Dollar Cost Averaging

In my last article I talked a bit about the concept of dollar cost averaging. Here is a video with a better explanation of how this works.

Fire Your Investment Adviser!

This may be some radical advice, but I truly believe that your investments (retirement fund, child's education fund, new home account) are best left to the person who cares about them the most. That's you! When we let others handle our investments (i.e. Manulife, Sunlife, Investors Group, etc...) we believe that they know better. How could they not, with all their sophisticated certificates and fancy business cards. Well it is statistical fact that investment advisers on average have underperformed the market indices (Malkiel B., 1973). So why do we constantly fork over our hard earned dollars to somebody in a suit who has convinced us that they know better?

One main reason that we continue to seek out investment adviser services is that we are led to believe that we cannot handle the responsibility ourselves. There is a multi-billion dollar industry built on this mentality. The more complicated they make the investment world seem, the more likely it is we will have to seek their services. A great book written by Robert Kiyosaki, author of the Rich Dad series, entitled Conspiracy of the Rich talks about how we are deliberately led to believe that we cannot handle our own investments so that the banking industry and other financial institutes can continue to reap large profits. For more information check out: conspiracy-of-rich.html.

When you are looking at investment vehicles be sure to ask about the Management Expense Ratio or MER. The MER is a % annual fee of the capital you invest that goes into the investment adviser's pocket. MER's typically range from 0.5% to 2%. Paying this fee does not garuntee positive growth of your investments. In fact, even if the markets take a tumble and your investments take a loss the investment adviser still gets paid. Although 2% may not seem like a lot of money over the long haul it adds up to big bucks and companies that offer portfolio management services know this.

My suggestion is to seek out the lowest MER's or even better learn how to handle your investments yourself. Low MER's can be found in the form of Index Funds and Exchange Traded Funds (ETF). For more information on ETF's traded in Canada visit Claymore investments (http://www.claymoreinvestments.ca/) and iShare (http://www.ishares.com/). These types of investments offer some of the lowest MER's. Over the long term low MER's and funds that mirror the market index will outperform 70% of all actively traded funds (Bogle J., 2007).

Even better is to manage your investments yourself. After all nobody cares more than you do. Another plus is that although you may have a couple losses in your investment career you can use those losses to build on your investment knowledge and develop your own investment style. If you pay someone else to do it, they can lose your whole nest egg and what you're left with is an empty pocket and no new investment knowledge to help you get out of the hole. The only thing you may gain from that experience is not to trust investment advisers.

Investing is risky business. As you increase your investment knowledge and gain valuable experience the risk levels will decrease. One key to unlimited wealth and prosperity is literacy and a local library card (free-books-magazines-dvds-and-music-cds.html). There have been a plethora of literature about how to build and keep your wealth. That being said, it's important to focus on the best books, because a lot of rubbish has been published on the subject. I've included a short of good reads I've come across at the end of this article

Knowledge is the new wealth. You can only attain this knowledge through actively managing your own investments, not by paying someone else to do it. Vultures are waiting around every corner to put their hands in your pocket. You can handle your own investments and you can develop your own investment style. Why pay others to gain valuable investment experience and play roulette with your nest egg?

Here is a short clip about ETF's:



Great Personal Finance and Investing Books Worth Reading

Start Small by Fred DeLuca (entrepreneurship)
start-small.html

4 Hour Workweek by Timothy Ferris (entrepreneurship)
4-hour-workweek.html

The Wealthy Barber by David Chilton (personal finance)
best-personal-finance-reads.html

Rich Dad Poor Dad by Robert Kiyosaki (personal finance)
rich-dad-poor-dad-whats-asset.html

The Millionaire Next Door by Stanley & Danko (personal finance)
millionaire-next-door.html

The Automatic Millionaire by David Bach ((personal finance)
whats-your-latte-factor.html

The Warren Buffett Way by Robert Hagstrom (investing)
invest-like-warren-buffett.html


References

Bogle J.C. 2007. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. John Wiley & Sons, Inc., Hoboken, New Jersey.

Malkiel B.G. 1973. Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing. W.W. Norton & Company, Inc., New York, N.Y.

