice dividend or the ability to consistently run a pick on an incoming point guard, I’m not interested. (Editor’s Note: OK. So maybe I know a little more about basketball than I’m letting on)

Invest for the long term
Don’t sweat it when it’s four minutes into the first half of round one, and the team you’ve picked to win it all is down by 8. There’s still time. Relax. Have faith that the team you blindly picked out of a hat will come through. You might even consider going double-or-nothing (or buying a few more shares) when your jackass friend starts to insult your intelligence at half-time. You did your homework, right?

A good company does not necessarily make for a good stock
I’m told Florida is, hands down, the most talented team in this tournament. But that doesn’t necessarily mean they’re the best. If they can’t play as a cohesive unit on the court, all the talent in the world won’t let them advance. So similarly, just because you’re in love with a particular company, and you think they have a great market share and competent management, doesn’t mean they’re a good stock. Maybe they were a great buy in 2002 when you first noticed them. But if their P/E is already 35 or something, I think you’ve missed the boat. Wait for a correction. Or take that team next year when they’ve learned their lesson in overconfidence.

When in doubt, go with companies that have steady earnings
I like my college basketball hotbeds the way I like my quarterly earnings reports: dependable and bland. And what’s the blandest state of the union? The answer is obvious...

Kansas will clearly win it all. Go Jayhawks!

Afternoon smile

Dilbert made me laugh today.

I won't reproduce the image due to copyright reasons, but do yourself a favour and click the link.

CDIC insurance

I notice that the Canada Deposit Insurance Corporation has launched a phalanx of public-awareness ads, hoping to educate the public about what CDIC is and what they do.

For those who don't know, CDIC is an arm of the federal government that insures the savings Canadians keep in their bank or other CDIC-covered financial institution in case they fail or go bankrupt. In essence, it's the government's way of ensuring that we put our money to work in banks or other investments, rather than keep it under our mattress where it's not contributing to the Canadian economy.

CDIC coverage typically applies for amounts up to $100,000. It's a nice feeling -- knowing that should anything happen to your financial institution, you would be reimbursed up to $100,000 is nice to cling to in an age where we all watch our investments fluctuate in the short term. I suppose it's a no-brainer idea for the government to implement, since the benefits are obvious while the costs are unlikely to every come into practice. But part of me questions the wisdom of having it. It seems like an empty promise.

Firstly, if we ever got into a situation where one of Canada's national banks or major insurance conglomerates went bankrupt, since the economy is so inter-connected, the negative impact such an event would have on the finances of every single Canadian would be certainly comparable to a hundred thousand dollars per person. I suppose I'd feel good about having that $100,000 in cash to hold on to while my mortgage went haywire, the value of my home plummetted, my cash was inaccessible, my stock portfolio tanked, and/or my life insurance ceased to exist, but I doubt I'd be able to see that at the time.

And secondly, I wouldn't be getting $100,000 cash in real terms anyway. An event like that, I suspect, would put the economy into such a tailspin that inflation would zoom up to ridiculous, developing-world levels, at least temporarily. So even if I was one of the lucky few who had $100,000 cash and zero other possessions to lose their value, the buying power of that cash would be drastically less than the $100,000 you think of it as.

Maybe I'm being a little overly-melodramatic here, but to me CDIC insurance is nothing more than a stamp that says "don't worry, this isn't sketchy. You can put money here." It's more of a general database of legitimate financial institutions than a promise that's worth anything more than the paper it's printed on.

Like anything else, I suppose, it's a nice little security blanket. Although if I ever need to put it on I suspect that'll be the least of my problems.

Pot pourri

Some Monday morning personal finance miscellany:

A - I found myself nodding my head even more than I usually do at Rob Carrick's piece in ROB over the weekend. Don't get me wrong, I like bitching about the banks as much as anyone. But considering how stellar they consistently are as investments, Rob proposes what we've all thought at some point: why not make Canadian banks the only thing you hold in your stock portfolio.

