Thursday, November 10, 2011

Feeling risky?

If you're in the game to win, then you won't mind a little risk.

However, if you're like MOST of the people I work with, then you don't know, or don't want to know, or don't care, or would rather have it NOW than have it * 10 later.

Lets start with the basics:

Inflation is inevitable.  This means your $10 today will not get you squat 30+ years from now.  So if you want to "save your money" then don't go to that bank that uses that as their slogan.  Their interest rate doesn't keep up to inflation.  Why not try their funds?  I don't like expensive mutual funds and theirs are surprisingly expensive. The Bank of Canada attempts to keep the rate of inflation between 2-4%  Which is very reasonable and fiscally responsible.

So if you want ZERO risk than I have bad news for you my friends...  There isn't ANY type of currency, commodity, or investment product that has ZERO risk.  Even the cash you have in your pocket has risk.  Washing machines, holes in your pockets, sticky fingers, and of course drunken rampages.  Also, if you did manage to put it under your mattress, if you did manage to find it years later, thanks to inflation you wouldn't have as much buying power.

So how do you climb up the "risk" ladder to keep your money at least matching inflation?  You have to "buy" something, or lend your money to your bank (or a bank).  This has some risk.  Bank robberies don't count.  But the bank's fiscal prudence does.  But remember, our banks (in Canada) were hailed as the world ideal for fiscal prudence.  They decided (thanks to LEGISLATION) from the government to establish what they can and can not do with your money.  And guess what?!?!  It works!  No Canadian banks exploded during the 2008/2009 credit crunch and NO Canadian banks are going to have trouble now with the European debt problems.  Even if the euro-zone exploded and broke apart back to it's original currencies, Canada would be hurt financially (along with the rest of the world) but our banks would still stand.

So yes, there is "some" albeit a near infinitesimal risk associated with lending Canadian banks money you are insured by the Bank of Canada up to $100,000.  So if you are foolish to have $100,000 of CASH or GICs even if your bank explodes (which it won't) you'll get a nice cheque from the government to compensate you.

That said, if you invest your cash in a GIC at any of the big banks, you would be hard pressed to get a rate higher than inflation.  The best GIC for us poor slobs with only $10 to your name is currently available from  2.75% for a 5-year GIC.  So you might beat inflation or you might not.

So is that right for you?  It's not for me.  I want to do better than that.  I NEED to do better than that.  There are ETFs (Exchange Traded Funds) that supply you with more yield with a very tiny amount of risk and much better yield.  For example the Claymore 1-5 year laddered government bond ETF and the Claymore 1-5 year laddered Corporate bond ETF use government and corporate bonds to make their product go.  Now these aren't the bonds that you might have had as a child.  These are BIG boy bonds.  They pay 3-7% interest for various terms on various amounts.  The long and the short of it, Claymore does the work and you get about 4.5% interest paid out to you monthly.  Now remember, you've stepped up the risk ladder buying government and corporate bonds.  The price of these bonds goes up and down, but only a small amount.  Go take a look at these two ETFs on google finance right now to see what I mean.  They do go up and down a bit in price, but seriously it's only a few cents in any one direction.  Also, if the stock markets are plunging, they generally go UP, and if the stock markets go up they go down, but they don't move much in value in any direction.

Take a look at CLF.  When the stock market lost half of it's value in 2008/09 This fund went up 5%.  As the stock market returned, it went down to where it started and then continued to drop another 5%.  All the while PAYING you to hold it.  Since then it's essentially back to where it was before in the $20.25-20.50 range.

If you're looking for something that will beat inflation, this is a good bet provided you like expect the government of Canada to be able to continue to pay it's bills in the next 1-5 years.  And as our finance minister did recently update our status returning to a balanced budget 2015-2016 this means yes.

Disclaimer:  I'm trying to help you dammit!  If you bet your lot in life on anything I suggest and lose it, then it's your own damn fault for not exercising better judgment.  I always advocate for a diverse portfolio of stuff so all your damn eggs aren't in the same damn basket!  Plus, if you do try to sue me for your own crappy judgment, you can tell your lawyer I have a net worth of about $37.50.  Don't waste his/her time!

Friday, November 4, 2011

set your own course

During the wine and cheese function I attend the other night I heard some of the most useful and strait-forward commentary on investing that I've heard in a very long time.  Som Seif, the CEO of Claymore said that setting up your own guidelines for investing is something you have to stick to.  It will keep you out of trouble, as falling in love with a stock is the best way to lose a lot of money!  (Just take a look at Nortel.)

