Investing | Trevor Abes: Writer

January 23, 2021

Young Canadian Investor #23 — Common Investing Mistakes

Just like the practitioners of any other discipline, investors have to deal with a set of common mistakes the avoidance of which separates the average from the exemplar. You don’t need specialized knowledge to avoid them, just the ability to keep your emotions in check and the willingness to read a book or two to learn how stock markets work. Being a successful investor is within anybody’s grasp. Let’s discuss why by exploring some of those common mistakes below.

First thing most investors fail to consider is the appropriateness of the fees they pay. If you’re invested in funds that charge you 1-2% of whatever money you have invested every year, are the funds’ portfolio managers earning you enough money to justify those fees? Seeing as owning the global stock market through index funds has historically made you about 5% per year after inflation on average, that means a 2% fee fund needs to earn you about 9% per year, supposing 2% inflation, just to keep up.
With so much praise showered on Buffett, Lynch, Templeton, and other legendary investors, too many people believe in the promise of stock-picking expertise. Truth is, though, these individuals are outliers, and research-based stock picking is just as much an art as it is a science. Over the long-term, the vast majority of practitioners will underperform those who simply buy the entire global stock market through a diversified portfolio of index funds.
Unless you know what you’re walking into, it’s very easy to let your emotions get the best of you as a new investor. On any given year a stock fund can fluctuate in price, sometimes by half or more, on its way to making you money over 10 or 15 years. Investing is a long-term practice, one where businesses need to be allowed to innovate, grow, and create lasting value; to be successful, you just need to live your life and stay out of their way. That means ignoring your urge to sell an investment simply because other investors are overreacting and causing its price to drop, even though the quality of the business hasn’t changed.
Many young investors think you need lots of money to participate in the world’s stock and bond markets. Thankfully, this is no longer true. Wealthsimple, for example, allows you to open an RRSP or TFSA and buy as little as one share of the investment fund of your choice without having to pay a commission. If you have a spare $50, you can start investing today.
It’s a widely-held misconception that investing in the stock market is basically gambling. You can definitely use stocks to gamble by, say, buying some shares in a company your coworker gave you a tip on, or a company that makes products you’re deeply familiar with even though its business prospects may not be all that bright. Whenever you invest hastily, you’re taking a flyer and could lose money. And you already read numeral 2. If you take a more measured approach, though, and invest prudently through index funds, which offer you a long-term positive expected return—5% per year or so after inflation—you’re golden.
The key to investing is staying invested long enough so that compound interest can work its magic. That means you need to buy more shares of your stock and bond funds at every paycheck over a handful of decades for satisfactory results to show. Making the rash decision to give up on funds after a few short years is always a mistake.
You may also be thinking that all this investing stuff is too complicated for you to handle it yourself, meaning you need to resort to a financial advisor to put your money to work. Not the case at all, if you ask me. As someone who put the reading in, learned about which investment accounts to open, and has been building his investment portfolio over the last two years, I can tell you with absolute certainty that you are more than capable of doing the same.

If you’re interested in a short and digestible investing guide to get you going, consider my new book, Nine Steps to Successful Investing: A Guide for Young Canadians. I designed it to cut through how financial literacy is one of the most boring things you can learn. You’ll get nothing but the essentials, expressed in plain language, with extra resources only if you’re interested in learning more. Whatever you decide, don’t hold off on building your nest egg. Your future self will love you dearly for it.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop any questions in the comments!

Disclaimer: This article is meant for general education purposes only. It does not constitute financial advice as I am unaware of your personal situation. Consult with a professional who abides by a fiduciary standard before making any investment decisions.

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January 19, 2021

Young Canadian Investor #22 — Ten Financial Concepts They Should Teach You in School

We’d all be a little better off if Canada’s basic education system included a thorough run through of basic finance. Such a course would allow young people to make better decisions with their money and ultimately keep more of it in their pockets. Nowadays, making mistakes with money is almost normalized as part of the journey toward managing it well, and there’s really no reason that should be the case with the right financial foundation.

Here are ten concepts that might serve as the base of that foundation.

Inflation is the sustained rise in the prices of goods and services people use in their everyday lives. A pack of bacon twenty years ago was a lot cheaper than a pack of bacon today because of inflation. The same can be said for orange juice, cars, houses, bathroom tissue, and pretty much anything else you need to live your life. We invest money in stocks because they offer a return that has beaten inflation over time. While you can buy approximately 3.3% less with a Canadian dollar with each passing year, a diversified stock portfolio would have earned you an average yearly return in the high single digits over the past few decades.

