CAPITAL GAINS TAXES: ANOTHER REASON VANGUARD DESTROYS MUTUAL FUNDS
One of the best books I’ve read on passive or index investing is The Elements of Investing by Burton Malkiel and Charles Ellis. The book is full of proof that buying mutual funds is a losers game for us, the investors.
One point they discuss that is not widely considered is the significant capital gains taxes that mutual fund investors are responsible for. Mutual fund managers are very active in buying and selling stocks in their fruitless attempt to beat the market.
Every time they sell a stock for a gain, you the investor have to pay tax on that gain. Many mutual funds turn over their stocks 100% in any year; that means the stocks they hold at the beginning of the year are completing different from the ones they hold at the end of the year.
Compare this to index funds which own the whole market. Unless a company declares bankruptcy or is bought by another company, the turnover is very low. This tax efficiency becomes a major advantage of whole market index funds. Mutual funds can create large tax liabilities if you hold them outside your tax-advantaged retirement plans (that’s a fancy word for outside your RRSP or TFSA accounts).
To overcome the drag of high fees and taxes, a mutual fund would have to outperform the market by 4.3 percentage points per year just to break even with whole market index funds.
The odds that you can find an actively managed mutual fund that will perform that much better than an index fund are virtually zero.
Monday, December 31, 2018
Monday, December 24, 2018
How Much Your Need To Save For Retirement
It depends. You want to save enough so you can have a secure retirement but not too much that you deprive yourself during your working years. How much to save depends on a bunch of different things like your yearly family income, are you married or not, do you have children, will you keep working until age 65, and do you own your home.
The common wisdom is you will spend roughly 70% of your yearly income when you retire. For example, if your family income is $100,000 average during your working years, you will need to spend $70,000 a year to maintain your standard of living in retirement.
The problem with this 70% number is it makes it very difficult to save enough while working unless you dramatically cut expenses when you are young. It also doesn’t take into account the fact that you won’t be supporting your children, or have a mortgage in your 60s and 70s.
Actuaries has been studying spending habits as we age for years. Their conclusions are very enlightening and reassuring. Basically, after taking into account the drop in “fixed” expenses like your children and mortgage, the vast majority of people will only need to replace between 40% and 50% of their working income in retirement*. Don’t forget, you will also be entitled to Old Age Security (OAS) and Canada Pension Plan (CPP) in your 60s that will add to your income.
At this level of income, retirees can enjoy the same living standards they had while working. The studies also showed that people did not change their spending habits much after retiring so living the same way you did when you were younger is quite a reasonable expectation. In fact spending actually decreased significantly in later stages of retirement as age and health issues make it harder to spend the same amount of money as you did as a “young” retiree.
What does this all mean for you?
Despite what you might hear in the media, collectively we are not all doomed to a subsistence retirement, as long as you save enough to replace roughly 50% of your income for retirement.
That’s sound better, but how much do you need to save every year while working to reach that 50% target? In order to have the same lifestyle in retirement as when you were working, you will need to save 6-10% of your yearly income each and every year from age 25 to 65. No excuses. 10% is more conservative and will even allow a cushion for the chance that you are without a job for a short while at some point.
* If you are interested in finding out more about how I reached this 40% to 60% replacement rate, read “The Real Retirement” by Fred Vettese. He goes into wonderful detail about the data and research.
HOW MUCH YOU NEED TO SAVE FOR RETIREMENT
It depends. You want to save enough so you can have a secure retirement but not too much that you deprive yourself during your working years. How much to save depends on a bunch of different things like your yearly family income, are you married or not, do you have children, will you keep working until age 65, and do you own your home.
The common wisdom is you will spend roughly 70% of your yearly income when you retire. For example, if your family income is $100,000 average during your working years, you will need to spend $70,000 a year to maintain your standard of living in retirement.
The problem with this 70% number is it makes it very difficult to save enough while working unless you dramatically cut expenses when you are young. It also doesn’t take into account the fact that you won’t be supporting your children, or have a mortgage in your 60s and 70s.
Actuaries has been studying spending habits as we age for years. Their conclusions are very enlightening and reassuring. Basically, after taking into account the drop in “fixed” expenses like your children and mortgage, the vast majority of people will only need to replace between 40% and 50% of their working income in retirement*. Don’t forget, you will also be entitled to Old Age Security (OAS) and Canada Pension Plan (CPP) in your 60s that will add to your income.
At this level of income, retirees can enjoy the same living standards they had while working. The studies also showed that people did not change their spending habits much after retiring so living the same way you did when you were younger is quite a reasonable expectation. In fact spending actually decreased significantly in later stages of retirement as age and health issues make it harder to spend the same amount of money as you did as a “young” retiree.
What does this all mean for you?
Despite what you might hear in the media, collectively we are not all doomed to a subsistence retirement, as long as you save enough to replace roughly 50% of your income for retirement.
That’s sound better, but how much do you need to save every year while working to reach that 50% target? In order to have the same lifestyle in retirement as when you were working, you will need to save 6-10% of your yearly income each and every year from age 25 to 65. No excuses. 10% is more conservative and will even allow a cushion for the chance that you are without a job for a short while at some point.
* If you are interested in finding out more about how I reached this 40% to 60% replacement rate, read “The Real Retirement” by Fred Vettese. He goes into wonderful detail about the data and research.
Monday, December 17, 2018
It Doesn't Really Matter
My second ever rock concert was to watch the 80’s glam band Platinum Blond. Their big hit was called “It Doesn’t Really Matter”. I find myself repeating that line in my mind when I’ve been asked some financial questions over the years. The most common questions I get from students, former students, colleagues, family and friends that make me think “Platinum Blonde” include:
Which Canadian etf should I buy – XIC, XIU and VCN (all Canadian low cost etfs)?
How much should I save for retirement – 6%,10%, 15% or some other amount?
How often should I rebalance my etfs- twice a year, once a year, or longer?
When should I buy the etfs – all at once, or little bit throughout the year?
Do I need to buy European, Japanese and emerging market etfs?
Which discount broker should I use – big bank broker (eg. Scotia Itrade), or independent broker (Questrade)?
In my mind I’m thinking that these people asking these questions are already winning the investing game. They’ve decided to take the time to learn how to DIY Invest. They have decided not to become the suckers that the big banks, mutual fund companies and even financial advisors rely on to pay for their lifestyles.
If you are one of these folks, congratulations!! The fact you are asking very specific questions on the nuts and bolts of DIY Investing means you are already 95% of the way there to retiring comfortably.
These questions listed here are the other 5% and that is why the answer to these questions typically is
“It doesn’t really matter”; just do what is easier for you and what improves the chances that you will continue to save 6-15% of your income in low cost etfs until you reach retirement age.
In any case, here are how I’d answer the questions:
The difference between XIC, XIU, VCN is insignificant. Buy one and stick with it.
Save between 6% and 15% depending on your chicken index.
Try to rebalance once per year, but if you forget, do it when you remember to.
I’d buy my Canadian etf first when I have the money, then I’d buy my International etf when I have the next block of money, and then finally my Canadian bond etf. 3 purchases during the year; that’s it, no more trading.
If you are more comfortable sticking only to Canadian and US stocks, that’s okay. I’ve seen analysis that adding non North American stocks to your portfolio has not significantly boosted returns since 1970. Remember Warren Buffett will put all his money in the US broad market when he can no longer invest for himself.
If you like the convenience of setting up a brokerage account with your personal bank, then do that. You pay a little more each time to buy an etf, but since you won’t be trading and will make few purchases, the extra cost is not significant.
IT DOESN’T REALLY MATTER
IT DOESN’T REALLY MATTER
My second ever rock concert was to watch the 80’s glam band Platinum Blonde perform at the Fire Fighters Club in Markham. Their big hit was called “It Doesn’t Really Matter”. I find myself repeating that line in my mind when I’ve been asked some financial questions over the years. The most common questions I get from students, former students, colleagues, family and friends that make me think “Platinum Blonde” include:
Which Canadian etf should I buy – XIC, XIU and VCN (all Canadian low cost etfs)?
How much should I save for retirement – 6%,10%, 15% or some other amount?
How often should I rebalance my etfs- twice a year, once a year, or longer?
When should I buy the etfs – all at once, or little bit throughout the year?
Do I need to buy European, Japanese and emerging market etfs?
Which discount broker should I use – big bank broker (eg. Scotia Itrade), or independent broker (Questrade)?
In my mind I’m thinking that these people asking these questions are already winning the investing game. They’ve decided to take the time to learn how to DIY Invest. They have decided not to become the suckers that the big banks, mutual fund companies and even financial advisors rely on to pay for their lifestyles.
If you are one of these folks, congratulations!! The fact you are asking very specific questions on the nuts and bolts of DIY Investing means you are already 95% of the way there to retiring comfortably.
These questions listed here are the other 5% and that is why the answer to these questions typically is
“It doesn’t really matter”; just do what is easier for you and what improves the chances that you will continue to save 6-15% of your income in low cost etfs until you reach retirement age.
In any case, here are how I’d answer the questions:
The difference between XIC, XIU, VCN is insignificant. Buy one and stick with it.
Save between 6% and 15% depending on your chicken index.
Try to rebalance once per year, but if you forget, do it when you remember to.
I’d buy my Canadian etf first when I have the money, then I’d buy my International etf when I have the next block of money, and then finally my Canadian bond etf. 3 purchases during the year; that’s it, no more trading.
If you are more comfortable sticking only to Canadian and US stocks, that’s okay. I’ve seen analysis that adding non North American stocks to your portfolio has not significantly boosted returns since 1970. Remember Warren Buffett will put all his money in the US broad market when he can no longer invest for himself.
If you like the convenience of setting up a brokerage account with your personal bank, then do that. You pay a little more each time to buy an etf, but since you won’t be trading and will make few purchases, the extra cost is not significant.
My second ever rock concert was to watch the 80’s glam band Platinum Blonde perform at the Fire Fighters Club in Markham. Their big hit was called “It Doesn’t Really Matter”. I find myself repeating that line in my mind when I’ve been asked some financial questions over the years. The most common questions I get from students, former students, colleagues, family and friends that make me think “Platinum Blonde” include:
Which Canadian etf should I buy – XIC, XIU and VCN (all Canadian low cost etfs)?
How much should I save for retirement – 6%,10%, 15% or some other amount?
How often should I rebalance my etfs- twice a year, once a year, or longer?
When should I buy the etfs – all at once, or little bit throughout the year?
Do I need to buy European, Japanese and emerging market etfs?
Which discount broker should I use – big bank broker (eg. Scotia Itrade), or independent broker (Questrade)?
In my mind I’m thinking that these people asking these questions are already winning the investing game. They’ve decided to take the time to learn how to DIY Invest. They have decided not to become the suckers that the big banks, mutual fund companies and even financial advisors rely on to pay for their lifestyles.
If you are one of these folks, congratulations!! The fact you are asking very specific questions on the nuts and bolts of DIY Investing means you are already 95% of the way there to retiring comfortably.
These questions listed here are the other 5% and that is why the answer to these questions typically is
“It doesn’t really matter”; just do what is easier for you and what improves the chances that you will continue to save 6-15% of your income in low cost etfs until you reach retirement age.
In any case, here are how I’d answer the questions:
The difference between XIC, XIU, VCN is insignificant. Buy one and stick with it.
Save between 6% and 15% depending on your chicken index.
Try to rebalance once per year, but if you forget, do it when you remember to.
I’d buy my Canadian etf first when I have the money, then I’d buy my International etf when I have the next block of money, and then finally my Canadian bond etf. 3 purchases during the year; that’s it, no more trading.
If you are more comfortable sticking only to Canadian and US stocks, that’s okay. I’ve seen analysis that adding non North American stocks to your portfolio has not significantly boosted returns since 1970. Remember Warren Buffett will put all his money in the US broad market when he can no longer invest for himself.
If you like the convenience of setting up a brokerage account with your personal bank, then do that. You pay a little more each time to buy an etf, but since you won’t be trading and will make few purchases, the extra cost is not significant.
Monday, December 10, 2018
Yale University Investing Advice
David Swensen is an investing superstar. He manages Yale University’s endowment which is valued at over $22 billion. Over the past two decades, Yale’s endowment has grown an average of 16.8 percent a year, more than any university, foundation or pension fund. Here is some of his advice for individual investors to D.I.Y. invest.
Paying for Advice :
“Paying up to 1.25 percent of the total investment. That means an investor with a half-million dollars invested in a retirement 401K would end up paying about $6,250 a year in fees.
Over 20 years, that person is losing hundreds of thousands of dollars because of fees. Of course, that’s better than not investing at all, and a lot of people want an adviser to help them. Most of these investment services provide pretty mediocre advice, and it’s just not worth giving them a percentage of your life savings.
That’s the wrong path and the reason it’s the wrong path is it’s a very, very expensive path.”
What to Invest in:
“Fees are also the big reason you should buy index funds instead of classic mutual funds. Index funds, which track market segments like the S&P 500, are a lot cheaper. The vast majority of professional mutual fund managers fail to beat those indexes.
When you look at the results on an after-fee, after-tax basis over reasonably long periods of time, there’s almost no chance that you end up beating an index fund the odds are 100 to 1.
Don’t try to pick individual stocks, instead pick nonprofit funds like Vanguard”
YALE UNIVERSITY INVESTING ADVICE
YALE UNIVERSITY INVESTING ADVICE
David Swensen is an investing superstar. He manages Yale University’s endowment which is valued at over $22 billion. Over the past two decades, Yale’s endowment has grown an average of 16.8 percent a year, more than any university, foundation or pension fund. Here is some of his advice for individual investors to D.I.Y. invest.
