Tag Archives: investments

Have Some Mattress Money?

While GIC rates are still pretty high, but dropping, it might be a good idea to consider what to do if you have any money under your mattress, too much in your checking account, or sitting in a bank savings account.

No, that wouldn’t and shouldn’t be investment money. That’s your retirement investment. But that definition is for any money you will not need or touch for over five years. The money you’re saving for a down-payment, a newer vehicle, home renovations, or other things is money you should not be investing as you’ll want access to it in less than five years.

The most effective way to have this money earn some returns is to ladder five GICs. Let’s use $10,000 as an example: Get five GICs for $2,000 each. A one year, two year, three year, four year and a five year one. That way you have access to a fifth of it every year. Right now, a five year GIC is still about 3.75% and a one year (if you look around) still gets you around 5%. Just make absolutely sure that you have it in writing that the maturing GIC does NOT automatically get renewed. No, them telling you doesn’t count. No, their comment that they “never auto renew” is a lie and doesn’t count. You need it in writing that the maturing GIC will be deposited into your checking or savings account. If it’s not in writing it does not count. On two previous occasions I’ve had to get a lawyer involved when GICs for a relative and acting as an executor were auto renewed and the bank attempted to tell me that I was out of luck. And that was WITH written instructions, dated and noted as to who it was given to!

Oh, and none of this matters or applies if you have a credit card balance! Hunting for an extra quarter percent return when you have a 20% credit card rate is crazy! See the Money Tools book chapter on credit cards: How to get a guaranteed 50% return (by paying off your cards).

Once You’re Debt Free…

I was super excited for a couple that someone met and asked to contact me. He told them to get in touch with me for some feedback on whether to use investment money to pay off their mortgage, or keep investing. That wasn’t the exciting part, though. Debt free, except the home, is something most people haven’t ever experienced in their life. If your home is also paid off, you’ve reached the pinnacle of financial success. But the critical hurdle is to have all the consumer debt cleared first.

This couple, at $780,000 actually is now around part of the richest one percent in the world. That includes your toys, cars, and equity of your home. Net worth is the total of what you OWN less the total of what you OWE. If you’re someone in that position, there are a few general things you should consider:

Close any line of credit you have. That’s especially true if it’s secured against your home. Once you have some net worth – stop borrowing forever. Don’t be tempted to just keep that line of credit in case…close it today.

Have one normal second credit card, but get an American Express card right from them with no monthly payments. A real charge card forces you to pay the balance in full every month. Close every other card but these two.

What’s you big reward for having won with money now? Maybe it’s a new vehicle every five years, perhaps it’s travelling, or now doing a ton of charitable giving. Set up a separate savings account and have money transferred into it automatically every month. $500, $800, or whatever accumulates automatically and pretty quickly to fund your well-earned big rewards.

Make sure your investments are conservative if you’re into your 50s or older. But do make sure they grow, and aren’t parked at a bank with really bad returns. Whether it’s $200,000 or $2 million – conservative investments should still yield around five percent a year before taxes! That will double what you have in the coming eight to 10 years!

If your investments do, or will, include rental property, make sure it’s with 50% down. Pay it down if you have one or have the 50% down if you buy one. Do not make a rental property the reason your finances crash. The risk isn’t worth the income. 50% down lets you sell it in a week no matter what the economy does.

Set up a full emergency account. Most people struggle with the first step of one week’s pay to get started. If you’re financially successful, set up a savings account with three to six months of all your expenses. That way you’re not breaking investments, cashing RRSPs, or using a line of credit in an emergency. If you need big car repairs or a new roof, it’s no longer an emergency, but only an inconvenience.

If you still have a mortgage, it’s time to get serious about paying it down or paying it off. You may just want to write a cheque for the balance and then re-direct what you were paying a month back into your investments. Plan B would be to pay 10% extra each year, cut the leftover term down, and change to weekly payments to cut another four to five years off the time left. You have the money – now just increase what goes on the mortgage.

