Happy New Year! I hope that you’ve had the opportunity to wind down, take things slowly and enjoy all the festivity with your family and friends. As we say goodbye to 2017, there were many great events that occurred during the last twelve months that were worth reviewing. I am extremely happy and excited to share all of it with you in this post.
What’s Covered In My Net Worth Review
If you have not started your personal net worth review for 2017 yet, I hope that this post will inspire you to get started. As usual, I’ll reflect on the following areas: net worth, real estate, debts, savings, and investments. However, the presentation of some of the categories had been re-ordered. I am still working on a format that will give this post a better flow to make it more readable and enjoyable for my readers. Let me know what your thoughts are in the comment section.
Why I Am Sharing My Net Worth Review
For new readers, the reason that I share my personal net worth review every quarter is to make myself accountable for my financial decisions. I want to encourage all my readers to take control of their personal finance and manage their money responsibly. I believe in transparency, accountability and knowledge sharing. If anyone has any questions, I encourage and welcome any inquiries in the comment section and I will try my best to address them.
What’s not my intent is to show off how much money I have or how great I am at managing my money. Please understand that everyone’s financial knowledge, motivation, risk tolerance and life situation is different. The actions that I had taken to improve my finances may or may not be suitable for everyone. The takeaway from my experience is to do whatever that makes sense to your personal situation not because someone else is doing it. So, without further ado, let’s get this net worth review started.
Table #1: The descriptions of items in my net worth review.
Table #2: 2017 Q4 Net Worth Performance
Net Worth Review
This quarter has been a great quarter. My investments had a reasonable return (+4.43%), my savings got a big boost due to the year-end bonus that both my wife and I got. We paid down $35K of debts and I have a separate post for this debt repayment to will share with you in an upcoming post. Overall, this quarter is the best performing quarter of the year with a net worth increase of $80,551.53 comparing to the first three quarters (Q1 = +71.539.72, Q2 = +19,644.08, Q3 = +23,335.78).
Table #3: 2017 Year-end Net Worth Performance
For the year, my net worth increased by an astounding $195,071.11 compared to 2016, but without any increases from real estate. I am really happy with this net worth increase as I surpassed three major net worth goals this year. The first was to increase my year-over-year net worth by $100,000. The second was to increase my net worth at a compounded annual rate of 10% (actual: +16.8%). Lastly, increasing my net worth to $1.3M (actual: $1,356,519.12). With such a stellar performance, this category deserves an “exceed expectation” rating.
Real Estate Review
The Canadian Real Estate market has constantly been in the headline the whole year. For the first three and a half months of the year, the Greater Toronto Area (GTA) home prices were increasing at an alarming and unsustainable rate. Resale and new construction homes were flying off the market like candies from a kid’s birthday party. Bidding wars were the norm in real estate transactions.
In late April, the Ontario Provincial government stepped in and introduced a foreign buyer tax for real estate transactions around the GTA. Any foreigner or non-permanent resident will fewer to a 15% foreign buyer tax when they purchase a property in the GTA. In a matter of weeks, the buyers went dormant, bidding wars were a rare sighting, sale prices and volumes trended down month after month.
Fortunately for me, I refused to overpay for a property back in the first quarter of the year when I was looking to invest in a new construction condo. I also stayed put in my home when the market was up for the first quarter of the year then down for the rest. Overall, the current market price of resale homes in my area is still about $100K above my estimate of my primary home. For this year, I am leaving the value of my real estate portfolio the same as last year. As a result, I am rating this category as a marginal “meet expectation.”
For most of the year, I did the absolute minimum with my debts. I was content to make only the required monthly payments for my mortgage and investment loan. I was on pace to pay off only about $18K in mortgage and investment loans for the whole year.
Due to an unforeseen circumstance, I needed to pay off an extra $35K in personal debt. Suddenly, I ended up paying off more than $54K in debts and lowered my overall debt level by 5.97%. I was fortunate enough to receive a year-end bonus and had some capital gains to offset. I sold a couple stocks to harvest the capital loss to offset the capital gains from my options activities, which I will cover later. The proceed of sale from those stocks were used to pay off the $35K in debt.