Just because a stock hit a high price doesn't mean they will EVER hit that again.  If all of a sudden they change their divided in a negative way it's time to re-think that stock.  Is it still a reasonable holding?  Do you see them fixing their trouble and moving on?  Or is the ship sinking?

These are hard things to know for small investors such as ourselves, but it is very worth your while to talk to your friends who invest, talk to me, watch the smart guests on BNN (Market Call & Market Call Tonight).

Don't be afraid to take some profits too...  When the market is going ganbusters then you might want to sell some of your holdings into that market strength.

Selling into strength and buying into weakness is the name of the game!

Sail well my friends.

Fixed income, dividends, and distributions

As you might have guessed from my the title of this post, I'm going to attempt to talk about these things in terms of how a hand-to-mouth artist like you (myself included) should know.

The joy of our society is that Capitolism works.  Regardless of your political stripe if you're reading this then in some way or another you've given money to big corporate.  (Unless you live under the freeway, panhandle for change and are reading this at the public library).

What does that mean?  It means that companies make money and some (but not all) choose to split the winnings with the shareholders.

Why does that matter to me?  

It's very easy to become a shareholder and get some of those profits!  Does this make me a "Wall Street" (or Bay street) fat cat?  Hardly.  My monthly income from my investments barely covers 25% of my monthly budget.  (And since most of it is in registered accounts, I don't use it to pay for my groceries.)

Why do you want to become a shareholder?  You like money right?  Ok ok, you might hate it...  But look at it this way, if you buy a small piece of a company that you expect to be around for a very long time then they will send you your share of the profits based on how many shares you own.

For example, in Canada, any of our big banks will no doubt stand the test of time (at least during my lifetime) so if you buy 100 shares of say Scotiabank (full discolsure: I own some!) then based on today's yield will pay you $0.52 per every share you own every quarter.  (4 times a year).  It works out to approximately 4%.  

Did you have to do anything to earn this money?  No...  aside from opening a brokerage account and scraping up enough money to cover the purchase price of the shares and the trading commission.  So once you buy you can sit on it the rest of your life and every 3 months you get $0.52*(number of shares you bought).  

Will they change the dividend?  Most likely yes, it will go up.  Even during the "disaster" of 2008/2009 they kept paying the dividends.  They didn't increase the payout, but they didn't decrease them or stop them completely like many other companies.

Does this make you evil for getting profit for doing nothing?  I can't answer that one for you.

There are other types of companies that pay a "distribution" but it's essentially the same thing, but it generally arrives monthly AND there may (or may not) be some taxation differences.  Mind you if you have your holdings in a registered account than it doesn't matter.

The story is the same:  they do something, they make money, they send you your slice.

Now the last part of this posting has to do with fixed income.  What does this mean?  In the investing world it essentially means BONDS or GICs.  Now I'm not talking the "Canada Savings Bonds" of yesteryear that offered decent returns.  I'm talking about "real" bonds both corporate and government.

How do bonds work?  Well, companies don't just appear magically out of thin air...  They essentially all start with one person, or a small collective of people working together to realize their dream of being able to manufacture and sell the best widget ever. 

Companies need to borrow money too!  (Just like you and me!)  So if they are a public company (more on the difference between public and private in a later post) they have a couple ways to do it.  If they decide they want to use bonds to do it, they make an offering to the market.  Company ABC is offering x number of bonds at a 5% coupon.  This means they are offering 5% interest.  There are terms to how long the bond takes to mature etc etc. but that's about it.  You would BUY the bond from them to get the interest payout.  You can also sell the bond back to the market before maturity if you need the money back without any penalties.  (There ARE trading commissions on bond trades though)  

Bonds do go up and down in price a bit (or a lot if the company or country sucks) representing the RISK that you (the investor) might be exposed to when you want to get your money back.

So if you bought Greek Bonds because they were offering 9% interest last year at this time, then sorry my friends you've lost at least half of your money!  But if you had bought government of canada bonds, or bonds from Telus, or Bell, or BMO or Scotia or hundreds of other well run boring Canadian companies then you would be sitting pretty.  The yields (how much they pay you) is of course somewhat lower but that's just the way the cookie crumbles.  You have to carefully consider what company you're lending your money too.  Just like people, not all companies or countries are responsible debtors.  They ran up their debts on booze or hookers and now are pleading poor.

So, the more risk the higher the yield.