Lastly, pay it forward. Make sure the kids of friends, your nieces, nephews, grandkids, or families in your church or elsewhere get to learn the lessons you know AND that you live: Put some money into savings each month, live on less than you earn, and learn the difference between needs and wants. Oh and if you care enough to share: Got to Mosaic and get someone a copy of the Money Tools book. They may not listen to you but maybe they’ll read a chapter or two…

Lessons From Last Week’s Book Signing

Every time I do one of my (rare) book signing, I learn a lot. If it isn’t an insight, it’s what I need to explain better, more or differently. From last week at Mosaic Books, it was:

Making your teenager a millionaire: Your teenage relative won’t do it because you tell them and YOU know it’s guaranteed to work. They won’t listen to you and you can’t want it more for them than they want it for themselves.

A teenager isn’t likely to even listen to you. But maybe they’ll “get it” from the two page Money Tools book chapter. They have to read it and understand compounding works better the younger the person investing. You also have to remember that saving $9,300 is like asking you to come up with a few million bucks. Teenagers dream of $300 bucks and a BIG shopping trip to the mall next week. They don’t dream of $9,300 or anything past next month.

That’s where you come in: The chapter is two pages. When they ‘get it’ and work through the compounding math on their own where $9,300 becomes $18,600 in 7 years and $37,200 in 14 years without them doing anything at all – they’ll get committed. At that point you can also help. Maybe you can match what they save, maybe you can add 10 or 20% to what they save or whatever you can afford to boost the odds it’ll happen.

If you contribute anything at all, the deal should be that the investment account is in joint names. Your money is in there and then it’ll assure they don’t take out anything.

Not knowing this or doing this when I was early 20s or so is now one of the top 5 lifetime regrets of mine – for obvious reasons. And I’ll post the more detailed “how to and where to” invest again.

Spend the $20 on the book – at least make them read it and understand it – think about some seed money to get started or to keep going. THAT is starting a family legacy in ways nobody else does…

Investment How To

Money Tools & Rules book: Expanding on the “How to make your teenager a millionaire” chapter:

The fine print first: I only ever give feedback based on what I would do, and I am not an investment broker, investment guru, etc. Always do your due diligence and check with an investment professional, no matter what, because this how-to is for information purposes only!  For someone that age, investments should likely be in diversified good growth mutual funds with a long-term track record and no load fees. To find them, search for Morningstar, an independent rating company of all mutual funds, or it’s U.S. equivalent. Careful just giving someone some money: I would do it on a matching basis. I’ll contribute a dollar for every dollar that you save towards this goal, or I’ll contribute two dollars for every dollar, etc. But tell them a maximum, or a kid who is a great saver will surprise you, and cost you a lot more than you may have wanted to match!

Where to invest: At age of majority, everyone is entitled to contribute to a Tax Free Savings Account (TFSA) to a maximum of $5,500 a year. The great thing about the TFSA is that it isn’t income percentage linked – it’s currently $5,500 a year irrespective of income. And, while it doesn’t get him or her a tax deduction up front, it is also never taxed in the TFSA, and never taxed when it’s taken out! If the person is 20, for example, they can also use the available “room” for the prior years! They can also do it through an RRSP, but that’s to a maximum percentage of their income, and then it will be taxed when it’s withdrawn in retirement. But that’s up to you…

What to invest in: The younger you are, the higher your risk tolerance. That’s simply because you have a vast number of years to average out a bad year with a great year. The older you get, the more you need to protect your principal and not chase higher returns. That changes gradually as you get into your 50s and older. For anyone in their 20s to 40s, THE easiest investment with next to zero commissions and huge diversifications is the S&P 500. It’s a basket of the largest 500 companies – you can’t get much more diversified than that! And you can do it in ten seconds on your own (online or by call). You want (in my opinion) the S&P 500 Index Fund, ETF (electronically traded funds) in Canadian dollars (it avoids you having to do a currency exchange). The historical return over the past 50 plus years is 11.5%. That’s why I use 10% returns in all my examples. I’m using LESS than a 50 year proven track record average!

If you don’t want that, go to Morningstar and search any mutual funds in whatever category you want: Emerging markets, conservative, balanced, etc. by returns. Just make sure you’re only looking at the ones with a long-term track record!

