Tag Archives: investing

Dollar Cost Averaging Your Investments

As we head into year end, and the RRSP season, lots of people are going to make a one-time annual contribution. Others are scrambling to get an RRSP loan so they can have the tax receipt. Both of those give someone an instant pot of cash to invest. In the case of an RRSP loan it also makes sure that person really doesn’t have the money to contribute because they’re making payments on last years’ loan. Not a good idea. I’d rather have them not contribute for one year and start immediately on a monthly plan for next year, which is actual real money, and not borrowed.

But for both these examples, a ton of people will have one lump sum of money to invest.
While we normally do not talk about investments, there was a story a couple of weeks ago that was so powerful it is worth sharing and certainly timely. While I believe investing comes after becoming debt free, except the mortgage, many people are in that enviable position.

One of the Wall Street Journal writers recently went back to the great depression and figured out how an investor would have made out in a market that went down 89% from its peak.
He took an index fund of 500 companies and calculated the returns. Now the story we hear in the media is that an investor at the height of the market in 1929 would have taken until 1954 to get back to even. Sick story, and probably enough to keep most people out of investing.

But someone who dollar cost averaged did incredibly well in a bad market. Dollar cost averaging is taking the same amount of money and investing it each and every month. The months the market is up, that money just buys less shares. The months the market is down, it buys more shares. So over time, it rides the peaks and valleys of the market.
Now, someone who started investing $100 a month at the absolute height of the market in September 1929 would probably be a huge loser, right? Wrong. Starting the worst week in the stock market with the same investment every month, that person was already even again in 1933. Now remember, those who dumped their money in all at once took until 1954 to break even. By 1936, still in the depression, the dollar cost averaging person had doubled their money. And by 1954 when everyone else was just back to even, they were up ten fold!

The difference is that you either pick the 5th horse in the 7th race or you are betting every horse in every race. Which one do you think is the guaranteed winner?

Want To Invest or Need to Cash Your RRSP?

Last week, the home improvement giant Lowe’s made a $1.7 billion offer to buy Rona. If you owned the stock, it immediately went up to around the offer price of $14.50 a share. Nice deal – but it doesn’t change what we’ve always talked about: Buying an individual stock is gambling and not investing. You’re betting on the 5th horse in the 7th race! Don’t do it.

Good growth mutual funds with a long-term track record are investing, as is a five year or longer time horizon. If you’re buying one stock, it’s gambling. If you know that – do it. But don’t do it with your RRSP money. Do you need a reminder about the Facebook stock offering now down about 40% or the Zynga hot stock down 70%, and not done dropping yet, or a bunch of others?

I do have to confess that Monday I had hoped Rona would just close their doors. Four people in the North East Calgary store wouldn’t do a thing to help my brother and myself. In my experience, Home Depot’s slogan should change to: You can do it and…well, good luck.” But Rona? When my kind and patient brother, who’s a Pastor, walks out, that’s a real problem. That kind of customer no-service is on par with the no service banks and cell carriers!

Fortunately, the fourth Rona store later, I ended up on MacLeod Trail in Calgary and met Angie and Dana. Over one hour these two ladies helped me locate a large amount of shelving AND found it in stock about a mile up and eight isles over. Part of my life is teaching seminars on customer service all over the world. Now I have two Rona stories, but if you’re in and around Calgary – make the drive to the McLeod Trail store, even if you’re in the North East!

Step Away From That RRSP!

According to a recent survey from Scotiabank, a quarter of all Canadians are actually cashing in some of their RRSPs before retirement. Say it ain’t so as the old expression goes.

The three main reasons given are to purchase a home, which is the homebuyer plan, under which you are essentially borrowing the money from your own RRSP and using it for the down payment of your principal residence. Then each tax year, you’re required to pay one-fifteeth of it back until it’s all back in your RRSP. That might be fine – it’s kind of like borrowing from yourself, even though you’re out the interest accumulated.

