Being Addicted to Investing

Now that I have started investing in companies through the Toronto Stock Exchange (The TSX), I have begun to constantly wish that I had more to invest.

If I only had more, I would be able to take advantage of the growth and passive income opportunities of the market!

But then again, I have to live my life, pay my rent, buy groceries, pay bills, and all the other 'fun' things that people do these days.



How do you know you're investing too much, let alone too much in a single company?

I believe that if you put more then 50% of your income into stocks, you are either crazy, or absolutely driven. Both of these states are very risky, and you can lose control very easily.
I'd like to make it clear that I am currently one of these 'crazy or driven' people.

Some of the things that 'driven' investors may do:

• Take a loan to invest.
• Sell low value objects to secure funds for investment.
• Bypass low-cost opportunities that may enrich their lives in non-financial ways.
• Lower their cost of living to sub-poverty levels to free up funds.
• Take a second job for that 'little bit extra'.

All of these habits are similar to what someone with a substance abuse problem would do to secure funds for their next 'fix'.

Investing is a positive thing. Taking a Tylenol for pain occasionally is also a positive thing. They both improve quality of life.

But if you need to invest, and it drives you like a burning craving in your soul, perhaps it is time to step back and take a look at your plan. Does it really make a difference if you sell the $10 coffee gift card you received for your birthday just to buy one more share of EXE.UN ?

I guarantee you there are a few investors who would say yes.

And I would like to say right now, that there are more important things then having that one more share.

• Go outside.
• Walk to the library, and read a novel.
• Meet for coffee with an old friend.
• Paint a picture.
• Have a family member over for dinner.

Make the most of your life, and enjoy the low-cost activities that are available to you.

After all, that share may eventually help pay for your work-free lifestyle, but it will never bring back the people, places, and experiences that you are able to have today.



EJ

Taking loans from family members

I'd like to talk today about a topic that I've often had come up from my friends (and even some of my relatives).



Should I take a loan from a family member, Jack? They really want to help me, and I really need the money!

There are a few questions we have to ask ourselves:

1) How badly do you need the money?

Are you so broke you can't buy food, or are you just paying off your credit card enough to let you get another double-fudge mocha-chino?

2) How long until you will be able to pay back the loan?

If you have no idea when you will be able to pay the person back, then you should seriously review your reasoning behind considering this a loan, and not a forced 'gift' from a relative.

3) What is the money for?

Do you need the money to purchase something you don't need, like a new TV, or a high-end coffee-maker? Then you don't need that money, you need to grow some will-power.

4) Does the person you are taking the loan from need the money more then you?

I have seen people take a 'loan' from a parent that didn't have two pennies to rub together, and was hair-deep in debt. The person taking the loan didn't even flinch when they spent the considerable wad of loaned cash at the bar, treating all her friends to cocktails and martinis.



But Jack! I really want the new (Consumer garbage) now! It's only (Inflated price), and I can't live without it! Daddy will pay for it from his RRSP!

Grow the hell up.

You are an adult now, or soon will be. You've got to belly-up to the reality that you're rarely going to be able to afford everything you want.

You've also got to accept that by being so spineless, you're influencing people to be just like you.

Your relatives don't need to lose more money. They likely had to endure some sort of hardship for it, whether it was working for 20 years straight, or inheriting it from a loved one.

And just think, if your children grow up to be just like you, eventually, you'll be on the receiving end of these same pathetic cries for money.

Key Points:
- Be responsible.
- Don't pull others down into your pit of debt.
- Consider other people's situations.
- Don't spend money when it's not nessicary.
- Grow some willpower.

Rent or Buy in Vancouver, BC

I received a comment on my previous post, and I wanted to write a bit on it today.

Anna said...

I am currently renting and want to buy a home of my own. The housing market where I live is very expensive - Vancouver, B.C. Would I be better off investing my money and waiting longer or should I save as much as I can and jumping into the real estate game as soon as possible?? Thanks. Anna.

Should I Rent and Invest, or Buy in Vancouver B.C, Jack?

This is a bit of a loaded question because I don't have the whole picture. There are quite a few questions that would be needed to be answered for me to make any sort of recommendation.

How much does she make in a year?
Is she in a sustainable industry?
Does she have any dependents?
Does she have to remain in Vancouver for her job?
How much does she have saved up for a down-payment?

I'm going to dig deep and make up some numbers here.



Anna Version 1
Age: 25
Annual Income: $42000 (Gross)
Job Industry: Stable
Job requires remaining in city: Yes
Dependents: None
Down-payment Saved: $32000

For this Anna, she could survive by renting a postage stamp apartment, without much room, and have still have a bit left over at the end of the month. If she expects to be able to live in style, she is sorely mistaken.

In my search for rental apartments in Vancouver I was unable to find hardly anything to rent for less then $1500 a month. And that is a small, 1 bedroom apartment in the rougher part of town.

To purchase, the costs are in the range of ~$200000 for a 'dumpy', old apartment on the wrong side of town. She would be able to swing this, and maybe even ~$225000, and still be under the ~38% maximum percentage of income mortgage payment.

What would she have in the ~20-25 years it takes her to pay off the mortgage?

A dumpy, old, smelly apartment on the wrong side of town.

I would rent for the moment, invest any largely spare money into stable, long term, passive income investments, and try to go for a promotion. If she purchases in Vancouver's core, in a few years, I don't believe she'll be happy with the results.