Who to invest with: If you, or another family member is an existing customer of a brokerage firm, that’s worth checking out as to a)whether they’d take another family member with a small account as a favour to keep their (current big family) client and b) what the fees would be! If that doesn’t apply, it will likely need to be an online brokerage account. Most of the large banks have them – just don’t confuse their brokerage division with investing at a bank. That’s generally a bad idea with poor returns! Again, you can compare their published returns with those from Morningstar.

If you’re just starting, any online broker is fine. If you deal with any of the major banks, they all have an online brokerage. You just need a place and an account and can do the rest. They won’t give you advice – just execute whatever you want to buy or sell. No worries if you get the S&P Index funds – click to buy it and leave it alone until you’re in retirement. And for pete’s sake STOP checking it every month…set it and forget it.

How to get started: Open the account where you decide, and how you decide (RRSP or TFSA). I would do it under joint names. That way both names are on it (especially if I’m helping with money), and if it requires joint signatures  you’re sure the person doesn’t do something stupid and make a withdrawal to pay a bill, etc. without your consent and signature. That’s not what this money was designed to do. It was/is meant for retirement and never to be touched until then… When your minor reaches the age of majority and can contribute to an RRSP or TFSA take the investments you’ve already made and move them over to one of those! It’ll protect them from ever having to pay taxes on the returns inside either of these!!

To check reasonable annual returns: Do a web search for “historical S&P returns,” “historical Dow Jones returns,” etc. (On the yourmoneybook.com site you can click on “radio stories” and search “historical returns.” I’ve posted the chart going back about 70 years!! For someone aged 18 to 25, there are more than four decades before they should access the money, and thus four decades of markets going up and down, so the historical averages apply, and are well above the 10% used in the Money Tools example of How to Make Your Teenager a Millionaire. If you’d like, you can use a different guestimate of returns for the next four decades, and re-do the easy math (or with an online calculator) of how long it takes for the money to double. IE: If you use 8%, it’d be 9 years.

Hopefully that gives you some of the how-to and/or steps to get from here to there. (updated 11/10/2019)

Yes, You Can Get a 10% Investment Return

Last week marked the 10th anniversary of the Lehman Brothers bankruptcy on October 15th, 2008. That was the straw that broke the camel’s back and what caused massive selloffs in investments of all kinds and the unofficial start of the financial meltdown from Wall Street to home owners. Eventually, it ended up wiping out three trillion dollars of wealth. Of the biggest investment firms failing kind of made the meltdown official.

At this depth of the meltdown, vast numbers of investors took their money out of the market. Yet, if you had invested in the Standard and Poor 500 – which is a basket of the largest 500 corporations, on the day before Lehman Brothers went bankrupt, you would today have a return of 11% per year for the last decade.

I talk about investing, in basic terms, a couple of times a year, and it never fails that I get two or three emails that using a 10% return isn’t reasonable. Or the question is where to get that kind of return. Well – here is proof once again. At the worst day since the great depression, it once again paid to invest and not pull your saving out. Yes, an 11% average annual return for the last decade. THAT is a long enough time period to be a fair measurement. If you want to go back over 50 years, the S&P return is still over 10%.

Do the research for five minutes and your own due diligence, but anyone under age 40 or so doesn’t need complex investing advice. They’re 20 or more years from retirement and can ride out three or four more cycles. Nothing could be better for someone in their 20s than to have their money in the S&P. It’s diversified because it’s 500 companies around the globe, it doesn’t need management fees or a broker and has a 50 plus year proven track record. I’m not sure what else anyone would need.

By the way, for anyone older than their 40s, a so-called 60-40 portfolio of 60% stocks and 40% bonds bought the day before the great meltdown would have been an 8% return on this 10th anniversary.

Time heals all investments. When the market corrects, lots of people panic, instead of seeing it as a temporary setback that has more upside than downside. No, you won’t more than maybe 5% this year. No, you won’t be down like you were in 2008, or up more than 25% as was the case a couple of years ago. If you’re not invested for the longer term of more than five years – stay away. If you’re needing to be up on a weekly basis – stay away. For the rest of the world, set it and forget it. Don’t even open your statements more than once a years. You’ll be happy you did….