Debt is what you take on when you borrow money. Usually the agreement is that you have to pay your lender back the full borrowed amount, aka the principal, after a certain period, plus periodic interest payments along the way. These interest payments tend to be expressed as a percentage of the total borrowed amount payable in monthly, annual, or biannual installments depending on the arrangement. One well-known example is credit card debt, which is some of the highest-interest debt you can incur at about 20% or so per year. On the flipside, no pun intended, taking out debt, aka a mortgage, to buy a house could be financed at only 3 or 4% because of Covid-19’s obliteration of housing demand.

Financial Independence means having enough money to finance your life’s expenses such that working becomes optional for you. We’re not talking about being rich here, just being able to support yourself and live with decency. The earlier kids know about this concept, the more years they’ll be able to save and invest and take advantage of compound interest.

Compound Interest is the process by which an investment grows in value. When an investment earns you interest, which is synonymous with a return, over one year, it’s added to the original amount you invested such that your $1000 is now $1200 for example. The $200 you earned in interest now has the opportunity to let the following year’s interest grow on top of it, essentially earning you interest on your interest as they compound into a higher amount.

Opportunity Cost is a perspective you can take when it comes to spending money. It consists of looking at what you’re about to spend, say $15 on a burger and fries, and considering what you’ll no longer be able to buy once you place your order. If you’re saving for a car, you won’t be able to put that money toward to car anymore. If you’re hoping to take a certain course to add depth to your skills, that $15 will no longer help you enroll. You get the idea. When you actually manage to hold off on dropping your cash on something in favor of a future desire, it’s called delayed gratification; not the easiest ask for young people looking to have a good time, but certainly a rewarding one in terms of making larger-scale dreams come true.

Investing is using money with the intention of making more of it. You invest in assets.

Assets are things you can own that make money. These include stocks, which rise in value and can pay you a bit of cash every month or quarter called a dividend. Bonds, which basically work the same as the lender-borrower relationship we delineated above, where the lender, or holder of the bond, receives regular interest payments and the return of principal at the end of the bond’s life. Real estate, which pays you monthly when you rent it out to people. Businesses that hopefully produce profits that line your pockets in proportion to the percentages of the businesses you own. Patents, which generally entitle you to a royalty for every time your patent is put to use. Guaranteed investment certificates, which, like bonds, function as debt. And so on. Think of how motivating it might be to have a working list of these in your head walking around as a daydreaming sixteen-year-old.

Retirement Planning is the last thing you want to talk to a high school kid about at length because it’s so far away and you gotta learn to live before worrying about the logistics of the end of it. I’d limit the spiel to saying that it’s a good idea to think about how much money you need to live on a yearly basis. Multiply that number by however many years between your age and 90, to be conservative, and that gives you a rough idea about how much money you would need until you croak. It can feel grim to think about death. I get it. Just wanted to acknowledge that.

Insurance is money you pay someone else to financially have your back in case something catastrophic happens to you, like croaking, getting seriously injured, losing your job, getting into a car accident, or having to deal with damage to your home. You get insurance for peace of mind. Your payments for it, called premiums, are ones you hope to make without ever having to file a claim due to this or that disaster. Knowing about insurance as a kid is important to instill the idea that certain things are worth protecting more than others, modified of course by each person’s individual values.

Taxes can be defined as money you pay the government to run the country you live in. The earlier little Timmy can develop a sense of what this means in hard numbers, the less of a surprise it’ll be compared to when those dollars have a tangible effect on his quality of life.

Feel free to drop a question or a comment.

I’m also offering investing 101 chats 1-on-1 over Zoom, Facebook, Skype, or Google Meet!

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January 16, 2021

Young Canadian Investor #21 — What It Costs To Invest

While investing is an essential part of being financially responsible, it’s important to know that it isn’t something you can do for free. There are costs associated with acquiring and owning stocks and bonds to save for your future, so you might as well learn about them now instead of being startled by them on a monthly statement years down the line. Let’s get going.

First off, anyone who buys or sells shares of stock has to pay a commission to the brokerage house facilitating the transaction. Usually that’s between $5-$10—if you do business with Questrade or one of the big banks—but Wealthsimple recently became the first financial institution in Canada to let you trade stocks for free.