After she has some more saved up, and perhaps a small passive income stream to help her along, I would move out of the city, and secure a house at a fraction of the cost. She could get a part time job, and start enjoying her life instead of living a hand-to-mouth existence in the city.



Anna Version 2
Age:31
Annual Income: $75000 (Gross)
Job Industry:Unstable
Job requires remaining in city: No
Dependents: 1 Child, Single Parent

Down-payment Saved: $12000

This Anna was blessed with a child earlier in her life, at 23. She had finished school, and now works as a sales rep for a pharmaceutical company that sells a newer, untested drug for good profit. She will be the first to get fired if the profits stop flowing, but she makes good money at the moment.

She doesn't have enough money saved up to even think about buying in the city.

She needs a little more space, and would prefer to be nearer schools for her child.

The 'husband' disappeared a long time ago.

I believe that she should consider moving out of the city. I feel this way because I don't believe that the city is the best place to raise a child, especially when you work full-time and don't have any help from a spouse.

She may even be able to work out a tele-commuting agreement with her current employer, and the locational-leeway would allow her to pick a place that has some space for her child,  as well be nearer to schools and other family oriented activities (parks, playgrounds, cinemas, etc).



Anna Version 3
Age: 27
Annual Income: $38000 (Gross)
Job Industry: Stable
Job requires remaining in city: Yes
Dependents: None

Down-payment Saved: $52000

This Anna has a sizable down-payment saved. Perhaps it was inherited, because her job certainly doesn't allow for that amount of savings.

She could get a mortgage for a place up to around ~$250000, but that still isn't much better then a slummy apartment.

She has to stay in the city for her job, but her job is pretty poor income for a city-living person. It's likely that she could move out of the city, and put that down payment to far better use on a house outside of the city.

There are even tracks of land in the 'boonies' that are less then ~$100000. She could own a few acres on the outskirts of civilization in a few years, take a few more to set up a long-term passive income stream, and raise her child in the peace and quiet of the country.

Maybe she would even have the time to teach her child the value of hard work and having a good savings and investing plan.



Jack, you obviously don't like the city! What if I want to live in the city, and buy a scummy apartment for a small fortune?

All the more power to you.

Just don't say I didn't warn you when you're gaining on 45 and you don't have anything to your name but a mortgage for a scummy apartment on the wrong side of the tracks, with a gorgeous view of a brick wall and the cringe-worthy stench of the docks.

Hate working? Invest in passive income!

I'd like to talk about why I put nearly 85% of my income into passive income investments.

The fact of that matter is: I hate working.

I dislike the idea of being under someones thumb so much, that I will suffer in a dead-end, decent wage job for a long time, if it means I wont have to work for someone else ever again.

Every time I plunk down some of my paycheque on a passive investment, I feel like a little piece of me has ascended away from the daily 'rat race' toil, and if I just sock a little more away, I just might be able to get away from the god-forsaken hell that is full-time work.

So, I watch my investments, I view the market as a key to a problem that I have never been able to solve - Living without having to work for that living.

Will my $19.74 this October allow me to live without a care? No.

But it will make a small difference, and if enough of those small differences stack up, it just might allow me to live the way I've always wanted:

Professionally Unemployed.

My current review of Crudential Direct

I'd like to take some time today to share my experience so far with Credential Direct.



Why did you want a brokerage account, Jack? They steal your money with fees and commissions!

Well, a month or so ago in my 'investor infancy', I didn't believe I needed any broker at all.

They would just level heavy commissions on me, and drag down my profits!

I was going to invest in Canadian Dividend stocks, buying directly from other investors that held physical certificates, and use Drips (Dividend ReInvestment Plans) and OCP's (Optional Cash Purchases) to get more stock.

Then I started looking at the forecast down the road for dividends, and how they are likely going to be taxed more and more as time goes on. Then I looked at the long term tax benefits that my investments would enjoy in a TFSA or an RRSP.

I'm putting together a post that crunches some numbers on how your long-term gains can be crippled with taxes in non-registered accounts, but you'll have to take my word for it at the moment.

Long-term investments are often best kept in tax-advantaged accounts, which you currently cannot have without a broker!

So, you have to have a broker to take 'advantage' of tax-advantaged accounts!



Why go with Credential Direct? Why not Questrade, with it's $5 commissions? TELL ME, JACK!

Frankly, I don't like alot of the reviews of Questrade. They make the entire service sound like crap. Too many people that sound pretty pissed off at bad customer service, lost money, delayed trades, and disappearing dividends.

I'm a tough mofo, but when it comes to my money, I want to know the people 'looking after' it are competent, and answer the phone when I call. So far, with Credential Direct, that seems to be the case.

My longest wait on hold so far has been 1 minute. After that, I was able to monopolize an account services gentleman for nearly 20 minutes, as he carefully and calmly answered my questions.

Plus, I have share certificates to deposit. Credential Direct takes deposits of share certificates for FREE. This is compared to $200 each for Questrade. Bloody ouch, indeed.

In-fact, the gentleman I spoke with said if I was in the area (Downtown Vancouver, B.C.), I could drop the certificates off directly at their mail-room, and save myself the courier fees. That's smart of him to offer, and likely a good idea, considering courier fees.

The only negative so far with Credential is the fact that they do not have or allow any sort of USD or USD 'money market' holdings in RRSP accounts. Questrade current offers this, and  so far, this has been my only issue with Credential Direct. I have spoke with their customer support about this, and asked for it three (3) separate times to three (3) different people, so hopefully they get the picture that it is a big deal to me.



