Half of 2017 is in the books. Now is the time sit down and do a midyear assessment to see how well we have performed compared to the goals that we set for ourselves at the beginning of the year. Conducting a quarterly performance review on my own finance is a fun (don’t judge) and leisure activity that I often enjoy. Especially, when you see the value of your assets and net worth increasing. By the way, I think that I am one of my own toughest critics as I’ve set a lofty standard to measure myself against. So without further adieu, let’s reflect on the following areas: savings, real estate, debts, investments and net worth. I will share my successes and failures with you so that I hold myself accountable for my decisions and we can all learn from my shared experience.
In order to increase your net worth, I believe that you have to develop the discipline to save money first. To develop my saving discipline, I need to ensure that all of my annual financial goals are achieved on a yearly basis. At this point, I am happy to share with you that three out of four of family saving goals (in the table below) for this year had been achieved. I am especially excited about the vacation fund as I had not been able to take my wife and kids on a family vacation since the end of 2012. Hence, this trip is long overdue.
My 2017 family saving goals
Based on the table above, maximizing our Tax Free Savings Account’s (TFSA) contribution room and the Registered Education Saving Plan (RESP) for both of my kids at the beginning of the year is starting to pay dividends, literally. I purchased a few Canadian dividend-paying stocks once we contributed the money and now, we are generating more passive incomes from those purchases. As for our RRSP, it’s still on autopilot mode. For every pay cheque, we are making a 6% contribution to our work’s Employee Share Ownership Plan (ESOP) to get a free 3% matching from our employers. Free money is definitely sweet and I encourage you to take advantage of any free money if there is an opportunity for you to do so.
The second quarter is usually tax filing time. For some people, it can be quite stressful because they either need to find extra money to pay their tax bills or don’t know how the tax system works. For me, I love tax time and filing my own taxes. This is the time that I get rewarded for continuously planning my finances and saving diligently throughout the previous year. After filing my income taxes during this quarter, I was able to get a tax refund of $10,423.59 and use it to fully fund my vacation account. I know that some people will be pointing out that I am giving the government a large tax-free loan. However, getting this refund gives me a psychological boost and it motivates me to do better the next year. So for now, it’s not a huge issue. Since 3 out of 4 goals are now completed, I believe that this category deserves a meet expectation.
If you have been paying attention to the Greater Toronto Area (GTA) real estate market, the sales volume had cool considerably in recent months. However, the price is still quite inflated with only a small decrease based on a month over month comparison. However, based on a year over year comparison, the price of resale homes in the GTA still increased by 6.7% as of June 2017. As I’ve mentioned in my first quarter net worth post, I was not able to find a property that meets my criteria so I decided to fully invest my remaining funds into dividend-paying stocks.
For the past three months, I was spending very little time at my rental property as most of the renovation work had been completed last quarter. The property is now back to operating normally and it requires a minimal amount of my attention. I am back to just managing the rental revenue and my partner back to managing the expenses. I don’t see myself adding more rental properties to my real estate portfolio in the near future. At this point in my life, spending more time with my kids and nurturing them is more important than increasing my real estate assets. Time is such a luxury now.
After operating the current rental property for two years now, we had paid down about $24,000 in mortgage principle. I had not included this as part of my net worth calculation as I wanted to be conservative and leave some room for future error. In addition, I just checked the recent sales data of similar properties in my rental area and noticed that the market value had increased by approximately 20% from my purchase price two years ago. Once again, this increase was not reflected in my net worth calculation as I only include the invested capital for this property only. All in all, this quarter is a quiet quarter on the real estate front and I am content with the lack of activities. Hence, this category is rated with a boring borderline meet expectation.
There hasn’t been a lot of activities on this front and I am content to take it slowly in the debt category. I had been paying all my credit card bills in full every month, paying my mortgages on time and did not incur any additional consumer debts. Talking about credit cards, I’ve just got my new Rogers Platinum Mastercard recently and I am excited to use it to earn a 1.75% reward for all my purchases. On average, this card will provide me with the most rewards for my spending. I got the Rogers Platinum Mastercard because I was disappointed with the Tangerine Mastercard as they cut back their cash rewards from 1% to 0.5% for regular purchase categories that are not on your 2% rewards list.
Sometimes, being boring with your debt is not a bad thing. With that being said, I am always on the lookout for opportunities to increase my net worth. If I need to further increase my good debt to make that I happen, I am more than happy to proceed as long as I am getting paid to borrow more money. So I’ll give this boring category a borderline meet expectation.
The investment category had always been my favourite category to discuss and share. At the beginning of the year, I had about $45,000 of cash that I have yet to deploy. By the end of this quarter, I am happy to reveal that I have put most of that money to work and purchased a few Canadian dividend-paying stocks. I am now seeing a noticeable increase in the amount of dividend income from my non-registered portfolio. For the first six months, my non-registered Canadian stock portfolio received about $8,500 in dividend payments. I am hoping to hit $18,000 by the end of this year.