If you own shares of a mutual fund or ETF that owns numerous stocks, bonds, or both, you’re going to pay something called a Management Expense Ratio (MER). The MER includes the salaries of investment professionals in charge of overseeing the fund, as well as any associated legal and administrative costs. What you’re charged is a percentage of the money you have invested on a yearly basis. Ex: suppose your fund’s MER is 0.5% per year. That means 0.5% of your investment will be taken by the fund to keep the lights on, usually calculated daily and withdrawn monthly from your balance.

Funds will also charge you a Trading Expense Ratio (TER), which is simply the amount of brokerage commissions the fund incurs to implement its investment strategy. The more stocks and bonds the strategy dictates that they buy and sell, the higher the TER will be.

If your fund engages in active management, that means its portfolio managers try to pick what they consider to be the stocks and bonds with the highest potential return. This tends to entail a hefty research budget to figure out what investment to pick, as well as a higher TER that reflects the buying and selling of these investments as they fall in and out of the research results. In Canada, an active fund will generally cost you 1%-2% of your investment per year all things considered.

If your fund engages in passive management, that means its portfolio managers don’t go to the trouble of trying to make predictions about the best investments to own. They opt instead for owning every stock, bond, or both in the markets they cover, or at the very least a sample or index of them that’s representative of the whole. The managers take this route because they believe that human progress will continue indefinitely, which will be reflected in the long-term rise in value of their stocks and bonds. A passive or index fund in Canada will cost you 0.1%-0.3% per year depending on what parts of the world it covers.

Which style has made investors the most money dependably over time? The evidence is squarely in passive investing’s corner.

Then there’s always the option of hiring a financial advisor to make all of your investment decisions for you. If you truly feel that you don’t have the time or patience to learn by yourself, this is the way to go. An advisor will probably cost you about 1%-1.5% of the value of your investments per year—and that’s on top of any fund MERs and TERs—but the fee is worth it if it frees up your time to do more of the things you love.

Now you have a good working sense of what it costs to invest, making you better prepared to make informed financial decisions.

Feel free to ask any questions in the comments!

If you are ready to learn how to invest on your own, have a look at my new investing guide for young Canadians. It’ll give you the tools you need to put your money to work in index funds in no more than an afternoon.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

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January 9, 2021

Young Canadian Investor #20 — The Pros of Financial Independence

Achieving financial independence means having enough money to do whatever you want with your time. In other words, your investment portfolio and cash reserves cover your food, housing, medical, and other basics expenses without you having to put in any more work, unless you want to. The result is that every day becomes an opportunity to tackle a new project your 9-5 job simply doesn’t allow.

The journey toward this independence and actually being able to experience it can be a fine way to spend your working years. Let’s explore why in a little more depth to help you determine whether or not it’s your deal.

If you have a very specific vision about how you want to live your life, and that vision doesn’t match with holding down a job because it feels like you’re working toward someone else’s dream, financial independence is probably for you. You may want to start a business and be your own boss, do charity work overseas, or pursue art projects that may only provide you with satisfactory mental and emotional as opposed to financial returns. Whatever it is, you can’t ignore what you know will make you happy.
The act of saving enough money to buy your freedom can be one of immense purpose. Picture yourself investing half or more of your monthly income, pinching pennies where you can, spurred on by the rush of your account balance climbing and climbing. There’s a lot of motivation to be had here that can make the less savory parts of a working life a little more palatable. Truth is, many of us don’t have a choice except to work, but long hours and annoying bosses and coworkers don’t matter as much when doing whatever you want is just over the horizon.
At a very basic level, enjoying some degree of financial independence is key to minimizing day-to-day stress. If we were to establish a hierarchy, we could say that the bottom end of it includes an emergency fund, a few months expenses to give you the space to handle a home repair or loss of employment without having to max out the credit card. One level up might be a year’s worth of expenses to tackle a heavy-duty catastrophe like an injury or a death in the family. Any money you invest from that point on gets you closer to being able to accept only the work you want.

If the idea of reclaiming your time as soon as possible lights a fire in you somewhere deep inside, you need to learn how to invest your money so it can grow beyond your biweekly paycheck. It’s reasonable to expect that a balanced portfolio of stocks and bonds will earn you about 5 percent per year over a few decades. That can add up to tens or hundreds of thousands of dollars to support yourself as you practice your passion.