2 - I'm familiar with the concept of 'vice investing' where you buy companies that profit off of our dirty little secrets. Traditionally, things like tobacco, liquor, gambling and guns are included under the vice umbrella. But an interesting Marketwatch article suggests another oft-overlooked vice industry. It turns out there's a sensible way to blow your paycheck at a strip club.

iii - We Canadians are only two days away from long-overdue wireless number portability and I don't know about you but I've been waiting a while for this. American readers may not appreciate how huge this is since they've had this ability for years, but until now, Canadians were unable to take their phone numbers with them when they switched phone companies. That sounds like a meaningless factor, but I know for a fact it's something the phone companies have been preying on for years, knowing that most people won't want to go through the hassle of changing a phone number, so they'll stick to a cellphone plan that's gouging them. Here's hoping this will be the first step towards Canada getting cellular rates that are halfway comparable to places elsewhere in the developed world.

Financial porn?

Some people have soap operas. Others gorge themselves on Sunday afternoon football.

Me? I've got my debt shows.

They're all over the dial of late, from W network's Maxed Out, to Life'sSlice's Till Debt Do Us Part, these shows focus on how out-of-control people's spending habits have gotten in today's day and age, and to varying degrees they offer help, whether in outright debt relief or at least an action plan that the subjects themselves can hopefully use to get out of their habits.

I watch these shows religiously every time I catch them on the dial. Some people's attitudes toward credit cards and their obsession with acquiring materialistic crap they neither need nor can afford simply astounds me. I guess I'm a bit of a voyeur that way. But there's a steady stream of shows to give me my fix. One blogger, admitting to her obsession with keeping an eye on the pfblogosphere even though she wasn't a contributor, recently described it as being like "financial porn" for her -- a rather apt description I thought. And one that could also apply to my obsession with debt-related reality television.

There's even a big screen documentary coming out that I'm anxious to see, although as of yet there appear to be no Canadian theatrical release for Maxed Out a documentary about the predatory nature of the US credit industry.

Looks like a good one.

Free Money™

For the past few months, I've been tracking the performance of my investments using Google's free spreadsheet-making program. Though I'm generally a fan of all things Google, I must admit I found the clumsiness and lack of functionality of the program annoying, and it wasn't really making it as easy as I'd hoped to track my portfolio in the manner I wanted to.

As such, I'd resolved to (gasp!) actually shell out money and buy some sort of basic financial software like Quicken or Microsoft Money, when I was cleaning out my junk drawer on the weekend and stumbled across a 2003 version of Microsoft Money I'd never bothered to install when I got my computer. Yay for me.

I spent some time goofing around on Sunday with the program and while I have yet to master all of the finer points, I'm pretty impressed and think it'll be a useful tool for me. Considering I paid $0 for it, I'd say it's a safe bet that it will pay for itself at the very least. :)

As far as I can tell, the program is actually capable of providing far more services that I'm really asking of it. One of the functions allows you to track checking and credit accounts, ensuring you stick to a budget. I don't really have problems balancing my checking account -- I already have an automatic savings program with ING -- so I don't really see myself spending my Sundays inputing every cent I spent on lattes during the week. Frankly, I just don't care enough. I already think I save too much sometimes and I need to live a little.

But from what I can see so far, the portfolio tracking tool will be an invaluable resource, letting me gauge how individual equities and the portfolio as a whole perform over time. I figure, if I can't manage to at least match the benchmark indices over a somewhat long time frame, I may as well bite the bullet and shell out for professional help because all the low-fee, do-it-yourself investing mojo in the world is worth squat if you're outthinking yourself and trying to get too cute.

Hopefully, Money will help me better see how I'm doing, and let me know if my overall strategy needs a tweak.

The Oracle speaks

Some light Friday-afternoon reading for everyone, as Warren Buffett's annual letter to Berkshire Hathaway shareholders is out and available online.

I'm a big fan of the Buffett investing philosophy and I make a point of reading it every year. It's full of insightful financial insights, but also riddled with quaint and endearing anecdotes that give us a glimpse of the what makes the richest man in the world really tick. I myself own a single Berkshire Hathaway B share and it's on my life's list to one day go down to Berkshire Hathaway's AGM and cavort with the man himself. They call it Woodstock for Capitalists, and it sounds like a nerdy good time.