I don't like Credential Direct. They stole all my money. 

I'm honestly sorry for you. As far as I can tell, they appear to be a decent, reputable company, charging a decent cost for a decent service.

I would strongly suggest that you call them, and ask why you lost money. They do have 'investment coverage' on deposits, much like banks and credit unions have coverage. So if you money was in your brokerage account, and disappeared, I believe it's covered under that insurance.

If you were a stinker and just lost your money on a bad investment, then I would suggest speaking with a fee-based financial advisor. They may be able to put you back on the right path.



A decent service for a decent price.

At this point, having just made my account, and speaking with their support staff quite a bit, I can feel strongly that Credential Direct is a decent company, with good customer service. They do have fairly costly trades ($20 for < 10 trades per 3 months), and no USD in RRSP accounts, but the fact that they seem to be decent people, offering a decent service, helps me sleep at night.

I would recommend Credential Direct to anyone that is looking for a smaller, less expensive brokerage then say TD Waterhouse, but still wants good customer service. If they pull down their trade fees to $14.95 or $9.95, and add USD holding capabilities to their RRSP accounts, then I would whole-heartily recommend them to anyone.

What is the Dividend 15 split, and how does it work? Pt.4

Yesterday, I talked about the 'Dividend 15', and how I believe they speculate dividends to make the unusually large yields they offer.

Today, I'll talk about some of the reasons I would not invest in the 'Dividend 15' personally.

Jack, why wouldn't you invest in the Dividend 15! it's a 10% yield!

I'll tell you.

1) Fees.

The 'Dividend 15' is a mutual fund. Mutual funds have fees. I dislike fees alot.

That ~10% yield is eaten up by the following:
0.1% - Manager Administration Fee
0.5% - Manager Service Fee
0.65% - Investment Company Fee
(20% of all profits over a 12% annual increase if NAV >$25) - Fee for good performance

This means that essentially, our yield becomes ~8.8%, which is still pretty excellent. But the icing on this cake is still rancid.


2) Split investment funds are dangerous

I have been reading alot about 'splits' like 'Dividend 15', and how they aren't paying out dividends so much as paying out capital from new investors to old - Much like a Ponzi scheme.

Some more people rightly concerned about such investments here.


3) No Special dividends for the jumper.

When you jump around to garner dividends, you will nearly always miss out on any special dividends that are paid. These dividends are not scheduled, so you cannot time them like regular dividend payments. And special dividends are very often generous, skewing the yearly yield upwards quite a bit.


4) I can speculate for myself, thanks.

If I was feeling like speculating, I'd rather do it myself. Plus, in all honesty, I don't feel like jumping around with such companies. I'd rather they hold my money and pay me well, for a long time. Call it a bit of foolish faith.




Ok Jack, I get it - If it's probably too good to be true, it probably is.

Damn right.

What is the Dividend 15 split, and how does it work? Pt.3

Yesterday, I talked about one way the 'dividend 15' may generate the very high 10% yields that they offer.

Today, lets look at how a 'dividend smash-and-grab' method would worth, if we calculated with real money.

I will continue to work with BNS (Bank of Nova Scotia) because, gosh-darn, they just work so well with this strategy (as many of the other stocks that the 'Dividend 15' say they invest in).

For example, BNS yields dividends quarterly. At the current yield they are at 4% for the year, so approx 1% per quarter. This is a decent yield, especially for a Canadian Bank, which many believe to be essentially bullet-proof.

The most recent dividend was July 27, with an Ex-dividend date of July 5. This means that you only had to hold the stock for ~3 weeks to get a 1% return. Not bad at all.
 
Wow Jack, 1% in a month? Count me in!

You and me both.
 
Say you were a stock fund manager. You had a number of big companies all paying an average 4% yield, quarterly. You only had to hold the stock for a month (the ex-dividend date) to get the sweet dividend.

If you moved the money around, jumping from dividend to dividend, you could do pretty good, right?

There are 12 months in a year, and even if you could only effectively get 11 of these yields, you would average about 11%, minus commissions and trading fees.

This is actually not that far from what 'Dividend 15' yields out.

So can I dividend speculate with $1000?

In short, No.

But maybe you could try with $10000.

Lets say we wanted to speculate BNS's dividend.

1) We invest $10000 in BNS, buying about 192 shares at $52/share before the ex-dividend date.
2) We wait the 3 weeks, and receive a dividend deposit of ~$100 in our brokerage account.
3) We immediately sell the stock, netting approximately the same value back (lets assume it was a smooth-market month, and the dividend depreciation was negligible.)
4) We now add up our booty:

Commissions & Trading Fees (for Credential Direct): ~($40)
Profit from Dividend: ~$100
Total: ~$60.

So, you profited about $60 on $10,000, or 0.6% for a month. Not too shabby.

If you were to invest $1000, you would have netted ~($30), and only made out with ~$9970 of your initial investment.

So if I speculate Dividends I can make 11% a year?

Still a No.

This assumes that the stock will have exactly the same value on the purchase and the sale. I can almost guarantee this would not happen. 

Yes, it may make money due to unrelated capital gains, but since dividends are paid directly from the market value of a stock, it's unlikely that you'll make back exactly the same value as before.

Tomorrow, I'll talk about why I wouldn't invest in the 'Dividend 15'.