Invest Like Warren Buffett

There have been a lot of personal finance articles here at Cash Saving Tips over the past couple of months. A lot of basic concepts about personal finance have been covered such as:

1) Paying off debt and the horrors of credit card interest

Check out: pay-off-debt-or-invest.html

2) How planning for retirement is now our own responsibility

Check out: retirement-rules-have-changed.html

3) The importance of maintaining your money's purchasing power

Check out: invisible-tax.html

4) Finally, the benefits of investing early and frequently

Check out: miracle-of-compound-interest.html

This brings us to the important topic of investing. There are numerous investment vehicles that exist, so it can be very difficult to know what to pick. Choosing the best investment option for you will depend on your risk tolerance and the return you expect on your investment. This article is about investment strategies in the stock market.

The stock market is inherently a very volatile investment arena. Prices can fluctuate wildly in a span of one trading day. Trying to spot trends in price volatility is the basis of what is known as technical analysis. Technical analysis attempts to spot patterns in price volatility and tries to time the buy and sell of a particular stock (which can be extremely risky). An opposing school of thought is fundamental analysis. This is where the investor rigorously researches the financial statements of a company before making an investment decision. This is the type of investing Warren Buffett practices (in conjunction with technical analysis to spot bargains).

Why should we care about how this Warren Buffett character invests? The reason is he is the most successful stock market investor of all time and has developed his net worth to over $45 billion US. We could all learn a thing or two from how Mr. Buffett has done this. One explanation is that Warren Buffett is a mathematical genius. When he looks at a companies financial statements, the numbers tell him a story. Just like how reading a book can tell a story, Buffett can piece together a story from pages and pages of financial statements.

You're probably thinking, "that's great that this guy can do this, but how does this help my investment portfolio?" Well, we need to study the methods and principles used in Buffetts investment decisions and implement them in our own investing. Buffett is not a day trader, nor is he a risk taker. He deliberately makes investment decisions after thoroughly doing his homework and we should too. One of the best books I've read about Buffet's investment style is entitled the "The Warren Buffett Way: Investment Strategies of the World's Greatest Investor" by Robert G. Hagstrom (borrow it from the library today).

If you are thinking of investing in the stock market or already have dabbled in it, I would highly recommend this book. Stocks aren't the only investment vehicle, but are an excellent option if you are tyring to find a very liquid (accessing your money fairly quickly) investment option. The stock market can be a very risky investment environment, however your risk will decrease as you do more research on the topic. Start doing your homework today and invest for tomorrow!

Check out this video about investing like Warren Buffett. Just ignore the endorsement at the end of the video.

How to Invest Like Warrent Buffett:

The Miracle of Compound Interest

One of the most memorable quotes of Albert Einstein was that "the most powerful force in the universe is compound interest!" Compound interest is really the catalyst that expands your funds and it's the mechanism that can turn small savings into huge sums. With a decent return on your investments (6-8%) and patience, compound interest can grow your savings astronomically.

Here's an awesome story that beautifully illustrates the power of compound interest. Back in the early history of China there was an emperor who had great problems with their tax laws and trouble calculating the dynasty's cash reserves. To solve this problem he hired one of the most prominent mathematician's at the time. The mathematician toiled day and night trying to audit the financial books of the dynasty and finally after months of slaving had solved the emperor's cash reserve problem thus saving the dynasty from financial ruin.

To reward the mathematician the emperor was willing to grant the mathematician whatever he wished, as long as the emperor approved. The mathematician thought long and hard about this and simply asked that he would be given a dollar one day and the next day two dollars, and the next day 4 dollars and so on... for an entire month (30 days), each day doubling the amount given. The emperor in his haste granted the mathematician's wish, not understanding the power of compound interest. Although the amount initially would be small, the amounts would grow exponentially. Eventually by day 30 the amount would grow to $536,870,912! By the end the emperor had to forfeit his entire kingdom to the mathematician or face the shame of not fulfilling his promise.

This story illustrates the power of compound interest. By making small investments early on in your investment career, your savings can grow dramatically. As long as you save for the purpose of growth and reinvest your returns, you can let compound interest work for you. Compound interest is one of the best tools you can use to increase your savings for your long term goals such as retirement or your child's education fund, since one of the main requirements is time. Harness the most powerful force in the universe save often and start early!

