Saturday, January 29, 2011

Harping on the same old soapbox/bandwagon/tune...

I know I promised that last instalment would be about diversification, but since this is still a shiny new blog, I'm going to take a moment here to remind you again (well... attempt to beat you over your head with) about the importance of starting early.

Yes, I know it's hard.  Yes I know you don't have enough money left over at the end of the month, and yes, I know you have debts.  I have some debt too!  It's not unreasonable to be in debt when you're in your 20s and 30s.  (Even in your 40s and 50s if you're buying a house)

The most important part is getting into the habit of not spending every last red cent with reckless abandon as soon as you get the cheque from the gig.  (Or even worse, if you spend it BEFORE thanks to your not-so-handy credit card)

If you're carrying a balance on your credit card, I have no sympathy for you, because you're a stupid MORON! Have you stopped to check your credit card bill lately?  Have you seen how much they are charging you?  Just because a store has a 50% off sale is pointless if you buying on your credit card.  You quickly lose all that "savings" (off an inflated mark-up no doubt) thanks to your sloppy spending habits and poor skills paying off the FULL balance of your card every month.  Honestly people, you're being charged 19.99% interest on your card... And some of you brilliant people are being charged 29%!!!!

Debt makes me cry!

Accidents happen and life happens.  I know.  But if you can't pay that card off in less than 3 months (so the card STOPS charging you interest) then you're an idiot for making a foolish purchase.

Now, not all debt is bad.  If you can get a line of credit from your bank, they should only charge you about 5% at today's rates.  If you can borrow at this rate then ok, you're not an idiot.  If you can get a decent size line of credit than this can be your "emergency" fund until you have enough cash on hand to do it yourself.

Also your brokerage might offer you "margin" on your CASH account.  (The taxable one)  Which can be a great tool since yes, you are borrowing money but you're using it to invest.  If you can invest in something that pays out at 8% (and typical margin rates right now are 4.75%) then you're making 4.25% using borrowed money.  The interest charged is tax deductible against the earnings.  So a starving artist like myself can almost completely eliminate any taxes owed on my taxable gains.  (Now set your damn stops on your margin purchases!  If you ride them into a black hole, you're still responsible to pay it all back!)

Now, back to my original point of this post: start early and stick with it.

I did some rough calculations for a few of my friends whom I work with on a quasi-regular basis.  (As regular as you could possibly expect in the music world)  A few of them are young couples about to (or recently have) embarked on married life and some of them are single folks who are often tempted by crazy nights out and the party scene.  If you can muster $25 a week and start before you turn 25 and continue to invest this until you retire you will have over $1,000,000 to live off of by retirement age.  Now that might not seem like a lot, but $1,000,000 invested the way I'm investing would yield $7000 to $10,000 a MONTH to live off of without even touching the principal.  And I'm not investing in crazy risky shit either.  (I do a bit of crazy shit only to keep me interested and make a few bucks on the side)  And my investment choices should cover inflation too, so you'd be living large in your retirement and all it would cost you is a measly $25 per week.

How hard is it to come up with $25 a week?  Well sadly for some of my friends it is VERY tough.  But how many times do you go out to eat any given week?  One restaurant meal with a drink or two easily costs more than this.  So why not eat at home and just go out for coffee/desert with your friends instead?  Or if you find yourself in restaurants almost every night then you're making a CHOICE to be poor.  Learn to cook dammit.  It will save you THOUSANDS of dollars a year.

I'm not saying you should be a hermit.  You should go out.  You can go out.  Just put that $25 per week away first and go out on the town with what's left over.  $25 isn't that much of a sacrifice these days, but in the long run it can add up to easy-street when you no longer want to, or no longer can work.

Now if you're truly pathetic, and can't come up with $25 a week, try to do $50 a month.  That's about how much your cell phone costs you right?  $50 a month can grow to over $400,000 by retirement age if you can start before age 25.  (That gives you income of $3000 to $4000 per month at retirement time)

Now if you're devastatingly poor and can only come up with $25 a month?  That's not a horrible life either.  Provided you can start BEFORE you have turned 25.  $25 a month will take some more aggressive investment techniques, but if worked properly you'll have $2500 or so a month in income.

Please start now.  You don't have the time to wait for better work or more work...  You're in the arts dammit!  It NEVER gets any better.  (Well, almost never)  We'll always be under the squeeze for smaller budgets, smaller seasons, smaller orchestras, smaller grants.  Either new education campaigns need to beat people over the head with the importance of art and artists, or our society will be a dull, boring, and nearly lifeless bunch of people consuming crap until the world is depleted.

Start now... You won't regret it.  Have you ever heard an elderly person complaining about how they started investing too early?  No...  Nor will you ever hear it.  If you start early you might just do well enough so that you don't have to work until you're 103 years old.  Imagine, financial freedom... It is possible and not unrealistic.

Next time: diversification.  (For real this time)

Disclaimer: My opinions are my opinions and mine alone.  If you use them for your gain GREAT!  Lets celebrate over a beer.  (You're buying)  If you're wiped out by following my advise then I'm sorry YOU messed up.  Did you read the fine print?  You can't sue me anyway since this is just my opinion and like you I have no money either!

Friday, January 28, 2011

A stop too soon!

If you've read my other posts, you've heard me extol the virtues of stop-loss orders.  They are indeed a fantastic way to save your ass/bacon/rump/skin/shirt/hard earned scratch.  However some care needs to be taken setting proper values.  Why you ask?  Well, as I found out the hard way today if you set your stop too close on a position you know is solid and expect to have it for years to come it will trigger unnecessarily.

My previously established 10% is a great starting point to handle most solid blue chip companies.  (Blue chip = huge)  However for smaller companies or even recovering companies in the current floundering economic recovery, 10% is just too tight.