The sudden increase in debt payment demonstrated a simple, but important key to boost your net worth substantially. As you can see, a small percentage reduction in debt (-5.97%) and a modest increase in assets (+6.82%) compounded to create a sizeable increase in my net worth (+16.8%). When the trending of your debt (down) and asset (up) moves in the right directions, your net worth will be following a great trend too – up. Since the sudden debt payment was not part of my plan, I can’t take credit for this, so this category only deserves a “meet expectation” rating.
I have a confession. I made a rookie mistake and miscalculated our Registered Retirement Savings Plan (RRSP) contribution room earlier this year. I thought that we had $17,000 of RRSP contribution room this year and we do, but I forgot that my wife deferred last year’s bonus payment to earlier this year. Hence, we won’t be able to make the full $17,000 in RRSP contribution and had to stop at around $12,000.
Table #4: My family saving goals for 2017
From the table above, three out of four of our family saving goals were completed by the end of the first quarter. I believe that when there’s free money available if we save, we should take full advantage of it as soon as possible. The earlier we get the free money working for us, the more time our savings has to grow. These are the reasons why we maxed our Tax Free Savings Account (TFSA) and Registered Education Savings Plan (RESP) accounts at the beginning of the year.
Only three of the four goals being completed was not a big deal. I went back to my net worth spreadsheet and did a quick estimate of our total savings. I realized that we saved almost $100K (excluding stock gains) this year. The good news was that we had a high saving rate. The bad news was our saving did about 50% of the heavy lifting to increase our net worth.
My preference is to have my savings contribute about 1/3 and my investments contribute about 2/3 of the increase in my net worth. As time goes by, I’d like my investments to account for the lion’s share of the increase in my net worth. Until then, I am happy to know that we were able to have a six-figure saving this year. As a result, this category deserves an “exceed expectation” rating.
Finally, we reached the investment section. I purposely leave this category last because I enjoy reviewing this category the most. If you had been reading my blog, you’ll notice that I have one very important money philosophy. “It’s not how much you earn, it’s how much you get to keep after taxes.” Every year, my goal is to pay the least amount of income tax as I possibly can, legally of course. So for this category, I will further break the review into sections: capital gains, dividends, interest costs and re-balancing, to discuss my strategies to keep more money in my pocket.
|Options – Contracts||Ticker||Expiry Date||Strike Price||Premium||Status||Return|
|Covered Call – 2||CAT||January 19, 2018||$110.00||$628.00||Active||-1,440.96%|
|Covered Call – 4||EXR||September 15, 2017||$85.00||$685.03||Expired||+100.00%|
|Covered Call – 4||MCD||January 19, 2018||$140.00||$765.03||Exercised||-1,435.08%|
|Covered Call – 5||WFC||January 19, 2018||$65.00||$963.77||Active||+90.97%|
|Naked Put – 3||BMO||January 19, 2018||$88.00||$961.30||Active||+97.81%|
|Naked Put – 1||CMG||January 19, 2018||$360.00||$2,489.00||Active||-161.15%|
|Naked Put – 3||CNR||January 18, 2019||$90.00||$990.00||Active||+31.17%|
|Naked Put – 5||ENB||January 19, 2018||$50.00||$933.80||Active||+34.76%|
|Naked Put – 1||GOOG||January 18, 2019||$600.00||$789.00||Active||+69.71%|
|Naked Put – 1||GOOG||January 18, 2019||$850.00||$5,300.00||Active||+70.17%|
|Naked Put – 2||GS||January 19, 2018||$185.00||$1,367.51||Active||+99.56%|
|Naked Put – 3||MRU||September 15, 2017||$38.00||$361.30||Expired||+100.00%|
|Naked Put – 5||V||January 18, 2019||$70.00||$610.00||Active||+38.52%|
|Naked Put – 3||V||January 18, 2019||$90.00||$1,155.00||Active||+42.86%|
Table #5: Options contracts sold during 2017.
If you’ve read my first three quarterly net worth reviews, you’ll know that I had sold quite a few options contracts throughout this year (see table above). All contracts, except for the Chipotle Mexican Grill (CMG) put contract had worked out well and in my favour. If you need a refresher to get up to speed on how I make money with options, check out this options basics post.
For CMG I will most likely have to buy the stock at a higher price as the current price of CMG had dropped significantly lowered than the strike price. This options is certainly a bad decision and trade on my part. There’s definitely room for improvement going forward.