To get yourself started, check out my new book, Nine Steps to Successful Investing: A Guide for Young Canadians. In no more than an afternoon, it’ll give you the tools you need to invest prudently in the world’s stock and bond markets through index funds and fulfill your long-term life goals.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop your questions in the comments!

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January 4, 2021

Young Canadian Investor #19 — The Cons of Financial Independence

For the purposes of this article, I’ll say you reach financial independence when you have enough money and/or investments to cover your expenses without ever having to work again.

It’s an important goal for a lot of 9-5ers who work decently-paying jobs that don’t mesh with how they’d like to spend their time. Maybe they want to be with family 24/7, maybe they want to travel all the time, maybe they want to write short stories all day and submit them to literary journals. It’s whatever makes you feel like you’re living the life you want, with the caveat that you should be realistic and thoroughly assess how close you can get to it. Here’s why.

Financial independence can become an overwhelming, all-or-nothing proposition. One where you give up a disposable income and with it any prospect of having fun for its own sake so long as you can save more money. And maybe you’re genuinely interested in travelling down this frugal road, exchanging nights out for pasta and cheap wine at home because you know that in 5-10 years you’ll have saved enough to free yourself from the daily grind. You should know, though, that there’s no point in saving half or more of your income if you’ll have to do it for decades to reach financial independence. In this case, there’s something to be said for investing less and living a little now instead of waiting until you’re 50.
You need to have a clear sense of what to do with your hard-earned independence. Once you hit your magic number and have enough to support yourself forever more, how are you going to spend your time? It’s easy to get caught up the the thrill of the journey without giving due consideration to what you need to do to look back proudly on your life. Would you paint a new canvas every day? Dive into research projects that’ve been on the backburner for too long? Would you open up a coffee shop, source all your ingredients in ethical ways, and serve your community in a way you can be proud of? Your answer can change, and often, you just need to get a handle on what gets you out of bed in the morning.
It’s not impossible to be fulfilled while holding down a 9-to-5. This entails finding a job you don’t hate or merely tolerate, one where you still have energy at the end of the day to go out, see people, and live a well-rounded life. There is nothing wrong with working for the next 40 years so long as it adds value to your waking hours, so long as it gives you a sense of purpose that makes you feel alive. Under this scenario, investing your money is still a must, but you can feel free to put less of your paycheck away knowing you’re comfortable working into old age. What would this ideal job be for you?

In the end, financial independence is a lifestyle choice, one that mostly appeals to people who value the freedom to do as they please day to day. If you’ve been searching for a short book to help you invest your money so you can get closer to tasting that freedom, my new effort is for you. It’s called Nine Steps to Successful Investing: A Guide for Young Canadians. In no more than an afternoon, it’ll give you the tools you need to invest prudently in the world’s stock and bond markets through index funds and fulfill your long-term financial goals.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop your questions in the comments!

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December 28, 2020

Young Canadian Investor #18 — Investment Safety Versus Investment Return

It can be tempting to think that the investment that offers you the highest potential return is where you always want to be. If you have enough time for the investment to realize its value, what’s the problem? Well, it really depends on your particular financial situation.

If you’re 65 and have a million and a half dollars sitting in the bank, putting 20% of your net worth in the hottest publicly-traded cryptocurrency mining company because it might grow 100X wouldn’t make much sense. That’s because you need that money to fund your retirement, you might live until you’re 100, and the price of bitcoin is incredibly volatile and may go to zero.

If you’re 27, healthy, and working a somewhat entry-level job that allows you to save a little bit of money, the whole bitcoin thing might work for you. Supposing you have an emergency fund in place, diversify your investments into stocks and bonds, and are well-read enough to feel comfortable about bitcoin’s future, there’s no reason not to go crypto with a small but significant percentage of your portfolio. Why? Because you understand the risks and believe in the prospects anyway. If bitcoin goes to zero, you like the story enough to follow it all the way down.

The takeaway here is that investors should aim for the return they need to fulfill their financial goals. At minimum, the 65-year-old needs to meet their yearly expenses until they pass away. Fulfilling that goal with 1.5 mil to draw on is really about preserving that money and growing it conservatively so it lasts for the next 40 years. Crypto is way too risky in this case. Even too high of a percentage in stocks may expose this retiree to a double-digit drawdown in the price of their shares from which they may not recover. Something like a 50/50 split between stocks and bonds would be a good starting point.