Paying for Advice :
“Paying up to 1.25 percent of the total investment. That means an investor with a half-million dollars invested in a retirement 401K would end up paying about $6,250 a year in fees.
Over 20 years, that person is losing hundreds of thousands of dollars because of fees. Of course, that’s better than not investing at all, and a lot of people want an adviser to help them. Most of these investment services provide pretty mediocre advice, and it’s just not worth giving them a percentage of your life savings.
That’s the wrong path and the reason it’s the wrong path is it’s a very, very expensive path.”
What to Invest in:
“Fees are also the big reason you should buy index funds instead of classic mutual funds. Index funds, which track market segments like the S&P 500, are a lot cheaper. The vast majority of professional mutual fund managers fail to beat those indexes.
When you look at the results on an after-fee, after-tax basis over reasonably long periods of time, there’s almost no chance that you end up beating an index fund the odds are 100 to 1.
Don’t try to pick individual stocks, instead pick nonprofit funds like Vanguard”
David Swensen is an investing superstar. He manages Yale University’s endowment which is valued at over $22 billion. Over the past two decades, Yale’s endowment has grown an average of 16.8 percent a year, more than any university, foundation or pension fund. Here is some of his advice for individual investors to D.I.Y. invest.
Paying for Advice :
“Paying up to 1.25 percent of the total investment. That means an investor with a half-million dollars invested in a retirement 401K would end up paying about $6,250 a year in fees.
Over 20 years, that person is losing hundreds of thousands of dollars because of fees. Of course, that’s better than not investing at all, and a lot of people want an adviser to help them. Most of these investment services provide pretty mediocre advice, and it’s just not worth giving them a percentage of your life savings.
That’s the wrong path and the reason it’s the wrong path is it’s a very, very expensive path.”
What to Invest in:
“Fees are also the big reason you should buy index funds instead of classic mutual funds. Index funds, which track market segments like the S&P 500, are a lot cheaper. The vast majority of professional mutual fund managers fail to beat those indexes.
When you look at the results on an after-fee, after-tax basis over reasonably long periods of time, there’s almost no chance that you end up beating an index fund the odds are 100 to 1.
Don’t try to pick individual stocks, instead pick nonprofit funds like Vanguard”
Monday, December 3, 2018
The Most Important Advice from Warren Buffett's 2017 Annual Letter to Shareholders
Mr. Buffett, as usual, has lots of useful advice to help ordinary investors improve their investing skill and increase the odds of success in achieving investment goals.
From this year’s letter, he addressed the fact that stocks will go down from time to time and instead of panicking, we should follow Rudyard Kipling’s advice.
“When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:
If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you
Yours is the Earth and everything that’s in it.”
The Most Important Advice from Warren Buffett's 2017 Annual Letter to Shareholders
From this year's letter, he addressed the fact that stocks will go down from time to time and instead of panicking, we should follow Rudyard Kipling's advice.
"When major declines occur, however, they offer extraordinary opportunities to those who are not handicapped by debt. That’s the time to heed these lines from Kipling’s If:
If you can keep your head when all about you are losing theirs . . .
If you can wait and not be tired by waiting . . .
If you can think – and not make thoughts your aim . . .
If you can trust yourself when all men doubt you
Yours is the Earth and everything that’s in it.”
Monday, November 26, 2018
"If You Can" by William Bernstein
William Bernstein is a well know personal finance writer who tries his best to convince people to save for retirement using low cost broadly diversified index funds. He has written a few books on the topic but recently released a short e-book for young people who need help investing. You could read this book and learn quite a bit on how to DIY.The book's advice in incredibly easy to follow and it works. Here is really all you need to know.
The book is written for an American audience so I've changed it to meet a Canadian's needs.
1. Save 15% of your pretax income, each and every year from your first year of working until retirement. So if your yearly salary is $60,000, save $9000 per year.
Remember our Canadian experts Fred Vettese and Malcolm Hamilton think 15% is too much to save. It means you will have more money to spend in retirement than when you were busy working and raising a family. But, the decision is yours.
2. Invest this money in 3 things equally:
1/3 in a low cost Canadian etf like Vanguard Canada's VCN.
1/3 in a low cost international etf like Vanguard Canada's VUN
1/3 in a low cost Canadian bond fund like Vanguard Canada's VAB
3. Once a year, re-balance your 3 etfs so that they each stay at 1/3 of your total portfolio. For example, if bonds do well one year, you may sell some VAB and buy some VCN and/or VUN. Or else, don't buy any VAB next year but instead purchase only VCN and/or VUN. Just keep the 3 etfs at equal value.
That's all folks.
Now that Vanguard has introduced their all in one product, you don't even have to worry about buying 3 etfs and rebalancing each year. Vanguard does it all for you. The job is even easier now. Your job is to set up a self directed trading account with any of the big banks and save. Once a year, buy some VGRO or VBAL or VCNS and forget about it .
Do this every year for 40 years, and you should have a superb retirement.
If your company offers you a pension plan and together you contribute at least 15% of your pay to it, you don't have to save anything more for retirement. Just make sure you are out of debt before you retire.
Monday, November 19, 2018
IS THE STOCK MARKET OVERVALUED? DOES IT MATTER?
IS THE STOCK MARKET OVERVALUED? DOES IT MATTER?
If you spend any time watching or reading about the stock market, I’m sure you will often hear debate on whether now is a good time to invest. Some will argue that the market is overvalued and is due for a drop, while equally intelligent sounding people will argue the market is not expensive and now is a good time to invest.
We’ll they can’t both be right, can they? And does it really matter in the end whether the market goes up or down 10 or even 20% in the next few months?
Question #1: Is the stock market overvalued? We’ll focus on the USA and Canada for now.
The case for overvalued: Robert Shiller from Yale University believes the markets are overvalued because the price to earnings ratio of companies that make up the S&P 500 is very high relative to its 136 year average. His price to earnings ratio is averaged over the past 10 years to smooth out super strong and super weak years. It’s commonly called the CAPE 10.
The case for not being too overvalued (no one is really arguing stocks are cheap today): Larry Swedroe from etf.com believes that Robert Shiller’s CAPE 10 is flawed for a variety of reasons. His main argument is if you remove the horrible 2008-2010 years when earnings collapsed in the US, the numbers look a lot better. Secondly, the data that Robert Shiller uses in his historic calculations is just not that accurate. Instead Larry thinks the data used should start around 1960 instead of 1871. Using Larry’s data set, the S&P 500 is not as overvalued as Robert Shiller suggests.
In Larry’s camp is Warren Buffett who also believes the market isn’t cheap but considering how low bond interest rates are, he doesn’t see the current valuation as being that problematic.
Conclusion: Who the heck knows? Probably not cheap but your guess is as good as mine.
Question #2: Is it worth worrying about answering question #1 above?
Probably not, because a guaranteed answer is not available. If you are worried that future returns will not be the same as past returns, you could always increase your savings from 6% to 10% of income.
Secondly, in any given year, the stock market can be up or down 15 or 20%. If you have the courage to wait and then buy in a dip, you can turbo boost your returns. For example, from April 24, 2015 to January 20, 2106, the TSX was down 23%. If you were worried that stocks were too expensive last year, you could have bought them for a 23% discount a few months ago. Since the January low, stocks have rebounded and are up 20% from the lows. Do you have to courage to buy when the world is telling you to sell?
Lastly, none of these month to month gyrations will matter much if you invest faithfully for 30 or 40 years. Far more important is sticking to a plan year after year, decade after decade, then re-balancing as required and forgetting the market noise.
If you spend any time watching or reading about the stock market, I’m sure you will often hear debate on whether now is a good time to invest. Some will argue that the market is overvalued and is due for a drop, while equally intelligent sounding people will argue the market is not expensive and now is a good time to invest.
We’ll they can’t both be right, can they? And does it really matter in the end whether the market goes up or down 10 or even 20% in the next few months?
Question #1: Is the stock market overvalued? We’ll focus on the USA and Canada for now.
The case for overvalued: Robert Shiller from Yale University believes the markets are overvalued because the price to earnings ratio of companies that make up the S&P 500 is very high relative to its 136 year average. His price to earnings ratio is averaged over the past 10 years to smooth out super strong and super weak years. It’s commonly called the CAPE 10.
The case for not being too overvalued (no one is really arguing stocks are cheap today): Larry Swedroe from etf.com believes that Robert Shiller’s CAPE 10 is flawed for a variety of reasons. His main argument is if you remove the horrible 2008-2010 years when earnings collapsed in the US, the numbers look a lot better. Secondly, the data that Robert Shiller uses in his historic calculations is just not that accurate. Instead Larry thinks the data used should start around 1960 instead of 1871. Using Larry’s data set, the S&P 500 is not as overvalued as Robert Shiller suggests.
In Larry’s camp is Warren Buffett who also believes the market isn’t cheap but considering how low bond interest rates are, he doesn’t see the current valuation as being that problematic.
Conclusion: Who the heck knows? Probably not cheap but your guess is as good as mine.
Question #2: Is it worth worrying about answering question #1 above?
Probably not, because a guaranteed answer is not available. If you are worried that future returns will not be the same as past returns, you could always increase your savings from 6% to 10% of income.
Secondly, in any given year, the stock market can be up or down 15 or 20%. If you have the courage to wait and then buy in a dip, you can turbo boost your returns. For example, from April 24, 2015 to January 20, 2106, the TSX was down 23%. If you were worried that stocks were too expensive last year, you could have bought them for a 23% discount a few months ago. Since the January low, stocks have rebounded and are up 20% from the lows. Do you have to courage to buy when the world is telling you to sell?
Lastly, none of these month to month gyrations will matter much if you invest faithfully for 30 or 40 years. Far more important is sticking to a plan year after year, decade after decade, then re-balancing as required and forgetting the market noise.
Monday, November 5, 2018
INDEX CARD INVESTING
INDEX CARD INVESTING
Investing doesn’t have to be complicated. It shouldn’t be complicated but bankers and financial planners want to complicate things so you need to go to them for advice. Here’s the newest thing I’ve heard of with respect to simplifying investing, something I’m trying to do with my blog.
The index card you see above came from a University of Chicago professor who was being interviewed on how the financial industry tries to overly complicate investing. The index card was his brilliant response.
To translate for a Canadian audience:
Accept any employer matching contributions to your RRSP
Invest in low cost index funds
Save 20% of your income
Pay off all credit cards in full every month
Maximize your government assisted saving programs (RRSP and TFSA)
My only issue is the 20% savings rate. This is very high and will mean you will have more income in retirement than you had while working and raising your family. Our Canadian experts recommend a savings rate of between 6 and 10% to achieve to same standard of living in retirement that you had while working.
If you are planning on retiring before age 65, then increasing your savings rate makes sense. Your spouse and kids may not support you here, but that’s a decision that is up to you and your family.
One disagreement aside, this index card advice really does do a great job of visually showing that you can do it alone. Take a few moments to review the blog postings from December and consider how doable it is to become a DIY investor and how much money you will save over your working life.
I hope you will find it in you to go this route. Happy DIYing!!
To see a clearer version of the index card:
https://www.washingtonpost.com/news/wonk/wp/2013/09/16/this-4×6-index-card-has-all-the-financial-advice-youll-ever-need/
Investing doesn’t have to be complicated. It shouldn’t be complicated but bankers and financial planners want to complicate things so you need to go to them for advice. Here’s the newest thing I’ve heard of with respect to simplifying investing, something I’m trying to do with my blog.
The index card you see above came from a University of Chicago professor who was being interviewed on how the financial industry tries to overly complicate investing. The index card was his brilliant response.
To translate for a Canadian audience:
Accept any employer matching contributions to your RRSP
Invest in low cost index funds
Save 20% of your income
Pay off all credit cards in full every month
Maximize your government assisted saving programs (RRSP and TFSA)
My only issue is the 20% savings rate. This is very high and will mean you will have more income in retirement than you had while working and raising your family. Our Canadian experts recommend a savings rate of between 6 and 10% to achieve to same standard of living in retirement that you had while working.
If you are planning on retiring before age 65, then increasing your savings rate makes sense. Your spouse and kids may not support you here, but that’s a decision that is up to you and your family.
One disagreement aside, this index card advice really does do a great job of visually showing that you can do it alone. Take a few moments to review the blog postings from December and consider how doable it is to become a DIY investor and how much money you will save over your working life.
I hope you will find it in you to go this route. Happy DIYing!!
To see a clearer version of the index card:
https://www.washingtonpost.com/news/wonk/wp/2013/09/16/this-4×6-index-card-has-all-the-financial-advice-youll-ever-need/
Monday, October 29, 2018
WHAT WARREN BUFFETT WILL DO WITH HIS FAMILY MONEY WHEN HE DIES
WHAT WARREN BUFFETT WILL DO WITH HIS FAMILY MONEY WHEN HE DIES
Warren Buffett is widely regarded as the best stock picker in the world. For over 50 years he has very successfully operated Berkshire Hathaway as a holding company purchasing companies trading primarily on the New York Stock Exchange.
When Warren is no longer buying and selling, he will place all his family money into only 2 investments: 90% will go into a index fund that tracks the 500 largest companies in America (S&P 500 ETF) and 10% will go into cash. That’s it. The world’s best investor knows how it is virtually impossible for normal folks who are not experts to beat the market.