Further more, you may see that my covered call contracts for McDonald’s (MCD) and Caterpillers (CAT) were losing money and may be wondering why is it still in my favour? The reason is that I own both stocks. I just have to sell it at a lowered price than the current market price. I may make less money on these trades, however, I am still making about 50% even selling these two stocks at the agreed strike prices.
The total capital gains for the options premiums are about $20,000 this year. I also have about $47,000 in capital gains from a few stock sales. The major source of the capital gain is from the sale of my McDonald’s stocks. The purchaser of my McDonald’s option exercised the rights to buy the stock from me and I had to sell it. I better find a way to offset these capital gains or else I’ll be looking at a five-figure tax bill next April.
Not all dividends collected are equal in terms of income tax treatment. Only dividends earned from Canadian eligible companies get the preferential tax treatment. Dividend is taxed at a lower tax rate comparing to normal income. This is the reason why my non-Registered investment account is made up of mostly Canadian dividend-paying stocks. For non-Canadian dividends, it’s treated as normal income so it’s not tax efficient.
There is no maneuver to lower your dividend income. However, you do get a dividend tax credit for Canadian eligible dividends. The amount of credit you get is determined by the amount of (Canadian eligible) dividends that you earned during the year. For me, the total amount of dividends that I collected in my non-Registered investment account for the year is about $24,000. I can see my tax bill inflating pretty quickly already.
One of the benefits of getting these dividends on a regular basis is the added cash flow. I can comfortably pay for my investment loans on a monthly basis without any added stress to my budget. Simply put, my investments are paying for itself.
Since I borrow about $700,000 at 2.59% per annum, my interest cost is about $18,130 (=$700,000 * 0.0259) per year. On top of that, I also invest with a margin account for my U.S. stocks and the interest can add up to about $10,000 Canadian per year. Hence, I get to deduct about $28,130 from my income at the highest tax bracket. If I can lower my capital gain to about $0, then I will get a huge tax refund (my highest combined tax rate is 43%). The trick I use is in the next section.
When you buy a basket of stocks, there’s a very high chance that you will have a loser or two in your picks. Even the best stock pickers still have losers in their portfolio so don’t feel bad if you have a couple of losers in yours. I also have a few losers too. It sucks when that happened, but it’s unavoidable. Just minimize the number of losers and play the percentage game. If your stock picking success rate is 65% or above, you’re in great shape.
It’s really painful for me to write this section, but I need to make myself accountable for my mistakes. I just have to treat this as an expensive $65,000 lesson learned for this year. Due to the terrible oil price and excessive supplies for the last three years, my investment in the oil sector lost about 75% of its value. This cost me more than $65K in losses so I sold my stocks in this sector to offset my capital gains.
Ideally, I’d like to have zero losses and would be happy to pay my fair share of income taxes. Unfortunately, I am not perfect and made quite a few mistakes. Hopefully, I will make fewer mistakes and be able to balance my portfolio better in the future. Due to my $65,000 lesson, I am rating this category with a “need improvement” rating.
2017 Year-end Overall Performance
Overall, this year has been a great year from a net worth growth perspective. Anytime when my net worth grows over a $100K or more than 10% year-over-year, I am satisfied with these results. On the other hand, I am only content with a reasonable annual return of 7% from my investments, but not satisfied. Every year, my investment goal is to beat both the Candian’s S & P TSX Index and the U.S.’s S & P 500 index. Unfortunately, my performance only exceeded the Candian’s S & P TSX Index and lags the U.S.’s S & P 500 index by more than 10%.
Every year, there is only one number that matters to me – my net worth. Regardless of what happened in each of the categories, the bar is set at 10% net worth increase. If my net worth increased above this number, then I’ve exceeded my own expectation. Anything less than 10% is not meeting my expectation. As a result, the 16.8% increase in my net worth deserves an “exceed expectation” rating.
Financial Goals For 2018
I can’t end the year with no goals for next year, that’ll be irresponsible of me and no one will slap me around if I didn’t meet expectation next year. So here are my Freedom 48 goals for 2018.
1) Increase my net worth by 10% in 2018 ==> $1,500,000
2) Maximize the contributions to registered saving accounts for the family
A) TFSA = $11,000
B) RESP = $5,000
C) RRSP = $17,000
D) Total Savings = $75,000
3) Build another $10,000 family vacation fund
So readers, how often do you conduct your net worth calculation? What financial goals do you set for yourself in 2018? How do you balance your current lifestyle with saving for the future?