Trevor Abes: Writer

Tag: stocks

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.

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.

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.

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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