Blog

TO SIMPLIFY AND FILTER

TO SIMPLIFY AND FILTER

To simplify and filter; that is the reason I started this blog. The amount of information on investing for retirement is overwhelming, contradictory, and self serving. Some people may argue that my strategy is too simple, but what’s the alternative? Seek out the advice of a financial advisor who, in the worst case scenario, gets paid by putting your money in high fee mutual funds?

And even if your advisor doesn’t make money this way but instead charges you an annual percentage, is it really necessary to pay someone any amount of money for something that you could easily do yourself? I’m not taking about renovating a bathroom here.

Being a successful saver is not about hitting home runs, it’s about not making mistakes. So save 6-10% of your income, depending on your chicken index (the more of a chicken you are, the higher your percentage), invest it in 3 Vanguard index funds and forget about it.

A couple of times a year, transfer money from your savings account to your discount brokerage account, put in a buy order to buy 1,2 or 3 of the funds depending on whether you need to rebalance to keep the 33%,33%,34% ratio and be done with it. It’s that simple.

These simple steps will put you miles ahead of most Canadians who either don’t save or are afraid to do it themselves.

Worse yet, there are Canadians who can’t help themselves and try to become superstar traders. I’ve met some of these folks over the years. What strikes me most about these guys (and yes, they’ve always been men) is that they truly cannot or will not answer one simple question I pose to them.

The question is: How do you know if you’d be better or worse off if you just bought simple index funds instead of doing all your trading? Put another way: How does your performance as a trader compare to a buy and hold index investor? They just don’t know!

Just once I’d like to hear some trader tell me they’ve created a spreadsheet that shows 2 options.
Option 1: starting money and calculate money made (or lost) from trading
Option 2: same starting money but calculate gain or loss if invested in index funds instead.

And then compare the performance of the 2 options. If they can honestly say they are better off investing using Option 1, over a long period of time (not just a lucky 6 months), then good for them. Unfortunately, I have’t met an amateur who has taken the time to compare.

If you absolutely must buy individual stocks, either go for strong dividend payers, or buy shares in companies with a pro who has a very long and strong history of excellent capital allocation. Companies like Warren Buffett’s Berkshire Hathaway, Prem Watsa’s Fairfax Financial or Gerry Schwartz’s Onex Corporation.

When Cash is King

I’ve read that keeping cash is not a good idea when you consider that inflation will decrease purchasing power over the years.  For example, in 1981 when I started high school, movie tickets were $2 on Tuesdays.  Today, the same ticket costs between $7 and $12. If I had decided to skip one Tuesday and put my $2 in the bank instead and left if there for 30 years, I would not be able to buy a movie ticket with what was in my bank account today.  The interest rate I earned from the bank and the taxes I would pay on the interest, would make my money less valuable than it was 30+ years ago.  This is even more true today when interest rates are so low.  I’m currently earning 1.8% interest from my bank, but don’t forget I have to pay tax on every penny of interest I make at a rate of 40%!

So I should buy risky investments like stocks, right?  Not so fast.  The big problem with this is when everyone is getting low interest rates, they rush out and buy risky assets.  That make the assets more expensive and increases the risk that the price of those assets will become overvalued and then may collapse.  This leaves me with less money than if I had just left the money in my bank, this is called principal risk.

Another thing to consider and I admit this may not be relevant to most people.  What if you have no debt, lots of retirement savings and are still working and making enough money to pay your bills and still save extra cash.  In this case, cash may in fact be king for two reasons. 

First of all, you can keep your cash for when the stock market corrects or crashes.  Then jump in with both feet and invest.  Markets correct every 2 to 4 years. If you’re lucky and you get a nice 30+% crash, you can make up for years of making 1.8% interest.

Second, somethings actually go down in price over time, mostly non necessities.  If you wait for these things to get cheaper or go on sale, your cash actually gives you a good return.  For example, my wife’s car is a 2001 Mazda MPV and we paid $29000 for it new. In 2012, we can get a similar new car for a little cheaper than $29000.  The real price of that car has decreased significantly over the past 11 years.   Same thing has happened for computers, televisions, air fare, music, and clothes.

Lots of services are also cheaper at certain times.  For example, in a recession home repairs and renovations, hotels, and trips get cheaper.

We actually have deflation for some products and services.  Remember that when you hear that cash is trash.