You and I are not Warren Buffett. When I was a kid, I thought I was good enough to become a major league baseball player. Soon enough, I realized that would never happen. Thinking you can buy and sell stocks when your competition are guys like Warren Buffett is almost as crazy as my dream of playing for the Blue Jays.
Most professional money managers can’t do it. There is a lot of research that shows the vast majority of “professionals” can’t beat the performance of a low cost exchange traded fund like the Vanguard All World Index ETF.
So why even try? Is you mess up with your buying and selling, and there is a very good chance you will, you risk not having enough money for retirement.
By buying the whole index and following the set it and forget it investing plan, you will outperform 75% of mutual funds consistently.
One last point: You know that hot mutual fund that has beaten the market the past 5 years that financial press keeps talking about? Chances are it will under perform the broad market during the next 5 years. It’s called reverting to the mean and it’ll happen as soon as you give them your money.
Warren Buffett is widely regarded as the best stock picker in the world. For over 50 years he has very successfully operated Berkshire Hathaway as a holding company purchasing companies trading primarily on the New York Stock Exchange.
When Warren is no longer buying and selling, he will place all his family money into only 2 investments: 90% will go into a index fund that tracks the 500 largest companies in America (S&P 500 ETF) and 10% will go into cash. That’s it. The world’s best investor knows how it is virtually impossible for normal folks who are not experts to beat the market.
You and I are not Warren Buffett. When I was a kid, I thought I was good enough to become a major league baseball player. Soon enough, I realized that would never happen. Thinking you can buy and sell stocks when your competition are guys like Warren Buffett is almost as crazy as my dream of playing for the Blue Jays.
Most professional money managers can’t do it. There is a lot of research that shows the vast majority of “professionals” can’t beat the performance of a low cost exchange traded fund like the Vanguard All World Index ETF.
So why even try? Is you mess up with your buying and selling, and there is a very good chance you will, you risk not having enough money for retirement.
By buying the whole index and following the set it and forget it investing plan, you will outperform 75% of mutual funds consistently.
One last point: You know that hot mutual fund that has beaten the market the past 5 years that financial press keeps talking about? Chances are it will under perform the broad market during the next 5 years. It’s called reverting to the mean and it’ll happen as soon as you give them your money.
Monday, October 15, 2018
WHAT KIND OF RETURNS CAN YOU EXPECT GOING FORWARD?
WHAT KIND OF RETURNS CAN YOU EXPECT GOING FORWARD?
In a nutshell, some stocks and all government bonds are expensive today, probably because interest rates are so low. That pushes investors to buy stocks and bonds which means that future returns will probably be lower than they were in the past 25 years.
Canadian and European stocks are actually not too over valued especially compared to US stocks. Canadian goverment bonds however are really where we should expect reduced returns in the future. So if you are investing your retirement savings in our recommended way (1/3 Canadian stocks, 1/3 World stocks, 1/3 Canada governement bonds), what kind of returns should you expect? Look at the chart below and you see a 60% equity, 40% bond mix should return about 5.5% before inflation. Since our preferred portfolio includes 66% stocks vs. 33% bonds, somewhere around 5.8% is a reasonable expectation.
Canadian Couch Potato just released their view on future returns. Here are their expectations and I think they make a lot of sense.
To summarize, here are some highlights.
Estimated long-term returns
Asset class Expected return
Inflation 1.80%
Canadian bonds 3.30%
Canadian equities 7.10%
U.S. equities 6.30%
International developed equities 7.20%
Emerging markets equities 9.80%
Equities/Bonds Expected Total Return (before inflation)
0% / 100% 3.30%
10% / 90% 3.60%
20% / 80% 4.00%
30% / 70% 4.40%
40% / 60% 4.80%
50% / 50% 5.10%
60% / 40% 5.50%
70% / 30% 5.90%
80% / 20% 6.30%
90% / 10% 6.70%
100% / 0% 7.00%
Source: PWL Capital
In a nutshell, some stocks and all government bonds are expensive today, probably because interest rates are so low. That pushes investors to buy stocks and bonds which means that future returns will probably be lower than they were in the past 25 years.
Canadian and European stocks are actually not too over valued especially compared to US stocks. Canadian goverment bonds however are really where we should expect reduced returns in the future. So if you are investing your retirement savings in our recommended way (1/3 Canadian stocks, 1/3 World stocks, 1/3 Canada governement bonds), what kind of returns should you expect? Look at the chart below and you see a 60% equity, 40% bond mix should return about 5.5% before inflation. Since our preferred portfolio includes 66% stocks vs. 33% bonds, somewhere around 5.8% is a reasonable expectation.
Canadian Couch Potato just released their view on future returns. Here are their expectations and I think they make a lot of sense.
To summarize, here are some highlights.
Estimated long-term returns
Asset class Expected return
Inflation 1.80%
Canadian bonds 3.30%
Canadian equities 7.10%
U.S. equities 6.30%
International developed equities 7.20%
Emerging markets equities 9.80%
Equities/Bonds Expected Total Return (before inflation)
0% / 100% 3.30%
10% / 90% 3.60%
20% / 80% 4.00%
30% / 70% 4.40%
40% / 60% 4.80%
50% / 50% 5.10%
60% / 40% 5.50%
70% / 30% 5.90%
80% / 20% 6.30%
90% / 10% 6.70%
100% / 0% 7.00%
Source: PWL Capital
Monday, October 8, 2018
WHAT HAPPENS TO MY RETIREMENT GOALS IF I LOSE MY JOB
WHAT HAPPENS TO MY RETIREMENT GOALS IF I LOSE MY JOB
A few commentators have criticized the idea of saving less than the usual 15% recommended by the financial services industry. I’ve already explained how saving so much means you will need to make big sacrifices when you are young and raising a family. In fact, you will have more money available to spend when you are retired at 65 years old than you had when you were working.
This doesn’t make sense to me. Instead you should strive to have a similar income throughout your working and retired life. Fred Vettese, one of my investingbs.com hall of fame members calls this your Neutral Retirement Income Target. For most families this can be achieved by saving 6-10% of your pay while you are working.
Research shows that people maintain the same spending habits as they age. So increasing your disposable income by 50+% in retirement means you probably could have done other things with your money in your 30’s, 40’s and 50’s without jeopardizing your golden years.
The most common criticism I’ve heard deals with job loss over the 35 year period that you will be working and saving for retirement. The argument is if you become unemployed and are unable to set aside money for retirement while looking for a new job, you may end up not having enough money to retire on and maintain your lifestyle.
My response is:
1. An event like job loss is exactly why the emergency fund is so important. Setting aside 6 months worth of expenses in a plain bank account means you will not fall into debt as you search for a new job.
2. The concern of job loss is exactly why you need to make sure that you keep up your employment skills. This is the best way to avoid an extended stretch of unemployment. Even the most valuable employees can be let go by a company facing difficulties, but the ones who have kept up their skills and value will find work quickly somewhere else.
3. North America will soon face a demographically driven worker shortage that will last decades. We are aging quickly and we will need more workers than we have available to us. Immigration to North America will help, but there is not one demographer that I have researched who believes that will be enough to fill the gap. The result is high quality workers will become more valuable and should experience lower levels of unemployment.
If a person is still unemployed for a extended period of time, then their living standard would need to be lowered and this would mean less money available now and into retirement. The person would have to become accustomed to this lower standard.
The possibility of the worst case scenario is still not a sufficient reason to over save for 35 years.
There are ways to mitigate the risk.
WHAT HAPPENS TO MY RETIREMENT GOALS IF I LOSE MY JOB
WHAT HAPPENS TO MY RETIREMENT GOALS IF I LOSE MY JOB
A few commentators have criticized the idea of saving less than the usual 15% recommended by the financial services industry. I’ve already explained how saving so much means you will need to make big sacrifices when you are young and raising a family. In fact, you will have more money available to spend when you are retired at 65 years old than you had when you were working.
This doesn’t make sense to me. Instead you should strive to have a similar income throughout your working and retired life. Fred Vettese, one of my investingbs.com hall of fame members calls this your Neutral Retirement Income Target. For most families this can be achieved by saving 6-10% of your pay while you are working.
Research shows that people maintain the same spending habits as they age. So increasing your disposable income by 50+% in retirement means you probably could have done other things with your money in your 30’s, 40’s and 50’s without jeopardizing your golden years.
The most common criticism I’ve heard deals with job loss over the 35 year period that you will be working and saving for retirement. The argument is if you become unemployed and are unable to set aside money for retirement while looking for a new job, you may end up not having enough money to retire on and maintain your lifestyle.
My response is:
1. An event like job loss is exactly why the emergency fund is so important. Setting aside 6 months worth of expenses in a plain bank account means you will not fall into debt as you search for a new job.
2. The concern of job loss is exactly why you need to make sure that you keep up your employment skills. This is the best way to avoid an extended stretch of unemployment. Even the most valuable employees can be let go by a company facing difficulties, but the ones who have kept up their skills and value will find work quickly somewhere else.
3. North America will soon face a demographically driven worker shortage that will last decades. We are aging quickly and we will need more workers than we have available to us. Immigration to North America will help, but there is not one demographer that I have researched who believes that will be enough to fill the gap. The result is high quality workers will become more valuable and should experience lower levels of unemployment.
If a person is still unemployed for a extended period of time, then their living standard would need to be lowered and this would mean less money available now and into retirement. The person would have to become accustomed to this lower standard.
The possibility of the worst case scenario is still not a sufficient reason to over save for 35 years.
There are ways to mitigate the risk.
A few commentators have criticized the idea of saving less than the usual 15% recommended by the financial services industry. I’ve already explained how saving so much means you will need to make big sacrifices when you are young and raising a family. In fact, you will have more money available to spend when you are retired at 65 years old than you had when you were working.
This doesn’t make sense to me. Instead you should strive to have a similar income throughout your working and retired life. Fred Vettese, one of my investingbs.com hall of fame members calls this your Neutral Retirement Income Target. For most families this can be achieved by saving 6-10% of your pay while you are working.
Research shows that people maintain the same spending habits as they age. So increasing your disposable income by 50+% in retirement means you probably could have done other things with your money in your 30’s, 40’s and 50’s without jeopardizing your golden years.
The most common criticism I’ve heard deals with job loss over the 35 year period that you will be working and saving for retirement. The argument is if you become unemployed and are unable to set aside money for retirement while looking for a new job, you may end up not having enough money to retire on and maintain your lifestyle.
My response is:
1. An event like job loss is exactly why the emergency fund is so important. Setting aside 6 months worth of expenses in a plain bank account means you will not fall into debt as you search for a new job.
2. The concern of job loss is exactly why you need to make sure that you keep up your employment skills. This is the best way to avoid an extended stretch of unemployment. Even the most valuable employees can be let go by a company facing difficulties, but the ones who have kept up their skills and value will find work quickly somewhere else.
3. North America will soon face a demographically driven worker shortage that will last decades. We are aging quickly and we will need more workers than we have available to us. Immigration to North America will help, but there is not one demographer that I have researched who believes that will be enough to fill the gap. The result is high quality workers will become more valuable and should experience lower levels of unemployment.
If a person is still unemployed for a extended period of time, then their living standard would need to be lowered and this would mean less money available now and into retirement. The person would have to become accustomed to this lower standard.
The possibility of the worst case scenario is still not a sufficient reason to over save for 35 years.
There are ways to mitigate the risk.
Monday, October 1, 2018
WHAT HAPPENS IF WE THINK WE CAN’T SAVE ENOUGH FOR RETIREMENT AND STILL HAVE A LIFE?
WHAT HAPPENS IF WE THINK WE CAN’T SAVE ENOUGH FOR RETIREMENT AND STILL HAVE A LIFE?
What’s the harm in saving 15% of your income for retirement? Many will argue, especially those who work in the financial services industry, that just to be sure, you can never save too much. Having too much money saved when you are 90 years old is a much better problem than not having enough money.
However, when we scare young people into believing they won’t be able to retire because they are not saving 15%, they sometimes make irrational, fear based decisions. The most dangerous of these decisions could be not to have any children, or have only 1 child instead of 2 or 3.
If the financial press and marketers convince enough young people that they can’t afford to be a parent, have a life AND retire in comfort at a reasonable age, then our whole country is doomed. We absolutely need to have at least enough children to keep the population of Canada from shrinking. Immigration can help a little bit, but it cannot save us if people stop having children.
Without enough young people to keep Canada working, our economy starts to flat line and eventually may collapse. Before you say this will never happen, it’s already started to cause economic problems in countries like Korea, Japan, and Italy.
We need young people to work, to build, to innovate, to start new businesses all to support seniors. Working and raising a family is already a challenge. We need to encourage this choice and reward those young people who are helping to keep Canada vibrant and economically strong into the future.
Young people need help to make good financial decisions and this can happen by providing them with unbiased information about retirement saving that proves to them they can have all the joy and challenge or raising a family and still afford a comfortable retirement at age 65.
WHAT HAPPENS IF WE THINK WE CAN’T SAVE ENOUGH FOR RETIREMENT AND STILL HAVE A LIFE?
WHAT HAPPENS IF WE THINK WE CAN’T SAVE ENOUGH FOR RETIREMENT AND STILL HAVE A LIFE?
What’s the harm in saving 15% of your income for retirement? Many will argue, especially those who work in the financial services industry, that just to be sure, you can never save too much. Having too much money saved when you are 90 years old is a much better problem than not having enough money.
However, when we scare young people into believing they won’t be able to retire because they are not saving 15%, they sometimes make irrational, fear based decisions. The most dangerous of these decisions could be not to have any children, or have only 1 child instead of 2 or 3.
