Investing | Trevor Abes: Writer

March 18, 2020

Young Canadian Investor #4 – The Privilege of Registered Investment Accounts

One of the great things about living in Canada is that the government allows you to open investment accounts where you can either, 1) defer your taxable income to much later in life, or 2) buy investments that can grow without you ever having to pay taxes on them period.

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Any money you invest in your RRSP, or Registered Retirement Savings Plan, will minimize your taxable income for that year by that amount. So if you contribute $5000, your taxable income for that year will be reduced by $5000. Your investments will also grow tax-free, meaning you receive dividends and capital gains in full. But when you withdraw any money, you’ll be taxed on it as income at whatever rate applies to you at that time.

RRSP contribution limits rise every year with inflation. For 2019, you may contribute up to 18% of your taxable income for the year up to a maximum of $27,830.

Any money you invest in your TFSA, or Tax-Free Savings Account, will grow tax-free and can be withdrawn without cost at any time. The contribution limit goes up every year with inflation and currently sits at $6000.

If you’re 18 or older, and a Canadian citizen, you can contribute an amount equivalent to the total contribution room that has accumulated since TFSAs came into existence in 2009. That total is $69,500.

Any withdrawals you make will give you an equivalent amount of contribution room come January 1st of the following year. So if you take $2000 out this year, you’ll get $2000 of contribution room in 2021 on top of the limit the government imposes.

These accounts are ways to park money and let it grow while you focus on living your life. Every major bank offers them and all you have to do to open one is ask. Seeing that a globally diversified portfolio of index funds has earned 7% a year as a long-term average, there’s no good reason not to invest your excess cash and let it multiply while you’re young.

When you really need the money, whether because of illness, lack of work, or not wanting to work anymore, it’ll be there to give you optionality and make for easier decisions.

Any questions? Drop em 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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March 4, 2020

Young Canadian Investor #2 -Maneuvering Through a Monopoly

Canada’s financial industry is dominated by six big banks—TD, RBC, Scotiabank, BMO, CIBC, and National Bank. All of them employ financial advisors who get paid by investing their clients in funds that charge very high yearly fees, a portion of which ends back in the advisors’ pockets.

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Because advisors in Canada do not have to be fiduciaries, i.e. act in the best interest of their clients, they are legally allowed to recommend investments that increase their income, even though cheaper options like indexed mutual funds or ETFs that better serve their clients are likely available, often at the very banks they work for. This is the definition of conflict of interest, but it’s called ‘the suitability rule’ under Canadian securities law. And there’s no incentive to change it, because lower fees mean a hit to the banks’ bottom lines.

The solution? Ask your advisor to be a fiduciary for you, even if they aren’t strictly required to be. If you bring it up, they can either abide by your request or perhaps recommend someone who will.

It’s also not a bad idea to brush up on your investing basics so that, when you have some money to put away, you can give your mattress a rest, and invest it in the stock market yourself for little to no cost.

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February 26, 2020

Young Canadian Investor #1 – Compounding is the Point

The point of investing is to use compound interest to get yourself closer to your financial goals. It can seem like magic at first, but compounding simply refers to how an investment will grow exponentially if you regularly contribute to it and allow it to grow over large periods of time.

The bike is metaphorical. It represents your financial journey. It’s a stock image; you got me. Pun intended.

$1 invested that grows on average 7% per year will become $3.87 in 20 years.

$1 invested with monthly $1 contributions that grows on average 7% per year becomes $511.41 in 20 years.

When it comes to putting money away for the benefit of your future self, there really isn’t much else to say.

That said, to make compounding work for you, you need to know which investments have the best expected return, which of them fit your financial situation, and how to go about acquiring them. To learn a little bit more about getting started, you can pick up my intro to investing here.

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

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October 29, 2019

Getting Your Investing Mind Right

Arguably, the hardest part of investing for the long term in broad stock index funds—this includes funds that track the total US Market, Developed International Markets, Emerging Markets, or the Global Stock Market— is keeping one’s psychology in check during market extremes.

When funds have been going up for a handful of years, most of us think the trend will continue and want to buy more shares. Even though we have to pay an increasingly high price to do so.

When funds have been dropping for a long stretch, most of us figure it’ll get worse and feel we should sell. Even though prices haven gotten cheaper and thus more appealing.

Why do we act like this? Human nature.

How do we fix it?

One. By setting a range for how high and low stock markets can go, as per the historical record, to get an idea of good lows to buy more of, and good highs to dollar-cost-average into until prices improve. Selling investments should be limited to the reasons you invested in the first place.

How much can markets rise before a recession knocks them down to fair value? Australia’s stock market has gone more than a quarter century without one.

How much can a country’s stock market drop, and how soon? Eighty percent is a reasonable worst case scenario. This happened in the US over two years in the late 1920s and early 1930s with the market taking over 25 years to recover. It happened again, this time over a couple decades, during the double-digit inflation of the 1960s and 1970s.

Historically speaking, though, any time a broad index is down double digits (over 10%) constitutes poor performance and thus a buying opportunity/sale/good deal. This with the knowledge that it could drop another 70% or more and get that much sweeter.

Two. By remembering that, excluding problems with the fund’s management or issuing company, a broad market index fund going out of business would require the industrial complexes of the countries they track to go out of business too. And that’s next to impossible, whether in Canada or Spain or South Africa. Barring investment company bankruptcy, dips in your index funds’ prices per share will eventually recover. It may take many years, so it’s up to you to ensure an appropriate time horizon.

Three. By holding firm that, to benefit from index investing in stocks over the long-term, i.e. make money, you have to invest regularly and stay invested—continuously— in a diversified portfolio for ideally a decade or more.

That’s how you watch your index funds drop in value without panic-selling to avoid the stress. Easier said than done? Absolutely.

But when you compare how inflation currently cuts what you can buy with the money in your savings account by 2% per year, every year, with a diversified portfolio’s long-term expected return of 7% per year, giving into fear looks a lot like very slowly going broke.

You can learn more by reading my introduction to investing for young Canadians.

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 a professional who abides by a fiduciary standard before making any investment decisions.

Image by The Langmaid Practice.