Now, consider the 27-year-old’s aspirations. While they may and probably should be putting some money away for retirement and investing it in the riskiest (aka highest-returning) assets they can stomach, they may have shorter-term goals they want to get to first. If you’re saving for a car, for example, it’s no good to put the money in stocks and experience a 25% drawdown the year you planned on making the purchase. Bonds, which give you a shot at keeping up with inflation, are more appropriate instruments here. While they may experience single-digit drawdowns year to year, bonds will do a much better job at preserving your capital over 3-5 years so it’s there when you need it. Any savings term shorter than that limits your investment options to cash and GICs, which won’t really grow much at all but they won’t lose anything either.

If you’ve been looking for a nudge to get invested in line with your personal needs, check out my new investing guide for young Canadians.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

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December 22, 2020

Young Canadian Investor #17 — Why I Write With Young People in Mind

It may or may not be obvious by now, but as a young person time is still capable of being very kind to you. It can still heal all your non-lethal wounds, just by letting it pass, because you have so much of it still to spend.

Go forth and get yours, lil cub.

When it comes to investing, having healthy time reserves is essential to actually making money. Stocks have a positive expected return only over very long periods—somewhere around 7% per year for a globally diversified stock portfolio over a couple decades—but they’ll go up and down unpredictably year to year. You’re in a fantastic situation here because, as a twenty- or thirty-something, you can simply keep investing and let those up and down years eventually add up to money in your pocket while you focus on living your life.

Another reason I’m interested in helping young people like myself invest is how boring all this stuff can get. I happen to be someone who’s blessed with an appreciation for economics, personal finance, and business analysis, but 90% of the people my age that I know can’t take more than a few minutes of investing talk without their eyes going glazy. I think it feels like work or grade school, something you’re obliged to partake in without particularly wanting to. My intention with Young Canadian Investor is to convey basic investment knowledge in accessible language to hopefully knock that 90% down in a meaningful way.

One more point worth mentioning is how nonurgent it can feel for a 27-year-old to put money away they’re only going to use 10-30 years from now. It’s much more enticing to splurge now than to delay gratification for your future self by investing 40 of those $60 in your wallet. And make no mistake, you should splurge to a degree. Life is short and it’s a gift meant to be savored. You just want to take steps to continue savoring comfortably well into your old age, and investing is one way to ensure that happens by minimizing your chances of going broke.

Being young is only full of advantages if you know how to recognize them. I’m just here to point one of them out for you. It’s the same reason I wrote my little book, Nine Steps to Successful Investing: A Guide for Young Canadians. I wanted to make it easier for people my age to cushion the expansive futures before them with more financial security, at least compared to not investing at all. Feel free to give it a shot and to ask any questions you may have in the comments.

And I do mean any, no matter how basic, because we all gotta start somewhere.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

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December 19, 2020

Young Canadian Investor #16 — The Costs of Not Investing

Why I Invest

I don’t know about you, fellow twenty or thirty-something, but my main goal right now is to have the freedom to do what I want with my time.

As a writer, I know that working alone isn’t going to get me that freedom—unless something I create takes off, catches loads of public attention, and grows to complement my history of barely livable wages and price-per-word rates. That means I need to be creative about the number and nature of income streams I put into place. That’s where investing comes in.

Here I am being writerly at Word Sound Power Open Mic in Toronto.

I’ve been diligently investing into a couple tax-free savings accounts for the past two years. I own mostly exchange-traded funds (ETFs) that hold the global stock and bond markets with about a fifth of my portfolio in individual stocks. As businesses improve and their stock prices rise over the long term, my investments will grow for me on their own while I focus on the rest of my life. It’s a small total right now—the entire portfolio provides me with about $1000 of dependable income per year— but it will eventually become enough to let me focus on putting words together full time. That’s why I do it.

Here are five more general reasons I invest and you should too.

