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Wednesday, October 22, 2014

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?

Diving In

Posted by Dave on September 3, 2014

I tend to over-think things and second-guess most decisions I make, especially when they’re money related. Most of the money-decisions my wife and I have made to-date about our plan to retire early were automatic – spend a lot less than we make and put all of the spare money we have against the outstanding mortgage.

Now, I actually have to do stuff – making lots and lots of investing decisions over the next (hopefully) 60 years. This month will mark the beginning of having funds available to start investing – which will be quite a change in my money-spending lifestyle.

I read a lot of stuff – a good chunk of it is money-related. Like most things on the Internet, a lot of the information available is contradictory. Some sources say that the market is at a peak right now and it would be ridiculous to buy anything. Other sources say that there’s never been a better time to invest in “Stock X”, or “REIT Y”. As an almost total rookie investor, and someone who is a constant second-guesser, this is the point where I get intimidated.

My whole investing plan centers around buying income-producing assets, which slowly (but hopefully surely) replace my wife’s and my salary, until we have enough money to be able to not work anymore. At a 5% return, every $1,000 we invest is going to increase our annual income by $50. I really try to keep these kind of numbers in mind when I go to spend money on something that is unreasonably dumb, because all of those decisions are doing nothing but adding to the time it will take us to achieve our goal.

In order to achieve my goal, I will probably start investing sooner rather than later, increasing our current annual income now. I will hopefully pick assets that will not result in me flushing money down the drain. I guess the good thing about having what could be called a somewhat stable job, is that if 100% of my decisions are wrong, I’ll still be able to eat. In some way of thinking, I think I’ll treat my retirement investing career the same way I’ve treated sports betting. With gambling, I assume that everything I put in is probably going to be gone. For someone who will hesitate to buy some random $5 item, explaining to my wife that this is within the realm of possibilities does give me a bit of a cushion when making these kind of decisions.

While I would prefer to not shovel money out the door, this pessimistic level of thinking does allow me to overcome my decision-making paralysis and continue down my path to financial independence.

How did you decide when to start investing? Do you try to time the market, or just find investments that fit your set criteria?