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Thursday, November 27, 2014

How Isn’t Investing the Same as Gambling?

Posted by Dave on October 28, 2014

I like to bet on sports, mainly hockey and NFL football, which I also enjoy watching. Before I make a bet (my normal bet being somewhere between $2-$5), I do some basic research on the money I’m about to wager. I look at the piles of information available (for non sports fans, you would be amazed at the tomes of information compiled in support of a 60-minute game) and make my pick, laying money down and hoping that the hypothesis I had about the game was correct.

This past Sunday, I felt that the Indianapolis Colts would win at a margin higher than the posted “line” of 3.5 points. I played for higher odds and bet they would win by 7 points. If you were to look at the score of the game they played in, you would see that I was completely wrong with my bet (not only didn’t they win by 7, they lost by 17). A loss betting is not good, as you lose 100% of the wagered amount, which is the reason why I keep my bets small enough to make watching the game interesting to me, while minimizing the impact of the losses on my available betting money.

For me, Investing works the same – prior to investing – whether it’s in a house, individual stocks or bonds, or Exchange Traded Funds, I research thoroughly (there is actually less information on a lot of investments than there is on sports games). I filter through all of the information and make my investment decision based on what I’ve read. As I invest, similar to when I bet on a football game, I have a story of why I’m making the particular investment I’m making, as well as an expected outcome of the money I have laid down.

To me, the main difference between sports betting and investing is the amount of faith I put into the information available. While there have been cases of falsified information, management and the auditors hired by corporations have much more to lose when they make reports on companies than some guy who makes a living selling pageviews on a sports website. Another difference is the “soft” decline offered by stock investment, compared to a binary win or lose outcome of a football game. Any company I’m investing in at least has assets that can be sold off which I have a chance at receiving some money for if the company fails.

Both sports betting and investing depend on third parties acting out the hypothesis you have in place for them – whether it’s a projected 7 point win for the Indianapolis Colts, or by maintaining the current market share and profitability in the long-term for a company I’m investing in. I’m sure other people may see it differently, but I see both of these activities as somewhat risky, just in different ways. It’s for this reason I’m much more willing to sink thousands of dollars in the stock market and a very tiny fraction of this amount into sports betting.

When you “pull the trigger” on an investment, how do you convince yourself you’ve made the right decision out of the thousands of things you could invest in?

Now on Sale

Posted by Tim Stobbs on October 17, 2014

I was recently out of town for work and I happen to look up at TV in the lobby the other day and saw the headline “Stock market Plunges” with a big red number and a negative sign in front of it.  I typically don’ t follow the market day to day so I was sort of obvious to the fact this had been a several day event of dropping values.  But in my head I translated the headline to “Stocks Now on Sale.”

I’m amused that the panic that seems to seep into people when a market takes a correction, they all consider it a bad event but I’m nearly jumping up and down at the thought of picking up some quality companies on discount.  So when I got home my wife and I put together three trades in our accounts for about $13,000 and proceeded to become the proud owners of some Royal Bank shares, and Canadian Index ETFs.  Ironically the market rebounded yesterday after we put in the trades so the Royal Bank shares alone were already up $154 in value.

I really do believe all the negative media coverage on these corrections tend to fog people’s head about “Oh, I’m losing money I should do something.”  This of course results in panic selling and losing money.  The issue is on an emotional side we fear losses more than we enjoy gains, so at the time this feels like a good idea to stop the loses.  Yet we tend to ignore the somewhat obvious point of the stock market…you never lose or gain anything until we sell.  At that point you lock in what you sell for and determine your gain or loss.  Up until that point the stock market is nothing more than a overly excited neighbour trying to buy your kids swing set and offering you a new price every single day.  So like any reasonable person you should relax and ignore your overly excited neighbour most of the time…that is until they offer a huge price where you can sell the old one and take the profit to buy a new one and still pocket some extra money.

Another issue people tend to forgot is when you get overly emotional you don’t think straight.  Your logic is impaired and you really shouldn’t be making any big decisions at that point.  So for my family we tend have a rough plan for our investing laid out in advance for the year.  It isn’t hugely detailed, but just an idea of how much we want to save, to which accounts and what investments we are interested in getting (often just sectors rather that a specific company).  That way when the market goes nuts, I tend to think about how can I use this to help the plan proceed rather than run around like Henny Penny thinking the sky is falling.

So how did you react to the market this week?  Buy anything or just ignoring it all?

Release the Cash

Posted by Tim Stobbs on September 26, 2014

Well after sitting on just over $100,000 cash in our RRSP accounts for months now I finished my research in various Exchange Traded Funds (EFTs) and came to agree with the model portfolio option #4 over at the Canadian Couch Potato.

In case you are too lazy to click the link, the portfolio is made up of four major ETFs:

  1. VCN – Vanguard FTSE Canada All Cap
  2. VUN – Vanguard US Total Market
  3. XEF – Ishares MSCI – International
  4. VAB – Vanguard Canada Bond

I laughed because I had predetermined that I would break up our portfolios into 60% equity and 40% bond before I started the research and that is ironically the exact break down recommended by Dan (author of the Couch Potato blog).

So you might wonder what the hell the advantage of going to ETFs are?  Well in a word: fees.  The MER on this portfolio is a rock bottom 0.192%, given we were previously in an index mutual funds with fees of 0.7%, that means we are saving just over $500 per year in fees, which more than offsets the $80 in trades it took to deploy the cash into these portfolios today.

Also you have to consider compared to the average mutual fund fees is around 2% or higher.  So on $100,000 portfolio switching to these exchanged traded funds like this will save you $1808 per year in fees.  Yes you can earn almost an extra $2000 per year in gains just by keeping your fees lower…isn’t that just a little mind blowing? Especially when you consider that compounding of that over a decade.

In case you were wondering…if you invest $100,000 at 6.5% return, after fees of 2% you end up with $157,000 in 10 years.  If you lower you fees to 0.192% your final balance jumps to $187,0000…and that assumes you haven’t added a dime into those accounts.

So that is today’s point….keep your fees low.  It will help you in the long run.  So do you know what your MER fees are for your investments?  If so, how low/high are you?