What is the Dividend 15 split, and how does it work? Pt.1

I was looking at some of the higher (highest) dividend yielding stocks, and this one caught my eye. It's called the 'Dividend 15' or 'Dividend 15 split'. It is currently yielding 10.42% - Which is pretty high for a dividend stock.


Ok Jack, so where do I buy this amazing stock?

Hold on, you can't just buy a stock without learning about it.

The 'Dividend 15' 'stocks' are actually funds that hold a handful of some of canada's best yielding, but most reliable stocks. These companies are the kind that have large operations, and most would call them 'blue-chip', due to the large number of economic 'moats' that protect them from their competitors.

A sampling is as follows:

Bank of Montreal National Bank of Canada Sun Life Financial Bank of Nova Scotia CI Financial Corp. TELUS Corporation CIBC BCE Inc. Thomson Corporation Royal Bank Manulife Financial TransAlta Corporation Toronto-Dominion Bank Enbridge Inc. TransCanada Corp

All of these companies are big, having many billions of dollars in girth, and are unlikely to drop off the face of the earth, like we always hear those market 'bears' saying.

You'll notice that these are all Canadian companies, but in even this sample, we have 8 financial institutions. This means that by investing in this fund you are buying into alot of banks and insurance-type companies.

If this particular market segment tanks, you can expect the fund managers to either drop that lovely 10%+ distribution, or move the fund into different investments that may be more lucrative.


Tommorrow, I'll look at how this fund is able to pull of that beautiful 10% yield.

The Best Canadian Discount Brokerage

There are quite a number of discount brokerages in Canada.

QTrade
QuestTrade
Scotiabank iTrade
BMO Investorline
RBC Direct Investing
TD Waterhouse

...just to name a few.

But which one have I chosen to hold my all-important stocks and investments?

Credential Direct.

It wasn't that they had a fantastic review. It wasn't that they were the cheapest, or the fastest, or the best customer service.
In fact, for the cheapest trades, I would be best off with Questtrade.
With TD Waterhouse, it's said you get very quick trades.
With BMO, you get to speak with a real person at a bank when you have issues.

No, it wasn't due to these particulars that I chose Credential.

It was simply the fact that it seemed like the least amount of people hated them.

You can go on any blog that 'reviews' the discount brokerages, and there will be upwards of 900 comments, all from people just about ready to kill their brokerage for making some unbelievable mistake. One man lost $40,000 due to a mis-communication on the brokerages end. Another had his trade delayed until nearly a two days later, losing him hundreds.

I'm sure there are people that have had such issues, or worse with Credential, but low and behold, in my (not-very) exhaustive search of the inter-webs, I was unable to find many people with such a passionate dislike of this brokerage.

Add to the fact that I live not too far from their office, so if for some reason I wanted to go throttle someone in person, I just might be able to; in less then an hour or two commute!

Plus, I've called them up multiple times, asking asinine newbie questions, and they were usually able to help me, even though they really didn't have to. I've actually applied for Questrade, and iTrade, but never felt comfortable enough to finish the application. With my Credential application, they never made me feel nervous, or worried.

They just seem like decent people charging a decent rate for a decent service.

So, my application is in, and I've provided all the paperwork. I'll keep this blog updated with my experiences with Credential Direct as I have them.






Who do you invest with?
Why are they better or worse then other Canadian Discount Brokerages?

Why Mutual Funds are Stealing your money - Pt3

Yesterday, I looked at some simple calculations that show how a mutual fund steals your money.
today, I will look at some of the ways that Mutual Funds are sold to unsuspecting investors.


But Jack, my adviser told me that my mutual fund is the best one out there!

You must remember that advisers are working their job to make money. I have yet to see an adviser that doesn't charge, and doesn't take a commission on the products they sell. This means that they are going to try to get you to purchase a product from them, and then they receive compensation for it.

The 'better' (more expensive) the investment they sell you, then more they receive in turn.
I am doubtful that a bank would be able to have such nice offices, or pay their employees so much if everyone invested in indexes (at low MER's that is.)


Expert's Bias

People are asked, and even required to defer to 'experts' all the time. We go to doctors for our health, teachers & professors for our learning. Why shouldn't we trust financial advisers with our money? This is what I would call 'experts bias'. But what we have to realize is that most financial advisers are paid to sell.
 
In my eyes, Commission-based financial advisers are no better then used car salespeople, trying to make the highest profit from every duped customer.


Fee-based advisers that do not receive a 'kick-back' from a mutual fund are much more likely to give you a honest opinion, but even they will have 'favored' investments that they prefer, just like anyone. This is why you need to learn for yourself how to invest, even if you buy a pre-packaged product like a mutual fund.

The only people that win with a mutual fund is the people that run and sell the fund.

Tomorrow, I will talk about a sub-set of mutual funds that most of these rules don't apply to, index funds.




Do you feel your financial adviser is stealing from you?
How much have you lost?
Let me know

Why Mutual Funds are Stealing your money - Pt2

Yesterday, I looked at some of the reasons why a Mutual Fund steals your money.

Today, I will look at some simple calculations to show you how they steal your money.


Lets do a quick and dirty calculation:

Investor Investment: $10,000
Mutual Fund advertised return potential: 8%
MER (Management Expense Ratio) 3%
By-In Fee: 0.25%
Cash-Out Fee: 0.25%
Total gains if advertised rate is achieved: ~ 4.75%
Average annual return of index: 5%

Now, it's obvious here that 5% is better then ~4.75%. But the ingrained belief of people is that with someone 'minding' their money, it will grow faster.