That's about it for bonds...  Mind you most of you folks I'm writing this blog for shouldn't be thinking about bonds.  You just don't have enough money to do it!  There are easier ways to do it such as the Bond ETFs from Claymore.  (Some of them you can trade without commission with Scotia iTrade!)  They do the busy work, take a TINY percentage (0.25% for the corporate bond funds and 0.15% for the government ones) of your distribution and you don't have to do ANYTHING.  They are excellent products for the risk-adverse investor.

But if you're still young, beautiful, (and a little stupid) you don't need to worry about bonds yet...  Think about them when you hit your mid 30s.  They should be accumulated slowly as time goes on and the commission free ones from iTrade/Claymore are the PERFECT way to do it.  You can buy a handful of units at a time every month.

Disclaimer: I'm writing this article to HELP you.  If you do something stupid based on my advice without thinking it through yourself, then you have only yourself to blame.  Plus if you try to sue me for bad advice I don't have any money either, so good luck with that.  Seriously people, stop making your lawyers rich... they don't need the cash!  WE DO!  If you get burned a couple times, it's a learning experience.  Just try to remember to NOT fall in love with your holdings.

Thursday, November 3, 2011


Today I had the opportunity to attend a "vip" function at Scotia Itrade.  I met both the CEO of Claymore and the Managing Director of Scotia Itrade.  The Claymore CEO (Som Seif) looks just as striking in person as on TV.  He was however much shorter than I expected, but then again EVERYBODY is much shorter than I expect just because I am... shall we say, not short in stature.

The short (hyuck hyuck gwafawww) of the matter, I'm delighted I chose to switch to iTrade last year and I shall hence recommend to all of my minions who read my blog to do so as well.

Hopefully we won't kill them with our nickel and dime accounts!

Now on to the meat and potatoes of this posting: sticking to your guns.

I've found myself as of late perhaps introducing too many luxuries back into my budget that I have deprived myself of for so long.  It's been a long slow grind to get to where I am today, and I expect some (or much) more slow yet painful slogging to continue to get to where I want to be.

Where do I want to be?  I want to have my entire set of fixed expenses for my family covered by my investment monthly yield, and a little more left over to cover inflation.

However, as my lot in life has show me both the highs and lows of what society has to offer... Showing up at a job (where you were nickel and dimed on the fee) to discover that while serenading the party with music which they all were thrilled and enjoyed immensely we discovered later from the catering company they had spent about 5 times more on the ice sculpture in the corner than they had on the musicians which they interacted with and made many many requests of.  The opulent houses I've been to, the decadent food I've eaten all while simply being part of "the help."  On the other side of the coin, fighting for kitchen scraps on low paying gigs that are far too far away and far too long to be able to have a dinner break and not come back with anything that either wouldn't break the bank, or be entirely what we could forage in the wilderness due to the remote location of the job.

Since I have had this taste of the "finer things" I often find myself coming home with some of them on shopping trips.  I enjoy them immensely but they are simply too expensive for my financial plan right now.  The trick is keeping your will power in check and not beating yourself up (too much) when you come home with a bottle of distillers reserve single malt.

Perhaps my biggest financial mistake to date was the car...  Sure it gets me to gigs in style, it's fun to drive and it's immensely practical when you have a young family.  (Which I do!  My son just turned 1 year old in October)  But the sad reality is that it was a poor (terribly poor) business decision.

To date my car has cost me nearly $1200 per month.  "WHOOOAH!" I can hear you thinking, you must be driving a Porche!  Sadly my friends, you need to look past the advertised price of car financing and include ALL the costs associated with vehicle leasing/ownership and usage.  Guess what folks, that's the cost of leasing a Mazda 3...  Yes, I got the heated seats, and moon roof, but still had I cheaped out on the model of the car, my monthly costs will be above $1000/month.

How is it so expensive you ask?  Lease payment $400, Insurance $250, Gas $200, Parking $100+, oil changes, snow tires and the occasional small "oops" $150 and there you have it.  (Yes I know these numbers only add up to $1150).  Shocking isn't it?

Due to my enhanced travel options I did get more work than I could have taken otherwise, but it was NOT to the tune of $1200/m more.  It was generally on average only about $400-500 more.  So I'm really out of pocket $500+ a month.

So my friends, resist the temptation to get a car for as long as you possibly can.  You knew your art required a certain amount of suffering...  just suffer on the bus!  At the same time, try not to do that suffering with an expensive bottle of booze!