My position in AGF.b was triggered today because they announced their earnings.  Did they make a profit?  Yes.  Was it more than last year at this time?  Yes.  Did the stock go up in value?  NO!  It fell like a stone past my stop, triggering the sell.  Why did it fall?  The earnings were not as rosy as predictions had expected them to be.  Now if I had any cash on hand available to make a purchase this would have been a great buying opportunity.  But it's falling!  Why would I want to buy something that's going down in value?  Well, you can buy more for less money that's why!  Also, this one question will lead me to an entirely new blog posting for a later date, because it's better to buy on fear and sell on greed.

Anyway, because I like the company and I expect to want to buy more as funds permit, I bought back the position almost instantly.  So today I lost the cost of 2 commissions and a few bucks because of the difference between the sell and then re-purchase.

Another position I hold today (Ford Motor company) nearly also triggered it's stop.  It fell nearly 14% in value in one day because they too "missed" market expectations.  The markets are really quite crazy though.  This is a chance to BUY more because Ford is leaps and bounds beyond the other North American car companies.  They were the first ones to get the fact that they couldn't keep selling us total crap and expect to keep profiting from it.  They started making more interesting cars that people weren't revolted to drive.  (I still don't drive a Ford...  I'm not sure I ever will, but when they fell to nearly $1 per share in 2009 I said, who cares if they go bust!  100 shares won't kill me if they explode.)  Ford was the only North American car company that did NOT ask for bailout money.  They managed on their own without having to go into bankruptcy protection and now they are well on their way to recovery seeing as they posted the biggest profit they have had in over 10 years.

Biggest PROFIT since 1999 and the stock price FALLS 14% in one day!  Just remember how insanely skittish the market is...  Wait for BAD news like this on a company you like and use that as your chance to buy or increase your position.

Since I had purchased Ford for just over $1 per share, I never set a stop on it as I had next to nothing to lose!  So even if it had fallen $10 a share I'd still have a profit on my hands.  Yes, $1000 less profit for my 100 shares, but still a profit.

So, take some care setting your stops.  10% is good for many things, but 15% is safer if you want to make sure you hold on to your position.  20% is also useful too for other more risky investment products provided you know the price will swing and eventually swing in your favour.

Next time: diversity...  Having a few eggs in a few different baskets.

Disclaimer: Today you read entirely about my misfortunes.  Laugh all you want.  You can't sue me for my tale of woe and financial loss.  If you do, you're an idiot since I didn't tell you to do anything.  If you do take my advise for anything please do realize your actions are your own doing.  If you want to find the source of your failure go look in the mirror!  My opinion is exactly that.  If you don't do your own research then you and only you are the source of your loss or gain.  You have waived the right to sue and if you do think you can, good luck.  I'm broke.

The "B" word is not a 4-letter word. (Budget)

I can't afford my rent... so how on earth can I budget?  Well my friend, if you really are in this much of a pickle you have to carefully scrutinize which of your (lousy) decisions got you here.  I must confess, I too often have trouble making my fixed expenses on a month to month basis, and no, it's not because I'm lousy at my investing, it's because I have my budget and I'm doing my best to stick to it.  So if I had a crappy month with no gigs then I'll have to make some sacrifices to prevent homelessness and keep the mouths at home fed.

I've watched a lot of crappy television programs about stupid people who consistently overspend, pay on credit cards, amass huge debts and then go on national television to humiliate themselves because they just want the $5000 cash reward.  Some people get it, most people don't.  The real problem is your attitude and your issues with self-entitlement.  If you find yourself saying "I deserve this..." Then you probably don't.  You're just looking for a quick fix to your moody-blues because your boss was crapping on you all week at work, or if you're like me you just had a killer work week and are so tired/exhausted/depleted that you need some kind of fix.

Always always stop and re-think your motivations if you're find yourself saying "I deserve it."  Not that you don't, but the trick is to make the money to buy it BEFORE you plunk down your plastic.  How does this relate to a budget?  Well, just like your parents (or perhaps grandparents) who survived any of the wars from the first half of the 20th century told you, "You have to SAVE."

Saving isn't hard.  It can be automated which is great if you have a 9-5 and get a steady pay-cheque.  The easiest way to save is to disappear 5-10% of that deposit instantly (into your investment account) leaving you 90% to have your way with any way you see fit.

A great way to "protect" this invested money (yes from your own damn sticky fingers) is to put it into a registered investment plan like your TFSA or RRSP.  (Fill up that TFSA first though... I talked about this before, and no doubt I'll keep harping on it again in the future!)  This way, if you want to make that "I deserve it" purchase you will have to make a phone call to your brokerage rather than just clicking with your mouse on your online banking.  This extra step of forced human contact will help prevent you from making a foolish mistake.

Now what if you don't have a steady job?  I don't.  I never have.  Everything is a contract basis and almost everything is a one-off deal.  I do have a few repeat customers but the regularity of the engagements is spotty at best.  This is why you have to budget.  So you won't be high and dry if you have a 3 month dry spell and are very tempted (or forced) to dig into your precious retirement monies.

Whatever you do if you are faced with this situation DON'T DO IT!  Seriously people, with compounding, every $10 you invest generates $1 of yearly income FOR THE REST OF YOUR LIFE.  (For those of you who are quick with math, yes, this is a 10% return after the nasty effects of inflation... so it's really a 12-15% average return on your investments... yes it's possible.  I'm averaging about 20% lifetime average so it's not unrealistic!)

So you have to start somewhere with your budget.  The trick is to start NOW!  Don't wait.  You can't afford to wait.  Every minute you waste now will cost you thousands of dollars when you retire.  There are general guidelines available on the web for how much you should save for a rainy day, for housing, for the dog etc..  Most of the recommendations are reasonable including the guidelines given on the TV shows that take great delight in revealing just how stupid broke people can be for the $5000 carrot on a stick.

The easy part?  The retirement savings portion.  The younger you are, the smaller a percentage it has to be.  The following chart will give you a VERY rough percentage of how much of your pay you should put away based on your STARTING AGE.  So if you start when you're 18, then you only have to put away 5% of your earnings for the rest of your life to assure a very lavish retirement.  (Even if you're working minimum wage!)