Here is a quick video clip illustrating the power of compound interest:

The Invisible Tax

This article is about that unseen tax that on average steals 2-3% of our money’s spending power each year. This tax is known as inflation. On average our money loses 2 to 3% of it’s value each year, this is mainly due to the increase in the amount of money circulating in the country. There are many other complex factors involved that influence inflation rates, but the important thing to note is that on average our money loses value. This means that in about 30 years what would have cost us a $1 (say a can of pop) will cost $10, a whopping 10 fold increase (that better be the best damned tasting pop ever!).

Inflation is also known as “The Widow’s Worse Enemy” (sorry for the sexist remark). It was given this name during World War I. During this period most men went off to fight and when they did not return their wives would be left a lump sum settlement from the government. Being that men were the main bread winners (earners) during that time the widows would have to invest their money to live off the interest. Most widows would invest in a fixed income investment (i.e. bonds) that would pay a constant interest rate each month. Widows who depended on their investments to survive saw the cost of living persistently and gradually increase each year due to inflation, while their investment income remained the same. Most widows in this situation were forced to work in old age or suffered alone in poverty.

Before we can even worry about inflation it is critical to pay off all your bad debt (Check out: Know your Debt & pay-off-debt-or-invest.html). After your debts are settled you can begin to invest (Check out: top-4-forms-of-passive-income.html). When looking for an investment you have to beat the average inflation rate. Otherwise you’re not producing any extra value with your investment. Most “high-interest” savings account offer an interest rate that is a complete joke. I believe most banks are offering something like 1%. That means that your money is losing value at 2% a year instead of 3%. Leaving your money in one of these accounts would be a bad idea. Your money has to be in some kind of investment vehicle that at the very least is beating the average inflation rate.

There will be many questions to ask yourself when examining investment options. One of the first questions you should always ask yourself is: “will my return on investment keep pace with the average inflation rate (2-3%).” Having your money in the bank is not a terrible idea. It’s a safe place to accumulate your savings, until you have a sizable sum it's difficult to make a serious investment. When your savings do grow to a large enough sum (say more than $1000 or so), then it’s time to start thinking of ways you can make that money work for you. Don’t let the invisible tax erode your spending power. Become a wise investor and kick inflation’s ass!

Check out this Rich Dad video on inflation:

One of the Best Personal Finance Reads - "The Wealthy Barber"

One of the best personal finance books that I've ever read is the Wealthy Barber by David Chilton. The story starts with some friends looking for financial advice. They end up finding advice from a very unlikely source, their local barber. Their local barber is someone who is not expected to be wealthy but they soon find that he is very well off. The wealthy barber's finanacial status is not through an exceedingly high income but through extremely wise spending habits. I highly recommend spending the time to read this book. It covers a lot of personal finance topics such as life insurance, education funds and real estate.

One of the main messages of this book was to pay yourself first. This can be done by setting up a separate savings account that you will not access and putting aside a set amount of money every week or month into the account. It may be hard at first to stretch an already tight budget, but usually we spend what is within our grasp. Putting a set portion of funds aside on a systematic basis will divert funds that are available at your finger tips that you might spend impulsively and allows you to build wealth. It would be a good idea to start small i.e. $5 a week and slowly build it up as time goes by. When the money has accumulated into a significant amount it would be wise to invest it to accelerate its growth.

Saving Cash

Building wealth is a lot like losing weight. To lose weight you have to burn more calories than you take in. This can be done by exercising more or dieting. To build wealth you have to take in more money and spend less. The principals are simple but it takes a lot of discipline to execute.

So in order to build wealth you must either increase your income or find ways to make your money go further. Increasing your income could be as easy as finding a part time job or investing in some venture. Lowering your costs could be as easy as trying to find out the things in your life that aren't completely necessary and cutting them out.

Go out for lunch less often. If you prepare a larger supper and pack some away for the next day's lunch you could save bundles. Going out for lunch should be more of a treat than a regular routine. Try to limit going out for lunch to once a week.