Tag Archives: investing

Keeping You Updated

Things change pretty quickly in the world of finance, credit, money and investing. Here are some updates to things we talked about in the last few  months. You can always find the stories at yourmoneybook.com and click on the radio stories button:

A few months ago we talked about the changes for airlines and your frequent flyer miles. Well, Air Canada just did another round of cutbacks to what you’ll earn and an increase to what you’ll need to redeem. Remember to think of your reward miles like bananas. Use them up as they don’t increase in value over time! Oh, and Westjet and Air Canada now charge baggage fees – surprise! Did you think they’d just ignore the $30 to $50 million in profits that you’re now going to hand over forever?

If it makes you feel any better, the deep discount carriers in Europe and the US now charge for carryon luggage. With Spirit Air, you can pre-buy it online at $35 for a carryon. If you want until you get to the airport, it goes up to $50 and if you do it at the gate, it’s $100 for a carryon!  Oh, and you’re paying $10 to print your boarding pass.

Yikes, it’s offical: Costco is dumping American Express in Canada. You’re Amex card is no longer welcome starting January 1st. They’re now partnering with Capital One. What’s in my wallet? Not Capital One! But, it’s a good guess that they changed over for a whole lot more money from Capital One…But why go from Amex whose clients spend four times more than Visa clients to a card that targets credit challenged people? Makes no sense, even if their kick-back is way higher.

I just read two reports that show independent book stores are growing in numbers and volume of sales. Great news as I love independents. I don’t deal with Chapters – you won’t find my books with them. I’m the author of 17 books. 14 are only on my web site and three are ONLY available at a few independents, including Mosaic on Bernard. When I talk about shopping local, I actually give up a ton of sales to do so. Actions speak louder than words.

For the last month, the stock markets have gone a little nuts. Down 300 points in a day, up 200 the next. We keep talking about the dangers of buying one or two stocks. If you’ve done that, if you gambled like that, you’re probably down a ton of money. If you’ve invested in good growth mutual funds, you’re already up again. I manage a seven figure account for a relative and all the bad news last month still had a 2% return for the month with Dundee Wealth.

And if you’re a gambler, gold and silver are below 2010 prices. Bitcoin, which is an online currency is down 75% for the year. If you bet only on energy stocks, you probably lost over 40% of your money. Those one-off buys are not investing. They’re gambling – and on these and many others, it’s a big loss right now. Investing is a five year or longer time period with a mix of good growth mutual funds with a long track record. Investing is also buying a fixed amount each month. Set it and forget it.

Graduate As a Millionaire

85% of teenagers never take a course on credit or finances. That means they haven’t got much of a hope of being financially successful from the get-go.

The first thing most teenagers do when leaving the home is to take on a car payment, get a credit card, pay rent, and often have a student loan. But if you have teenager that’s about to leave the home, here’s a deal you can make that’ll insure their financial freedom for the rest of their life.

The only thing your teenager has to do is to save $8,000 by their 20th birthday. Nothing more – nothing less. After that, without getting into debt, or touching these savings, they can literally spend every dollar they make.

It’s the magic of compounding and works with something called the Rule of 72. Simply take your rate of return and divide it by 72 – that’s how long it’ll take for your savings to double. So at a 7% rate, it’ll double every 10 years, while a 10% rate will double it every seven years.

Do some lateral thinking of how you can help them achieve this. Maybe you can charge them rent and keep that in a savings account. Some parents match whatever the teenager saves to a certain amount – there are all kinds of ways.

Then your 20-year old just has to watch his or her savings double again and again until it reaches $1 million at age 67, using a 10% rate, and it all started with a one-time saving of $8,000.

Oh, if only we had done this when we were their age. But one more thing: Because they’re teenagers, I’d recommend there’d be two signatures on the account – just in case they get the urge to take some money out…

The Rule of 72:   At 10% it’s 72 divided by 10 = money doubles every 7 years

At 11% it’s 72 divided by 11 = money doubles ever 6 ½ years

At age              Amount now saved through compounding interest at a 10% rate

20…                 8,000

27…                16,000

34…                32,000

41…                64,000

48…                128,000

55…                256,000

62…                512,000

67…                1,014,000

THAT is the best graduation present I can think of, and it’s not hard to do at all. It works with any starting amount. Even if it’s $5,000, it’ll turn to $640,000 and that’s not a bad deal for a year of two of savings at an early age!

Adults can get there, too. If you want to have $1 million when you retire at age 67, for example, you just need to work backwards.

So at age 60 you’ll need half a million because it’ll double when you reach 67. At age 53, you’ll need $250,000 and at age 46 you’ll need $125,000, and age 39 you’ll need $63,000. When you reach any of those amounts, at whatever age, it’ll double and double until you reach a million at age 67. But, depending on your age, you may want to use a more conservative 7%, depending on your age in order to lower the risk of your investments.

However, there’s a big proviso: It’ll never happen if you’re also in debt and making a bunch of payments. Sorry, can’t be done. You need to be debt free to have some serious money to put away for investments. I know the world has taught you that you can have it all – it’s not true. There’s no chance you can save a little, pay a little here and there and still have a life with your normal rent, mortgage, utilities, gas, etc. I know you think you can and it’ll be another five, 10, or 20 years of finding out that you were really wrong and wasted another decade.

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.