For many young and middle-of-the-road families out there the RRSP vs RESP account debate is a very real one that usually creeps up right around tax time every year if not more often. It is often a confusing topic for some people because the financial industry spends a lot of money trying to convince parents that they need to max out RRSP and RESP accounts, and it is often extremely difficult to do both as people seek to balance mortgages, student debt, and life (that pesky life, always seems to get in the way of the raw numbers right?). There are obviously numerous aspects of each person’s financial situation that will come into play when looking at whether a RRSP or an RESP contribution is right for them.
Investing In Tobacco Dividends – Collect ‘em If You Got ‘em
Warren Buffett and his pal Charlie Munger always say that they are looking for companies that have a “durable competitive advantage” and have low debt levels. Well, if millions of people around the world are strongly addicted to your product, and you have no real debt to speak of, does that qualify (Buffett has in fact owned stock in a smokeless tobacco company, and the giant RJR Nabisco which sold tobacco products)? From a complete numbers point of view, it still pays to be with the tobacco companies instead of against them. Sure, popular culture in North America might be trending away from the old school Marlboro Man icon, but internationally cigarette sales have never been healthier (now there is an oxymoron) and the smokeless tobacco market seems to be taking off as well. The products created by tobacco giants such as Altria, Philip Morris, Reynolds America, and Lorillard are not going out of style any time soon. They have great profit margins, solid shareholder pay back histories, and will likely be nice little income-generators for your portfolio. For this reason, many investors who usually leave their emotions at the door when it comes to comes to distributing capital are left with a moral conflict. (more…)
Choosing the Latest Investing Fad
Don’t you love the guys/gals that get their investment advice from the water cooler? You know the guys and gals that are constantly hopping on the bandwagon of whatever terrible investment advice that their co-workers heard on the radio on the way in this morning?
“I watched Jim Cramer last night and he said that even though last week he hated this renewable energy stock, since it has went down 7% he is now in love with it, and at it’s current prices it is the best buying opportunity for this decade”
Everyone then nods their heads and positively affirms how smart everyone else is in the group. Now I often do this simply because it gets really socially awkward when you tell someone that they should probably just light their money on fire as do what they are proposing. If you tell someone that their vaunted financial expertise is exactly the sort of thing that the financial sector preys on, they tend to want to ostracize you. However, after I am done giving my false contribution to group dynamics it would never enter my mind to act on the advice, and yet countless others do.
There are actually some fairly straightforward reasons why this style of investing is more harmful than most. By trying to jump on the latest investing fad that your buddies heard about through the most recent mainstream media, you are almost guaranteed to buy at a market top, and then if you are like most investors you will panic when the investment starts to cycle downwards and likely sell at a very bad time. In other words you will do the exact opposite of buy low, sell high. The rationale behind this claim is that by the time most people around the average office water cooler (obviously if you work on Bay Street or Wall Street your water cooler is a little different… for starters it’s probably gold plated) it has made its rounds on the various media circuits. The real investors, the hardcore traders, and hedge fund managers have already been in and made their money. By the time the media reports on an investing movement, almost always the majority of the bull run has taken place and now they are just encouraging speculation. Speculation is when people purchase an asset not because they think it has good value, but because they believe the price will continue to go up and they can sell it for a profit. That in a nutshell is how bubbles happen, and why so many people can’t figure out why their investment returns most years.
Before you take someone else’s investment advice, I advise you to take a look at how the average person does picking stocks. If you’re in a hurry, I’ll save you the trouble, the vast majority of investors, no matter the geographical location or asset class will severely underperform the overall returns of their index. In other words, if they just bought ETFs or index funds they would be far better off. As a general rule, when Glenn Beck begins to pitch your asset class (hey gold lovers out there – that’s you!) it’s time to sell and run for cover.
The really interesting thing is that the guys out there that actually do make a ton of money in the stock market and experience above average returns, do so at the expense of the water cooler/investing fad types. Warren Buffet is famous for saying, “You pay a very high price in the stock market for a cheery consensus.” His philosophy revolves around investing in companies when there is proverbial blood in the streets. When everyone else panics, he simply wades in and buys companies at depressed prices because of all the volume that is suddenly on the market. There are other lesser-known investors out there who make pretty decent returns most years by simply doing the opposite of whatever most people are doing. This is called the contrarian investing style, and it would be interesting to try (if I wasn’t an ETF convert). Maybe I’ll do a test in the future by simply turning on the investment shows at night and buying whatever is the opposite of what there are saying. I’m fairly certain that strategy would outperform the average investor.
Don’t let the fancy production levels and talking heads convince you the latest investment fad is the ticket, or that this downward cycle is different than all the others and you need to sell now. Simply have faith that capitalism and entrepreneurship will continue to drive money towards businesses that can get you a decent return on it. The world is still growing by leaps and bounds, simply investing money in the market average and leaving it alone is by far the best policy for most people. Unless you heard that tip on gold bullion last week… deal of the decade they say…
Risk Taking: Intelligent vs Non-Intelligent
When we told select family and friends that we were going to purchase this website, we got some stunned looks and some other words of support. The interesting part about that varied reaction is the fact that we intentionally haven’t told many people. For example, we agreed to tell our parents about the business venture after we had earned enough from our web properties and freelance work to pay the loan back in full. The reason for this is that we have grown accustomed to having our eardrums intact and would rather not have them burst by hearing, “Are you insane” shouted at glass-shattering decibels. You see, many people (including banks) just don’t understand the idea of buying a blog. The business model is not well-known, and there is only very tentative precedent currently available. Seeing as how a web property is something you can’t touch, it makes it very difficult to quantify to most people, and even harder to support taking out a loan in order to buy such an entity. Interestingly enough, I am almost certain that if either my partner or I had took out a fairly large loan to buy a new vehicle that was above what we needed, we might have gotten a slight smirk at our perceived slight overspending, but overall the reaction would have been to enjoy yourself and your new toy (we probably “earned it” according to every advertiser out there).