Past market conditions have generally shown this to be false.

Now, lets imagine that we leave that money in there for 10 years, as if we are 20 years old, and want to take it out to make our first house down-payment with it when we are 30 years old.

All market fluctuations are removed, and the mutual fund manager is a star, hitting his return percentage target every year (highly unlikely).

 1 : 10197.91
 2 : 10666.4
 3 : 11156.41
 4 : 11668.94
 5 : 12205
 6 : 12765.7
 7 : 13352.15
 8 : 13965.55
 9 : 14607.13
10 : 15278.17

Seems pretty good. making a ~52% increase over the 10 years.
Remember that the cash-out fee is still looming though, and drops our final value to $15239.97.
That fee is just a tickle in the ribs at ~$39, but it doesn't help our investor.


Now, lets look at it with some market instability (like in reality):

 1 : 9946.79
 2 : 10147.56
 3 : 10152.38
 4 : 10561.34
 5 : 9774.51
 6 : 10091.99
 7 : 12213.86
 8 : 11440.2
 9 : 9671.12
10 : 11506.69

Whoa - That's a pretty rocky ride there now. But this time, our investor still made a profit, netting a 15% return when he cashed out.

The mutual fund didn't return the advertised amount; in-fact it was an average ~ 1.5%, when the average market index returned 5% . Those MER and cash-in/cash-out fees put what many call a 'drag' on the fund, crushing it's ability to perform.

Add to that the fact that the Mutual Fund manager made many trades, and wracked up quite the commission bill (as well as more then a few losses on trades), and you have the reason why the MER is 3% every year.


Disaster strikes our fragile fund

But what if our investor was investing during the late 90's, and the mutual fund manager didn't see the 2008 crash coming?

 1 : 10197.91
 2 : 10666.4
 3 : 11156.41
 4 : 11668.94
 5 : 12205
 6 : 12765.7
 7 : 13352.15
 8 : 13965.55
 9 : 12607.13
10 : 5687.91

Our investor gets off the coaster right at the bottom, and lands on the cement like an exploding watermelon.
He loses over 30%, and to top it all off, the mutual fund manager still collects the 0.25% cash-out fee.

During the 1999-2009 period this pattern was quite common; investors would see the spectacular gains of the bull 2000's market, and invest a great deal of cash , hoping to ride the wave to wealth.

But in late 2008, the market crash came, and decimated many, many, mutual funds. Some were hurt even worse then our example here. But it wasn't the mutual fund managers that 'went hungry' so to speak.

It was the investors that were left out in the cold.

Tomorrow, I'll look at some of the ways that Mutual Funds are sold, and how they are stealing your money, right before your eyes.




What are your thoughts on mutual funds?
Do you like or hate mutual funds?
Let me know :)!

Why Mutual Funds are Stealing your money - Pt1

Mutual Funds.

Many, many people are invested in mutual funds. Savings, holidays funds, down payments, retirement pensions. A large share of these are in mutual funds.

And ~90% of mutual funds lose money compared to the index over the long term.

Investor geeks puts it nicely in their article Mutual Funds are for Losers.

The nuts and bolts of a Mutual Fund follow this general pattern:

1) Investors like you and me give money to a mutual fund's broker.
2) The broker reports there is a decent chance to make you back a good return for the risk.
3) Times goes by, and the broker buys and sells stocks to try and make money.
4) Eventually, we the investors need the money back, and asks the broker to cash us out.
5) The broker calculates how much of the initial investment is left (minus losses, plus gains), and gives it back to the investor.
6) According to the average, the investor will net a return less then the index (market median) ~90% of the time.
7) Loss :-(.


Why do mutual funds make less then the average?

1) Higher costs:

Mutual funds employ financial folks to buy and sell the stocks. These folks research, discuss, and communicate with companies to try and foresee how stocks will go (up or down).

These people cost money - in most cases quite a bit more then you or I make. The frequency of trades that a mutual fund makes (many times an hour, or even minute) cost alot as well.

Lazy Potato Investor puts it well in: Would you like fees with that?


2) Results Reporting:

Mutual funds managers have a set schedule in which to make the 'return' that investors are seeking. This time crunch means that they often don't have the luxury of 'holding' a large number of stocks. They have to 'stick and move', meaning buying low and selling high - usually in fairly rapid succession.

This often means a flurry of trades and adjustments, an upward battle as they try to time the market.

I am a firm believer in human capacity, but now-a-days computers are trading on the stock market at a rate of millions of trades a second.

No human being can keep up with that sort of frequency, and many mutual fund managers expect to beat these computers and make money doing it. I don't buy it, and history backs me up.


Tomorrow, I'll do some calculations to put all of this into play, and show you how mutual funds really do steal your money.




Do you believe that your mutual fund is performing better then the index?
How much better?
Let me know.

Where should I invest my money?

So, where do I put my money, Jack?

I strongly believe that no one can tell you what investment strategy is right for you. If you are looking for guidance, I would employ a fee-based financial adviser.

That is not what I wanted to hear!

I realize that, but lets be frank: I don't know you, or your lifestyle.

You may have a unusually high or low risk tolerance, or a new, intricate investment pattern you know it 'fool-proof'. Or you may have insider information about the state of the fundamentals of companies - more then an adviser, or a blogger on-line can possibly have access to.