5% 18-20
6% 21-23
7% 24-26
8% 27-29
9% 30-32
10% 33-35
15% 36-40
20% 40-50

So if you wait, you'll have to pay WAY more of your budget to live comfortably during your retirement.

Now you say what if my union has a pension plan?  That's a great thing to have if you can VEST into the plan.  (If you don't vest, you don't get the money)  Vesting requires you meet a certain minimum number of union engagements in a certain time-frame.  However this doesn't mean you can run straight to the bar and down the extra money you don't have to invest in Jagermeister shots.

It means you can round down a percentage point or two from your investment savings.  I wouldn't cut more than 2% though since you don't know what's going to happen to those pension plans.  Legislation might change and they may reduce the payouts or who knows what.  What I'm trying to get you to do here is to be self-reliant and take responsibility for your own life rather than hoping somebody will call you with the next gig.

General guidelines
30% housing (utilities INCLUDED)
20% travel (car, insurance, parking, bus pass, taxi)
25% life (food/clothes/vacation/ipods/cell phone plans)
10% retirement
15% debts/emergency/vacation/other

If you're an urbanite your travel might be way lower so it's ok to go with 50% of your income to housing/travel.  Just make sure the sum of all that stuff is no more than 50% of your income or you won't be a happy camper...  Having a nice place is nice, but if you can't afford food because of your crippling rent you have to re-consider.  You don't have money to go out so you have to stay at home, so your home can start feeling like an expensive cage.

Now there's a problem if you're like me since every cheque you get is PRE tax and this handy reference guide is your POST tax income.  So you have to guess as to how much tax you'll have to remit and save that too!  So what this really means is you have to re-jig your numbers a bit to incorporate this extra savings bucket.

Since I make have consistently made an abysmally low income every year I don't have to save much for tax.  Also being "self-employed" as most performers/musicians/artists are you'll have many more tax deductible goodies you can claim to bring down the taxable portion of your income.  (The amount of money you have to pay tax on.)  Watch out though!  If you're having a good year, make sure to save some extra money for the tax man, or you'll get a NASTY surprise when you file your tax return.

The hard part is getting this savings rolling.  The first few months are critical  If you find yourself having 3 good months in a row you feel like rewarding yourself.  Reward yourself with a safety net!  If you do, (baring a huge devastating financial disaster like when my computer hard-drive croaked and I had to pay way too much to get the data recovered) it all starts to get easier.  If you have a crappy few months, you can dip into your emergency funds to cover your monthly expenses.  Then when work picks up again, your emergency fund recovers and is primed for your next inevitable shortfall.

After you've kept this ball rolling for a year then you'll have peace of mind, a buffer to get you through crunch times and a realistic appreciation of what you can actually afford to reward yourself when you're feeling blue.

Next time: diversity, adversity and easy slip-ups.

Disclaimer: By having read this blog you dismiss any liability I have in your investing failures.  Just remember if you do ANYTHING based on ONLY my advice, you're an idiot.  Do your homework and if you're looking to place blame for your uninformed horrible stock picks you have to only look for the nearest mirror.  My opinions are exactly that: MY opinions only.  They might be right for you, or they might not be.  I have winners and losers and my goal is to help you understand where I went wrong so that you don't have to.  If you crash and burn, lets get together for a beer to commiserate our losses and plan a new attack.


Thursday, January 27, 2011

hold n' hope? CUT AND RUN!!!

Now instead of waxing poetic about the virtues of picking good long-term picks and holding to your convictions the brutal truth of it is this: nobody's perfect.  I've made some bad picks and I've ridden them down into oblivion.  This to a novice may seem like a horrible thing, but there is something to gain from this experience.  And no, it's not an ugly black-eye in your account where it stubbornly shows you how much you paid and it's current value of $0.00 giving you an infinite percentage loss.

If you do make a bad choice and didn't set a stop (hold n' hope) and watched it go down and down and down and down hoping it would one day recover all is not lost.  Even if this company de-lists (disappears from the stock-exchange) you can get rid of it by doing a tiny bit of paperwork called a "deed of gift" which lets you transfer this worthless holding into the holding account of your brokerage.  Not only do you clean up this ugly eye-sore from your account, you can also claim the loss against your investment income.  (And if you didn't make much from your investing activities you can defer the loss until you need it)  Also, you don't have to do the deed of gift to claim your loss.  All this means is that this ugly record will sit in your account forever.  But you will have to do the deed of gift to get rid of it if you want to close your brokerage account.

Now rather than riding a company down and down until you've lost all your money, you should set your stop-loss and feel happy if it sells.  It means it SAVED you money.  (You could have lost it all!)  But at least you got out after having only lost 10%.  (Give or take depending on where you set your stop)

The important part about stops is to not feel bad if they trigger.  Your pride isn't on the line here.  Don't beat yourself up about a bad pick.  If you choose to run away you can come back another day with another idea, and hopefully a better idea!

Always always always set a stop!  There are only a few small exceptions for this, but they are a topic for a later date.  Every time (yes EVERY time) I have decided to hold and hope using the keen observations that only hind-sight can provide shows me that yes, I should have set a stop and yes it would have been much better to do so.  If you're trading something you want to keep when things slide they generally slide more than you want.  Once they settle if you had stopped out, you would have enough cash to buy MORE units than you previously held.  This would let you make more money when they recover.

Recommendation of the day: You're finally warming up a bit to this investing thing... You've had your account for a few months now and if you followed my previous recommendation you bought some bank stock.  They have fluttered up and down a bit but have generally trended up (modestly) in recent months.  (Unless you bought BMO as they made an acquisitions in Asia that the market didn't seem to like right away...  It should only take them a couple months though for the stock price to recover fully and then keep charging upward)  In addition to any gains you might have, you'll have received a dividend payment or two and the yield will have been at least twice (or more) as much as your "high" interest savings account.

