Tempis Fugit & Letting Sleeping Investments Lie

Well, it's been a few months since I posted here! I promised a video, and here I haven't even put the darn thing up!

To be honest, I've been really swamped with schooling (welding, which is going along quite nicely), and keeping up with the social groups I've joined in the last few months. So, lets just get on with one of my favorite topics: Money.

Over the last few months, going to school, I haven't had any money to invest, and I have been hesitant to sell any of my investments as they have been both paying dividends, and rising in value. Don't fix what's not broken, right?

So I come to my point of the day:

If you are comfortable with your investments, or you can't think of a really good reason to sell them, then Do Not Sell Them!

I have made that mistake in the past, feeling so embarrassed that I didn't even mention it in this blog. I lost about $300 (a mere rounding error for some, but a good chuck of money for me!) when I sold low because I was SCARED.

Unfortunately, as in life, the brave and the bold walk away with the prize.

So the moral for today is:
1. Research your investments thoroughly
2. Follow a contentious plan
3. Keep to the course!

Do you have any topics you want me to tackle?
Let me know by dropping a comment below!

So you want to be rich.

So you want to be rich, eh?

Well, this may come as a bit of a shock to the trust-fund babies in the back row, but most of the 'rich' in North America (which I personally define as having over $500,000 in net worth), do not come by their money by ways of inheritance or gifts.

Actually, the largest majority of the rich are working class folks such as your tradesman neighbour.

Ye of little faith, check out 'The millionaire next door'.

Although this book is a little old, having been published in 1998, I personally believe that many of the tenets within have held true.

By working a steady job, earning a decent wage (much like most trades will provide), early in ones life, living below ones means, and investing patiently, I believe that anyone can retire at an earlier date, and with more assets then most.

For example, we can take a person such as myself:

Age: 26
Occupation: I.T. - soon to be Welder
Expected Wages:
   I.T. - ~$40,000 /year
   Welder - ~$45,000 / year + Overtime

I will work hard and make $50,000 take-home, with raises of ~$2000 /year as I gain experience and education.
I will invest as much as comfortable (~$25,000 + $1000 /year)
I will seek investments that are >2% dividend yield.
If I realize a return of ~4% after inflation (~3%), I will see a growth of ~7%.

Over the next 14 years, this investment will grow to over ~$733,000!

This means that when I am 40, I will have 3 quarters of a million dollars to my name.
Does this take into account taxes? No.
Does this take into account large raises or significantly higher wages? No.
Does this take into account market volatility (up or down)? No.
But, it does show that if you have the balls, and some luck, you can be rich before you're 40.

Will it be easy? No.

But it is possible, and as a wise man once said:

"The first hundred-thousand was hard. After that, it got easier."


----

Want to see the math in action? I've posted the results of my spreadsheet calculations below, and also ran them out to the usual '40 year' working period:


Bonus Calculation Chart:

Year	Invested	Rate Of Return	Result
1	25000.00	0.07	26750.00
2	52750.00	0.07	56442.50
3	83442.50	0.07	89283.48
4	117283.48	0.07	125493.32
5	154493.32	0.07	165307.85
6	195307.85	0.07	208979.40
7	239979.40	0.07	256777.96
8	288777.96	0.07	308992.42
9	341992.42	0.07	365931.88
10	399931.88	0.07	427927.12
11	462927.12	0.07	495332.01
12	531332.01	0.07	568525.26
13	605525.26	0.07	647912.02
14	685912.02	0.07	733925.86
15	772925.86	0.07	827030.68
16	867030.68	0.07	927722.82
17	968722.82	0.07	1036533.42
18	1078533.42	0.07	1154030.76
19	1197030.76	0.07	1280822.91
20	1324822.91	0.07	1417560.52
21	1462560.52	0.07	1564939.75
22	1610939.75	0.07	1723705.54
23	1770705.54	0.07	1894654.92
24	1942654.92	0.07	2078640.77
25	2127640.77	0.07	2276575.62
26	2326575.62	0.07	2489435.91
27	2540435.91	0.07	2718266.43
28	2770266.43	0.07	2964185.08
29	3017185.08	0.07	3228388.03
30	3282388.03	0.07	3512155.20
31	3567155.20	0.07	3816856.06
32	3872856.06	0.07	4143955.98
33	4200955.98	0.07	4495022.90
34	4553022.90	0.07	4871734.51
35	4930734.51	0.07	5275885.92
36	5335885.92	0.07	5709397.94
37	5770397.94	0.07	6174325.79
38	6236325.79	0.07	6672868.60
39	6735868.60	0.07	7207379.40
40	7271379.40	0.07	7780375.96

Want to use this spreadsheet for your own calculations? Comment below and I'll e-mail it to you!

