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Hey everyone,

I've just met with my financial advisor on how I should prepare for the future, and I wanted to run it past you guys and hear your thoughts, suggestions.. anything!

First off, I'm 20 years old(21 in June) making 50k a year... I've just closed on a condo, and my mortgage is 226k. My girlfriend is living with me and will be helping on the payments (though I'm not dependent on her payments, just makes things easier).

My only current savings are my RRSPs which I contribute to 5%, with work matching 4%.

As mentioned I just sat down with a financial advisor and worked out a few things. I plan on opening a TFSA for saving, then assessing my situation each year and moving funds to my RRSPs if possible. This is to keep liquidity for my situation at any point, and on how much room I have available to contribute.

The next suggestion was using a leverage strategy for long term savings towards retirement. This is where I'm looking for the most input. The plan would be to take a loan of 25k to build my portfolio, and amortize it over 30 years. Payments would be $125/month... The interest here being tax deductable. Using the rule of 72, by the time I've retired the money will have grown, and I'll be in a much better situation than if I'd taken the time in the beginning to build my portolio from scratch. From my investigation this looks like the Smith Manouever. Does this seem like a smart decision, or am I better off doing something else?

Any input is greatly appreciated.


Thanks!
 

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Sounds good in theory, however, in practice, it can be challenging to stick to the plan should the markets take a dive while holding an investment loan.

Seems like your planner is advocating an investing only strategy. I would suggest, however, to look at your debt situation. Would getting aggressive with your mortgage make more sense? What are the interest rates on the investment loan? How about your mortgage?
 

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Yet another invocation of the "rule of 72" as an investing strategy! Oy. (Not that I disagree that over a 30-year time frame, an equity portfolio has a higher expected return than a bond portfolio.)

Here's my first question: in order to truly maintain liquidity, you must be able to sell the shares without penalty. Is your advisor suggesting DSC mutual funds for your investments?

Second question: have you or has your advisor plotted the outcomes of this strategy against (as FT suggests) paying down your mortgage and investing in RRSPs?

Main caution: I think you need to be very clear about how leverage works before you do this.

Leverage magnifies losses and gains. Your advisor seems to have suggested that due to this effect, you will be better off in 30 years than if you built your portfolio slowly.

However, this assertion rests on the assumption that you will make early gains in the portfolio (you will have a sequence of returns which is strongly positive in the first few years of the strategy).

What if, instead, the sequence of returns is weakly positive, weakly negative, or strongly negative? Then you may have borrowed funds, and a flat or underwater portfolio, no other savings to back yourself out of the strategy, and you are NOT better off at retirement.

Try this: assume an average geometric return of 7%, use Excel to force your portfolio to earn 7%, -13% and +27% in alternating years over the 30 years of the strategy, but alternate which return you start with (7, -13 or +27). Then see where you end up at 30 years. (This just gives you a quick way to evaluate three possible outcomes modelling volatility and the sequence of returns.)

You should also model the after-tax returns and compare them to a straight RRSP strategy.

I don't know what strategy would win, because (just like your advisor) I have no crystal ball. I do think, though, that you should clearly understand the assumptions the argument your advisor is making rests on. I suspect there are other options which are simpler to implement (paying down your mortgage is the main one) and which would build your wealth more efficiently. There are too many friction points in the strategy suggested by your advisor.
 

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OK. One more thought. I feel old and cynical this morning.

You realize that 30 years is really a very long time for you to be committing to a strategy, right?

Your advisor is suggesting that you will be better off jumping into the market with both feet using leverage. But have you considered that this is the strategy that makes the advisor the most money? Will the advisor be around in 30 years to see how this turns out?

If your advisor is selling you DSC mutual funds (and I'd bet dollars to donuts he or she is), then they get their commission of 5% on the whole $25K when you implement the strategy (and possibly a commission on the loan, too).

However, if you invest slowly, their commission arrives much more slowly.

Ask yourself this: Do you think the advisor's compensation plays a role in their recommendations? Have they disclosed their commissions to you?
 

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What did the other financial adviser say when you visited?

How is your investment going to make money??? Ask this ? over and over. If it's a magic manipulation. Your moneys going into this company moved to that company and presto 12% JUMP UP ANG RUN. "Ponsi"

Ask how the adviser is making money over and over?

If any ? are not crystal clear jump up and run.

By the way you will be running a lot.
 

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If you pay $125 a year for 30 years, your investment will have cost you $45,000. That's $20,000 of interest. Think about it.
 

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Your girlfreind will own half that condo if she lives with you long enough, even if she doesn't put a dime into it. Ask you lawyer about a pre-cohabitation agreement. I lived with a girlfriend in my first house for about 3 years and had to give her half the equity when I dumped her. Plus I was dumb enough to have given her a credit card with her name but tied to my account so I had about $15,000 in credit card bills to pay off. My lawyer told me about that agreement (after the fact).
 

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Discussion Starter #8
First off thanks everyone.. appreciate the quick comments, and it's already given me lots to think about.


FT: Being more aggressive with my mortgage is something I'll have to consider. Interest rate on mortgage is 3.65% fixed for 5yrs. Interest on the loan is 4.35% I believe also fixed for 5.

MoneyGal: I'm unsure if he is suggesting DSC mutual funds, I'll have to check on that.