So now you're thinking I like these dividend payments.  What else can I buy that will be a good long-term investment and pay me to hold?  Easy!  What companies send you bills every month?  Chances are some of them are publicly traded.  They bill you every month.  They profit every month.  It's time to own some of them and get them to pay you.  

Disclaimer:  Since I didn't make any specific recommendations this time, if you lose your shirt/house/car/dog/army-rations or anything, it's not my fault!  If you're looking to place blame, go find a mirror.  By reading my blog you must agree to not sue me for anything.  I didn't make you do it.  Everything here is my own experience and opinion.  It's what I've done and it may not be right for you!  (And some of my moves haven't been right for me either!)  So quit wasting your time thinking you're going to get rich by suing me.  I'm a starving artist dammit!  I've got NOTHING!  My net-worth is tragically low and home-ownership might be out of my reach my entire life.

Next time: the painful truth - you need a budget!  (And stick to it)

Sunday, January 23, 2011

Mmmm... Bacon! (Saving your's that is!)

Now that you have a few stocks in your account and you're feverishly checking the prices every ten minutes thrilled by every up-tick and distraught, rage-filled, and full of contempt for me who got you into this mess on every down tick.

How can I reclaim my life and get away from hovering over the sell button?

Easy!  It's all about the "stop-loss" order.  The stop-loss order is an order to sell your shares if the value falls past the value that you set or a percentage value.  The general rule of thumb is to set this value 10% LESS than your original purchase price.

Why on earth do you want to lose 10% you ask?  

Well, I don't really.  But this will cover my posterior if things take a turn for the worse or the market has an insanity week where everything gets sucked down into an evil vortex of panic. (Which the market does more often than you might think)

The good news is that this saves most of your money if the stop is triggered.  And lets you cool off and wait for things to settle before you either buy back your position (hopefully for LESS than where you sold) or decide to move your money somewhere else.

If you decide you still have faith in "Toothless Joe's Manure Haulage inc." and want to buy back in, if the price is still lower then where you stopped out, you'll get your shares back and have some extra cash left over.  Even though your balance sheet shows less than it was before the market "wobble" you still have the same number of shares you had before AND some more cash in the account.  Since you have a good feeling about ol' Toothless Joe, you'll be back up (with some profit in the form of that extra cash) in no time at all.

Here's what happened to me:  I was trying to "ride the range" with my shares of Royal Bank last year at about this time.  I had made a few trades and was up about $1000 or so (in cash) in addition to still having 100 shares.  Then in the late spring of 2010 there was a market "correction" for the valuations of all the Canadian big banks.  I had been adjusting my stop-loss order to be 10% away from the market price rather than my original purchase price.  This technique lets you preserve your profits in addition to your hard earned original investment.  So when things slid down the stop sold my shares for $56 each.  The valuations continued to slide down to about $50 where I decided to buy back in.  Since I only paid $50 each, I had an extra $600 in my account to do something else with.  Royal has essentially been "going sideways" ever since and I've been holding ever since mid July 2010.  It did go up to about $56 again and then back down to about $50 and now it's up again to $53 ish.    So this time around my stop was NOT triggered.  

How do you place an order to stop?

Enter an order to "SELL" with a "STOP" condition and set your price or percentage.  Make sure to set the time-frame to 30 days rather than "day-order" or you'll have to re-enter your order every day!

If your brokerage permits you can set a "trailing-stop" order which will automatically adjust the value for you! Just enter your percentage and let it do it's thing.

Don't forget to come back in 30 days though and update it.  Current rules don't let orders stay open for longer than 1 month.

The only pitfall however is related to how tight you set your stop.  You don't want it to trigger unnecessarily since your sell and then subsequent re-purchase will cost you 2 commissions.  If you're going backwards because of that then you're setting things too tight and losing money at the same time.  Plus certain things are skittish sometimes.  Your stop might trigger just before a press-release and then it shoots up.  Sorry mate... you just lost out.  So 10% is a good ball-park figure.  Some of my stuff has a looser leash.  It all depends on the nature of your trade.  (And some things I have no stop set at all...  I want to ride it out and I know it's a long-term winner)

There...  I've successfully re-claimed your sanity and preserved your hard earned cash.  Now go play outside already!  You're getting fat, bald, and middle-age looking basking in the glow of your computer monitor!

Next time: I didn't quite get to Hold n' Hope or Cut n' Run this time... So I'll do that next post!

Disclaimer: by having read ANY of my blog contents you have agreed to not sue me for any of my advice or recomendations.  I have both successes and failures trading.  (Thankfully more success!)  My advise is just my opinion.  It might not be right for you, but I'll try to explain why it's right for me.  So you're free to use this advice as you see fit. I am not liable nor am I accountable if you lose your shirt/house/dog/girlfriend/wife/pet rock/or favourite bottle-cap collection.  Take some damn responsibility for your own damn actions!  YOU did it... If you're trying to place blame, look in the mirror!

Saturday, January 22, 2011

Can I take your order?

So you've finally done it...  scraped every last cent you could out of the couch, dug out every stray suit/pants/jacket pocket for that rogue tenner, fiver or even a few loonies.  You killed the piggy-bank and robbed the car of all your parking metre money.

Your account is open and funded... now what?

The next part is deciding what to buy.  My first pick?  Apple.  (AAPL:Nasdaq)  It was early 2005 and I could only afford 5 shares!  But I saw what was happening with the iPod and how all my nerd friends were snapping it up.  To me it seemed clunky, fragile and prone to breakage with crazy short battery life.  But I could see where this might be taking us.  Remember this was back in the day when peer-to-peer file-sharing programs were very new, very cool and very off the radar.  Anyway, I held onto my apple until I couldn't stand it any more...  Last year at about this time, (feb-2010) I saw this huge runup couldn't possibly last much longer and that the market would eventually come up with a proper valuation for Apple and I sold for a tidy $1500 profit.  Not bad on less than $500 investment.  Looks like I should have waited on that one as they are now $340 or so each and the company numbers look good for more gain.