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

Watching my investments (and the market) fall

Well, with the recent downturn, I've been watching nearly every one of me investments tank.



Well, Jack, I bet you're feeling like a big fat fool now; all that money down the drain!

Not so fast.

My investments were all into decently strong dividend stocks. The fact is, the investment I've put the most into pays a healthy monthly dividend. At these current prices, my Synthetic DRIP (Dividend Re-Invesment Plan) will buy two whole shares instead of one.

Which means that these low prices have actually ACCELERATED my plans, not caused them any lasting harm.

In fact you could say that with this downturn, my investments are worth MORE to me then before!

They will purchase a nice boost of shares, and I win. My dividend income goes up, because more shares are purchased.

So, Am I throughly stressed by the market's fall? No.
Am I somewhat nervous? Yes, of course.

Remember, I've only been invested in the market for just over a month.

I don't have the personal experience of long-term investment woes.

But at the current state of the markets, am I running for the hills? No.
I'm going to sit here at my desk at work, and write posts, and read non-market news, and try to relax, and think about having a nice fat passive income stream to look forward to in the future.

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.

Dividend Income Update - October 2011

This month, I jumped in on some more SLF (Sunlife Financial) because I believe them to be a bargain price for such a well-run financial firm.

I purchased 45 units at $24, which makes the $.36 quarterly dividend approximately a 6% yield. I believe this to be excellent for a company that has never dropped it's dividends.

This month is probably going to be one of my slowest months ever for dividends. Add that to the fact that the weather is pretty rainy and depressing makes for more of a slog then a slide into dividend-funded happiness.

I'm going to add an additional Dividend Income Update for the end of October, and show what I truly received as opposed to what I'm estimating to receive this month like I am here.

Here's hoping that I'm able to add another great position this month! :-D

Equity (Stock, Bond, ETF, etc)	Amount (In Shares)	Dividends Paid This Month
Artis REIT (AX.UN)	200	$18
Canadian REIT(REF.UN)	1	$.12
Bank of Montreal (BMO)	1	$.70
Bank of Nova Scotia (BNS)	1	$.52
Emera Inc. (EMA)	1	$.33
Pengrowth Energy (PGF)	1	$.7

Total Dividends for month of October: $19.74

Net Worth Update: September, 30, 2011

So, this month, I did invest a good chunk of change into dividend stocks.

I will be posting a 'Dividend Income Update' every once in a while, so you (and I) can track my progress.

I'd again like to caution anyone that is looking at the 'dividend as a full-time income' plan - it's not a quick way to get rich. It's all about the slow growth of your money, like a tree that you nurture with paycheques instead of water.

My goal progress increased by about .13%  (from .61% to .739% of my goal of $1,000,000 dollars net worth).


(This post summarized my current net worth in an easy to read table - It's a snapshot, so as unforeseen expenses or windfalls accrue in the month, this will become less relevant.)

Net Assets	Sept-15-11	Sept-30-11	Change	%
Emergency Fund	$ 1,000.00	$ 1,000.00	$ -	0.00%
Taxable Accounts	$ -	$ -	$ -	0.00%
Taxable Brokerage Account	$ -	$ -	$	0.00%
TFSA Brokerage Account	$ 5577.44	$ 6872.44	$ 1250.00	18.18%
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	$ 7142.44	$ 8392.44	$ 1250.00	17.50%
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)	$ 6142.44	$ 7392.44	$	0.739%  (Total)
Net Worth	$ 7142.94	$ 8392.44	$	17.50%

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

Net Worth Update: September 15th, 2011

So, this month, I dove in and bought some quality dividend stocks.
If anyone tells you that your first trades are without worry and peril, they are lying :-P.

I also rolled my taxable stock certificates into my TFSA - I was reading online about some of the records you have to keep for tax purposes when you have stocks in non-registered accounts, and I am honestly doubtful that I could keep up to date with such calculations.

My goal progress increased by about .19%  (from .42% to .61% of my goal of $1,000,000 dollars net worth), and my down-payment fund has been consumed by my TFSA brokerage account.

I'll be making another net worth update in a few days on September 30th.

(This post summarized my current net worth in an easy to read table - It's a snapshot, so as unforeseen expenses or windfalls accrue in the month, this will become less relevant.)

