Thursday, April 19, 2012

For all you Novice Investors

The following is an interview with a friend who wanted to understand what it is I am blogging about, so this is for all you novice investors who are not sure about what I blog about.

I must admit that I am in information overload and spread sheets are beyond me!

I get about 150 people looking at my blog daily and sometimes none or sometimes one or two look at the spreadsheets. You are not alone in this.

You are currently reading "Economics of Good and Evil" by Tomas Sedlacek, how has it helped you to better understand the current economic situation?

I understood the situation before I read the book. I read a lot of economic books, magazines and articles. Tomas Sedlacek is considered to be one of the ‘five hot minds in economics’ by the Yale Economic Review. If you Google Tomas Sedlacek and RSA, you should get his 20 minute video that explains very well our current economic problems.

What advice would you give to the low risk, medium risk and high risk investor?

Risk is a very subjective thing. What I might think is low risk others may not. Maybe we should go to smarter risk or smarter investing. First a smart investor should know his/her comfort level. Do not invest in something that might keep you awake at night. The second big cardinal rule is “do not invest in something you do not understand”.

If you are going to invest what are your goals? Are you trying to retain your capital or to make some money? People who are currently investing in bonds often say that they are safe and they want to retain capital. Of course the current problem with our extremely low interest rates is that you are probably not even retaining capital with bonds as your capital is being eaten away by inflation.

If you are out to make money, you have to realize that often with high returns comes with high risk. This is generally true but not always, because for some high risk investments you make lousy returns. However, you are not going to make any money without taking some risks.

I invest in high quality dividend paying blue chip stocks. Often such stocks make more money than other stock because they are less volatile. My portfolio does not reach the lows of the stock market. It also does not reach the highs either. Less volatile sock often produce higher returns over the long term.

At 45+years, how much money does one really need to start to invest meaningfully?

Usually, when starting out investing, one does not have much money. I started out by buying Canadian Savings bonds on a monthly plan and then cashing them in in November to buy some shares. To buy stock you need a minimum of $3,000. You have to buy stocks in a board lot that is 100 shares. Quality shares start around $30, but can be a lot higher. TD Bank is currently around $82. So for TD Bank you will need $8200, plus commission.

It is a wise idea to have more than one stream of income. A job is generally the first steam of income a person gets. Investing can give you a stream of income. In fact investing can give you a number of different streams if you diversify. Some diversify into commodities, bonds, GIC and stocks. Others make money out of buying and selling or renting real estate and still other make money on the internet.

Personally, I diversify my income using different sectors of the investment market. I have stocks in industrial, consumer, real estate, financial and utility sectors. I have very little in resources as I find this sector very risky.

Should one be looking at GICs and Bonds v mutual funds and stocks?

We have gone from a climate of extremely high interest rates to one of extremely low interest rates. I used to have GICs and Bonds. I sold my last bond in 2007. It was a 30 year CIBC bond due in 2014 with interest rate just below 10%. I sold my last GIC in 1997.

The problem with any interest bearing investment vehicle at the moment is the very low interest rates. A lot of high quality government bonds in Canada have interest rates around 2% and some are lower. Inflation is running current around 2%. And, do not forget that you have to pay tax on any income. This is the reason I have no bonds currently. Interest rates are much too low.

The other reason I have no bonds is that we are at the tail end of a very long bond bull market. With bonds, the interest rate and value of bonds go in the opposite directions. So if you buy a $50,000 bond with a 2% interest rate and interest rates go up, your bond will be worth less than $50,000.

The volatile of the bond value depends on how much interest rates change and what the bond duration is. The longer the period to the bond’s maturity the more volatile the bond’s value will be. Interest rates are extremely low. They have nowhere to go but up. At some point we are going to go into a bond bear market.

People generally do not buy mutual funds, they are sold mutual funds. One problem with a lot of mutual funds is the high fees. However, you cannot expect people to invest for you for free. Another problem is that there are more mutual funds to choose from than there are stocks on the stock exchange. You have the same problem with ETFs (Exchange Traded funds)

Currently, I am into stocks and mostly dividend paying Canadian Stocks. My blog mostly talks about specific stocks.

How about paying off the mortgage v buying RRSPs?

The general rule is always paying off debt before investing. However, this is a general rule. You may have a good reason to do otherwise. If you are going to invest before paying off your debt can you articulate why?

What is the situation with the Toronto housing market from the investment point of view?

I have not owned a house or condo in Toronto yet. I love apartment living, so if I buy it would be a condo. However, I am worried about the number of condos being built currently in Toronto. I also worry about what the future holds for those monthly condo fees. They seem to keep go up and up.

I have always rented an apartment in Toronto. However, when my son was growing up I did have a cottage.

What is your tip of the month to the average zoomer?

Now is not the time to buy utilities and REITs. Everyone is looking for income because of the low interest rates. The stock of utilities and REITs are currently overpriced.

What books would you recommend to the new investor, the low, medium and high risk investor?

I do not read that many investments books. One I did like was Stocks for the Long Run by Jeremy J. Siegel. He is an American, but what he says also applies to our market.

I know a blogger I follow called Dividend Ninja has recently recommended “Never Too Late, Take Control of Your Retirement and Your Future” by Gail Vaz-Oxlade. Another blogger I like, My Own Advisor has recommended Millionaire Teacher by Andrew Hallam.

Maybe you could give me some examples of what you are typically asked by people

Usually people ask me to recommend a stock and I cannot do that as I am not a licenced advisor. Of course, I can tell them what I am buying or what I am reviewing. The thing is I am investing to live off my dividends. It may not be what others want to do. However, the stocks I have and review are often just as great for new investors as they are for people living off dividends.

Would you think it is a good idea for parents/grandparents to buy stocks for their children/grand children?

If the child is 18 or over, there are no problems. You can get into tax complexity if the child is under 18. Any income is taxable back to the parent/grandparent. Capital Gain is taxable in the hands of the child.

If you are using the RESP vehicle, you can of course have stocks if the RESP is a trading account. The problem here for stocks is that you have to plan 5 years before the RESP money is need to get out of the market. No one knows exactly where the market is at any time, but you do know if it is relatively high or relatively low. Within the 5 years to when money is need, you need to pick a time when the market is relatively high to sell the stocks.

I know people have often suggested giving children shares in toy game companies, but I think that is a bad idea. They are not good long term investments. Games and toy changed very rapidly. You need good stable companies. Utilities are probably best. I know utilities are currently overpriced, but they will not always be.

Please Susan, now that you know how very basic my questions are, could you please make your responses at a very simple level?

Let me know what you do not understand and we can fix it.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.


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