If the financial press and marketers convince enough young people that they can’t afford to be a parent, have a life AND retire in comfort at a reasonable age, then our whole country is doomed. We absolutely need to have at least enough children to keep the population of Canada from shrinking. Immigration can help a little bit, but it cannot save us if people stop having children.
Without enough young people to keep Canada working, our economy starts to flat line and eventually may collapse. Before you say this will never happen, it’s already started to cause economic problems in countries like Korea, Japan, and Italy.
We need young people to work, to build, to innovate, to start new businesses all to support seniors. Working and raising a family is already a challenge. We need to encourage this choice and reward those young people who are helping to keep Canada vibrant and economically strong into the future.
Young people need help to make good financial decisions and this can happen by providing them with unbiased information about retirement saving that proves to them they can have all the joy and challenge or raising a family and still afford a comfortable retirement at age 65.
What’s the harm in saving 15% of your income for retirement? Many will argue, especially those who work in the financial services industry, that just to be sure, you can never save too much. Having too much money saved when you are 90 years old is a much better problem than not having enough money.
However, when we scare young people into believing they won’t be able to retire because they are not saving 15%, they sometimes make irrational, fear based decisions. The most dangerous of these decisions could be not to have any children, or have only 1 child instead of 2 or 3.
If the financial press and marketers convince enough young people that they can’t afford to be a parent, have a life AND retire in comfort at a reasonable age, then our whole country is doomed. We absolutely need to have at least enough children to keep the population of Canada from shrinking. Immigration can help a little bit, but it cannot save us if people stop having children.
Without enough young people to keep Canada working, our economy starts to flat line and eventually may collapse. Before you say this will never happen, it’s already started to cause economic problems in countries like Korea, Japan, and Italy.
We need young people to work, to build, to innovate, to start new businesses all to support seniors. Working and raising a family is already a challenge. We need to encourage this choice and reward those young people who are helping to keep Canada vibrant and economically strong into the future.
Young people need help to make good financial decisions and this can happen by providing them with unbiased information about retirement saving that proves to them they can have all the joy and challenge or raising a family and still afford a comfortable retirement at age 65.
Monday, September 24, 2018
HOW DOES QUITTING WORK BEFORE AGE 65 AFFECT YOUR LIFE
HOW DOES QUITTING WORK BEFORE AGE 65 AFFECT YOUR LIFE
Lots of people dream of being able to retire before age 65. Not only can working be stressful, it may not be that much fun. It definitely can’t compare with your vacation time, which for many people, if how they imagine retirement will be.
If you are convinced that early retirement is for you then you will need to save more money while you are working to make sure you have enough money for the rest of your life. Not only will you have less time to save money, you’ll also spend a longer time depleting your savings.
In The Real Retirement by Fred Vetesse and Bill Morneau (Fred is an actuary and Bill is now the Minister of Finance for the Government of Canada), the authors spelled out the extra costs of retiring early. Their conclusion is: It’s quite expensive to leave the work force before age 65. Here’s why:
You will receive a smaller Canada Pension Plan payment because you don’t have as many qualifying years. Remember C.P.P. is guaranteed for life and indexed for inflation so this will affect your retirement income for the rest of your life.
You will need to significantly increase your savings rate while you are working and raising your family to pay for your decision to retire before age 65. Remember according to our experts, you need to save 6-10% of your family income for 40 years to have as much money in retirement as during your working years (minus fixed costs like mortgages and child rearing expenses).
So how much extra will you need to save for those 40 years? Vetesse and Morneau concluded you would need to increase your savings rate by 3% for every year you want to retire early. See the chart below for some examples.
If you want to retire at age: Your yearly savings rate will be:
65 10%
62 19% (10% + 3 years x 3%)
60 25% (10% + 5 years x 3%)
Remember, this calculation is to balance the amount of money you have to spend while retired with the amount of money you have to spend while working. So if you want out by age 60, plan to save 25% of your family income for 35 years.
People who plan to retire by age 50 or earlier really have to dramatically increase their savings during their working years. On some “Retire at 40” sites I’ve visited, people are saving 50 or 60% of their incomes in order to get out at a young age. Many of these folks don’t have children or have 1 child. I’ve already mentioned, let’s hope not everyone follows their life plans, or we won’t have much of a country in 50 or 60 years.
Lots of people dream of being able to retire before age 65. Not only can working be stressful, it may not be that much fun. It definitely can’t compare with your vacation time, which for many people, if how they imagine retirement will be.
If you are convinced that early retirement is for you then you will need to save more money while you are working to make sure you have enough money for the rest of your life. Not only will you have less time to save money, you’ll also spend a longer time depleting your savings.
In The Real Retirement by Fred Vetesse and Bill Morneau (Fred is an actuary and Bill is now the Minister of Finance for the Government of Canada), the authors spelled out the extra costs of retiring early. Their conclusion is: It’s quite expensive to leave the work force before age 65. Here’s why:
You will receive a smaller Canada Pension Plan payment because you don’t have as many qualifying years. Remember C.P.P. is guaranteed for life and indexed for inflation so this will affect your retirement income for the rest of your life.
You will need to significantly increase your savings rate while you are working and raising your family to pay for your decision to retire before age 65. Remember according to our experts, you need to save 6-10% of your family income for 40 years to have as much money in retirement as during your working years (minus fixed costs like mortgages and child rearing expenses).
So how much extra will you need to save for those 40 years? Vetesse and Morneau concluded you would need to increase your savings rate by 3% for every year you want to retire early. See the chart below for some examples.
If you want to retire at age: Your yearly savings rate will be:
65 10%
62 19% (10% + 3 years x 3%)
60 25% (10% + 5 years x 3%)
Remember, this calculation is to balance the amount of money you have to spend while retired with the amount of money you have to spend while working. So if you want out by age 60, plan to save 25% of your family income for 35 years.
People who plan to retire by age 50 or earlier really have to dramatically increase their savings during their working years. On some “Retire at 40” sites I’ve visited, people are saving 50 or 60% of their incomes in order to get out at a young age. Many of these folks don’t have children or have 1 child. I’ve already mentioned, let’s hope not everyone follows their life plans, or we won’t have much of a country in 50 or 60 years.
Monday, September 17, 2018
STICK TO THE BASICS, YOU WILL BE A SUCCESSFUL DIY INVESTOR
STICK TO THE BASICS, YOU WILL BE A SUCCESSFUL DIY INVESTOR
DIY investing is both easy to do and hard to do. It’s easy because it doesn’t take a lot of time, it’s not complicated, and you don’t have to know much about the stock market, investing or anything else financial.
However, it’s hard to do because we’re humans and we get tempted by our emotions to want more, and want it right away. How many times have I been unable to resist the bag of chips in my cupboard? If only you knew.
Your best chance of being successful at DIY investing is not to look at it as a hobby and not to spend too much time listening to the “experts”, or your brother-in-law or the taxi driver who all seem to know what’s going to happen with this and that. You have to find a way to turn to all off when it comes to investing.
I realize I’m asking you to ignore all the other advice you’re bombarded with except for the strategy on this blog, but I can explain that. I’m not trying to sell you anything and this is not my strategy. The idea of saving 6-10% of your income and investing in low cost index funds is recommended by the experts who study investing and are also not interested in selling you anything. They are the good guys in the investing world and who else are you going to trust?
I tend to read quite a few articles on investing because I find the topic interesting, the same way a hockey fan reads articles on who is getting traded to his favourite team or something like that. It’s a distraction and I do occasionally pick up some good tidbits of information. But the truth is about 99% of the thousands upon thousands of articles you’ll find on investing only complicate things and make it easier for you to make a mistake. So, forget about it. Just know that you are making an incredibly wise decision to invest this way and you will be rewarded when the time comes to retire. Saving for retirement is not a sprint, it’s a long, slow marathon.
If you feel this urgent need to boost your investment results, something else is probably going on in your life that’s causing you grief. Maybe the boss is driving you crazy and you’re looking for a way out, or you’re going through that mid life crisis and are bored with playing it safe. Whatever it is, find another way to deal with it. Leave your investing strategy alone and you will be grateful when the time comes to retire.
STICK TO THE BASICS, YOU WILL BE A SUCCESSFUL DIY INVESTOR
STICK TO THE BASICS, YOU WILL BE A SUCCESSFUL DIY INVESTOR
DIY investing is both easy to do and hard to do. It’s easy because it doesn’t take a lot of time, it’s not complicated, and you don’t have to know much about the stock market, investing or anything else financial.
However, it’s hard to do because we’re humans and we get tempted by our emotions to want more, and want it right away. How many times have I been unable to resist the bag of chips in my cupboard? If only you knew.
Your best chance of being successful at DIY investing is not to look at it as a hobby and not to spend too much time listening to the “experts”, or your brother-in-law or the taxi driver who all seem to know what’s going to happen with this and that. You have to find a way to turn to all off when it comes to investing.
I realize I’m asking you to ignore all the other advice you’re bombarded with except for the strategy on this blog, but I can explain that. I’m not trying to sell you anything and this is not my strategy. The idea of saving 6-10% of your income and investing in low cost index funds is recommended by the experts who study investing and are also not interested in selling you anything. They are the good guys in the investing world and who else are you going to trust?
I tend to read quite a few articles on investing because I find the topic interesting, the same way a hockey fan reads articles on who is getting traded to his favourite team or something like that. It’s a distraction and I do occasionally pick up some good tidbits of information. But the truth is about 99% of the thousands upon thousands of articles you’ll find on investing only complicate things and make it easier for you to make a mistake. So, forget about it. Just know that you are making an incredibly wise decision to invest this way and you will be rewarded when the time comes to retire. Saving for retirement is not a sprint, it’s a long, slow marathon.
If you feel this urgent need to boost your investment results, something else is probably going on in your life that’s causing you grief. Maybe the boss is driving you crazy and you’re looking for a way out, or you’re going through that mid life crisis and are bored with playing it safe. Whatever it is, find another way to deal with it. Leave your investing strategy alone and you will be grateful when the time comes to retire.
DIY investing is both easy to do and hard to do. It’s easy because it doesn’t take a lot of time, it’s not complicated, and you don’t have to know much about the stock market, investing or anything else financial.
However, it’s hard to do because we’re humans and we get tempted by our emotions to want more, and want it right away. How many times have I been unable to resist the bag of chips in my cupboard? If only you knew.
Your best chance of being successful at DIY investing is not to look at it as a hobby and not to spend too much time listening to the “experts”, or your brother-in-law or the taxi driver who all seem to know what’s going to happen with this and that. You have to find a way to turn to all off when it comes to investing.
I realize I’m asking you to ignore all the other advice you’re bombarded with except for the strategy on this blog, but I can explain that. I’m not trying to sell you anything and this is not my strategy. The idea of saving 6-10% of your income and investing in low cost index funds is recommended by the experts who study investing and are also not interested in selling you anything. They are the good guys in the investing world and who else are you going to trust?
I tend to read quite a few articles on investing because I find the topic interesting, the same way a hockey fan reads articles on who is getting traded to his favourite team or something like that. It’s a distraction and I do occasionally pick up some good tidbits of information. But the truth is about 99% of the thousands upon thousands of articles you’ll find on investing only complicate things and make it easier for you to make a mistake. So, forget about it. Just know that you are making an incredibly wise decision to invest this way and you will be rewarded when the time comes to retire. Saving for retirement is not a sprint, it’s a long, slow marathon.
If you feel this urgent need to boost your investment results, something else is probably going on in your life that’s causing you grief. Maybe the boss is driving you crazy and you’re looking for a way out, or you’re going through that mid life crisis and are bored with playing it safe. Whatever it is, find another way to deal with it. Leave your investing strategy alone and you will be grateful when the time comes to retire.
Monday, September 10, 2018
HIGH PAYING JOB YOU DON’T LIKE VS. LOWER PAYING JOB YOU LIKE
HIGH PAYING JOB YOU DON’T LIKE VS. LOWER PAYING JOB YOU LIKE
I graduated from university 24 years ago and have held several jobs in this time. I’ve concluded that it is better to have a job you enjoy that pays less than a job you detest but pays substantially more.
When you are young, it is easier to put up with a job you don’t like. It hasn’t worn you out yet, but that time will come. When that finally happens you may be married, have a couple of kids and a mountain of mortgage debt and day to day financial obligations. At that point, you are trapped. Very few parents are going to deprive their children of playing competitve sports or sell the family house to move to a cheaper neighbourhood.
I read an article last summer where a senior partner at a Wall Street law firm admitted that his firm encouraged young lawyers to go into debt to purchase fancy houses and cars and send their children to private school. The firm even used their financial connections to get lower interest rates for these expensive purchases.
The reason, he admitted, was to get these young lawyers hooked on spending money so they’d be less likely to leave their high stress, high commitment jobs. Apparently it’s not that easy to replace high quality lawyers once they’ve become big contributors to the firm’s bottom line.
The way to avoid the loss was to make it real difficult to leave. Of course, the lawyer could always decide to give it all up, but at a cost. It could cost him his marriage, his friends and his children’s future; how would Johnny and Sally ever be able to make it in this world with a public school education?
When you’re young, you really don’t know what you want, and you don’t know what will give your life satisfaction. That’s the whole point of being young; you’re exploring, learning who you are and what turns you on.
The problem is you can get caught going down a path that gets real hard to veer off later. At some point, you’ll probably realize that you’re not happy with your career choice, but you don’t have to time or energy to discover what would give you more satisfaction in life.
So most people just soldier on down that path, telling themselves that things aren’t so bad. They have wealth, prestige, and retirement is only 22 years away.