Most advisors would recommend against timing the market. However, I prefer to time the market especially when it comes to writing options. This quarter is a relatively active quarter as I was able to time a few of my options trades, which will be explained in a bit (see my post about options basics if you need to get up to speed). Most of the time, I tend to write my options contracts close to the end or the beginning of the calendar year. I prefer to write my options contracts with an expiry date of about one year or so to maximize the premium that I collect. One of the factors that affect the premium of an options contract is time. The longer the expiry date, the more premium the purchaser needs to pay. Also, as time passes, the value of the premium decays, which works in my favour because time is helping me make money.
The way how I make money with options is similar to the flow of sand in an hourglass. At the beginning, when I just sold the options, the money that I make is close to zero, which represents very little sand in the bottom half of the hourglass. As time goes by, more and more sand will flow to the bottom half, which means I will be making more money as the value of the option (the top half of the hourglass) is worth less as time goes by. I get the free money when the option expires. Similarly, all the sands flow from the top half of the hourglass to the bottom half.
There are two strategies that I use when I write my options. For covered call options, my preferred time to sell is when there is momentum in the stocks that I own. By that, I mean the price is at 52 weeks high or an all-time high and there’s a lot of euphoria and optimism about the stock. I would set the strike price to be even higher than the current high price. My intent is to earn the free premium most of the time and not to sell the stock when I write the covered call options. This transaction takes advantage of the greed that had been created in this stock. Selling the covered call options for Extra Space Storage (EXR) highlights this strategy during the past quarter (see the options table below).
For naked put options, my preferred time to sell is when there is fear in the stock. By that, I mean there is either bad news related to the company or the company had just reported their quarterly financial result that did not meet analysts’ expectations. I would set the strike price to be even lower than the current low price.
My intent is to buy these great companies at an even lower price, but I am content to just earn the free premium if the stock price doesn’t go lower than the strike price. Selling naked put options for the Bank of Montreal (BMO) and Goldman Sachs (GS) highlighted this strategy during the past quarter (see the options table below). Both of these institutions had earned decent profits in their latest quarter, but they did not meet the analysts’ lofty expectations. Both of these stock had a significant drop in price after they reported and that was my time to sell the naked put options.
|Options – Contracts||Ticker||Expiry Date||Strike Price||Premium||Status||Return|
|Covered Call – 2||CAT||January 19, 2018||$110.00||$628.00||Active||-50.96%|
|Covered Call – 1||CMG||January 19,2018||$600.00||$1629.00||Active||+78.47%|
|Covered Call – 4||EXR||September 15, 2017||$85.00||$685.03||Active||+67.84%|
|Covered Call – 4||MCD||January 19, 2018||$140.00||$765.03||Active||-696.34%|
|Covered Call – 5||WFC||January 19, 2018||$65.00||$963.77||Active||+74.09%|
|Naked Put – 3||BMO||January 19, 2018||$88.00||$961.30||Active||+14.06%|
|Naked Put – 5||ENB||January 19, 2018||$50.00||$933.80||Active||-4.28%|
|Naked Put – 2||GS||January 19, 2018||$185.00||$1,367.51||Active||+54.24%|
|Naked Put – 3||MRU||September 15, 2017||$38.00||$361.30||Active||+41.88%|
Options sold during 2017.
In the table above, you may notice that I lost more money than I had collected for McDonald’s covered call options. From time to time, this will happen because I probably would never be able to predict a stable company like McDonald’s to increase more than 25% within less than half a year. At this rate, I will most likely have to sell my McDonald’s stocks at $140 per share sometime before it expires. Even with that price, I am still making around 15% on the stock for the current year. Not too shabby. For the rest of the options, they will most likely expire worthless and I will be able to keep all those premium for free. Now can you see why I like timing the market to sell options?
Even with such a great performance on my options activities and a few great performing stocks, I could not escape the horrible performance of the oil stocks and the main Canadian stock market index. My non-registered account’s performance took a huge hit as I moved all my non-performing stocks from other accounts to my non-registered account. I was lucky to escape this quarter with a small increase. As a result, this category gets a borderline meet expectation.
2017 Second Quarter Net Worth Performance
From a quarter to quarter point of view, I don’t pay much attention to the movement of my net worth. I prefer to assess my net worth performance on an annual basis as I think that is a better measurement. Based on the table above, my net worth is performing well compared to the return of the Canadian stock market index, but I lag the S&P 500 index. My 2017 net worth goal is to reach $1.3M by the end of the year. At this pace, it seems achievable and hopefully, my performance can continue to improve. Hence, I’ll give this category a meet expectation as long as my net worth continues to increase on a quarterly basis.
2017 Year-To-Date Net Worth Performance
2017 Q2 Overall Performance
Overall, this quarter had been a mediocre quarter with lots of volatility in the Canadian stock market. There had been quite a few maintenance activities where I moved some of my loser stocks from my registered accounts to my non-registered accounts. For the short-term, I am sacrificing the performance of my non-registered account. In the long-term, more of my money will be tax-sheltered as I bought more dividend paying stocks with the proceeds of the sales. At this point, my goal is to increase my net worth by 10% annually, the return for the first six months is 7.85% still on on-track. Hence, a borderline meet expectation for the overall mediocre performance.
So, how often to you conduct your net worth calculation? What financial goals do you set for yourself? How do you balance your current lifestyle with saving for the future?