Back to the hard part: what do I want to buy?  This is a tough question depending on what your investment goals are.  If you're looking for income or growth or some combination of the two, or even if you're looking for 100% safety of your money even if you "lose" value relative to inflation.

My recommendation for beginners?  Any of the Canadian big banks.  (Full disclosure: I own small positions of Royal (RY:TSX) and Scotia (BNS:TSX))  Why the big banks?  Canada has perhaps the most conservative banking rules on earth, so they aren't about to invent crazy/stupid/insane ways of slicing pennies and selling them for thousands of dollars like the banks in America did leading up to the financial "collapse" of 2008.  (The straw that broke the camel's back in America was really the "sub-prime" mortgages that were given to people who were hopelessly under-qualified to make the payments when the bait-n-switch low interest phase of the mortgage ended and the real rate began)  The Canadian banks survived this crisis completely intact and they still were able to distribute the same amount of profit to their share holders.  (They didn't raise the payouts of dividends though, but they did keep paying the same amount.)  They all took a tumble for the share price, but this was completely wack.  They continued to make billions of dollars in profits from fees and interest charged to us consumers.  We have few banking options in Canada so they are essentially free to charge us whatever they want for banking, and we have no choice but to pay it.  So why not own a piece of the bank and get that money back?  Or buy a few more and get a bit of profit?

The valuations (share price) of the big Canadian banks will go up and down a few dollars this way and a few dollars that way, but over time they will continue to prosper (at our expense) and will continue to pay profits to the share holders (in the form of quarterly dividend payments ranging from $0.50 to $0.70 per share)

Example:  Say you own 100 shares of BNS and if you bought them a year ago (Mid January 2010) it would have cost you $4500.  Every quarter (every 3 months) they pay $0.50 per share in dividends.  So you would have had $200 cash deposited into your brokerage account.  AND today BNS is trading at $56+ per share.  Thus the value of your investment will have increased to $5600.  So your investment has paid you $200 cash and gone up in value $1100 for a grand total of $1300.  What does that mean?  This is a 29% return.  Compare that to the interest rate you get on your savings...

CAUTION: you can't be spooked though if the value goes down.  I think it's safe to stay the course with any of the Canadian big banks though, but there are some tricks I'll discuss in a future post to help ease your fears.  Example: had you bought 100 shares in February 2008 it would have cost you about the same $4500.  However in February 2009 your 100 shares would only be worth $2500.  (You would have still received $200 in dividends though)  However, you only "confirm" your loss if you sell.  If you had stayed the course and waited 2 years you would full recovered and back up to the previously mentioned profit.  (Actually it would be $200 higher thus being a 33% gain from your investment of $4500.)

So you've made your pick yet?  Great!  Now login to your brokerage account and there should be a "trade" button or an "order entry" page or something to that effect.  You will have to tell the system what you want to do either "buy" or "sell" (yes you can sell shares you don't have!  Watch out!  It can bite you if you do it wrong...  It's called a "short sale" and should only be used if you expect the value of that company to go DOWN!) and tell it how many units (shares) you want to buy. AND you will have to tell the system what stock exchange you want to buy it from.  NB: some companies are listed on several exchanges so be careful here.)  The last important part of the order is the Term.  This tells your brokerage how long you want the order to try and make your purchase.  (Up to 30 days away)

IMPORTANT: there are "market" orders and "limit" orders.  I strongly recommend  that you set your buys and sells as a "limit" orders for nearly every trade.  Markets have many sellers and buyers all electronically haggling for the best price.  A market order will buy from whomever is selling at nearly any price they want.  So depending on the time of day or depending on how many shares of a company are being traded you might pay a bit or a lot of a premium.

This however isn't much of an issue with the big banks since millions of shares trade daily and all of them go for very very close to the market price.  But still, get a real-time quote from your brokerage just before you buy and then enter that number as a limit and you won't be surprised.

 So you've entered your order, make sure to click the "preview" button if it has one.  Most brokerages default to order preview anyway so you can double check you're going to get the stock you want, on the exchange you want at the price you want.  Once the system gives you the preview, click "submit order" and boom!  If you've entered this order during open hours (9:30am-4:00pm EST) the order will hit the market almost instantly.  Click the "order status" button if you're not already presented with a "fill"confirmation.  (fill = your order has been filled)

Typically it's best to buy in chunks of 100.  It's called a "board lot" and they fill fastest and get the best price with the lowest exchange fees.  (Your broker will thank you and absorb them as part of the commission or at Quest, they tack them on to the commission fee... Don't worry though, exchange fees are only a few cents per order for the small fry orders you'll be making as a starving artist!)

That's pretty much it really.  Now if you check your account you'll see that your cash balance should have gone down by the order amount (but the commission won't get deducted until after close) and your "buying power" will have gone down.  Your "settlement date" funds however will still be in tact.  All trades take 3 business days to settle.  This gives your broker time to do the paperwork to register you as a shareholder with the company you just bought.  So watch out!  If you buy too close to the date of a dividend, you might not get it if your trade doesn't settle before the indicated date for "shareholders on record".  Sometimes depending on the company you often see spikes or dips in share price before and after this date as some investors try in swoop in, own the stock for 3 days and get out with the dividend without having to own the shares for any length of time.  (This actually can be very profitable if you can borrow money cheaply and can get in and out without a loss... more on this in a future post).

So that's it really!  You're now the proud owner of a big bank or a widget company or toothless-joe's manure haullage inc.

Recommendation: almost any Canadian portfolio can stand to have a big Canadian bank in it.  Pick your favourite and buy.  They all pay steady dividends and weathered the financial disaster of 2008 well, and are back on the road to billions of profits every year.  Buy some of them and get a slice of that.  You can't go wrong.  (Unless you sell too early, or enter your order backwards!  I've sold too early so now I'm holding.  It will return to profit eventually and while I wait I'm still collecting the lovely dividend.)  My favourite is BNS.  Royal is a good buy now too since they had a few disappointments lately.