I would advise anyone that is looking into investing, especially in stock markets, is to READ. Read everything you can about everything to do with your investment before putting your money into it.

Good places to help you get a grasp of investing:

• Investorpedia
• Finance Blogs
• Magazine-based sites (Globe & Mail, Moneysense, etc.) - Beware the rampant bias.
• Library books

There are many others sources for information on investing, because, lets face it, everyone likes to believe they can get rich from investing, and everyone wants to know how, so writing about it (and selling that 'advice') is very popular.

I think it's fair to say that almost all financial advice is a little bit biased, and I think that is due to the fact that so many people feel 'strongly' about the subject matter. This can lead to some people having some very intense (and often, unhealthy) emotions about dealing with income, bills, and investments.

Jack, I feel nervous about my money.

I believe a little nervousness is not a bad thing. Obviously, if you have trouble sleeping at night (a popular sign that you invested in a risky venture above your tolerance), then you need to make a change.

If you don't feel any nervousness investing your life-savings in a risky emerging markets stock, then you may need to speak with a financial adviser, and be told, in person the risks and repercussions of such actions.

If you are interested in learning about two of the most popular amateur investing styles, please read my post on Dividend investing vs Index investing.

In the end, no one can tell you what is perfectly correct for you; not even a highly-trained financial adviser can read your mind and know exactly what you really want.

Only you can know your investing inner-desires through conscious effort and learning.





Have you invested your money already?
Where did you invest it?
Let me know!

Dividend investing vs Index investing

Today, I wanted to share some of my thoughts about one of the more popular amateur investor debates:

Dividend investing vs Index investing.


I'm a busy investor. Just tell me which one is better!

If only it were this easy.

There are many proponents on one side or the other. Here are a few of each, for your perusal:

Dividends:
Dividend Monk
Dividend Ninja
The Dividend Guy
Dividend Pig
Invest It Wisely

Indexes:
Oblivious Investor
Millionaire Teacher (Andrew Hallam)
Canadian Couch Potato

Most of these folks respect the 'other sides' investment choices, but generally prefer to go with one or the other.

I haven't decided my primary investment strategy yet (other then a handful or dividend stocks that I cut my teeth on), so I'm very interested figuring this out myself.

I'm going to compare the two in a general way (I am not an expert, and these lists are not exhaustive).
 

Why Indexes are great:

• Similar to a mutual fund in that it holds many stocks, in this case, from a tracked index, (such as TSX, S&P, etc).
• Attempts to follow the trends of it's market index - Which in the past have been generally 70% positive, 30% negative.
• Will never 'bust' unless nearly the entire stock market 'disappears'
• Generally has very low MER (Management Expense Ratios) so it is inexpensive to invest in.
• You can invest in multiple indexes, and have a portfolio that virtually covers many countries and markets, offering unparalleled diversity.
• You can profit from the shifting currents between indexes (during your 'rebalances').
• You don't need to buy and sell often, just 're-balance' your portfolio perhaps a few times a year to bring it back into line. I like to refer to this as The Ratcheting Effect.

Why Indexes are bad:

• Since indexes track the market, they can also track it off a cliff into a crash (although you will be in a better position then most).
• It's 'boring' (no thrill of the hunt for excellent stocks, just the same index funds, over and over)
• You won't need to trade often, so that can mute any excitement about investing.
• The upcoming markets may slow to the point where you are not 'gaining' very much in capital gains over time, but this is universal for most any stock.

Why Dividends are great:

• You can pick and choose exactly companies to invest in.
• You can leverage insider knowledge about company performance to purchase your dividend stocks when they are at their best 'value' (lowest cost).
• You can enjoy a constant, small stream of income as these companies pay out dividends to you at regular intervals.
• Long-term dividend paying companies tend to be well-run, and more resistant to wildly fluctuating stock prices and values, helping to keep your investment stable-ish.
• During a 'crash', you may be in a better position then non-dividend investors due to the continual income from dividends (but only if your companies manage to keep up the payments during the slump).
• Some companies offer what is known as a 'DRIP' or Dividend Re-Investment Program' - This program will reinvest your dividends into more stock from the same company, often at no additional cost to you, and sometimes at a discount to the regular market price. (Some investors swear by DRIPs).
• Dividends paid by qualifying Canadian companies in Canada are given a *very* preferable taxation rate.

Why Dividends are bad:

• Low Diversity - You will only invest in companies that pay enough dividends to interest you - This limits your selection of stocks, and will almost definitely keep you from picking up any high-capital growth stock.
• Companies may drop dividends for any reason, or no reason at all. They are not beholden to pay them (Unless you are purchasing preferred shares, or shares with other, special conditions).
• The few companies you invest in (compared with the hundreds in an index) leaves you open to losing all your money if the company folds.

But which one is better?

Dividend stocks simply pay out the dividend from their market value, so they generally have slower growth. But, you are being paid with 'today's' dollars, which means that they are worth more then 'future' money that is felt the effects of inflation and market growth (devaluation).

Indexes tend to slowly gain over time, when you filter out the market noise. You can also profit quite handsomely when you re-balance due to one sector doing much better then another.

You will have to make up your own mind about which investing strategy you will use, but I hope this simple primer will provide you with some insight when it comes to dividend and index investing.





What are your thoughts when it comes to dividend and index investing?
Do you use one style or another yourself?
Let me know :).

Investment Strategy: How to rebalance a portfolio - The Ratchet Effect

I have explored a few different investment strategies that involve 're-balancing' your portfolio.