Net Assets	Aug-31-11	Sept-15-11	Change	%
Emergency Fund	$ 1,000.00	$ 1,000.00	$ -	0.00%
Taxable Accounts	$ 3,000	$ 0.00	$ (3,000.00)	(100.00%)
Taxable Brokerage	$ 665.94	$ 0.00	$ (665.94)	(100.00%)
TFSA Brokerage Account	$ -	$ 5577.44	$ 5577.44	+++%
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	$ 5,230.94	$ 7142.44	$ 1911.50	36%
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)	$ 4,230.94	$ 6142.44	$ 1911.50	0.61%  (Total)
Net Worth	$ 5,230.94	$ 7142.94	$ 1911.50	36%

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

Being made fun of for being frugal

Now, we have all been peer-pressured into buying something.
And when we say 'No, I'd rather not spend $100 on monster truck show tickets', our 'friends' retort:

"You're no fun!"

"You're too cheap!"

"You don't have a life!"



You're right, Jack! All my friends bug me and act like I'm a frugal fool!

It's happened to me too. Both of us know the pain of being ridiculed. So what can we do about this socioeconomic menace?


1) Try telling them the truth:

Tell them that that $100 is the water for your wealth-tree, with karma fueling it's ever-present upward climb...

Or, you could tell them that that $100 will let you retire 1 or 2 days earlier, while they are still slaving away at the 9 to 5.

Or maybe that $100 will be the last straw in the haystack that allows your future child to seek out the higher education that they always wanted.


2) Try telling them a lie:

Tell them that $100 is going to quintuple in the next 3 weeks, and you will be an overnight millionaire.

Tell them that you have to get an ass-transplant, and $100 is the last step towards the rear you've always wanted.


3) Ignore their idle financial prattle:

This is probably the most difficult, and effective tactic. It's a proven fact that friends poke fun because they want to get a reaction. By ignoring them, you rob them of the payoff of the activity.

No reaction -->  No reward


4) Show them your 5 page asset sheet, complete with lots of very large numbers:

... And watch them stammer as they wobble away to their fully-leveraged car and mortgaged-up-to-the-hilt condo.

I like this option BEST.

I thoroughly ENJOY the look on people's faces when they come to the realization that saving and investing soundly will beat the pants off of spending like you're going to die tommorrow.

I guess I'm sort of a jerk that way :-P.



Jack, they won't stop bugging me about being frugal, no matter what I do!

Well, you can always get new friends.

In-fact, go to www.meetup.com, and you can find lots of groups nearby you that share your interests, including being frugal.

It's nearly always free to go to meetings, and the people you find there can be incredibly supportive; after-all, they have probably been in the same situation as you!

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.2

Yesterday, I was looking at the basic stocks that compose the 'dividend 15' fund.

Today, I'll look at how the fund is able to generate such a high-yield.

The dividend split is yielding over 10%. In most cases (and maybe even in this case) this should send alarm bells off. Such a high dividend yield means that the organization paying this yield is forking over 10% of it's market value every year.

By giving away so much, they have less and less available to invest in the organization.


Jack, I'm looking that these companies (all the banks especially). They only provide 3-5% dividends. How does the 'dividend 15 split' yield over 10%?

I am not the fund manager for the dividend 15, so I can't tell you for sure, but there is a good chance that they are doing some active trading of these stocks behind the scenes.

You see, in order to qualify for a dividend, you simply have to own the stock before the ex-dividend date. Think of it as a sort of 'dividend deadline'. If you own it after that, then you don't 'qualify' for upcoming dividend.

I have a strong suspicion that the dividend 15 is actually speculating the dividends of these stocks. Another thing that tipped me off was the fact that they say right on the website "Shares held within the Portfolio are expected to range between 4-8% in weight but may vary from time to time."

This means that they are usually going to have money in these stocks, but really, they may not have any, and they don't have to tell you when or why they are buying or selling. Mega alarm-bells in my head go off.

Let me show you how they may do it, step-by-step.

1) D15 (Dividend 15) watches the ex-dividend dates for a strong dividend stock like BNS (Bank of Nova Scotia).
2) They invest a large amount at the last minute of the ex-dividend date for the upcoming dividend.
3) They collect the dividend, and immediately sell.
4) Notice that since BNS is such a large stock, it's dividend devaluation is minimal, so they don't lose much in the 'dividend smash and grab'.
5) They repeat this process with another companies' ex-dividend date and dividend.

Jack! You've hit a gold-mine! I'm going to speculate dividend stocks too!

Hold on there - This strategy only works if you have a big ol' heap of money, like $10,000+.

How do I know it's only good for the big guys? Easy. I worked out the numbers.

Tomorrow, I'll look at one of the ways I believe the 'Dividend 15' makes it high yields - through a little 'dividend smash and grab'!

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.

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.