HIGH PAYING JOB YOU DON’T LIKE VS. LOWER PAYING JOB YOU LIKE
HIGH PAYING JOB YOU DON’T LIKE VS. LOWER PAYING JOB YOU LIKE
I graduated from university 24 years ago and have held several jobs in this time. I’ve concluded that it is better to have a job you enjoy that pays less than a job you detest but pays substantially more.
When you are young, it is easier to put up with a job you don’t like. It hasn’t worn you out yet, but that time will come. When that finally happens you may be married, have a couple of kids and a mountain of mortgage debt and day to day financial obligations. At that point, you are trapped. Very few parents are going to deprive their children of playing competitve sports or sell the family house to move to a cheaper neighbourhood.
I read an article last summer where a senior partner at a Wall Street law firm admitted that his firm encouraged young lawyers to go into debt to purchase fancy houses and cars and send their children to private school. The firm even used their financial connections to get lower interest rates for these expensive purchases.
The reason, he admitted, was to get these young lawyers hooked on spending money so they’d be less likely to leave their high stress, high commitment jobs. Apparently it’s not that easy to replace high quality lawyers once they’ve become big contributors to the firm’s bottom line.
The way to avoid the loss was to make it real difficult to leave. Of course, the lawyer could always decide to give it all up, but at a cost. It could cost him his marriage, his friends and his children’s future; how would Johnny and Sally ever be able to make it in this world with a public school education?
When you’re young, you really don’t know what you want, and you don’t know what will give your life satisfaction. That’s the whole point of being young; you’re exploring, learning who you are and what turns you on.
The problem is you can get caught going down a path that gets real hard to veer off later. At some point, you’ll probably realize that you’re not happy with your career choice, but you don’t have to time or energy to discover what would give you more satisfaction in life.
So most people just soldier on down that path, telling themselves that things aren’t so bad. They have wealth, prestige, and retirement is only 22 years away.
I graduated from university 24 years ago and have held several jobs in this time. I’ve concluded that it is better to have a job you enjoy that pays less than a job you detest but pays substantially more.
When you are young, it is easier to put up with a job you don’t like. It hasn’t worn you out yet, but that time will come. When that finally happens you may be married, have a couple of kids and a mountain of mortgage debt and day to day financial obligations. At that point, you are trapped. Very few parents are going to deprive their children of playing competitve sports or sell the family house to move to a cheaper neighbourhood.
I read an article last summer where a senior partner at a Wall Street law firm admitted that his firm encouraged young lawyers to go into debt to purchase fancy houses and cars and send their children to private school. The firm even used their financial connections to get lower interest rates for these expensive purchases.
The reason, he admitted, was to get these young lawyers hooked on spending money so they’d be less likely to leave their high stress, high commitment jobs. Apparently it’s not that easy to replace high quality lawyers once they’ve become big contributors to the firm’s bottom line.
The way to avoid the loss was to make it real difficult to leave. Of course, the lawyer could always decide to give it all up, but at a cost. It could cost him his marriage, his friends and his children’s future; how would Johnny and Sally ever be able to make it in this world with a public school education?
When you’re young, you really don’t know what you want, and you don’t know what will give your life satisfaction. That’s the whole point of being young; you’re exploring, learning who you are and what turns you on.
The problem is you can get caught going down a path that gets real hard to veer off later. At some point, you’ll probably realize that you’re not happy with your career choice, but you don’t have to time or energy to discover what would give you more satisfaction in life.
So most people just soldier on down that path, telling themselves that things aren’t so bad. They have wealth, prestige, and retirement is only 22 years away.
Monday, September 3, 2018
INVESTING IN DIVIDEND STOCKS VS. VANGUARD INDEX FUNDS
INVESTING IN DIVIDEND STOCKS VS. VANGUARD INDEX FUNDS
Many Canadian investors believe that you can obtain market beating returns by investing in companies that have a long history of paying dividends. It’s even better when these companies are increasing their dividends year and after year.
In Canada, suitable stable dividend companies are found in a few sectors like financial services (banks and insurance), utilities (electric and pipeline), food and drug retailers, telecom, and transportation.
Over the past 30 years these companies have in fact been better investments than the broader Toronto market which includes more volatile sectors like oil and gas and mining. Investors who bought these large companies such as Royal Bank, TD Bank, Power Corp, Fortis, Enbridge, Loblaw, Sobeys, BCE, Rogers, CN Rail, CP Rail and held them have seen growing share prices and dividends.
When I started investing 25 years ago, there were no broad market index funds. You either had to buy an actively managed mutual fund and pay the very high fees or do it yourself. Good quality dividend stocks were an excellent alterative to high priced funds.
Does that mean that you should stick to picking individual dividend stocks today or should your consider investing in index funds that buy the whole Canadian market, Vanguard’s VCN?
My personal take on this is despite the success over the past 30 years, whole market index funds are the way to go looking forward. I can think of a couple of reasons for this:
1. We are in a 35 year bull market for bonds, meaning interest rates have been falling consistently for the past 35 years. In 1981, the rate you received for buying Canada Savings Bonds was around 19%. Today, the rate is less than 1%. In an environment where interest rates are falling, dividend stocks outperform. The value of the growing dividends is greater since people are looking for alternatives to falling interest rates. We’ve reached a point where interest rates can either stay low or go up. There really is no more room to go down. If they start to go up, then dividends become less valuable to investors as bonds compete for investor attention. There is a reasonably good chance this will happen at some point in the next few years. If you believe that everything eventually reverts to the mean, then interest rates should be higher in the future and dividend stocks could underperform the overall market. Beware that things could always be different this time.
2. There are only a few sectors in Canada that offer steady dividend growth over years or decades. In the past year or so, many investors have lost huge sums of money when oil and gas companies, who had paid dividends for a few years in a row, had to reduce or eliminate their dividends. Companies that operate in very cyclical industries like oil, gas, mining, and manufacturing are not good candidates for long term dividend investing. As a result, Canadian investors are forced to keep their money concentrated in 5 or 6 sectors. In some cases, there may only be 1 or 2 players in the sector. The Canadian market is just not that broad compared to American or European markets and there are sectors that don’t really exist much in Canada (technology, pharmaceuticals, consumer staples). This increases long term risk as there could be a catastrophic event or major technology change that decimates a whole sector and, in the process, seriously damages your retirement plans. No one predicted that many large American banks would be on the verge of bankruptcy in 2009. Many of these companies eliminated dividends and their share prices have not recovered 7 years later.
Consider how much easier and less risky it is to just buy the whole market including the good dividend payers and forget about it. Historically buying low cost index funds have performed very well, especially for your international stock exposure which, according to many experts, should be about 1/3 of your portfolio.
For the Canadian component of your retirement savings, you may do better with dividend stocks, assuming the past is like the future, but why take the risk? Buying the whole market makes it less likely that you will make a big mistake.
Many Canadian investors believe that you can obtain market beating returns by investing in companies that have a long history of paying dividends. It’s even better when these companies are increasing their dividends year and after year.
In Canada, suitable stable dividend companies are found in a few sectors like financial services (banks and insurance), utilities (electric and pipeline), food and drug retailers, telecom, and transportation.
Over the past 30 years these companies have in fact been better investments than the broader Toronto market which includes more volatile sectors like oil and gas and mining. Investors who bought these large companies such as Royal Bank, TD Bank, Power Corp, Fortis, Enbridge, Loblaw, Sobeys, BCE, Rogers, CN Rail, CP Rail and held them have seen growing share prices and dividends.
When I started investing 25 years ago, there were no broad market index funds. You either had to buy an actively managed mutual fund and pay the very high fees or do it yourself. Good quality dividend stocks were an excellent alterative to high priced funds.
Does that mean that you should stick to picking individual dividend stocks today or should your consider investing in index funds that buy the whole Canadian market, Vanguard’s VCN?
My personal take on this is despite the success over the past 30 years, whole market index funds are the way to go looking forward. I can think of a couple of reasons for this:
1. We are in a 35 year bull market for bonds, meaning interest rates have been falling consistently for the past 35 years. In 1981, the rate you received for buying Canada Savings Bonds was around 19%. Today, the rate is less than 1%. In an environment where interest rates are falling, dividend stocks outperform. The value of the growing dividends is greater since people are looking for alternatives to falling interest rates. We’ve reached a point where interest rates can either stay low or go up. There really is no more room to go down. If they start to go up, then dividends become less valuable to investors as bonds compete for investor attention. There is a reasonably good chance this will happen at some point in the next few years. If you believe that everything eventually reverts to the mean, then interest rates should be higher in the future and dividend stocks could underperform the overall market. Beware that things could always be different this time.
2. There are only a few sectors in Canada that offer steady dividend growth over years or decades. In the past year or so, many investors have lost huge sums of money when oil and gas companies, who had paid dividends for a few years in a row, had to reduce or eliminate their dividends. Companies that operate in very cyclical industries like oil, gas, mining, and manufacturing are not good candidates for long term dividend investing. As a result, Canadian investors are forced to keep their money concentrated in 5 or 6 sectors. In some cases, there may only be 1 or 2 players in the sector. The Canadian market is just not that broad compared to American or European markets and there are sectors that don’t really exist much in Canada (technology, pharmaceuticals, consumer staples). This increases long term risk as there could be a catastrophic event or major technology change that decimates a whole sector and, in the process, seriously damages your retirement plans. No one predicted that many large American banks would be on the verge of bankruptcy in 2009. Many of these companies eliminated dividends and their share prices have not recovered 7 years later.
Consider how much easier and less risky it is to just buy the whole market including the good dividend payers and forget about it. Historically buying low cost index funds have performed very well, especially for your international stock exposure which, according to many experts, should be about 1/3 of your portfolio.
For the Canadian component of your retirement savings, you may do better with dividend stocks, assuming the past is like the future, but why take the risk? Buying the whole market makes it less likely that you will make a big mistake.
Monday, August 27, 2018
OTHER ASSETS AVAILABLE TO BOOST RETIREMENT INCOME
OTHER ASSETS AVAILABLE TO BOOST RETIREMENT INCOME
Much of what you read about saving for retirement forgets to include a valuable source of income that can be unlocked if needed. Just like a piece of coal can be burned to create energy, these assets can be released to create cash.
So, on top of retirement savings held in your TFSA and/or RRSP, your government pension (CPP), Old Age Security (OAS), and any company pensions, you shouldn’t forget other assets you or your family may have accumulated in your lives.
The primary asset many will have when they reach retirement age is a mortgage free home. There are more than a couple ways you can unlock the equity in your home.
First, you call sell the home and downsize to a less expensive home. They could also take out a reverse mortgage on the equity of the home. There are pros and cons to this idea. Typically the interest rate is higher on reverse mortgages and the fees to set up the reverse mortgage and substantial.
You could also sell and move to a retirement community where you purchase the physical home but not the land the home sits on. This concept unlocks a considerable amount of cash if you live in or around a large city like Toronto or Vancouver.
For example, my parents live in Markham, Ontario and could sell their condo for roughly $600,000. They could move down the street to a retirement community and pay roughly $220,000 for a 2 bedroom townhome. They would be allowed to stay in the home until they both die. At that time, the unit would revert back to the non profit organization that owns the community. The cost of the townhome is determined by the age and health of the individual seniors who are considering making the purchase.
Examples of other assets that could finance retirement are a cottage, rental property, business equity, other savings and any inheritance you may expect.
While not everyone has these other assets, many do and any discussion on how much to save for retirement should not forget these other assets.
OTHER ASSETS AVAILABLE TO BOOST RETIREMENT INCOME
OTHER ASSETS AVAILABLE TO BOOST RETIREMENT INCOME
Much of what you read about saving for retirement forgets to include a valuable source of income that can be unlocked if needed. Just like a piece of coal can be burned to create energy, these assets can be released to create cash.
So, on top of retirement savings held in your TFSA and/or RRSP, your government pension (CPP), Old Age Security (OAS), and any company pensions, you shouldn’t forget other assets you or your family may have accumulated in your lives.
The primary asset many will have when they reach retirement age is a mortgage free home. There are more than a couple ways you can unlock the equity in your home.
First, you call sell the home and downsize to a less expensive home. They could also take out a reverse mortgage on the equity of the home. There are pros and cons to this idea. Typically the interest rate is higher on reverse mortgages and the fees to set up the reverse mortgage and substantial.
You could also sell and move to a retirement community where you purchase the physical home but not the land the home sits on. This concept unlocks a considerable amount of cash if you live in or around a large city like Toronto or Vancouver.
For example, my parents live in Markham, Ontario and could sell their condo for roughly $600,000. They could move down the street to a retirement community and pay roughly $220,000 for a 2 bedroom townhome. They would be allowed to stay in the home until they both die. At that time, the unit would revert back to the non profit organization that owns the community. The cost of the townhome is determined by the age and health of the individual seniors who are considering making the purchase.
Examples of other assets that could finance retirement are a cottage, rental property, business equity, other savings and any inheritance you may expect.
While not everyone has these other assets, many do and any discussion on how much to save for retirement should not forget these other assets.
Much of what you read about saving for retirement forgets to include a valuable source of income that can be unlocked if needed. Just like a piece of coal can be burned to create energy, these assets can be released to create cash.
So, on top of retirement savings held in your TFSA and/or RRSP, your government pension (CPP), Old Age Security (OAS), and any company pensions, you shouldn’t forget other assets you or your family may have accumulated in your lives.
The primary asset many will have when they reach retirement age is a mortgage free home. There are more than a couple ways you can unlock the equity in your home.
