Tag Archives: RRSP

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.

Where Exactly Is All That Money?

Good news and bad news: It’s tax season, and most of us are likely getting a refund. That’s both the good news, for obvious reasons, but also the bad news.

Most people tend to think that a tax refund is free money. As a result, they tend to treat it as such, and generally blow it. Unfortunately, it’s not found money – it’s just refunding money that you overpaid all year long.

A big refund is bad news in that you have had too much money deducted from your pay each month. All you’ve done is given the government an interest free loan. You need to go to your payroll department and increase your exemptions. When you do that, it’ll increase your net income on each paycheque.

When you now have that money on each paycheque, you can use it all year long and not the government. If it’s a big increase in your net pay, use it to immediately start an RRSP or Tax Free Savings Account. You’ll be funding it with free money and your net pay won’t be any less than it was before you fixed your deductions!

One more question with this being the big tax refund month. I was thinking the other day where exactly all our money is, and has gone.

Sometime today, just add up what you’ve earned over the past ten years. Or make it five years if you haven’t worked for a decade. It’s not hard to do, and close counts. Take your T4 slips, or a calculator, and multiply your income by the last 120 months. Sure, you had raises, promotions, or whatever. Close counts.

What you’ll have is a pretty staggering number. Your pay over the past ten years has added up to a huge amount of money. Someone earning $3,000 a month has made $360,000 in the last decade. Yet, most people have never thought of that.

Now add up what you have in RRSPs, saving, and investments. The difference between what you have in savings and what you’ve earned is spent and gone. I know, I know – lots of that money includes rent, mortgage payments, groceries, utilities and the likes.

But, if you’re like most people, what you have in savings is less than 5% of what you’ve earned. That should scare you, or should be a huge wakeup call. I’m not even talking about adding up your monthly bills or the total debt load you have.

Just comparing your 10-year income to what’s actually left is enough food for thought. Now think of how many more decades you can, or choose to work. If you do another decade what you’ve done for the last decade in borrowing, not doing a budget, and not saving much, where will you be? Financially, can you afford another decade like the last one?

I got Fired and Ripped-Off Twice

…other than that, it’s a great week.

Getting fired by CIBC Wood Gundy was both humiliating and a little unnerving a couple of months ago. It’s never happened to me before, and I needed the few months to calm down before I could use the words CIBC Wood Gundy in a sentence without bad language.

You see, I received a call from their national no-service discount brokerage department: Your RRSP account has been transferred here, please call us. I was simply dumped by the actual full-service broker because they weren’t making enough money off me, and I wasn’t close to the $100,000 accounts they want to keep. They handled it very badly, and everyone from my advisor, to their PR department, couldn’t even be bothered to return my calls.

It turns out that it can happen to you, too. According to a story in Money Sense magazine, about 20% of clients are simply dumped each year. It is those of us who don’t buy and sell lots and who don’t have $100,000 – or even close. It also happened to a family member with the Royal Bank where he, too, was bounced out of the branch and into the no-service national discount brokerage.

But you’ll get a letter that says it’s actually great news and you’ll be “better serviced.” You’ll never get told it’s because you’re a lousy little client, because that breaches industry codes of ethics and could lose someone their professional designation. Yes, I’ll be pursuing a complaint with the ethics boards against CIBC and the broker. In the U.S. it’s worse as reports are coming out that some firms will kick you out if your portfolio is under $250,000.

Now to the rip-offs: The big no-service banks have all expressed their thanks and gratitude for the bailouts and cash-infusion us taxpayers gave them by increasing almost all their service charges and dragging their heals on the prime rate decrease the middle of October, passing on half of it for a while.

But their charges are getting insane. I had to re-order some cheques for an account I need to keep for another year or so. They charged me $27 for one pad of cheques! I was so shocked I didn’t know what to say. Reason 426 to deal at a credit union where you never pay for cheque orders.

The second one was an attempted rip-off. I paid a credit card payment on-line and entered my transit number wrong. Well, two days later I got an e-mail that my payment had bounced and there was a $30 NSF charge. The odds of me bouncing a cheque, or paying a $30 service charge, are the same: They’re zero! It was a keypunch error and took two calls and 15 minutes to reverse. They just love to call everything NSF to be able add on that $30 when it costs the banks around 17 cents to process a reversal.

When these things happen to you, do not take it lying down. Make a couple of calls, challenge them and ask for what you want. YOU are the customer and getting service-charged to death is not something you have to accept. Or in the words of the captain on Hill Street Blues: Be careful out there.