Chatter Around the World – 1

Welcome to Chatter Around the World – my weekly collection of links in business, economics and the personal finance blogosphere.I am excited to start with these weekly update. Lets dive in to the articles which have caught my eye over the week.

General Reads

The Newsmakers

Dividend Reads

Updates from my Portfolio Holdings

That’s it for this week. Have a fantastic Canada Day weekend!

Getting Started – Why invest

This is one of the easier questions to answer in Getting Started series. Investing allows you to grow your savings and is a critical part of your Roadmap2Retire.

Cash is useless!

Being in possession of cash gives you a false sense of security of richness due to its dwindling nature. Cash always loses value over time due to inflation. The way modern economics works and how the central banks tweak their policies is to always have some inflation in modern society. Just letting your cash stay in a bank savings account and accumulate interest is also not enough for a secure financial future, as these savings rates are almost always paltry and lag the inflation rates. It is important to look to other ways to grow your coffers more than the inflation rate – which is where investing comes into play.

Income can be achieved in two ways; usually classified as active and passive income, the latter of which is the goal of investing.

  1. Active Income – You work hard and you are paid in exchange of your time in providing the goods or services. 
  2. Passive Income : The money generated through investing can involve two methodologies.
    • You buy something that increases in value over time
    • You make your money work for you to generate more money
Investing can occur in various forms – some may invest in real estate (either buying a house where the value may increase, or as an investment property which can be rented out to generate income), some buy gold or invest in the stock market while others others invest in collectibles such as jewelry or art. This blog talks in detail about investing in the stock and bond market – as it is one of the easiest ways to invest without too much initial capital needed (compared to real estate, collectibles, art etc). 
However, it should be clear that every investment comes with an inherent risk; and without risk, there is no reward. So, it is imperative that the potential investment undergo thorough analysis and should match your appetite for risk.

< Back to Getting Started


Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Getting Started – Terminology

Welcome to the Terminology page of the Getting Started series on Roadmap2Retire. The basics of investing and the definitions have been repeated innumerable times by various entities, but I have decided to do my own version for the sake of completeness. If you are already familiar with the basics of investing and the terminology, you may skip this section. 
  • Stocks – When you invest in a company and buy its stock on the market, you are owning a portion of the company. Since you are now part-owner, your investment  goes up or down depending on the company’s performance.
    • E.g.: The fast food chain McDonalds has 1 billion shares. So, purchasing one share of MCD will amount to 1/1,000,000,000th of the company’s ownership. 
  • Bonds – Bonds are an investment method where an entity (a corporation or government) needs to borrow money. Depending on the credibility of the borrower in the market, a rate and the duration is decided. The purchaser of the bond (the investor who is lending the money) get paid the original amount + the decided rate within the pre-decided duration.
    • The Treasury 10 year bond, which are backed by the US government, will pay a fixed rate of distribution every six months and at the end of the 10-year period pays the full face value of the bond to the holder.
  • Stock market – When someone refers to the stock market, its a market where you can buy or sell publicly traded companies. 
    • E.g.: Each country has its own stock markets such as NYSE, NASDAQ, TSX, LSE etc.
  • Private vs. public company – Private companies are usually owned by one person or only a handful of people. Outsiders are not allowed to own any part of the company and is not traded on an open market. Public companies, on the other hand, are open to the public and are traded on the open market. Any person who has access to the market can buy or sell a share of the company.
    • E.g.: The hotel chain Hilton Worldwide is a private company and does not trade on an open market. You, as an investor cannot buy a share of the company unless you contact the owners directly and strike a deal, not open to the rest of the world. 
    • E.g.: The fast food chain McDonalds is a public company. You can buy one share of the company off the NYSE for $97.23 (price, as of Jun 21, 2013). 
  • Dividend – When a company is in a healthy state, it makes profits on a regular basis. The management/board of the company decides whether to share its profits with the rest of the owners or re-invest the profits back into the operations and grow. Companies which are more mature usually tend to share the profits by issuing dividends and companies which are relatively young tend to keep the profits in-house order to grow. 
    • E.g.: McDonalds pays a dividend of $0.77 per share every quarter.
  • Distribution – Distributions are like dividends and depends on the company and how they are taxed. The is the term used by companies which are income trusts, REITs (real estate income trust) or bonds. In this blog, dividends is used as an umbrella term which could also mean distributions.
    • E.g.: The rate paid by 10 year Treasury bonds every six months is a distribution.
  • Mutual fund – The stock/bond market has thousands, if not millions, of companies publicly traded. A mutual fund is a pool of stocks/bonds grouped  together which can be traded as one single entity. By owning one unit of the mutual fund, the investor’s money is divided into the various holdings of the fund. Money managers oversee the fund and decide if stocks/bonds need to be added or deleted or left unchanged.
    • E.g.: Vanguard Total Stock Market Index Fund (VTSMX) is a mutual fund which holds 3197 stocks. Each dollar that is used to buy a unit of the fund is divided to the weighting percentage of the holding.
  • Exchange Traded Fund (ETF) – An ETF is similar to the mutual fund with one important difference. The fund itself is traded as if it were a stock on the stock market. This difference from the mutual fund makes it easier to buy and sell the fund. 
    • E.g.: Vanguard Total Stock Market ETF trades on the NYSEArca and holds 3434 stocks.
This list of terminology barely scratches the surface of the investing world. The terminology covered in this article are merely terms that I frequently use in the Getting Started series – for use by new investors getting  their feet wet. 
Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Getting Started – Goals