The other two main reasons are for daily living expenses and to pay off debt. THAT is a problem. Here’s why:

Let’s assume you want to cash $4,000 to pay off some old bills. The first thing that happens is that 10% is deducted as withholding off the top. Because you received a tax deduction when you made the contribution, you now have to pay tax to get it out again. In a 30% tax bracket, $1,200 comes right off the top as withholding. So the bottom line is that this $4,000 you wanted is really $2,800 in your pocket. With me so far?

It gets worse. So it’s saved you some interest and financial pressure to pay off these bills. But you no longer have these savings growing and compounding and here’s what you’re really out:

This $4,000 left alone would double every 7 years at just a 10% return. So today’s $4,000 is $8,000 in 7 years, which is $16,000 in 14 years and $32,000 in 21 years. Nothing for you to do but sit back and watch it grow! That is if you hadn’t cashed it.

The bottom line? You got your hands on $2,800 and it’s cost you $32,000 just 21 years from now. It’s one of the most expensive ways to get your hands on some cash.

Yes, people do it – but there are lots of ways to relieve the financial pressure and NOT cash the RRSPs. After all, knowing is always better than hoping and a $20 investment in the It’s Your Money book to get the tools and insights has to be better than being out $32,000.

You are robbing a lot of tomorrows to pay for yesterday – don’t do it.

Investing Lessons…The Hard Way

Two more quick thoughts for your 17 to 22-year olds from what we talked about last week.

Becoming financially successful happens from two sides: The savings side, and the borrowing – or not borrowing side. If you want to be rich, it’s a no brainer to study the habits of rich people, right? Well, the Fortune 400 richest people can teach us something we already know. To start, of those 400 richest people, 90% started with nothing – so it’s not inherited money, but rather earned on their own. For these people, 75% shared that the number one way to get rich is to pay off debt and to stay out of debt.

Of course, the best way to actually have money is to not pay it all out every month in interest and bills. That allows you to save. For students, there is a story on how to be a millionaire at age 20 by just saving $10,000. It’s on my web site – a story we did last year.

When you have money – you can invest and watch it grow… if you choose not to gamble with it. Investing is a five year or longer time horizon, and not a one-off stock or investment. It’s long track record, good growth mutual funds and the likes.

Want proof? The two so-called hottest things in investing have been gold and the Facebook, or some other IPO from the tech industry. Well, let’s see how that’s been going:

Gold yesterday went below $1,600. Now, I had said it’d be half of its high of $1,950 or so within two years, and it’s well on track. Just listen to some of the hype about gold and gold stocks. It’s been insane, and you have to know a ton of people invested with borrowed money. That’s now a double hit that will wipe out a ton of their money AND have them paying interest to add insult to injury.

Friday’s launch of Facebook stock is another great example of gambling versus investing. It’s a one-off stock. That’s way too risky for anyone of us to gamble on! The stock came out at $38. That’s what institutional investors got it for in advance. When it came out, the first few hours the stock went up. Of course it did – the almost always do. That’s individuals now getting their first chance at buying it! How do we know? On the first day every stock issued was bought and sold more than once.

So who was selling if individuals were buying? All those institutional companies who got it in advance and wanted out! You can’t buy a stock if nobody is selling! Those companies sold because they knew things you and I didn’t: During their road show of convincing these investment companies to buy the stock they reduced the forecast for Facebook profits. They also gave these institutions more stock than they thought they’d get allocated. Why? Because there wasn’t enough demand. That was a BIG warning flag for those companies to dump it quickly, and you and I didn’t have a clue.

So within a few hours, the stock was back down to its original price. By yesterday it was down to$33 from $38. Any hype to get in right away because you didn’t want to be left out would quickly have died. Today it’s at almost a 15% discount and some think, when you compare it to Google’s profits vs. price it ought to be a $10 stock.

Today you have that knowledge in hindsight. But by today you’d have lost your shirt. Don’t do it – stick with mutual funds managed by people who are on the inside and not reading about it two days late.