George Boelcke – Money Tools & Rules book – yourmoneybook.com

Another Week – Another Scam

You are not exempt from the law of gravity. You and I also aren’t exempt from that little part of our brain that gets greedy and wants it all today. That comes to spending as much as investment returns.

On the spending part, we think that it’s not really that much per month or in total, and we get wildly and wrongly optimistic that we’ll pay it off sooner than reality or our income will ever allow. Besides, we think we make maybe $50,000 and we deserve it. Well, we don’t make $50,000 by the time taxes come off and all the bills we already have. But that little part of our brain conveniently forgets about that.

We can get just as stupid about investment returns when that part of our brain forgets about common sense. Savings accounts are around 1% right now, and the stock market has a historical return of 8% to 10%. So when someone tells us we can get a risk-free 18% to 22% return we have two choices: We can laugh and tell the guy to get lost because it’s always a scam, or has a big catch. But often we don’t. That little greedy part of our brain says: Well, that’s a great idea – and never mind the fine print, that we’ve never heard of the firm, and that it’s way too good to be true.

And thus, another scam or Ponzi scheme succeeds. The latest one unraveled in Alberta for over $52 million. Surprise! The police can’t find the people involved and the accounting firm can’t find any of the money. This one even conned a really successful Western Canadian businessman for $6 million.

If it’s 20 times what the bank pays, and double or triple the best market returns, it’s a scam. Stop and listen to the part of your brain that has the common sense gene and know only slow and steady wins the investment race.

All that glitters is not gold anymore. The hype of gold seems to be cooled off – or turned cold. That can’t miss investment and the only safe place from inflation was another fad like so many others. Sure, those still invested and everyone who has a stake in selling you gold tells you it’s just temporary. If you look through our stories, I’ve warned you away from golf three or four times. Now it’s down to the $1,300 area code from a high of $1,900 or so.

That wasn’t much of a hard prediction. Gold is massively volatile and subject to extreme downturns. A 30-second internet search past all the hype would have told anyone that. Tons of people have lost a fortune. That’s sad, but totally unnecessary. Slow and steady investing always wins the investment race. Those people got greedy and I guarantee they’ll get greedy again on the next sure thing in the hope of making it all back in one shot. They should have gone to Vegas, instead.

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?

Black Monday: Why You Should Learn the Lessons

Last week we talked about the nightmare of the bankruptcy of Lehman Brothers, the sale, or give away of Merrill, and the $85 billion loan injection into insurance giant AIG.

There are some big lessons for all of us individuals, as well. Sure, our first thought is about our mutual funds and RRSPs. But how many of us live on credit and are buried in payments of one kind or another?

As long as our income keeps coming in, we’re fine. But what happens when we have to do without a paycheque for two months? That’s the same as cash-flow problems for companies.

What are the odds of doing well, over the long term, if we use borrowed money to do our investing? Now, it’s fine to get a one-year RRSP loan, that’s different. But how many e mails do you want from people who look a line of credit to buy gold at around $1,000 an ounce and it’s now around $800? How many examples would you like of second mortgages to buy tech stocks in the 90s because they were never going to go down and people didn’t want to get left out? It is not investing – that is gambling, pure and simple. When someone jumps out of a 50-storey building, for 49 floors they can convince themselves they can fly. But then reality re-appears in a hurry when they hit bottom.

It’s called leverage and it’s a very dangerous shell game. One of the bankrupt firms was leveraged 33 to 1. That is: for ever dollar of assets, they borrowed $33. When shares, or in their case, these mortgage portfolios they invested in, were going up they were making a ton of money. But with a 33 to 1 ratio if investments drop three percent – that’s all – three percent – their entire assets are wiped out.

When you invest with cash – that’s the most you can lose. When it’s on margin, through leverage, you can be wiped out AND still owe a ton of money after all your cash investment is gone!

The good news? These days the rich will absolutely get richer! Why? There are a bunch of companies who have been around for decades whose stock is trashed for no reason. They have great dividends and their shares just got sucked down with the whole market.

Could you have been one of the rich people? You bet. If you’d have the cash to put into savings instead of paying the credit card, the mortgage, line of credit or the car payments.