I have not, however, run across a clear step-by-step direction for performing this movement. I'd like to share with you an idea about the re-balance of stocks I like to call 'The Ratchet Effect'.

Nuts and Bolts of The Ratchet Effect.

Lets say you are an index investor. You have the following asset allocation, and you invested $10,000 evenly between these indexes.

25% - $2500 - Domestic Canadian Index
25% - $2500 - US Index
25% - $2500 - Emerging Markets Index
25% - $2500 - Total Stock Market Index

$10000 Total.

One year passes. The markets bounce around and shift like a bucking bronco. On the investment anniversary, you check your broker account to see the following balances

$2670 - Domestic Canadian Index
$2240 - US Index
$2845 - Emerging Markets Index
$2618 - Total Stock Market Index

$10373 Total (3.7 % Overall return)

Now, lets say you didn't have any more money to invest. So, you take some money from the 'best performing' index, and apply it to the 'worst performing' index.

This would give us the following allocation:

$2670 - Domestic Canadian Index
$2492 - US Index
$2593 - Emerging Markets Index
$2618 - Total Stock Market Index

We sell $252 from Emerging Markets, which brings it to $2593, 25% of our total value $10373.
Then we buy $252 of US Index, which brings it roughly to the 25% value range that we want all indexes to stay at.
We have Ratcheted up our total value, and purchased more stock in the index that currently has the best value to buy in.

This strategy is cheap and easy.

To improve the return of this strategy, you may investigate adding additional indexes/stocks to the mix.

Please check out Canadian Couch Potato's Portfolio Models to see some good index-based mixes in person.

Remember that this can also work with any portfolio of stocks, but works best with a portfolio that has stocks that will move relatively independently of each other (this is why different countries' major indexes work well).

But Jack, my diversity-poor bank portfolio's stocks are all priced the same!

Don't go into your brokerage account and expect to see large performance differences between your stocks if it's filled with only Canadian Banks, or Telecoms, or Utilities. They would all perform very closely, and you wouldn't get an opportunity to 'sell high' on one of them and 'buy low' on another, as they would be at very similar valuations.

Next time you are looking at your portfolio, check which of your holdings is performing the best, and consider investing it's gains into your most undervalued stock.


Please notice that this is not investment advice. I am an amateur investor, and I only know what I have read from others, which may or may not be completely accurate.

Why I invested my down-payment into stocks instead.

Well, I tossed and turned for weeks, not sure what to do with my down payment fund. I've finally made up my mind.

I won't be buying a place for at least 6 months no matter my choice. Where should I put the money in the mean time?

1) Hoard it away in a low-interest savings account that pays no more then 1.25% interest?
Bear in mind that with the announced low interest rates, that savings account isn't going to be increasing it's rate any times soon (next year or two).

With the savings account, my money will be safe, with no risk of 'loss', but very little gain - in-fact, less gain then the inflation rate.

Interest (1.25%) + Inflation (~3.00%) = -1.75% Annual Profit

So if I leave it in there, I will, in-essence, be losing money. To be fair, this loss is 'controlled', in that I can watch, every month, and see the exact loss, and count on it being exactly the same, unlike in a stock, which can (and will) shoot up and down in value constantly.

2) Place the vast majority of my free-flow 'down-payment funds' into stocks?
If I invested in decent quality dividend stocks, I would enjoy the slow trickle of dividends. I'd have to reinvest and re-balance the portfolio every month or so, and watch to see which stocks were the most 'under-valued' for my monthly investment.

The stock market is one of the most volatile investments a person with money can make. It rocks up and down constantly, and no-one knows where or what it will do next. Will the company you invest with have a good year, a bad year, or will it simply close it's doors, and disappear? No one knows for sure with stocks.

But the gains can be great, and if an investor takes his time, and invests is strong companies, with good track records, the risks can be reduced by a margin.

I believe that I have the capacity, and the situation, that would benefit from careful investment in the market. I'm young, and, even though I loathe the idea of working for a long time, I know that in reality, I will be. I have the capacity to 'bounce-back' from some losses. I don't have children, so no-one depends directly on me for their survival.

Plus, if I can invest decently, I just might get a little further ahead then if I didn't.

I have already spoke with my land-lord about reducing my rent, and she seemed relatively receptive to the idea, considering I'm the best tenant she's ever had (I pay rent 2 months ahead, and am as quiet as a church-mouse).

Plus, I am comfortable where I am renting, and frankly, I will end up spending quite a bit more on gas when I move out as the places in my price range are 20 minutes further from my work then  my current rental residence.

For me, it just makes more sense to invest then to make a down-payment.

Earning Jack: Investment Snapshot

Welcome to my new net worth charting and 'wealth' allocation system (TM).

The general idea is that I show you where-abouts my money is, so you can have some idea how I live. This in turn, may give you some ideas about your own personal finances.

I may end up changing the format and style of the snapshot as time goes on, but this will at least give you a decent idea of my allocations at the end of the month..

(This chart is a modified version of Brien's 'Net Worth' chart from www.2millionblog.com. It is used with permission.)

