Monthly Archives: October 2011

Day off

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The Wealthy Barber ReturnsNo new post today. I am getting ready to go to the Ballet tonight (insert joke here).

I just wanted to pass on an article and a video that I came across that might interest some of you.

In my past posts I have talked about credit card debt, mutual funds, index investing and ETF’s. I also suggested that picking up a copy of “The Wealthy Barber Returns” might not be a bad idea.

Well today I came across an interview with the author David Chilton where he talks about credit card debt, mutual funds, index investing and ETF’s. Spooky! It must be Halloween.

Read the article here.

If you don’t feel like reading, crack a beer, put your feet up and watch David Chilton being interviewed on CBC’s “The Hour”.

Funds

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Can-Am Spyder Roadster in Silver

Vehicle.

I like that word when it comes to investing.

It implies that there are several different ways of getting from here to there and none of them are right or wrong.

Today I want to talk about 3 investment vehicles:

  1. Mutual funds
  2. Index Funds
  3. Exchange traded funds

When you first start out investing and only have a small amount of money to invest every month, often mutual funds are a great way to go. You can set one up through your bank and make sure it’s protected from taxation through an RRSP or TFSA (see my past 2 posts).

You can ask your bank to automatically withdraw a set amount every month, and that money will be pooled with other investors to purchase a portfolio of stocks and bonds. By contributing the same amount every month you can harness the power of dollar cost averaging to maximize growth.

The benefit of a mutual fund is that it’s ideal for someone with a small amount to invest each month and no investment knowledge. For example, you can start a mutual fund at the Royal Bank with $500 and then set up a regular investing program for as little as $25 a month. You can then sleep well at night knowing there is a professional money manager watching the markets and making decisions.

So what’s not to love?

Fees! Mutual funds have a lot of fees associated with them. In fact Morningstar recently published a report stating that fees for Canadian equity (stocks) mutual funds were the highest among the 22 countries they surveyed. Read the article here.

These fees cut into the profits mutual funds return and hurt their performance in a big way. In fact the Motley Fool website reports 80% of managed mutual funds underperform the market.

So what are you to do?

In 1975 there was a Princeton grad named John Bogle who invented a type of mutual fund that would mirror the returns of the major markets while charging a fraction of the fees. The fund he started is now worth over $100 billion dollars! This type of fund is called an “index fund”.

To read about the difference between a mutual fund and an index fund, please click here.

There is one last type of fund that I want to touch on briefly. Exchange traded funds (ETF) have been growing in popularity over the past few years with financial institutions now offering a dizzying variety of them.

An ETF is like a mutual fund that is traded on the stock exchange. They have lower fees and can be traded much quicker than mutual funds.

If for example I wanted to sell some mutual funds, I would put in an order with my banker, he would sell the funds the next day and then I would wait for the funds to be deposited in my account. An ETF could be traded in minutes on the open market and then repurchased minutes later through a brokerage account.

Say for example, I wanted to take advantage of recent fluctuations in the price of gold. I could buy shares of iShares Gold Trust ETF and trade them several times throughout the day. Or maybe I just wanted a low-cost way of buying a basket of stocks in a particular industry, I could do that also with an ETF.

Click here to read about exchange traded funds.

RRSP

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Still in the Box

RRSP’s are probably one of the most common and misunderstood of any investment vehicle in Canada.

It is important for anyone who wishes to be financially stable to have a working knowledge of what an RRSP is and what it’s strengths and weaknesses are.

If you are a member of one of the actor’s unions in Canada, chances are you’ve had an RRSP for years. But do you really know what it is? Do you know what it’s invested in and how that money will be taxed when it is withdrawn?

An RRSP is a personal savings plan registered with the federal government allowing you to save for retirement on a tax deferred basis. You may contribute to an RRSP until Dec. 31st of the year in which you turn 71. In 2011 the maximum annual RRSP contribution limit is $22,450 or 18% of your earned income from the previous year (whichever is less).

I like to make it simple by explaining to people that an RRSP is like a shoebox and anything you put in that box can be deducted from this years taxable income. You could put a variety of investments in the box including stocks, bonds or mutual funds. The box is not an investment, what you put in it is.

I sometimes talk to people who say they have an RRSP and I ask them what it’s invested in and they say, “an RRSP”.

When I rephrase the question and ask “what is the money in your RRSP invested in?”. They sometimes say, “oh… I don’t know some mutual funds or bonds or something I think…”.

This is a small but important distinction to understand.

I could have a great shoebox, but a bad pair of stinky runners in it! An RRSP might be a great investment for me because I need the tax break, but I could have filled my RRSP with Greek bank stocks!

I was going to try and go into more detail about RRSP’s but I found an article online by someone much smarter than I am and I love the way he laid it all out so simply.

Please click here to read a great article by Dave Chilton and I would encourage you to put his new book “The Wealthy Barber Returns” on your Christmas list.

Credit Cards

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Credit cards

I thought it would be fitting to have credit cards be the subject of the first post on this site as they seem to be such a necessary evil these days. Don’t worry, I’m not going to yell at you for racking up your credit card, or tell you to cut it up like they do on Oprah.

We’re all adults here and you can’t do much these days without a credit card. And let’s face it, sometimes you really need to buy that pair of shoes, or that last round of drinks out at the pub.

What I am surprised at is the number of people I talk to who don’t know what the interest rate is on their credit cards. Your first assignment on your road to financial stability is to find out what the interest rate is on all outstanding loans. Here’s why…

When I first moved to Vancouver, I opened up a bank account with RBC and got my first credit card. After using it for a year, I was in the bank doing a transaction and complained to the teller about the 18% interest rate I was paying. She asked me, “why didn’t you get the one with the 10% interest rate?” Because I didn’t know they had a low-interest credit card! No one offered it to me!!

Always make sure you are paying the lowest interest rate possible on your credit card. As I write this RBC, CIBC and Bank of Nova Scotia all offer a credit card with an 11.99% rate and Van City has a card with an 11.25% rate. But the real winners seem to be Coast Capital Savings and Prospera Credit Union both offering a card with a 9.9% interest rate.

Yes, I know you may need a good credit rating to qualify for certain cards and other cards may offer air miles or other perks, but just make sure those extra perks are really worth the higher rate. It is often very confusing to tell how much that credit card is really costing you each year.

Thankfully on September 1st, 2010, finance minister Jim Flaherty introduced new regulations in an effort to protect Canadians who use credit cards.

Also remember that hopping around every 6 months to take advantage of credit cards low rates on balance transfers can negatively effect your credit score and end up costing you more money in the long run.

Bottom line, if you want to be financially stable, try to get down to one credit card with a low-interest rate and spend responsibly!

To read a good article about credit card cheques, click here.