Next time: saving your bacon!
The STOP-LOSS order
Should you cut and run?
Should you hold and hope?

Disclaimer: by having read any of my blog you immediately waive your right to sue me for any reason whatsoever.  If you do try to sue me for my advice, you have to immediately agree that you are wrong, will pay for my legal fees and will pay me a settlement of $1,000,000 for wasting my time.  My advice is entirely my opinion.  I have made gains AND losses trading stocks.  (Thankfully I've made more than I've lost!  That's why I'm here trying to help you noobs.)  If you take my advice and lose your shirt/dog/wife/house/car/everything don't cry to me about it.  You've waived that right.  Stand up and take some damn responsibility for your own actions already!  (The insurance companies are getting tired of this... that's why insurance has gotten so expensive in the last few years... that and lawyers)

So you want to make the plunge!

It's about time you got your head out of that bucket!  Your savings account isn't going to help do anything thanks to the all-mighty inflationary pressures the world is under right now.  (Central banks are printing money hand-over-fist to pay the bills.  How else do you think the USA hasn't folded when they post multi-trillion dollar deficits year over year?)

So what will you need to start buying stocks?  A brokerage account.  There is nothing terribly special about brokerage accounts and all of our big banks offer a variety of different "service" options ranging from Full Service (painfully expensive... great for super-rich people) down to discount brokerages which offer you direct access and some research tools.

I prefer discount brokerages because if you make even a handful of small trades, the small commissions will save you money and let you buy more shares/units/positions and help keep more money working for you.  Discount brokerages typically offer fixed pricing and flat rates per trade.  Most of the offerings in Canada will be in the $4.95-$19.99 range per trade.  The old "discount" brokerages from the big banks charge $28.95 per trade unless you make some hideous number of trades per quarter and then they offer you a slightly better rate after you "qualify".  Some discount brokerages will also offer better rates if you have a certain amount of holdings and will also give you a better "platform" (think user interface) for free.  Don't worry about platforms just yet.  They typically are for folks who are making dozens of trades per week or even per day.  (The jittery, over-caffinated day traders who can have great success if they can see through market jitters and other typical market rubbish).

Lastly full service brokerages typically charge $125 per stock trade!  This means if you want to buy 100 shares of Wonderful Widgets Inc.  (Not a real company) @ 1 per share then your actual cost per share is $2.25.  So this means Wonderful Widgets has to over double in value before you break even!  It actually has to triple in value before you can cash out with the same $100 you started with.  (Each stock buy or sell costs you commission!)  With your discount broker your $100 trade costs $110.00  ($10 commission) and to break even when you sell your cost for the stock + the commission to purchase + the commission to sell adds up to $120.  This means Wonderful Widgets only has to go up 20% in value for you to break even.  20% is a far more realistic return in a year or two than a 300%+ return if you had done this with a full service brokerage.

So you can see how with even a few trades a year this can really add up.  But please remember, discount brokerages typically offer FLAT rate commissions.  Which means it doesn't matter if you buy 1 share or 1,000,000 shares.  You will still pay the same flat-rate.  So you can see that it's typically better to buy larger quantities of shares if you have the cash for it.

Now back to opening your account.  There is one brokerage in Canada (that is Canadian owned and operated) which is the best deal for low cost.  (Full disclosure I am NOT with this brokerage!  But my wife is)  It's Questrade.  They offer "flat" rate commissions starting at $4.95 which will go to a maximum of $9.95 depending on how many shares you buy.  (100 shares = $4.95, 1000 shares = $9.95)  So with this broker, go ahead and buy 100 units of Wonderful Widgets!  The company will only have to go up in value 10% for you to break even on the transaction.  (Or less if they pay dividends!)

Full Disclosure:  I'm with Scotia Itrade.  I have enough money in my accounts with them to enjoy a flat rate of $9.99 per trade.  I had been formerly with one of the big bank's old "discount" brokerage paying a whopping $28.95 per trade.  I did have a busy year last year and did qualify for $14.95 eventually.  Bank of Nova Scotia bought out "e-trade" a few years ago and morphed it into Scotia Itrade.  I was able to transfer from ScotiaMcleod to Itrade for free and almost instantly without hassle because they are both a division of Scotia Capitol Inc.  I didn't switch to Questtrade for a couple reasons: "Release" fees charged by brokerages if you want to transfer out your holdings to another company.  (Registered accounts like RRSPs, TFSAs and RESPs have a lot of paperwork for the company to process if they have to surrender it to another institution so they charge you $125 to $150 PER ACCOUNT for this "service".)  Many brokerages offer to pay this fee for you provided you of course have enough funds.  (I think it's about $25,000 per account)  A $10 commission charge is small enough so that I don't feel upset about it.  And most of my busy market trading is 1000 units at a time so the premium per share is only a penny!  (So the stock only has to go up $0.02 each for me to break-even)  And since the commission at quest is $9.95 when you're trading 1000 shares or more the difference is only $0.05 per transaction.  This of course would require THOUSANDS of trades to make it better to switch to quest.

Now that you've decided on your brokerage of choice it's time to open an account.  The online process for most discount brokerages is simple enough.  You will have to answer a bunch of questions (which are required by the regulators) so it's tedious and you might not really understand what's going on.  The application process does include lots of help along the way so you should be able to work your way through it in about 15 to 20 minutes.  Once your account is funded you're ready to place your first order!

I HIGHLY recommend using a registered account for your trading.  This will shield you from having to list the details of EVERY transaction and give them to your accountant at tax time.  It will also protect you from having to pay taxes on any monies you make.  So a TFSA account is a great place to start because it's recently new in Canada and you won't have to pay taxes on the money when you withdraw it.

Next time: placing your first order, and what the heck should I buy first?