Inflation is the phenomenon of the prices of things going up over time. In Canada, it’s about 2 percent per year—about 3.3 percent when you factor taxes in. In other words, your cash buys you about 3 percent less stuff every year you hold on to it. Conversely, it’s reasonable to expect that owning the global stock and bond markets through ETFs will earn you around 7 percent per year over a couple decades. By simple addition, investing puts you 7-3.3=3.7 percent ahead.
If you don’t invest, you may have to confront the reality of Unfulfilled Goals. And we’re talking big goals here, like a car, a down payment on a house, tuition for a degree, or the head start you need to start that family. It’s a lot easier to accumulate 20 thousand dollars over a handful of years if that money is invested and growing, as opposed to you putting it in a savings account that makes you 0.01 percent per year.
The difference between peace of mind and Financial Insecurity is having enough money to meet your basic needs, say for six months, just in case you fall on hard times. This emergency fund is insurance against the ups and downs of life and everyone should work toward building one. But once you have that emergency fund sitting safely in cash, it’s important to start investing and building your nest egg for the future. The simple fact is this: when it’s time for a pivot in your professional or personal life, having tens of thousands of dollars around to help you achieve it will make a huge difference.
Living paycheck to paycheck entails A Poorer Quality of Life. One where there isn’t a whole lot of breathing room at the end of the month after accounting for expenses. That said, a diligent investing plan is one way to generate more room for you to spend your time as you please. What would life be like if your investment portfolio provided you with even $200 of extra income per month? What kind of pressure would that relieve? If you start investing today, you can get there.
The biggest consequence of not investing is the Inability to Retire. A good rule of thumb is to multiply your current salary by 25 to get a sense of how much you need to stop working at 65 years old. Whatever that number is for you, counting on investment growth to reach it is a lot easier than putting your cash in a savings account or under your mattress where it’ll lose money to inflation over time.

If you’re interested in learning the ins and outs of investing prudently to meet your financial goals, you can read my new investing guide for young Canadians. It’s short, to-the-point, and will set you up for making the most of your money regardless of how much you have. Feast your eyes on the luxuriously cheesy cover below.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop any questions in the comments!

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December 12, 2020

Young Canadian Investor #15 – Trusted Financial Sources

You can’t infer trust from any random person dressed in formal wear eager to tell you where the stock market is headed. This is especially true in a world where financial television stations like CNBC, Bloomberg, and BNN bestow their airtime on experts who pull economic predictions out of their behinds and aren’t held accountable for being unreliable.

What you’re looking for are financial professionals who can be objective with you because they don’t have to choose between giving you useful advice, or selling you products and services, even if you don’t need them, to ensure that there’s food on the table.

It’s hard to comb through the media landscape to identify people who focus on the needs of everyday investors, the ones who never learned money management in school, and treat the financial field as they do the medical one—with unwavering trust—when most financial advisors in Canada are actually under no obligation to put your bottom line before theirs. In the interest of facilitating the process, get to know a handful of people who have shaped my investing mind with solid fundamentals for long-term success.

common sense investing

Ben Felix is a financial advisor who runs a YouTube channel called Common Sense Investing. It’s great for in-depth but digestible explanations of core investing concepts, plus a fair amount of content that will take you far into the investing weeds. I like Ben’s work because he backs his points up with academic research and isn’t afraid to call out active managers for lining their pockets with client money before bothering to grow what’s left over. He’s also very blunt, which I find refreshing. All he’s trying to “sell you on” is the upside of taking the reins of your financial future.

One reason Ben can be so forthright about his peers is that he works for a firm that is way more transparent about its strategies and fees than the major Canadian banks. One of his colleagues there, Dan Bortolotti, is the creator of the Canadian Couch Potato, a pioneering blog and podcast dedicated to helping everyday Canadians understand the benefits of investing through index funds. Unlike picking individual stocks and relying on your research to ensure satisfactory returns, index funds allow you to own a piece of the global stock market for cheap, thus hitching your money for a ride on capitalism and human progress as you save more of it. Dan is one of the leading index fund proponents in Canada; a contrarian stance in a country where most advisors steer clear of index funds because they get paid the least for recommending them.

plain bagel

Richard Coffin, an investment analyst in Ottawa, operates a YouTube channel called The Plain Bagel. He uses his platform to run through basic investment concepts, much like Felix, but in a broader, more accessible style that emphasizes humor and entertainment. His Q&As and April Fools videos are prime examples of this. If you’re as new as it gets to stocks and bonds, I’d say start here.

money school canada

Preet Banerjee, a popular financial consultant and speaker known for his many media appearances, sits somewhere between Coffin and Felix when it comes to pedagogical use. On Money School Canada, he pairs his slow and measured approach to unraveling terminology with your favourite teacher’s enthusiasm and production value that helps break everything down into constituent elements.