You’re Buying A What?!
Why is this? It is socially acceptable to purchase luxury goods and enter into contracts paying relatively high interest rates for them, but yet buying an income-producing asset is met with such disbelief? If we had purchased a rental property, there would have been some words of caution no doubt, but probably far less of a reaction than purchasing a website. Again, this is interesting to me. From what I can tell, the average perception of risk is quite different than the one I have. So either I am completely wrong and will end up biting off way more than I can chew or, many of us are little mixed up in regards to how money and risk are used.
I Deserve It, Just Ask Visa
Purchasing luxury goods is not an intelligent risk, yet is generally accepted in society. Going into debt to pay for these luxury goods is also fairly common. For transactions that appear to be straight capital-for-pleasure trades, the marketing industry appears to have convinced us that we can never have too much, and that we deserve everything we can get our hands on. This of course leads to that weird lifestyle inflation phenomenon we all know and love. I must be wired differently, because I get way more of a jolt out of buying an asset than I do from buying something to wear, or drive, etc. This is not to say I’m overly cheap (although I may be). I like to pay for experiences, trips, going out with friends etc., but going into debt for luxury goods is not my thing.
My Best Investment Is My Home *gulp*
Many people who believe they know their way through day-to-day personal finance would strongly agree that going into large amounts of debt for a home mortgage (500% leverage anyone?) or for a rental property is a good investment. You can touch a home, feel a home, and the business model is very common. This is obviously intelligent risk right? I mean home rates always go up, renting property is totally passive since home maintenance is almost non-existent, what could go wrong? Paying the carrying costs on mortgages is an intelligent risk, while the carrying costs on a relatively small investment loan is insane if it’s used to buy a blog right? See where I am going here?
The Difference Between Good Risk and Bad Risk
Many of the things we believe are good risks such buying a “luxury toy” like a boat, or a new vehicle aren’t risks at all, they are merely buying something that has no way to generate cash (and will just leak value forever). Other things we believe that are considered intelligent risks include certain types of investment loans to buy real estate, or to purchase a piece of equipment for your business to make use of. To me, the bottom line on intelligent vs non-intelligent risk of your money/capital is: do you understand how your risk will pay off and do you understand the size of your risk?
If you understand the industry, you have a solid grasp on how profits are made and what “best practice” is within the field, then you can be confident that you continue to operate the asset your buying in an efficient fashion. If you believe that your risk-reward ratio carries a return on investment that is greater than 15%, then you are also in good company (the stock market by comparison has historically returned around 10%, and lately, much less than that). Finally, if you understand just how much money you are borrowing, relative to the expected income of your purchase, then you are well on your way to determining the difference between intelligent and non-intelligent risk in my opinion. If we step back a look objectively at mortgages, they are often just a socially acceptable way of leveraging your money in a massive way. There are plenty of lenders out there willing to hand out mortgages with 5% down if you have a decent credit history. That is 20-1 leverage, or 2000%!! If the housing market dips at all, you can lose massive amounts of net worth in a very short time. Yet five years ago a mortgage would have been considered a very smart risk if any risk at all.
Common Sense Makes You Average By Definition
Try not to let “common sense” money practices cloud your impression of what good and bad risk is. I find common sense a great guide in most aspects of life, but in terms of money and capital management, it has led many astray. People rarely go wrong investing in things that produce income, and are also assets that they understand. On the other hand, plenty of people go wrong when debt is used to fund luxurious tastes and overextending ourselves through social acceptable means.
Youngandthrifty’s 2012 TFSA Acquisitions
A few weeks earlier, I asked you what you thought I should do with the $3500 I had put into my Tax Free Trading Account with Questrade.
I was deliberating between buying some BMO bank stocks (I currently only own 45 shares) or adding more HSE Husky Energy (I recently bought 100 shares). My TFSA portfolio included about 10% in ETFs and the rest of the portfolio was dividend producing stocks. Needless to say, the allure of dividend investing really attracts me.
However, this quickly changed when I realized that I hadn’t balanced my ETF portfolio for the year. When I looked at the pie chart of my portfolio, I saw that the ETFs were a teeny tiny portion of my entire portfolio. I’m a visual person and seeing this helped me realize that I needed to incorporate more ETFs.
Also, looking back at my investing journal, I had sold an entire ETF from my lazy couch potato portfolio (it was recommended by Money Sense) which included 25% proportions in each XDV, CYH, CPD, and XTR. When I read my investing notes, it seems like I sold XTR in 2010 to get enough capital to buy some dividend stocks. At the time, I probably told myself that I would just buy them back… but it seems like I never did.
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