Welcome  to the Getting Started series of Roadmap2Retire. These articles are targeted at people who have decided to take their financial future in their hands.

The first order of business is to set your goals. The most important aspect here being, “what are you trying to accomplish?” There are no clear rules as it changes from person to person, couple to couple and family to family. It is also recommended that such goals are preferably written down so that you can revisit and re-evaluate on a regular basis. That being said, lets just jump in and take a look at the various aspects in goal setting.

Prioritize your goals

People evolve over time and so do goals and priorities. For e.g.: A new graduate’s priority might be to pay down student debt, credit card debt and save for an emergency fund; while a newly married couple might have a top priority of saving for down payment of a house. Some others dream of retiring early.

The easy one

Some decisions should be fairly straightforward and obvious: Always pay down your high interest debts such as credit card debt. High interest debt can have a debilitating effect on your financial future and this should be the highest priority for every single person.

The tricky one

A trickier decision is on how to balance low-interest debt and savings – the classic example being whether to pay down your mortgage faster or save for retirement. Paying down debt seems like an easier decision, but the flip side of that is that you lose out on years of investments and returns – and when you consider compounding returns, that really adds up!
The way I look at it, there is no one answer that fits all. You have to find a balance that fits your needs without sacrificing one for the other.

Horizon

You can set yourself three types of goals – short, medium and long term.

  • Short term: Usually less-than-2 years from current time. For e.g.: emergency funds, car, vacations etc.
  • Medium term: Usually 3-5 years. For e.g.: down payment for a house, vacation property etc.
  • Long term: Usually 6+ years. For e.g.: pay down mortgage, save for children’s education, retirement etc.

Note that when it comes to investments (which will be discussed in detailed throughout this blog), the horizons should not matter – always invest for the long term. It is never recommended to invest in risky or questionable investments.

My goals

The following figure shows my personal goals.
Past goal:
  • I had a goal of generating passive income of $100 per month before I turned 30 in 2011. I failed in achieving that, but I did catch up a year later 🙂
  • My other goal was to start blogging, which I finally did with this blog – Roadmap2Retire.
Future goals:
I have two goals in the short and medium term timeline
  • Buy a house in the next year or two.
  • Generate a passive income of $1,000 per month before I turn 40 in 2021.
My Goals

Have you set your goals yet?

< Back to Getting Started

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.