First, you call sell the home and downsize to a less expensive home. They could also take out a reverse mortgage on the equity of the home. There are pros and cons to this idea. Typically the interest rate is higher on reverse mortgages and the fees to set up the reverse mortgage and substantial.
You could also sell and move to a retirement community where you purchase the physical home but not the land the home sits on. This concept unlocks a considerable amount of cash if you live in or around a large city like Toronto or Vancouver.
For example, my parents live in Markham, Ontario and could sell their condo for roughly $600,000. They could move down the street to a retirement community and pay roughly $220,000 for a 2 bedroom townhome. They would be allowed to stay in the home until they both die. At that time, the unit would revert back to the non profit organization that owns the community. The cost of the townhome is determined by the age and health of the individual seniors who are considering making the purchase.
Examples of other assets that could finance retirement are a cottage, rental property, business equity, other savings and any inheritance you may expect.
While not everyone has these other assets, many do and any discussion on how much to save for retirement should not forget these other assets.
Monday, August 13, 2018
IS 10% THE NEW 6%?
IS 10% THE NEW 6%?
Part of the plan to retire well that I’ve been espousing on this blog is to save 6% of your income each and every year of work between the ages of 25 and 65. This advice came from actuaries who studied the spending habits of Canadians during their working and retirement years. The 6% figure, it was concluded, meant that Canadians could save enough for retirement to maintain the lifestyle they had become accustomed to while working a raising family.
The 2 chief actuaries who came up with this number, working independently, are Fred Vettese and Malcolm Hamiliton. Recently Fred Vettese wrote a follow up book to his The Real Retirement, this time called The Essential Retirement Guide. I just finished reading the book and I’d like to provide a summary of the key points that you may find interesting.
First, and probably most surprising, Fred seems to be moving away from his belief that saving 6% of your income would be enough to ensure a comfortable retirement at age 65. The primary reason for this is his forecast that stock and bond returns will be lower in the next 25 years due to demographics trends. Basically, an aging population worldwide will reduce economic growth which will, in turn, reduce stock market returns.
An aging population will also crave the relative security of high quality bonds which will further reduce bond returns as more investors seek them out. Based on this forecast, he believes a 10% savings rate would be safer to protect retirees from the potential to run out of money.
So what are readers supposed to do? Save 6%, 10% or some other amount. My take on this is simple.
First off, remember that Malcolm Hamilton still recommends 6%.
Second point, know thyself. If you are more of a worrier than average, then boost your percentage to 8% or 10%. If you are more concerned about living for today, keep it at 6%. We’ll call this the chicken index. The more of a chicken you are, the more you save.
Remember Fred is making a long term prediction on stock and bond performance that is different from the past. In this way, he is saying “this time it’s different”. He may be correct, but we should all know by now how hard it is to predict the future.
In any case, deciding on 6% or 10% is like icing on the cake. Bake the cake first, by setting aside your percentage every month in low cost index funds, keep yourself valuable to you employer or your customers. Then you can worry about the icing. The important thing is you won’t starve.
The other interesting part of the book deals with his writing about risks of illness as you age, as well as the potential need for long term medical care, either in your home or a long term care facililty. To be honest, I found this section of the book quite depressing, but ultimately necessary to contemplate. Fred wrote quite frankly about his relatively minor health issues (he was 63 years old when he wrote the book), his fitness and lifestyle regiment to reduce the risk of illness, and his experience watching his parents age. There is lots of good advice on how we can all improve our chances of living longer without suffering a major illness and keeping up our spirits along the way. Much of the advice would not be new to anyone who keeps up to date on healthy lifestyle recommendations, but he did provide some solid information on the percentage risks associated with certain lifestyle choices (smoking, drinking excessive alcohol, etc.).
He also spend some time discussing the benefits of annuities and how they need to be marketed better because they really are a valuable product that could greatly reduce the stress retirees may have about running out of money. He also writes about sustainable withdrawal rates, long term care insurance, and gives his views on the current state of the stock and bond markets in the developed world.
Most of the rest of the book is similar to The Real Retirement, although it is told more like a story with real couples who have different income levels and different needs for retirement savings.
Overall, the new book is more accessible for everyday readers and I think most people would really benefit for reading it. I came away from reading this book thinking it must be tough as an actuary to know the odds of all these bad things happening to you. It’s probably much better to be blissfully unaware of the odds as long as you have a solid retirement plan in place.
Part of the plan to retire well that I’ve been espousing on this blog is to save 6% of your income each and every year of work between the ages of 25 and 65. This advice came from actuaries who studied the spending habits of Canadians during their working and retirement years. The 6% figure, it was concluded, meant that Canadians could save enough for retirement to maintain the lifestyle they had become accustomed to while working a raising family.
The 2 chief actuaries who came up with this number, working independently, are Fred Vettese and Malcolm Hamiliton. Recently Fred Vettese wrote a follow up book to his The Real Retirement, this time called The Essential Retirement Guide. I just finished reading the book and I’d like to provide a summary of the key points that you may find interesting.
First, and probably most surprising, Fred seems to be moving away from his belief that saving 6% of your income would be enough to ensure a comfortable retirement at age 65. The primary reason for this is his forecast that stock and bond returns will be lower in the next 25 years due to demographics trends. Basically, an aging population worldwide will reduce economic growth which will, in turn, reduce stock market returns.
An aging population will also crave the relative security of high quality bonds which will further reduce bond returns as more investors seek them out. Based on this forecast, he believes a 10% savings rate would be safer to protect retirees from the potential to run out of money.
So what are readers supposed to do? Save 6%, 10% or some other amount. My take on this is simple.
First off, remember that Malcolm Hamilton still recommends 6%.
Second point, know thyself. If you are more of a worrier than average, then boost your percentage to 8% or 10%. If you are more concerned about living for today, keep it at 6%. We’ll call this the chicken index. The more of a chicken you are, the more you save.
Remember Fred is making a long term prediction on stock and bond performance that is different from the past. In this way, he is saying “this time it’s different”. He may be correct, but we should all know by now how hard it is to predict the future.
In any case, deciding on 6% or 10% is like icing on the cake. Bake the cake first, by setting aside your percentage every month in low cost index funds, keep yourself valuable to you employer or your customers. Then you can worry about the icing. The important thing is you won’t starve.
The other interesting part of the book deals with his writing about risks of illness as you age, as well as the potential need for long term medical care, either in your home or a long term care facililty. To be honest, I found this section of the book quite depressing, but ultimately necessary to contemplate. Fred wrote quite frankly about his relatively minor health issues (he was 63 years old when he wrote the book), his fitness and lifestyle regiment to reduce the risk of illness, and his experience watching his parents age. There is lots of good advice on how we can all improve our chances of living longer without suffering a major illness and keeping up our spirits along the way. Much of the advice would not be new to anyone who keeps up to date on healthy lifestyle recommendations, but he did provide some solid information on the percentage risks associated with certain lifestyle choices (smoking, drinking excessive alcohol, etc.).
He also spend some time discussing the benefits of annuities and how they need to be marketed better because they really are a valuable product that could greatly reduce the stress retirees may have about running out of money. He also writes about sustainable withdrawal rates, long term care insurance, and gives his views on the current state of the stock and bond markets in the developed world.
Most of the rest of the book is similar to The Real Retirement, although it is told more like a story with real couples who have different income levels and different needs for retirement savings.
Overall, the new book is more accessible for everyday readers and I think most people would really benefit for reading it. I came away from reading this book thinking it must be tough as an actuary to know the odds of all these bad things happening to you. It’s probably much better to be blissfully unaware of the odds as long as you have a solid retirement plan in place.
Monday, July 16, 2018
SCARE TACTIC #1: YOU DON’T KNOW ENOUGH TO D.I.Y.
SCARE TACTIC #1: YOU DON’T KNOW ENOUGH TO D.I.Y.
There are times when I read articles about finance or investing and my mind starts to wander. I try to stay focused but the articles can sometimes be so complicated and so boring, I can’t help myself. Or I”ll be reading an article that starts off interesting but gets boring when a so called expert makes a prediction on where the price of oil or stocks will be 6 months from now. I’m getting pretty good at skipping right over those silly statements.
Despite my concentration limitations and lack of deep, sophisticated knowledge of financial markets, I have been a successful D.I.Y. investor for over 25 years. How can this be? We’ll I think Warren Buffett summed it up beautifully when he wrote two things: “There are no bonus points for complicated investments” (Letter to Shareholders 2008) and “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” (Letter to Shareholders 1989).
To this I would add “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes” (Letter to Shareholders 1996).
That’s pretty much all you need to know. So in practical terms, stick to a simple buy and hold strategy of low cost index funds, make regular purchases of between 6 and 10% of your income for a period of 40 years and you’ll have a wonderful retirement when you reach age 65.
Remember the experts will try to convince you that you don’t know enough and will need their very expensive guidance to successfully invest. All the research I’ve read convinces me that this will mean less money in your pocket at the end of a your long working career. Thankfully, there is a easy way to avoid being the sucker.
SCARE TACTIC #1: YOU DON’T KNOW ENOUGH TO D.I.Y.
SCARE TACTIC #1: YOU DON’T KNOW ENOUGH TO D.I.Y.
There are times when I read articles about finance or investing and my mind starts to wander. I try to stay focused but the articles can sometimes be so complicated and so boring, I can’t help myself. Or I”ll be reading an article that starts off interesting but gets boring when a so called expert makes a prediction on where the price of oil or stocks will be 6 months from now. I’m getting pretty good at skipping right over those silly statements.
Despite my concentration limitations and lack of deep, sophisticated knowledge of financial markets, I have been a successful D.I.Y. investor for over 25 years. How can this be? We’ll I think Warren Buffett summed it up beautifully when he wrote two things: “There are no bonus points for complicated investments” (Letter to Shareholders 2008) and “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” (Letter to Shareholders 1989).
To this I would add “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes” (Letter to Shareholders 1996).
That’s pretty much all you need to know. So in practical terms, stick to a simple buy and hold strategy of low cost index funds, make regular purchases of between 6 and 10% of your income for a period of 40 years and you’ll have a wonderful retirement when you reach age 65.
Remember the experts will try to convince you that you don’t know enough and will need their very expensive guidance to successfully invest. All the research I’ve read convinces me that this will mean less money in your pocket at the end of a your long working career. Thankfully, there is a easy way to avoid being the sucker.
There are times when I read articles about finance or investing and my mind starts to wander. I try to stay focused but the articles can sometimes be so complicated and so boring, I can’t help myself. Or I”ll be reading an article that starts off interesting but gets boring when a so called expert makes a prediction on where the price of oil or stocks will be 6 months from now. I’m getting pretty good at skipping right over those silly statements.
Despite my concentration limitations and lack of deep, sophisticated knowledge of financial markets, I have been a successful D.I.Y. investor for over 25 years. How can this be? We’ll I think Warren Buffett summed it up beautifully when he wrote two things: “There are no bonus points for complicated investments” (Letter to Shareholders 2008) and “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.” (Letter to Shareholders 1989).
To this I would add “If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes” (Letter to Shareholders 1996).
That’s pretty much all you need to know. So in practical terms, stick to a simple buy and hold strategy of low cost index funds, make regular purchases of between 6 and 10% of your income for a period of 40 years and you’ll have a wonderful retirement when you reach age 65.
Remember the experts will try to convince you that you don’t know enough and will need their very expensive guidance to successfully invest. All the research I’ve read convinces me that this will mean less money in your pocket at the end of a your long working career. Thankfully, there is a easy way to avoid being the sucker.
Monday, June 25, 2018
CAREER ADVICE PART 2 – SWITCHING CAREERS OR FINDING YOUR FIRST JOB
CAREER ADVICE PART 2 – SWITCHING CAREERS OR FINDING YOUR FIRST JOB
I wanted to add another piece of career advice that I’ve gleamed after years of working with companies as a co-op coordinator. Over and over managers have told me how hard it is to find good employees who work hard, are conscientious, show initiative, have common sense and are honest.
In many cases, if you have these traits, managers are willing to invest and train you for a job that you currently are not qualified for. The problem is it’s really hard to know if a prospective employee has the right stuff. That’s one reason why co-op can be valuable for both students and employers. It’s a low risk way to find out about a potential employee. If things don’t work out, a thank you and a hand shake are all that is required when the work term ends.
Back to my advice for would be job seekers and this advice has been proven successful many times over in my experience.
This advice will help you if you are good worker who has the skills I mentioned above but is having difficulty convincing employers due to
lack of any work experience or
lack of Canadian work experience, or
missing some training or education that the job requires
lack of network contacts
The key for you is to find a company that you think has the long term potential to be a good fit for you and apply for a position below your level of expertise. The idea is to get into the company and then prove your worth once there. Once this happens, it is almost a guarantee that you will not remain in the low level job for long.
If you are an experienced worker, this may mean omitting certain education and work experiences from your resume to avoid appearing overqualified. I don’t see a problem with this because you already doing a lot of editing when you create a resume. This is just one more edit.
It also means being willing to take a pay cut for a while. And there are no guarantees that you will like the new job any more than the job you left but it’s worth a try if you are not happy.
For new workers, who are usually younger, there is little risk to trying to method if you cannot find a job commensurate with your education.
It is once you are on the job that you can easily handle that you need to shine and convince supervisors that you are capable of so much more. Slow and steady is the way this will happen if you have what it takes. Don’t show off too much and remember to build strong relationships with co-workers, above and beneath your current pay grade. Trying to earn a promotion doesn’t have to be a fight to the death competition. Many workers are not interested in more responsibility but will be pleased to see a good person take on the role. Be that good person and you can find that place on the corporate ladder that suits your skills and temperament.