I bet it'd be full of gems like this:

Our exemplar is the older man who crashed his grocery cart into that of a much younger fellow while both were shopping. The elderly man explained apologetically that he had lost track of his wife and was preoccupied searching for her. His new acquaintance said that by coincidence his wife had also wandered off and suggested that it might be more efficient if they jointly looked for the two women. Agreeing, the older man asked his new companion what his wife looked like. “She’s a gorgeous blonde,” the fellow answered, “with a body that would cause a bishop to go through a stained glass window, and she’s wearing tight white shorts. How about yours?” The senior citizen wasted no words: “Forget her,
we’ll look for yours.

What we are looking for is described on page 25. If you have an acquisition candidate that fits,call me – day or night. And then watch me shatter a stained glass window.

You've just got to love a company that can include a section like that in its annual report. That, and the 18.4% return in 2006.

I'm a bad little asset allocator...

Asset allocation -- it's the cornerstone of any long-term investing plan and it's a topic I find myself thinking about a lot of late, mainly because I think I'm cheating on the fixed income portion.

For newbies, asset allocation refers to the ratio in which you keep the funds you have in different investment vehicles. At it's most basic level, asset allocation means deciding how much of your total nest egg you earmark for safe fixed-income instruments like bonds, GICs and high-interest savings accounts, and how much you put into stock market equity, which generally holds the potential for higher returns, but also a higher risk of losing capital. Other asset allocation models are even more complex, including things like real estate, precious metals, etc. into the total financial outlook, but generally speaking most asset allocators stick to a fairly striaghtforward strategy like the one above. The idea is to diversify so that all your investments don't move up and down in lockstep -- as one investment moves up in value, you sell off a little and buy into the classes that haven't done as well to hedge your bets over the long term.

An oft-quoted rule of thumb for asset allocation is that the percentage you devote to fixed income should be equal to your age -- the idea being that the older you are, the more conservative you want to be, so the less risky, more capital-preserving investments you're going to want to gravitate towards. That framework always sat right with me.

If that's the case, I should be directing 26% of my net worth (currently at $29,443 according to my NetworthIQ report for this month) towards fixed income products. In my case, the vehicle I've chosen is a high-interest savings account with ING. So my fixed-income holdings should be at around $7,655 if I were a good little asset allocator. As it stands, I'm way above that level, with more than $11,000 sitting around in cash, gaining interest every month. I generally like to roll the dice a little bit and devote more funds towards equities while I'm young, so I was surprised to find myself devoting nearly 40% of my net worth, effectively, to cash, but then I realized that number is skewed a little for three main reasons.

No. 1 -- I plan on buying real estate at some point in the next 18 months. So I'm filling that high-interest savings account with as much money as I can under the pretense that I can't afford to lose this as I need those funds to be around for a downpayment fairly soon. Secondly, while my ING account is my de facto house fund right now, it was originally started as my emergency fund where I stashed enough cash to cover my expenses for three to six months should the need arise. It’s since ballooned well beyond that, as I said, now doubling as a downpayment fund. But I still want to keep those few thousand dollars worth of "just in case" money in there, not really as an investment per se -- more like peace of mind.

The third reason I find that section of my portfolio larger than it should be is that I can't shake the nagging feeling I have that the stock market, particularly the TSX, is a tad overvalued. Things have been too good for too long, so my natural inclination is to keep a lot of cash on hand both to minimize my losses and also be able to buy back in after a correction -- something recent events seem to suggest might be happening as we speak.

This is the area where I think I'm "cheating" at my asset allocation. Technically, your asset allocation is supposed to change as your circumtances change, so I guess I'm just responding to the stimuli of my own situation the way you're supposed to. But at its core, the whole reason asset allocation works is because it forces discipline on to an investing plan. It's meant to veer you away from making decisions like piling more money into the latest hot sector or emerging market -- or the flipside, where you panic and sell off all your holdings in a particular class because of a bad quarterly statement. Indeed, you're supposed to shave off some of your winners and pad up your losers to come up ahead in the long run.

At any rate, I don't really see myself cutting back on my cash allocation, as all three factors I listed are strong actors on my decision-making process at the moment. But it still doesn't sit right that here I am, making excuses why it's OK for me to veer from the long term asset allocation plan "just this once." I'm consoled by the fact that if anything, I'm being overly cautious, as opposed to aggressive, by having a lot of money tied up in low-yielding investments. At the end of the day, nobody ever went broke by having too much money in their savings account.

Questions and comments welcome as always