Does anyone worthwhile come to mind to complement this post? Feel free to drop their name in the comments. Everyone’s journey to financial independence will have its own unique twists and turns and I’d love to know who’s been there to help you along the way.

If audio is more your thing, check out my favourite investing podcasts part one and part two.

If you’ve been searching for a short, no-nonsense guide to walk you through the process of index investing, you can pick up a copy of my new book, Nine Steps to Successful Investing: A Guide for Young Canadians.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop any questions in the comments!

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December 5, 2020

Young Canadian Investor #14 – The Downsides of Stock Picking or Active Management

If you’ve ever thought it’d be a good idea to pick your own stocks, as opposed to investing in broad index funds, I’m here to dissuade you.

1200px-Wall_Street_bubbles_-_Always_the_same_-_Keppler_1901

Illustration by Udo Keppler.

For one, if you invest in a fund that tracks the global stock market, it’ll never go to 0 unless the world ends. If you buy $1000 worth of shares in a single company you believe in, on the other hand, it could fall on hard times, causing the share price to plummet, and with it your ownership stake.
The only way stock picking can work out is if you treat the endeavor like index investing, by which I mean owning stakes in a diversified group of businesses and holding them for decades. To follow through here, your research needs to support the long-term success of these businesses in spite of temporary drops in prices per share. It’s common for great investments to drop by 50% or more on their way to paying off for you. Will you be able to keep your convictions and hold on, or will you cave at the first whiff of trouble, make up an excuse, and panic sell at a low price like most self-directed investors? What makes you so sure that the investments that have caught your eye aren’t just the latest overpriced fads everyone and their grandmothers are joining the herd to own?
To produce high-quality research, you need to take the time to learn how to evaluate a business as it stands to make a judgement about its future prospects. If you’re interested in building up savings over the long term so you can live with dignity through your golden years, this is not something you can do casually when the fancy arises. You’ll have to immerse yourself in the intricacies of balance sheets, income statements, cash flow statements, and quarterly and annual reports at a minimum to give yourself a chance.
As an active investor trying to earn returns above the global stock market as a whole, or at the very least your national stock market, history is decidedly against you. Over 10 years, you’re looking at about a 20% success rate among professionals, with the percentage dwindling the farther out in time you go. Compare this to participating in your national stock market by owning an index fund that tracks it, which will provide you with that market’s return year in and year out minus a very small fee.
Speaking of fees, one of the hardest parts about making active investing profitable is keeping commissions under control. You usually pay $5-$10 per transaction when buying or selling stocks, while index funds can be bought on Questrade for free.
It’s also important to realize that, if you buy individual stocks in your RRSP or TFSA and they permanently tank, you can’t get that contribution room back. It might be hard to feel strongly about the benefits of accounts where investments can grow tax-free, especially if you’re young and justifiably all about the now, but it’s basically free money. You’d be doing your future self a huge disservice by letting it go to waste.

Still feel like building wealth by buying shares in individual companies? It’s not that it’s impossible to do well for yourself in this way. There are plenty of examples out there of people who dedicate their lives to investing through in-depth research and make a decent living off gains, as opposed to investment management fees they’re paid whether or not they produce satisfactory returns for their clients. If you’re consumed by your passion for picking stocks, by all means, have at it. But if you’re not, I wish you more than luck.

If you’re interested in learning how to invest through index funds and you’re looking for a concise guide to see you through the process—from establishing financial goals, to opening an RRSP or TFSA, to purchasing your investments and caring for them year to year—you’ll likely find my new book to be of service. It’s called Nine Steps to Successful Investing: A Guide for Young Canadians. It uses plain language, and draws from some of Canada’s leading voices in personal finance, to set you up with the fundamentals you need to grow your money as a self-directed investor.

I’m also available to teach you 1-on-1 over Zoom if you prefer.

Feel free to drop your questions in the comments.

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November 28, 2020

Young Canadian Investor #13 — The Benefits of Delayed Gratification

Far be it from me to tell you to not indulge in the pleasures of youth, whatever those amount to for you. You need to fill your time with experiences now to be able to look back fondly on them later when energy, passion, and priorities have evolved you into a different person. Don’t worry, I’m not here to be a wet blanket.

