Getting Started – When to invest

The short answer is “Now”. A more careful detailed look at this would sound more to the tune of “Depends…”.
There have been countless studies and you can find various examples on the internet of how your nest egg can grow by a substantial amount depending on how many years you save. The bottom-line for every single calculator is Start Early. Your returns compound over the years and have a snowballing effect. As a simple example:

Lets say you invest $5,000 every year and manage to get a 8% return on your investments. If you start at the age of 25, you end up with $615,580 at the age of 60. If you start at the age of 35 instead, you end up with $431,754 at the age of 60. That amounts to a whopping $183,826.

That being said, here are a few considerations to keep in mind:

  1. Rank and pay down the high interest debt: It is highly unlikely you will be able to invest and get better returns than the interest rates charged by the credit card companies, which are normally at 18-20%. So, first things first – get rid of your bad debt.
  2. Analyze & Re-Analyze Goals: Each person’s investment goals are different. You need to analyze and annually re-analyze your goals to make sure your savings, debt payments (mortgage, car loan etc) and investments are matching your goals.
  3. Save consistently: Consistent monthly savings (using automatic transfer programs) is an important part of investing. Most people who say “I will to save and transfer whatever is left at the end of the month” seldom have a healthy financial future. The old adage of ‘Pay yourself first‘ is popular for a reason. If you treat your savings like a bill payment, where you periodically and automatically save, you can build on your nest egg.
  4. Invest consistently: It is a fools game to try and time the stock market. Consistently investing by finding the best available value at the time almost always provides better results. If you feel that one method of investing suits your needs and you are happy with the risk vs. reward balance, stick to it. If you ever feel the need to gamble and have some extra money, open a new account for it without taking anything out of your retirement fund.
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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.

A Scam Called Mutual Fund

If there is any universal piece of advice in the investing world, it should be – “Stay away from mutual funds”.
Mutual funds come with a a little hidden number called MER – the Management Expense Ratio – which looks measly to begin with ranging from 1%-3% (some mutual funds may be as high as 5%).

Do not get fooled by this number because this number is a recurring annual fee and is taken off the overall returns of the fund, so you never see it anywhere on your semi-annual or annual statements reminding you that you just gave a major part of your savings to the fund company.

The Solution

  1. If you are looking for diversification without picking individual stocks, invest using an ETF – Exchange Traded Fund. The ETF fees normally vary from 0.05% to 0.8%. 
  2. A better option is to build your own portfolio. You pay a one time trading fee and no other recurring fees. You have two options – either direct investing via a DRIP plan or through an online discount broker.

Use Case

To best illustrate my point, lets assume you decided to invest in a mutual fund:

  • Initial investment: $10,000
  • Subsequent investments: None
  • Rate of investment return: 5%
  • Mutual fund MER = 2%  (which is a conservative estimate of the funds available in the market).
  • ETF MER = 0.5%
  • Stock investing via DRIP – assuming you buy 10 companies and setup direct investing – the only expense would be the cost associated with obtaining the first share from your peers (which is usually $10).
  • Stock investing via discount brokerage – assuming you buy 10 companies and a trading fee of $4.95 per trade (as offered by Questrade).
Mutual Fund Fees ETF Fees DRIP Investing Brokerage Fees
After 1 year $807 $52 $100 $49.50
After 5 years $1,444 $315 $100 $49.50
After 10 years $2,605 $796 $100 $49.50
After 20 years $6,849 $2,530 $100 $49.50

ETF fees also add up over time, but no where near the rate of mutual fund fees. So, if you are looking for diversification with a fund, it is no brainer to choose ETFs.
If keeping your fees down is your ultimate goal, direct investing either via DRIP or online discount broker is your best option.

If you own mutual funds and wish to find out how much your funds are costing you, click here for a great tool.

Disclosure: I owned about 6 mutual funds until I started realizing the snowballing effects of the fees. I have started trimming them down and currently own two mutual funds. I am hoping to cut back on those two funds in the near future.

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 – 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.

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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?

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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.