Getting Started – What to invest in

Getting started with investing can be a daunting task considering the number of options available for investments – and there is no lack of advice on the interwebs, including this blog 😉

It is important to keep in mind that it is extremely difficult, if not impossible, to consistently beat the market. Even with the ease of access of information because of the internet, “Buy low & sell high”, the oldest axiom in investing, is hard to time. Lucky for us, it is easy to join ’em if you cant beat ’em with the use of index funds. Investing greats such as Warren Buffett, John Bogle and countless others have been proponents of index fund investing.

Index Funds

Index funds replicate the movements of a specific benchmark index. There are a number of indices that track various components of the economy. Some of the popular ones are:

  • Dow Jones Industrial Average  – tracks 30 mega-cap US stocks
  • S&P 500 – tracks 500 leading US corporations, a better measure of the US economy as it is broader.
  • Russell 2000 – an index of 2000 small-cap US stocks
  • Nasdaq Composite Index – an index tracking approx 3000 companies on Nasdaq
  • S&P/TSX – tracks some of the largest Canadian corporations on Toronto Stock Exchange
  • FTSE 100 – index of 100 companies on the London Stock Exchange
  • Nikkei 225 – tracks 225 companies on the Tokyo Stock Exchange

The list goes on. There are various indices used in each country as a benchmark of the economy.

The indices listed above track various corporations in different industries but are associated geographically to where the index originates – for e.g., S&P 500 tracks American companies listed on one of US stock exchanges whereas S&P/TSX tracks Canadian companies listed on Canadian stock exchange. However, indices are not just limited to geographical locations – there can also be indices that target a certain sector of the economy such as Financials, Healthcare, Energy etc. A list of sector-based indices can be found here and here.

20 yrs S&P 500 returns: Jun ’93-Jun ’13

The chart above shows the returns for the last 20 years, Jun 1993 to Jun 2013, and the index has gone up by 257% – and that is without including the dividends. Click here for details of the annualized S&P 500 historical returns.

The goal for new starters needs to be to ‘keep it simple’. Fancy funds do not necessarily translate to better performance. They usually simply translate to a higher fees. Some key points to consider when investing using index funds are:

  1. Buy well diversified low cost funds
  2. Keep it balanced (pay attention to asset allocation)
  3. Optimize the tax efficiency

Vehicle to use

Investing in index funds can be achieved by using either mutual funds or ETFs. Using an index fund which stays true to the actual index with the least amount of overhead management fee should be the goal of the new investor. ETFs almost always have a lower fee compared to mutual funds and is the recommended vehicle to use. Vanguard, iShares and SPDR are some of the largest vendors for ETFs in the market.
Asset allocation

There are a couple of different approaches that a new investor can take to have some diversification in the portfolio. The following articles are a good place to start:

  • Target date funds – an all-in-one fund which automatically balances the asset allocation depending on the date.
  • Three-fund portfolio – consisting of US stocks, international stocks and bonds.
  • Lazy portfolio – a combination of low cost funds to take advantage of various market conditions.
  • More lazy portfolios from CanadianCouchPotato, which gives more Canadian options. CanadianCouchPotato also has a great breakdown of the recommended ETFs for index investing.

My holdings

I have the following index funds as part of my holdings. I own 4 funds for broad market exposure in US equities, Canadian equities, Canadian bonds and International equities. I also own 2 index funds which are sector specific.

Broad indices

  • iShares 1-5 Yr Laddered Government Bond Fund (CLF)
  • Vanguard US Total Market Index ETF CAD Hedged (VUS)
  • Vanguard Total International Stock ETF (VXUS)
  • BMO S&P/TSX Capped Composite Index ETF (ZCN)

Sector specific indices

  • Consumer Staples Select Sector SPDR (XLP)
  • BMO Equal Weight Utilities Index ETF (ZUT)

Remember, starting to invest is the hardest step. Once you get the ball rolling, you are on your way to secure financial future and a happy  retirement.

Happy Investing! 🙂

< Back to Getting Started

Disclaimer: The information provided here is for educational purposes only. All opinions here are my personal opinions and should not be taken as financial advice. I am not qualified to be a financial advisor. Always consult with your financial advisor before investing in any of the companies mentioned on this blog.