What I’m here for is to illustrate how investing is the bridge between your horny, idealistic, sleep-deprived self to the person you’re going to become after you’ve lived your fair share. It may not be immediately worth it, but investing now can lead to opportunities that aren’t presently available to you.

“The answer is dreams” — Haruki Murakami, Sputnik Sweetheart.

If you follow through on some of my suggestions about saving money, invest in stocks for at least a decade, and stick to making regular contributions, that extra 40 or 50 grand just lying around, while unimaginable now, will be available for you to take the next major step in your life. That may be starting a business, starting over somewhere new, or putting a down payment on a house, really any fantasy turned into tangible reality due to the benefits of compound interest and living below your means.

If I may get a little heady and sentimental, what do you dream about? If I may get a little more to the point, you already know that time is an inexorable progression toward pushing daisies, so what are you waiting on to move closer to the life you want?

It’s really all about rustling up your first $1000, investing it in a TFSA, and contributing to it from there until you reach your target number. If you think this investing business is too complicated for you, I beg to differ. My new book, Nine Steps to Successful Investing: A Guide for Young Canadians, will walk you through the process in plain language in no more than an afternoon. Give it a go if you’re ready for your nest egg to grow at a considerably greater clip than the pennies your bank throws into your savings account every month.

Feel free to drop any questions in the comments!

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November 21, 2020

Young Canadian Investor #12 – How to Save $1000

The smallest amount of money you can invest in Canada without having to pay a fee for the privilege—usually $25 per quarter—or commissions on transactions—$5-$10 a pop—is a grand at a brokerage house called Questrade. A brokerage house simply provides a platform where investment buyers and sellers can make their orders.

The problem here is that, if your investments fall below $1000 in any given quarter, Questrade will charge you the fee unless you make one trade in any amount. To avoid all this time wasted monitoring your balance, what you really need is to start investing with an amount that could fluctuate in value, due to the ups and downs of the stock market, without much of a risk that you’ll fall below the threshold. Seeing as 50% drops occur about once every decade or more, this post should be called How to Save $2000, stock market history considered.

If you have cable, you’ve probably seen Questrade’s commercials where young 20- or 30-somethings sass some sense into older, crustier financial advisors for their high fees. As the broker with the lowest minimum in the land, this is entirely by design. Compared to the big banks, where $5000, $10000, and $15000 minimums are prohibitively in place, youngins have nowhere else to turn. To be fair, you could invest in a TFSA at CIBC with no fee and a $500 minimum, but you’d still have to pay $7 per transaction. Question is, how do you get that two grand in your hand in the first place? Ponder my suggestions below.

If you receive a regular paycheck, shift 5%-10% of it into a savings account each time. The amount should be small enough that you won’t feel like it’s missing.
Think about the money you spend on personal entertainment like books, music, games, and eating out, and make small cuts such that you end up with a reasonable bit of cash, say $100, by the end of three months. Obviously up the amount if you are able.
If you eat out as a matter of course, learn to cook. Seriously, be willing to mess up, experiment until you find your comfort zone, and it will pay off. When you cook from home, you don’t charge yourself extra to pay for rent and staff salaries. That means your fried chicken dinner will cost you $5 instead of $15.
Remove brand influences from your life by shopping for generic brands and netting yourself the savings, which can be 25% or more.
Consider subjecting yourself to ads and using the free version of Spotify for a good long stretch. You could also cancel your Netflix or Crave subscription and opt for your local library’s free streaming service. You’ll probably only get to stream a limited number of recordings per month, so complementing your viewing with creative YouTubing would become a must.
Adopt a big-picture perspective and identify things you spend money on but don’t use and/or need. Beyond mere entertainment, this could include balance protection insurance on your bank account, a gym membership, or extra cellphone plan features bloating your monthly bill.
Give yourself time to accomplish this goal, even if it’s a year or more. Your means are what they are and improving them requires you to simply begin.

While this list is by no means exhaustive, it should add up to meaningful savings over a reasonably short timeframe if you put it into practice as a whole.

If you’re curious about investing and have been searching for a short, no-nonsense guide to help you get started, have a look at my new e-book, Nine Steps to Successful Investing: A Guide for Young Canadians.

Feel free to drop any questions in the comments!

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