Net Assets	July-11	Aug-11	Change	%
Emergency Fund	$ 1,000.00	$ 1,000.00	$ -	0.00%
Taxable Accounts	$ 1,000	$ 1,500.00	$ 500.00	50.00%
Taxable Brokerage	$ -	$ 665.94	$ 665.94	665.94%
TFSA Accounts	$ -	$ -	$ -	0.00%
RRSP Accounts	$ 565.00	$ 565.00	$ -	0.00%
Stock Options	$ -	$ -	$ -	0.00%
ESPP	$ -	$ -	$ -	0.00%
House	$ -	$ -	$ -	0.00%
Receivable (Payable)	$ -	$ -	$ -	0.00%
Other Assets	$ -	$ -	$ -	0.00%
Total Assets	$ 2,565.00	$ 3730.94	$ 1165.94	45.4%
Liabilities
Credit Cards	$ -	$ -	$ -	0.00%
Mortgage	$ -	$ -	$ -	0.00%
Tax Liabilities	$ -	$ -	$ -	0.00%
Other Liabilities	$ -	$ -	$ -	0.00%
Total Liabilities	$ -	$ -	$ -	0.00%
Goal Progress ($1,000,000 CAD) (Investments + House - Liabilities)	$ 1,565.00	$ 2,730.94	$ 1165.94	0.27%  (Total)
Net Worth	$ 2565.00	$ 3730.94	$ 1165.94	45.4%

So, as you can see, I haven't got alot (which explains the blog title).

My goal is $1,000,000 by retirement. I haven't decided when I will retire, but as soon as possible is the primary goal.

Every month end, including the end of August, I will be updating this chart, and posting it, to show you how I'm fairing.

What do you think?

Earning Jack

Recently, I was asked why my blog is called 'Earning Jack'.

Well, it's really very simple:

I'm not earning very much (Jack, in-fact), and scrambling to earn more and save more so that I can reach my crossover point sooner.

And hey, I am a Jack-of-all-trades, with my interests bouncing around so much, so it fits quite nicely.

I'm continually trying to build my side business, and live off of the proceeds of that, and save every dime of my full-time job wages into my investments to maximize the outcomes of them.

Will it be able to do it?

Well, I believe that as long as the TSX doesn't completely implode in the next 15 years, I'll be just fine.

Curious where I've invested?


I'll be starting a new series called: "Earning Jack on my Investments" very soon. Stay tuned.




Do you want to write full time, but can't due to financial considerations?
How do you fit writing into your schedule?
Let me know! :) 

Working on the side: Pt.1

I am a key & inventory management support specialist. This means that I install and support these systems in-person, over the phone, and with remote access on my PC.

It's a pretty decent job - I don't have to travel away from my family much, and the money is decent. I work at a small company, so I see the owner several times, every day. This can up the stress level a bit, but inside, he really is a decent guy, even if he tends to get overcome with some of the daily challenges of running the business.

My side work is what tends to 'drive' me more.

My first business is fixing computers, that is, laptops, desktops, and most consumer electronics. It makes good money, when there is work!

My second business is a store on e-bay. I am in the process of handing this over to my parents, as my mother has nothing to do with her days (she is retired), and my dad can generally get through any technical stuff that she gets caught on.

Between these these two side businesses, I am kept pretty busy. I tend to have some computer repair work a few times a week, so I'll spend my evenings working on laptops, taking them apart (which satisfies the part of me that is creative and curious), and when I'm not doing that, I'm writing here on my blog.

My suggestion to anyone that is looking at starting a side business?

Do it.

But my grandpa once told me (being self-employed for over 25 years now), in order to make it, you have to be excellent at what you do. You have to have to be one of the best, confident to a fault, and strong in your convictions.

Most of all, you have to have patience.

You won't make it in a week. Or a month. Or a year. Maybe not even ever.

You have to accept that you will have months without a single 'call' or 'order' or 'sale'. Maybe even a string of many months.

When I was first starting out, I couldn't even beg people to give me work, even for pennies on the dollar of what I wanted to charge. People didn't trust me, didn't see me as a professional.

And really, they were right.

I hadn't realized what one of the most powerful forces is when you are starting a business.

Tune in tommorrow, and I'll let you know ;-).



Have you ever run a business?
What are your thoughts about how to start?
When did you realize it was 'for you' or not?
Let me know! :).

In the beginning

I started this blog to share my journey through writing and financing my goal of being a full-time writer.

I realize that I will be working at this for a very long time. From what I have read on other blogs, most people agree that attaining full time financial independence (that it, not having to work a full-time job to afford living) is a life-long exercise in frugality, budgeting, and investing wisely.

Do I have what it takes?

I've always spent less then I've earned, watched my money (often with a tinge of grief as it merrily disappeared from my accounts), and invested in the best places I knew. Unfortunately, this often meant the local credit union's "High-interest" savings account, which, even during the heydays of pre-2008, wasn't higher then 3%!

Now, reading up on blogs such as: http://learndividends.com/, http://www.intelligentspeculator.net/, http://www.thesimpledollar.com/, I've learned that it is possible to put that money to much better use, often through investing directly into strong companies that pay dividends.

I feel as though with the tips, hints, and guides that these blogs and others put forth, I'm able to make a much more informed decisions on how to make more, save more, and invest more money.

My fictional writing with have to sit on the back-burner while I work hard to make the money that I'll require to make my dream of financial independence come true, but I won't stop writing, not here, or on my personal projects! Add that to the fact that I still want desperately to publish my novella 'Pale Dawn', which is the first part of the 'Loneman' trilogy. I can't wait to introduce Kesh, and the humble beginnings to her sultry, saucy, current self.

So, I'll be using this blog to chronicle my journey. I hope that you find it just as entertaining and useful as it is to me to write it.