On your second question, I will have to sit down and see what the outcome of that would be. So on this front, the option would be paying more in to RRSPs, as opposed to the loan, and continuing to utilize the TFSA.

I do realize that 30 years is a very long time for committing, however what I'm going for is long term. I'm only 20 now, and this puts me (ideally) in a good situation 30 years down the road.

He has disclosed that the way he makes money is by taking my business to the banks/institutions. I hadn't really thought about the fact that he'd be making more money faster by all of a sudden having that 25k in a portfolio.

Oldroe: I think you misunderstood, I may have worded that badly.. I only met with the one financial advisor.

Ihatetaxes: Yeah, we've talked about the the risk of living together and having her be able to run off with half. We haven't been to a lawyer yet, but certainly will. Also didn't know it was called pre-cohabitation agreement, thanks!
 

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Have you also given a thought to risk management?

What will happen if you get sick or lose your job? Will you be able to maintain your level of payments if you are making $1600 per month (maximum EI)

Do you lease or have payments on a car?

My idea is that you already have a debt on your mortgage if you pay that down you can then do a Smith Manoever on your equity.

You could also implement a plan to pay 10% of your pay into your RRSP or TFSA.

I'm not sure why you would take on this level of debt at your age. If you want you could possibly take an annual loan that way every year you reexamine your commitment.

I would say that it's not necessary to take on a loan at this time.
 

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Nosta, Oldroe was trying to tell you with the initial post, that you should meet with several financial planners, take all of their recommendations into account, then decide which plan may be best for you, and which planner would be the best fit for you as well.

At your level of financial understanding I would not personally recommend leverage at this point. That comment is not meant in a negative way. You seem to have good financial intentions and are starting in the right direction.

Yes the more you invest with the FP will make them more money. Not necessarily make you more money.

Meet with other FP's, just like how you came on here and asked for different opinions too.
 

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No one here will disagree with taking a long-term approach.

My question is about committing to a strategy that has you in DEBT for 30 years, when I suspect that there are many other ways for you to meet your goals which don't require signing a 30-year loan.
 

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Buy Low, Sell High

Nosta: You have a fairly large mortgage given your income. Paying down that first, makes a lot of sense. Once you pay down the mortgage quite a bit, get a secured line of credit. If the market crashes, use the secure line of credit and cash you have on the side to buy stocks. Analyze individual stocks at that time (TCK.B was a 15 bagger from trough to peak). This way you will make good money with minimal psychological negative effects.

Congratulations on your successful career. Did you graduate from university 1 year early?
 

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Henry is right pay down the mortgage first.

Secondly, if you want max out the TFSA into something safe like a high interest savings account. I say this because who knows if the government will someday take this away from us.

Later on when the mortgage is lower start a couch potato portfolio or start one now with a small monthly contribution after you have figured out the above. You can do this inside or outside your RRSP.

As you can see the whole idea here is building a strong foundation that you can live on and it also gives you time to learn about investing and so on.
 

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Discussion Starter #15
Thanks again everyone, this helps so much!

Sorry Oldroe, I misunderstood.. I see what you mean. And Cal you're bang on, I really don't have a huge understanding of all this.

I currently have no debt outside of the mortgage, my car is paid off in full and I have no student loans.

Seems that the consensus is getting the mortgage down asap is the best thing to do. I agree, I think that makes the most sense.

Thanks Henry! Yeah I finished the first year of my program in grade 12, then started work right after graduating.

Thanks again guys (and gals!), I'll also see about other FPs.
 

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why do you have to make plan for your entire life? You'd better make things happen.
Of course, if you have a plan for the next 5 years, or even 10 years, your life will be smooth and easy, but it sounds boring. And that's for sure.
Therefore, no need to make any plan
 

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The next suggestion was using a leverage strategy for long term savings towards retirement. This is where I'm looking for the most input. The plan would be to take a loan of 25k to build my portfolio, and amortize it over 30 years. Payments would be $125/month... The interest here being tax deductable. Using the rule of 72, by the time I've retired the money will have grown, and I'll be in a much better situation than if I'd taken the time in the beginning to build my portolio from scratch. From my investigation this looks like the Smith Manouever. Does this seem like a smart decision, or am I better off doing something else?

Any input is greatly appreciated.
There goes another "advisor" leading an inexperienced investor into slaughter.
These guys are dime a dozen.
Most of them have very limited investing knowledge, very limited financial, and tax expertise and have zero regard for client's interest.

You don't need leverage - you're already leveraged enough with your 226K mortgage.
For someone making $50K, this is a lot of mortgage.
Focus on your RRSPs, TFSA, paying off the mortgage and building a cash emergency fund first.
Forget about leveraged investing until at least a few years from now when you've made some dent into that mortgage, have maxed out your TFSA and have some RRSPs to write home about.
 

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Discussion Starter #18
There goes another "advisor" leading an inexperienced investor into slaughter.
These guys are dime a dozen.
Most of them have very limited investing knowledge, very limited financial, and tax expertise and have zero regard for client's interest.

You don't need leverage - you're already leveraged enough with your 226K mortgage.
For someone making $50K, this is a lot of mortgage.
Focus on your RRSPs, TFSA, paying off the mortgage and building a cash emergency fund first.
Forget about leveraged investing until at least a few years from now when you've made some dent into that mortgage, have maxed out your TFSA and have some RRSPs to write home about.

This would be exactly why I came here asking for advice... Thanks!
 

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