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.
< 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.

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 – Passive Income

Note: The meaning of Passive Income used on this blog differs from the definition used by the American IRS. The IRS defines three different categories of income: Active Income (income earned by actively working for it), Passive Income (income generated through rental property or business where you do not actively participate) and Portfolio Income (interest, dividends, distributions, capital gains etc.).

Any income that I earn without actively working or engaging business in, I will consider as passive income on this blog.  My retirement target is to live off of passive income. This is a powerful mechanism where I make my money work for me (and make me more money). There are various ways of generating an passive source of income.

  1. Interest: Most bank and credit union accounts pay out an interest on the deposited money. The interest paid out by the bank may vary from time to time depending on the economic conditions and the current national interest rate set by the central bank.
  2. GICs: A Guaranteed Investment Certificate is a product sold by banks and credit unions that offers a guaranteed rate of return over a fixed period of time.
  3. Bonds: A bond is a security that the bond issuer promises to pay the bond holder the principal at a later date and pays interest on certain dates at a fixed interest rate.
  4. Rental property: Property is rented out for temporary use by an individual or business, who agrees to pay the property owner a regular rate for the use of space.
  5. Dividends & Distributions: Investments in securities such as stocks result in dividends which is a method employed by mature corporations to share profits with their shareholders. 
  6. Royalties: Royalties are usage-based payments made for the ongoing use of an asset such as books, intellectual property etc.
  7. Rewards programs: Corporations offer various rewards programs in order to attract customers. This may include an airmiles program from an airline and/or financial institution or a cash-back program from the grocery store or credit card company.
  8. Peer lending: Also called peer-to-peer lending, is lending money to unrelated individuals without going through traditional financial intermediary such as banks or other financial institutions.
This is not an exhaustive list of sources of passive income, but simply lists a few options available to people to generate a secondary source of income. Passive incomes play a huge role in the Roadmap to Retirement.
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.

Welcome to Roadmap2Retire!

Hello World!

Who I am

I work in the High Tech industry with a passion for personal finances and investing. I consider myself a DIY investor and wish to share my experiences via this blog.

OK. How about a little more context?

  • I live in Ottawa, Canada
  • I am in my early 30’s. I started saving and investing in 2007
  • I am engaged and will be getting married later this year (2013)
  • I work in the High Tech industry

Why this blog?

I have been contemplating on starting a blog for a while but my procrastinating-self has always gotten the better of me. I spend a large portion of my day reading and already maintain a huge collection of stats/notes. I decided that by making this public, others may benefit from it and in the process, I get to learn more 🙂

What’s my investment style?

I have experimented with a lot of different investment styles over the past few years. From investing in index funds, mutual funds, ETFs, stocks of blue chip companies, penny stocks, options etc. I intend to cover pros and cons of different investing styles and share some of my experiences. I also intend to share my portfolios and track my overall returns here.

Disclaimer

All posts on this blog are my personal opinions and should not be taken as professional advice. Posts here are for educational purposes only. All investments should be assumed inherently risky. Please consult with your financial advisor before making any major financial decisions.