Friday, January 21, 2011

Mutual Fund Madness

I was about 21 years old when I thought it was time to start investing.  My father had instilled in me that it was a wise thing to do and the earlier you started the better.  This is all thanks to the miracle of compounding as I mentioned a bit in my last post.

I was fortunate enough to receive a small gift from a family member to help kick-start this process and get the ball rolling.  Sadly I think I spent most of this money on tuition for my masters, the copious quantity of beer and a computer.

Seeing as I was so focused on my studies with my artistic ideals intact (that I would be able to earn a reasonable living from my art) I thought that a financial advisor was the right way to go.  Some mutual funds were purchased and things chugged along doing almost nothing for many years as my career grew, stagnated and then retreated into a slow plod.

At this point in my life I had a small amount of debt.  Much of this was thanks to the fact that I did much of my schooling outside of Canada and thus didn't have any credit history, so nobody would even give me a credit card when I returned to Canada since they didn't know I even existed.  I tried to finance a vehicle and I had proof of sustainable income but I was declined as I had no history of any kind!

But, I digress...  My mutual fund holdings did essentially nothing for several years.  The advisor whom I liked got a better job with a different company and my account advisement was transferred to another agent.  His recommendations would have been perfect if I were a 75 year old pensioner and drawing on my pittance for the next few years until I ceased to exist.  But sadly I was 25 at the time and still hungering for fortune and glory and of course world domination through financial success.  Eventually this advisor saw the folly of his ways and transferred my account management to a guy who is on the ball and I actually like.  His ideas are straightforward and he's willing to listen to what I'm thinking and find products that fulfil that request.  Once I started participating in my financial future rather than leaving it in the hands of an advisor, my account started to grow.

Sadly, the financial explosion of 2008 happened and my net worth plummeted to half.  This while looking scary is what they call a "paper loss".  This means you only lose money if you sell.  Recovery is inevitable and my holdings recovered 100% of their previous value in about 13 months.

During the amazing plunge the stock market made during late 2008 I got the brilliant idea to start trying my own hand with a few bucks in the market to see how well I could do with only a small investment of time.  I was working a soul-crushing day job at this point in my life and was looking for any potential out I could find. (This job was the WORST decision of my life...  I'm glad it's over.)

So at nearly the bottom of the market I made a few picks and within a few short weeks I had nearly doubled the money I had started with.  (If only this rate of gain could have been sustainable!  It's not... recovery has slowed to a nice and steady rate.  This is by far much more reasonable.)  It was at this point where I started to hunger for more information and actually started to properly research what I was thinking of purchasing.

Every time I looked into a mutual fund (with the exception of a small collection of funds my guy at the big bank picked WITH me) it all looked like it was a great thing to own... for the company that sells the units of the funds.  Remember, mutual funds have management fees that come out of the earnings of the fund.  If the fund doesn't make any money this year you're still on the hook for those fees!  Plus many funds have "loads" which is not-so-clever term for fee!  You pay to buy them, you pay to hold them and you pay to cash out.  What could be better than that?  (For the fund company!!!)

Some funds are of course better than others and many funds don't have commissions so you can make a regular purchase of $25.  However, with the exception of the small collection I have, I don't think I'll every buy mutual funds again.  They cost too much and don't get me enough return.

My humble opinion: Mutual funds are devices primarily for keeping mutual fund companies busy.  They hire lots of people to research, analyse, bean-count and mull over what to do.  This of course costs YOU money all while dangling a carrot on a stick promising potential gains.

How do you make this work for you?  Easy!  Buy stock of the companies that sell mutual fund units!  That way you win no matter what!  If the funds go up or down, the mutual fund company still collects fees from investors and then uses that money to pay staff, run the company and distribute to share holders.

Disclosure:  I own (and have owned) and like the following companies that sell mutual funds:
AGF Management Limited (TSX:AGF.B) currently hold a small position
Sprott Asset Management Inc. (TSX:SII) sold in May 2010, will buy again

Next time: making the investing plunge

Disclamer: By reading this blog you waive your right to sue me for any reason whatsoever.  The info you have gleaned/or stolen from me is entirely here for entertainment purposes only.  If you learn something from me than I'm happy, but if you lose your shirt/house/life-savings/girlfriend then you can't hold me responsible.  You also acknowledge that I'm just a small operator trying to hack out a living for myself and that my recommendations may win or they may lose.  (And I have lost... but thankfully I've gained more than I've lost)

get that money out of the mattress young man/woman!

So, you've just graduated (or flunked out) of whatever school, university, trade-school, or Starbucks Coffee College and you're now the proud owner of some (or a lot) of student loans, or a lousy rust-bucket car or a bus pass and working for some lousy shop with an overbearing boss and demanding customers.  Your ideals are in tact and you're dreaming of your break or next step up on the corporate ladder.

Why should I invest now I hear you asking?  I can barely afford my $7/day latte habit.  I only have $10 left over to invest... you can't buy anything with that?  Why bother?

Simple answer: Compounding.

And no, I'm not talking about compound interest because at today's rates your savings depreciate relative to inflation.  There are many financial products out there that are happy to pay you.  Why?  Everything and everybody is in business.  It's human nature really.  You need to eat.  This creates a demand for food.  Somebody has to grow that food, somebody has to transport that food and somebody has to sell that food to you.  You of course also need clothing, housing, transportation etc..  What does this mean to me you ask?  Well it's infrastructure with thousands of busy people working at thousands of jobs all working making money, spending money all contributing to the demand.  Demand goes up and down over time, but with more people there will be more demand until our poor little planet can no longer support us.

Again, I can hear you shaking your head, "I don't have any money though!  How does this un-solicited factual tid-bit help me?"  Easy: There are many products and services that you buy or use every month.  You can own a small piece of those companies and those companies will distribute their profits to share holders in some form or another.  You have to start small of course, but the sooner the ball starts rolling the sooner your profits will start paying for line-items on your monthly budget.