CAREER ADVICE PART 2 – SWITCHING CAREERS OR FINDING YOUR FIRST JOB
CAREER ADVICE PART 2 – SWITCHING CAREERS OR FINDING YOUR FIRST JOB
I wanted to add another piece of career advice that I’ve gleamed after years of working with companies as a co-op coordinator. Over and over managers have told me how hard it is to find good employees who work hard, are conscientious, show initiative, have common sense and are honest.
In many cases, if you have these traits, managers are willing to invest and train you for a job that you currently are not qualified for. The problem is it’s really hard to know if a prospective employee has the right stuff. That’s one reason why co-op can be valuable for both students and employers. It’s a low risk way to find out about a potential employee. If things don’t work out, a thank you and a hand shake are all that is required when the work term ends.
Back to my advice for would be job seekers and this advice has been proven successful many times over in my experience.
This advice will help you if you are good worker who has the skills I mentioned above but is having difficulty convincing employers due to
lack of any work experience or
lack of Canadian work experience, or
missing some training or education that the job requires
lack of network contacts
The key for you is to find a company that you think has the long term potential to be a good fit for you and apply for a position below your level of expertise. The idea is to get into the company and then prove your worth once there. Once this happens, it is almost a guarantee that you will not remain in the low level job for long.
If you are an experienced worker, this may mean omitting certain education and work experiences from your resume to avoid appearing overqualified. I don’t see a problem with this because you already doing a lot of editing when you create a resume. This is just one more edit.
It also means being willing to take a pay cut for a while. And there are no guarantees that you will like the new job any more than the job you left but it’s worth a try if you are not happy.
For new workers, who are usually younger, there is little risk to trying to method if you cannot find a job commensurate with your education.
It is once you are on the job that you can easily handle that you need to shine and convince supervisors that you are capable of so much more. Slow and steady is the way this will happen if you have what it takes. Don’t show off too much and remember to build strong relationships with co-workers, above and beneath your current pay grade. Trying to earn a promotion doesn’t have to be a fight to the death competition. Many workers are not interested in more responsibility but will be pleased to see a good person take on the role. Be that good person and you can find that place on the corporate ladder that suits your skills and temperament.
I wanted to add another piece of career advice that I’ve gleamed after years of working with companies as a co-op coordinator. Over and over managers have told me how hard it is to find good employees who work hard, are conscientious, show initiative, have common sense and are honest.
In many cases, if you have these traits, managers are willing to invest and train you for a job that you currently are not qualified for. The problem is it’s really hard to know if a prospective employee has the right stuff. That’s one reason why co-op can be valuable for both students and employers. It’s a low risk way to find out about a potential employee. If things don’t work out, a thank you and a hand shake are all that is required when the work term ends.
Back to my advice for would be job seekers and this advice has been proven successful many times over in my experience.
This advice will help you if you are good worker who has the skills I mentioned above but is having difficulty convincing employers due to
lack of any work experience or
lack of Canadian work experience, or
missing some training or education that the job requires
lack of network contacts
The key for you is to find a company that you think has the long term potential to be a good fit for you and apply for a position below your level of expertise. The idea is to get into the company and then prove your worth once there. Once this happens, it is almost a guarantee that you will not remain in the low level job for long.
If you are an experienced worker, this may mean omitting certain education and work experiences from your resume to avoid appearing overqualified. I don’t see a problem with this because you already doing a lot of editing when you create a resume. This is just one more edit.
It also means being willing to take a pay cut for a while. And there are no guarantees that you will like the new job any more than the job you left but it’s worth a try if you are not happy.
For new workers, who are usually younger, there is little risk to trying to method if you cannot find a job commensurate with your education.
It is once you are on the job that you can easily handle that you need to shine and convince supervisors that you are capable of so much more. Slow and steady is the way this will happen if you have what it takes. Don’t show off too much and remember to build strong relationships with co-workers, above and beneath your current pay grade. Trying to earn a promotion doesn’t have to be a fight to the death competition. Many workers are not interested in more responsibility but will be pleased to see a good person take on the role. Be that good person and you can find that place on the corporate ladder that suits your skills and temperament.
Monday, June 4, 2018
A JOB YOU ENJOY IS MORE IMPORTANT THAN BEING GOOD AT SAVING
A JOB YOU ENJOY IS MORE IMPORTANT THAN BEING GOOD AT SAVING
If you have to choose between being a super saver and having a job you enjoy, hands down I would choose the job I like.
Creating a comfortable retirement income is all about:
how long you are in the work force
how quickly you can reduce or eliminate your debts and fixed costs (mortgage, child raising)
and finally, saving the relatively small amount of 6-10% of your gross income
If you find a job you enjoy, chances are you will be good at it and will continue to upgrade yourself to stay valuable to your employer and clients.
The longer you are a productive working citizen:
the greater the amount of money you can spend on things and experiences while raising the children
the more financial mistakes you can make and still recover before it’s time to retire
the more you will contribute to your Canada Pension Plan or work pension plan
the less time you will have to go shopping and buy things you probably don’t need
And the number 1 reason working longer is good for your retirement is:
The longer you work, the longer the miracle of compounding interest works for your retirement savings.
If you are reader of financial blogs, you have probably heard this over and over, but it’s worth reinforcing one more time with the story of William and James.
Twin brothers, William and James are now 65 years old.
Forty-five years ago, when William was 20, he started a retirement account, putting $4,000 in the stock market at the beginning of each year. After 20 years of contributions, totaling $80,000, he stopped making new investments but left the accumulated contributions in his account. The fund earned 10 percent per year, tax free.
James, started his own retirement account at age 40 (just after William quit) and continued depositing $4,000 per year for the next 25 years for a total investment of $100,000. James investments also earned 10% tax free. When both brothers reached the age of 65, which one do you think had the bigger nest egg?
The answer is startling:
William’ s account was worth almost $2.5 million.
James’ account was worth less than $400,000.
Despite having invested less money than James, William’s stake was over $2 million greater. The moral is clear; you can accumulate much more money by starting earlier and taking greater advantage of the miracle of compounding.
A JOB YOU ENJOY IS MORE IMPORTANT THAN BEING GOOD AT SAVING
A JOB YOU ENJOY IS MORE IMPORTANT THAN BEING GOOD AT SAVING
If you have to choose between being a super saver and having a job you enjoy, hands down I would choose the job I like.
Creating a comfortable retirement income is all about:
how long you are in the work force
how quickly you can reduce or eliminate your debts and fixed costs (mortgage, child raising)
and finally, saving the relatively small amount of 6-10% of your gross income
If you find a job you enjoy, chances are you will be good at it and will continue to upgrade yourself to stay valuable to your employer and clients.
The longer you are a productive working citizen:
the greater the amount of money you can spend on things and experiences while raising the children
the more financial mistakes you can make and still recover before it’s time to retire
the more you will contribute to your Canada Pension Plan or work pension plan
the less time you will have to go shopping and buy things you probably don’t need
And the number 1 reason working longer is good for your retirement is:
The longer you work, the longer the miracle of compounding interest works for your retirement savings.
If you are reader of financial blogs, you have probably heard this over and over, but it’s worth reinforcing one more time with the story of William and James.
Twin brothers, William and James are now 65 years old.
Forty-five years ago, when William was 20, he started a retirement account, putting $4,000 in the stock market at the beginning of each year. After 20 years of contributions, totaling $80,000, he stopped making new investments but left the accumulated contributions in his account. The fund earned 10 percent per year, tax free.
James, started his own retirement account at age 40 (just after William quit) and continued depositing $4,000 per year for the next 25 years for a total investment of $100,000. James investments also earned 10% tax free. When both brothers reached the age of 65, which one do you think had the bigger nest egg?
The answer is startling:
William’ s account was worth almost $2.5 million.
James’ account was worth less than $400,000.
Despite having invested less money than James, William’s stake was over $2 million greater. The moral is clear; you can accumulate much more money by starting earlier and taking greater advantage of the miracle of compounding.
If you have to choose between being a super saver and having a job you enjoy, hands down I would choose the job I like.
Creating a comfortable retirement income is all about:
how long you are in the work force
how quickly you can reduce or eliminate your debts and fixed costs (mortgage, child raising)
and finally, saving the relatively small amount of 6-10% of your gross income
If you find a job you enjoy, chances are you will be good at it and will continue to upgrade yourself to stay valuable to your employer and clients.
The longer you are a productive working citizen:
the greater the amount of money you can spend on things and experiences while raising the children
the more financial mistakes you can make and still recover before it’s time to retire
the more you will contribute to your Canada Pension Plan or work pension plan
the less time you will have to go shopping and buy things you probably don’t need
And the number 1 reason working longer is good for your retirement is:
The longer you work, the longer the miracle of compounding interest works for your retirement savings.
If you are reader of financial blogs, you have probably heard this over and over, but it’s worth reinforcing one more time with the story of William and James.
Twin brothers, William and James are now 65 years old.
Forty-five years ago, when William was 20, he started a retirement account, putting $4,000 in the stock market at the beginning of each year. After 20 years of contributions, totaling $80,000, he stopped making new investments but left the accumulated contributions in his account. The fund earned 10 percent per year, tax free.
James, started his own retirement account at age 40 (just after William quit) and continued depositing $4,000 per year for the next 25 years for a total investment of $100,000. James investments also earned 10% tax free. When both brothers reached the age of 65, which one do you think had the bigger nest egg?
The answer is startling:
William’ s account was worth almost $2.5 million.
James’ account was worth less than $400,000.
Despite having invested less money than James, William’s stake was over $2 million greater. The moral is clear; you can accumulate much more money by starting earlier and taking greater advantage of the miracle of compounding.
Monday, May 28, 2018
STAR WARS ADVICE: "STAY ON TARGET"
STAR WARS ADVICE: “STAY ON TARGET”
Some weeks can be brutal for world stock markets. Recently, the Chinese stock market dropped over 7% on both a Monday and a Thursday. It probably would have fallen more but these drops triggered some sort of market unplug that stopped trading. The Chinese government then forces market participants to buy shares or does not allow them to sell shares hoping to stabilize things, for a while at least.
In North America, it’s not unheard of for the New York and Toronto Stock Indexes to drop almost 6% in a week.
These kinds of weeks are not that uncommon. The best advice in these situations is to ignore what’s happening and stay on target with your strategy to save 6-10% of your income and invest it three ways; Canadian stock index funds, international stock index funds, and Canadian bonds.
Stop watching BNN (Business News Network) or CNBC or Fox Business and go on with your life. These television stations are all about entertaining and creating drama. They are always trying to convince you to take some action, or invest in some new product or person.
Remember, television stations are looking for audience, primarily to sell advertising. To keep their audience, they need to sell the false dream that anyone can beat the market if they watch and learn from the self proclaimed “experts” who know exactly what stocks to buy to make a killing.
Try this experiment next time you are tempted to follow the advice of one of these superstar investors that you see on BNN. Go online and try to find out how the superstar’s fund has performed over the past year, 3 years, 5 years, etc.
Chances are you won’t be able to find that information. More and more of these fund people are hiding their past performance because it is so rare to beat the market. Or, they may boast about beating the market in the past year, but do not mention their performance over the past 5 or 10 years.
If you find yourself constantly questioning our simple investing strategy because of what you see on BNN, then resolve to stop watching. It’s hard to not do something, especially when it appears that everyone else is doing it. That’s how we get stock market bubbles and crashes.
STAR WARS ADVICE: "STAY ON TARGET"
STAR WARS ADVICE: "STAY ON TARGET"
Some weeks can be brutal for world stock markets. Recently, the Chinese stock market dropped over 7% on both a Monday and a Thursday. It probably would have fallen more but these drops triggered some sort of market unplug that stopped trading. The Chinese government then forces market participants to buy shares or does not allow them to sell shares hoping to stabilize things, for a while at least.
In North America, it's not unheard of for the New York and Toronto Stock Indexes to drop almost 6% in a week.
These kinds of weeks are not that uncommon. The best advice in these situations is to ignore what’s happening and stay on target with your strategy to save 6-10% of your income and invest it three ways; Canadian stock index funds, international stock index funds, and Canadian bonds.
Stop watching BNN (Business News Network) or CNBC or Fox Business and go on with your life. These television stations are all about entertaining and creating drama. They are always trying to convince you to take some action, or invest in some new product or person.
Remember, television stations are looking for audience, primarily to sell advertising. To keep their audience, they need to sell the false dream that anyone can beat the market if they watch and learn from the self proclaimed “experts” who know exactly what stocks to buy to make a killing.
Try this experiment next time you are tempted to follow the advice of one of these superstar investors that you see on BNN. Go online and try to find out how the superstar’s fund has performed over the past year, 3 years, 5 years, etc.
Chances are you won’t be able to find that information. More and more of these fund people are hiding their past performance because it is so rare to beat the market. Or, they may boast about beating the market in the past year, but do not mention their performance over the past 5 or 10 years.
If you find yourself constantly questioning our simple investing strategy because of what you see on BNN, then resolve to stop watching. It’s hard to not do something, especially when it appears that everyone else is doing it. That’s how we get stock market bubbles and crashes.
Some weeks can be brutal for world stock markets. Recently, the Chinese stock market dropped over 7% on both a Monday and a Thursday. It probably would have fallen more but these drops triggered some sort of market unplug that stopped trading. The Chinese government then forces market participants to buy shares or does not allow them to sell shares hoping to stabilize things, for a while at least.
In North America, it's not unheard of for the New York and Toronto Stock Indexes to drop almost 6% in a week.
These kinds of weeks are not that uncommon. The best advice in these situations is to ignore what’s happening and stay on target with your strategy to save 6-10% of your income and invest it three ways; Canadian stock index funds, international stock index funds, and Canadian bonds.
Stop watching BNN (Business News Network) or CNBC or Fox Business and go on with your life. These television stations are all about entertaining and creating drama. They are always trying to convince you to take some action, or invest in some new product or person.
Remember, television stations are looking for audience, primarily to sell advertising. To keep their audience, they need to sell the false dream that anyone can beat the market if they watch and learn from the self proclaimed “experts” who know exactly what stocks to buy to make a killing.
Try this experiment next time you are tempted to follow the advice of one of these superstar investors that you see on BNN. Go online and try to find out how the superstar’s fund has performed over the past year, 3 years, 5 years, etc.
Chances are you won’t be able to find that information. More and more of these fund people are hiding their past performance because it is so rare to beat the market. Or, they may boast about beating the market in the past year, but do not mention their performance over the past 5 or 10 years.
If you find yourself constantly questioning our simple investing strategy because of what you see on BNN, then resolve to stop watching. It’s hard to not do something, especially when it appears that everyone else is doing it. That’s how we get stock market bubbles and crashes.
Monday, May 21, 2018
RUNNING OUT OF MONEY: HOW TO HANDLE THE RISK
RUNNING OUT OF MONEY: HOW TO HANDLE THE RISK
The financial industry likes to scare people into saving more money than necessary. The pitch goes something like this: If you don’t save 15% of your working income, you may run out of money before you have the good sense to die. They do this because every dollar you save, they shave off 2 or 3 percent for themselves. It’s not wrong to encourage people to save more, but as we’ve talked about on this blog it means you will have to make real sacrifices when you are younger and raising a family.
There are ways to reduce people’s fear of running out of money and still not over save for retirement. You probably won’t hear any of these recommendations from banks and mutual fund salespeople.
1. Buy your home and have the mortgage fully paid off before you retire. In a pinch, the equity in the home can be converted to income.
2. Keep your investing costs low. Instead of purchasing high cost mutual funds that rarely beat the market, purchase low cost index funds instead. The cost differential is huge and can mean tens and possibly hundreds of thousands of dollars more for you when you retire.
3. Keep your employment skills sharp. If you stay valuable to your employer, you significantly reduce the risk of being forced out of a job before age 65.
4. Start collecting your Canada Pension Plan later in life. 65 years old is the standard age when most start collecting CPP. Each year you delay CPP, your payment increases 8.4%. So if you wait until age 70 to collect, your monthly payment will be 42% higher. Remember CPP is guaranteed for life and fully indexed for inflation.
5. Start collection Old Age Security later. Instead of starting to collect at age 65, wait until age 70 and your monthly payment increases by 21.6%.
6. Consider part time work or small business after age 65. Many people find full time retirement less fulfilling than expected. You could find part time work in a field that you find interesting. Even earning $11 or $12 an hour part time can add up to $12,000/year.
The financial industry likes to scare people into saving more money than necessary. The pitch goes something like this: If you don’t save 15% of your working income, you may run out of money before you have the good sense to die. They do this because every dollar you save, they shave off 2 or 3 percent for themselves. It’s not wrong to encourage people to save more, but as we’ve talked about on this blog it means you will have to make real sacrifices when you are younger and raising a family.
There are ways to reduce people’s fear of running out of money and still not over save for retirement. You probably won’t hear any of these recommendations from banks and mutual fund salespeople.
1. Buy your home and have the mortgage fully paid off before you retire. In a pinch, the equity in the home can be converted to income.
2. Keep your investing costs low. Instead of purchasing high cost mutual funds that rarely beat the market, purchase low cost index funds instead. The cost differential is huge and can mean tens and possibly hundreds of thousands of dollars more for you when you retire.
3. Keep your employment skills sharp. If you stay valuable to your employer, you significantly reduce the risk of being forced out of a job before age 65.
4. Start collecting your Canada Pension Plan later in life. 65 years old is the standard age when most start collecting CPP. Each year you delay CPP, your payment increases 8.4%. So if you wait until age 70 to collect, your monthly payment will be 42% higher. Remember CPP is guaranteed for life and fully indexed for inflation.
5. Start collection Old Age Security later. Instead of starting to collect at age 65, wait until age 70 and your monthly payment increases by 21.6%.
6. Consider part time work or small business after age 65. Many people find full time retirement less fulfilling than expected. You could find part time work in a field that you find interesting. Even earning $11 or $12 an hour part time can add up to $12,000/year.
Monday, May 14, 2018
"SET IT AND FORGET IT"
“SET IT AND FORGET IT”
If you are of a certain age, you will probably remember late night commercials for the Showtime Rotisserie that encouraged TV watchers to “set it and forget it”. The Showtime Rotisserie sold millions of units and made its owner and main pitchman Ron Popeil very rich.
I never succumbed to the temptation to buy a Showtime Rotisserie but I do think Ron`s pitch to “set it and forget it” makes a lot of sense when it comes to saving for retirement. A lot of research shows that investors who buy and sell frequently end up making a lot less money than others who leave their investments (preferably low cost index funds) untouched for years and even decades.
Altogether too much time and energy is spent trying to guess which way the “market” will go. This is unknowable and the events of the last few years clearly proves this. Very few highly paid market analysts predicted the crash of 2009. So instead of spending time trying to predict the unpredictable, follow the common sense, less stress method for investing explained in this blog.
The key to successful retirement saving is consistency over many years – 40 years in fact. Making sure you remain a valuable employee or a successful business owner over your working career is a lot more valuable than spending time guessing what will happen to interest rates or oil prices.
If you continue to earn and continue to invest your set percentage in low cost index funds for 40 years, you will be prepared financially for retirement. If you have some free time along the way, focus on other predictors of retirement happiness – physical fitness, healthy diet and maintaining social relationships.
"SET IT AND FORGET IT"
"SET IT AND FORGET IT"
If you are of a certain age, you will probably remember late night commercials for the Showtime Rotisserie that encouraged TV watchers to “set it and forget it”. The Showtime Rotisserie sold millions of units and made its owner and main pitchman Ron Popeil very rich.
I never succumbed to the temptation to buy a Showtime Rotisserie but I do think Ron`s pitch to “set it and forget it” makes a lot of sense when it comes to saving for retirement. A lot of research shows that investors who buy and sell frequently end up making a lot less money than others who leave their investments (preferably low cost index funds) untouched for years and even decades.
Altogether too much time and energy is spent trying to guess which way the “market” will go. This is unknowable and the events of the last few years clearly proves this. Very few highly paid market analysts predicted the crash of 2009. So instead of spending time trying to predict the unpredictable, follow the common sense, less stress method for investing explained in this blog.
The key to successful retirement saving is consistency over many years – 40 years in fact. Making sure you remain a valuable employee or a successful business owner over your working career is a lot more valuable than spending time guessing what will happen to interest rates or oil prices.
If you continue to earn and continue to invest your set percentage in low cost index funds for 40 years, you will be prepared financially for retirement. If you have some free time along the way, focus on other predictors of retirement happiness – physical fitness, healthy diet and maintaining social relationships.
If you are of a certain age, you will probably remember late night commercials for the Showtime Rotisserie that encouraged TV watchers to “set it and forget it”. The Showtime Rotisserie sold millions of units and made its owner and main pitchman Ron Popeil very rich.
I never succumbed to the temptation to buy a Showtime Rotisserie but I do think Ron`s pitch to “set it and forget it” makes a lot of sense when it comes to saving for retirement. A lot of research shows that investors who buy and sell frequently end up making a lot less money than others who leave their investments (preferably low cost index funds) untouched for years and even decades.
Altogether too much time and energy is spent trying to guess which way the “market” will go. This is unknowable and the events of the last few years clearly proves this. Very few highly paid market analysts predicted the crash of 2009. So instead of spending time trying to predict the unpredictable, follow the common sense, less stress method for investing explained in this blog.
The key to successful retirement saving is consistency over many years – 40 years in fact. Making sure you remain a valuable employee or a successful business owner over your working career is a lot more valuable than spending time guessing what will happen to interest rates or oil prices.
If you continue to earn and continue to invest your set percentage in low cost index funds for 40 years, you will be prepared financially for retirement. If you have some free time along the way, focus on other predictors of retirement happiness – physical fitness, healthy diet and maintaining social relationships.
Thursday, April 5, 2018
REBALANCING YOUR SAVINGS
REBALANCING YOUR SAVINGS
Rebalance your 3 index funds once per year so you keep the 1/3 Canadian stocks , 1/3 world stocks and 1/3 Canadian bonds.
In a past post, I told you to purchase low cost index funds from Vanguard Canada or Ishares Canada using the split you see below.
Invest 1/3 in a low cost all Canada stock index fund
Invest 1/3 in a low cost all world stock index fund
Invest 1/3 in a low cost Canadian bond fund
This was before Vanguard introduced their one stop shopping funds that do all the rebalancing for you.
However, if you still choose to buy the individual Vanguard funds (VCN, VXC, VAB), then you’ll have to rebalance from time to time. Here’s an explanation on how it could be done.
Over time, the one third/one third/one third balance may change if, for example Canadian stocks outperform world stocks, or the stock market crashes (as happened in 2008) and Canadian bonds significantly outperform stocks.
When this happens, it is important to try to maintain that proper balance by changing how much you buy of each fund in the following year.
So if you notice that your mix is now 40% Canadian stocks, 40% World stocks and only 20% Canadian bonds this year, next year buy only Canadian bonds to boost the percentage of bonds in your savings.
If the mix has really gotten out of whack, for example, after a market crash, you may need to sell some of your Canadian bonds and redirect that money to Canadian and world stocks.
You may be asking why go through the hassle of rebalancing. We’ll according to much research by academics, rebalancing has a fairly significant positive effect on overall investment success. Some say it the only “free lunch” in investing.
Because your savings are in tax sheltered accounts, you won’t pay tax on your profits when you rebalance and the brokerage fees to buy and sell and very reasonable (between $6 and $30, depending on your discount broker and the amount of your savings).
REBALANCING YOUR SAVINGS
REBALANCING YOUR SAVINGS
Rebalance your 3 index funds once per year so you keep the 1/3 Canadian stocks , 1/3 world stocks and 1/3 Canadian bonds.
In a past post, I told you to purchase low cost index funds from Vanguard Canada or Ishares Canada using the split you see below.
Invest 1/3 in a low cost all Canada stock index fund
Invest 1/3 in a low cost all world stock index fund
Invest 1/3 in a low cost Canadian bond fund
This was before Vanguard introduced their one stop shopping funds that do all the rebalancing for you.
However, if you still choose to buy the individual Vanguard funds (VCN, VXC, VAB), then you'll have to rebalance from time to time. Here's an explanation on how it could be done.
Over time, the one third/one third/one third balance may change if, for example Canadian stocks outperform world stocks, or the stock market crashes (as happened in 2008) and Canadian bonds significantly outperform stocks.
When this happens, it is important to try to maintain that proper balance by changing how much you buy of each fund in the following year.
So if you notice that your mix is now 40% Canadian stocks, 40% World stocks and only 20% Canadian bonds this year, next year buy only Canadian bonds to boost the percentage of bonds in your savings.
If the mix has really gotten out of whack, for example, after a market crash, you may need to sell some of your Canadian bonds and redirect that money to Canadian and world stocks.
You may be asking why go through the hassle of rebalancing. We’ll according to much research by academics, rebalancing has a fairly significant positive effect on overall investment success. Some say it the only “free lunch” in investing.
Because your savings are in tax sheltered accounts, you won’t pay tax on your profits when you rebalance and the brokerage fees to buy and sell and very reasonable (between $6 and $30, depending on your discount broker and the amount of your savings).
Rebalance your 3 index funds once per year so you keep the 1/3 Canadian stocks , 1/3 world stocks and 1/3 Canadian bonds.
In a past post, I told you to purchase low cost index funds from Vanguard Canada or Ishares Canada using the split you see below.
Invest 1/3 in a low cost all Canada stock index fund
Invest 1/3 in a low cost all world stock index fund
Invest 1/3 in a low cost Canadian bond fund
This was before Vanguard introduced their one stop shopping funds that do all the rebalancing for you.
However, if you still choose to buy the individual Vanguard funds (VCN, VXC, VAB), then you'll have to rebalance from time to time. Here's an explanation on how it could be done.
Over time, the one third/one third/one third balance may change if, for example Canadian stocks outperform world stocks, or the stock market crashes (as happened in 2008) and Canadian bonds significantly outperform stocks.
When this happens, it is important to try to maintain that proper balance by changing how much you buy of each fund in the following year.
So if you notice that your mix is now 40% Canadian stocks, 40% World stocks and only 20% Canadian bonds this year, next year buy only Canadian bonds to boost the percentage of bonds in your savings.
If the mix has really gotten out of whack, for example, after a market crash, you may need to sell some of your Canadian bonds and redirect that money to Canadian and world stocks.
You may be asking why go through the hassle of rebalancing. We’ll according to much research by academics, rebalancing has a fairly significant positive effect on overall investment success. Some say it the only “free lunch” in investing.
Because your savings are in tax sheltered accounts, you won’t pay tax on your profits when you rebalance and the brokerage fees to buy and sell and very reasonable (between $6 and $30, depending on your discount broker and the amount of your savings).
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