I know you're still objecting and saying this is all pie-in-the-sky or a pipe-dream or some other clever vernacular which no doubt questions my parentage, my state of mind, my lack of sobriety etc..  But you have a cell phone right?  Chances are it's with one of the big 3 telco's in Canada.  (Rogers, Telus or Bell)  If it's not, then it's probably one of the "discount" brands that are owned by the big three.  While the stock prices of each is rather pricey, it doesn't take very many units of these stocks to generate enough income to pay your entire monthly bill!  Yes, that means your cell phone becomes essentially FREE!

Other examples include property management companies.  You no doubt pay rent unless you're living in Mom's basement, or have found a lovely waterproofed cardboard box and have a good location tucked away under a billboard near the bus station.  Property management companies own and operate commercial and residential real-estate holdings and generally pay investors every month.  (You pay rent every month, so they pay their investors every month)  Many many apartments all over town are owned by such corporate entities so why not own a piece of them?  The unit prices are generally low and the monthly payments are often in the 6-10% range.  (6-10% per annum)

I'm not saying there are no sacrifices you have to make though.  Take for example your $7 latte addiction.  that's 2 lattes a day for say 200 days a year.  That's $1400 yearly.  Now fast forward 10 years and it adds up to $14,000!  (Or more if you eat cake/cookies/snacks while you have your cuppa.)  Based on this logic I "invested" in a very nice italian espresso machine.  (I actually did a work-exchange deal for it to get the price down).  And I have my coffee fix at home.  Even though I spent a pretty penny on the machine (and grinder... and yes, It's a nice machine, so the plumbing to get it hooked up to my water too) in the long run it will save me thousands of dollars.  So instead of chugging $7 of coffee a day, I decided to start investing it.  How much income is it generating for me now?  Nearly $100 a month.

If you start investing at age 18 and STOP contributing at age 45 (27 years) you will have MORE to retire on than somebody who starts at age 35 and contributes all the way to age 70.  (35 years)  So you put away less and come away with more.

DO IT NOW!  Even if you can only come up with $25 a week!

Next time: types of investment products and why most of the ones sold to novice investors are rubbish!

Tax time! RRSP or TFSA?

It's almost that time of year people...  when you have a chance to file some tedious paperwork and fight/claw/scratch back a few dollars of your hard earned income from the the Canada Revenue Agency (CRA).  The adverts on TV most certainly want you to maximize your Registered Retirement Savings Plan (RRSP) contributions for your retirement.  This isn't wholly a bad thing, but if you're like me the benefits of the contribution don't really add up to much.

Remember: contributing to your RRSP only lets you procrastinate paying your taxes.  You'll have to pay the tax when you need your RRSP money to live off of when the Old Age Pension (OAP) and the Canada Pension Plan  (CPP) have dried up.  Don't get me wrong, I'm not a tin-foil-hat wearing doom-and-gloom professing the end-is-nigh wacko.  I'm hoping OAP and CPP will still exist when I need them, but I'm making sure my lifestyle (as humble and meek as it is) won't be too heavily impacted by their collapse.  Plus, if you're a starving artist like me your income now is much lower than it will be when you retire.  So chances are you will be paying more tax when you need your RRSP money than you would pay now.  That being said, yes, the tax shielding inside the RRSP is a good thing, but before you fill up your RRSP, please consider the Tax Free Savings Account.  (TFSA)

The most brilliant gift from CRA in a long long time is the TFSA.  Please don't be fooled by the big banks and those online operations that have higher rates on savings accounts.  The TFSA can be more than just a pedestrian savings account.  It can also be a brokerage account and yes you can day-trade in it if you see fit!  ALL of the monies earned through capitol gains, dividends, distributions and interest is 100% tax free.  NO TAX will be deducted when you take the money out of this plan.  Thus any profits you make are FREE MONEY!  

I can hear you shaking your heads...  investing isn't for me!  I say pshaww!  It most certainly is!  If you're young you have the most to gain from contributing.  My goal with this blog is to help you understand some basics and eventually some more advanced techniques to help you live a long, happy life without having to worry about income.  However, the focus of today's post isn't investing techniques, it's about tax advantages and account types.

Once you fill up your TFSA then any money left over should be used for your RRSP.  Alternatively, you might consider investing in a CASH account.  Cash accounts are NOT registered so any money you make is subject to capitol gains tax or income tax or taxable interest income.  Which for the low income investor isn't as bad as it sounds.  Example:  Say you purchased 100 shares of ACME Widgets Inc for $10 per share.  ACME had a bumper year selling items to Wylie Coyote and their stock went up 100%.  You're $1000 investment is now worth $2000.  Do you owe any tax?  As long as you continue to own those shares you won't have to pay any taxes.  But when you sell them, then you will be responsible for reporting the sale in your tax return.  (The brokerage won't report anything to CRA)  The good news is that you only owe capitol gains tax on 50% of the gain and only at the tax rate of your current income bracket.  So if you sold your shares for $2000 you made a profit of $1000.  Since you only have to pay tax on half of that at your margin rate you would only owe $75 or $125.  (Current lowest 2 tax rates in Canada for 2010 year).

Please note my figures are VERY approximate and I'm streamlining things a lot.  Your accountant (or tax software) will need to know the name of the company you sold, how many units, your average purchase price and how much you sold it for.  This does involve a bit of busy work but it sure beats an audit from CRA!  Also, one other item to know, if you're trading in a registered account (TFSA, RRSP etc.)  Then you don't have to do any of this tedious reporting.

In summary, if you have anything to invest (even $25 a week... even $25 a month!) it really does pay to fill up your TFSA and get it working for you!

Lastly: I'm not a tax accountant.  Do NOT take my rough figures as gospel!  By reading this you have agreed to not sue me for my over-simplification of taxation.  And finally if you lose all your money and then some it's not my fault.  You just have to accept responsibility for your own actions people!  

Next time: I'm 25, single and hoping to get a better job...  Why should I invest now?  I'm going to be making more money in the future so won't that be better to wait?