People learn in many different ways. Some people learn by reading, others learn by watching videos and some learn by listening.
My goal with this blog is to share some of the information I have about personal finance. I am sure that whatever I know it can help some one else. But I know that not every one likes reading, so I have created other channels of communication. About a year ago I created a YouTube channel and today I want to announce that I have created a podcast.
What can you expect from this podcast
Expect, most of the time, the same information which I publish in this blog. But also, because podcasting is such a nice medium to have conversations, expect to listen to interviews with other people interested in personal finance or entrepreneurship.
The podcast will be aired about once per week, sometime between Friday night and Monday morning.
The podcast will be about 30 minutes long, but the truth is that it will be as long as it needs to be. If a guest and I are having a wonderful conversation, then it could be as long as one hour. If I don’t have much to share on that day, it could be as long as 15 minutes.
I hope that you will join me in this journey. If you have a question that you would like to be aired, please write me a message and we will air it.
Would you subscribe?
At this moment, I am at the first stage of my podcasting journey, I am in the learning process. I am sure that with time my podcast will be of great quality. For the moment, I would ask you to help me out by subscribing. I need to show iTunes that my podcast is worth listening to, and the only way to do that is by having some subscriptions.
“Walmart is evil! it pays very little to its employees and discourage unions.”
I am so tired of the victim mentality. We have won the geographical lottery, we live in a place where there is law and order, yet… we want the government to pamper us, we want all the opportunities to be thrown at our feet.
Sure, Walmart and other retailers pay little salaries, but those positions are not meant to be life-long careers. If your salary as a retailer cashier is low, be grateful for the opportunity to be a cashier while you look for something more rewarding. If 5 years later, you are still a cashier, then you need to look at yourself in the mirror and ask your self this question:
Why haven’t I invested in myself
I interviewed my friend Daniel Davies, a fellow toastmaster member and an immigrant who is searching to improve his life.
Daniel arrived at Canada and he fond a job working at Winners, a clothing boutique in Montreal. At this place he was earning $11/h. After one year he left and started working for Home Depot for $12/h. He worked at Home Depot for another year before he realized that was not the life he was hopping for when he came to Canada. He wanted more.
Presently Daniel is working for Uber. He finds that he has more time flexibility, and he earns more. Now his gross revenue is $4,000 to $4,500 per month. His expenses are about $1,000 per month. So his net income is more that $3,000 per month or about $36,000 per year.
Daniel is not going to become millionaire working for Uber, but he took a small step to improve his life and now he’s reaping the benefits. He has more time independence and more money. In addition, he’s taking steps further improve his life. He continues to study, to read, to listen to podcasts, and he’s experimenting with other platforms such as Airbnb. He also started to invest in the stock market.
When I ask Daniel, what is holding other people back. He answered: “fear!”
People get comfortable in their routines and are afraid to lose what they already have. They become paralyzed and they stay working at the retail place one more month, one more year, one more decade. They see life passing by, other people passing them by then they say:
Life is unfair, the system is staked against us the poor.
We live in a world with so many opportunities. We have FREE high schools, subsidized universities, free (Internet) university classes from world-renowned universities (such as Harvard and Standford). In short, the opportunities have never been greater, yet we take everything for granted and become paralyzed.
People have never had so much access to information and so many platforms where to voice their opinions. We have all the social medias and we can build a WordPress website within minutes.
Daniel and million of others are taking little steps to improve their lives. You can too.
I get sick to my stomach every time I hear an investment expert saying that we should own commodities in our portfolios.
The purpose of investing is to get a return for your money
The purpose of investing is to get a return on your money. You buy a financial product and you get a higher value when you sell, you get a dividend, you get an interest payment, you get royalties, you get paid rent, and so on…
I am appalled when I hear financial experts suggesting that we should invest in gold and other commodities.
Let’s begin by describing what commodities are. Commodities are standardized goods and services, most of them are traded in an open market. It’s easy to explain commodities by giving you an example:
Agricultural products such as wheat and corn
Metals such as gold and silver
Energy such as oil and coal
These products are actively traded in the commodity market and they might have a lot of volatility.
The people who make money in the commodities market are the broker houses that facilitates all the transactions. During the The California Gold Rush (1848–1855) the people who became millionaires where the ones selling the pick and shovels, not the miners. It’s the same in the commodity market, the people who get rich are the ones who sell the dream of commodities as an investment.
Commodities don’t make babies
The truth is that when you put two bushels of corn in a barn, they don’t have sex and produce a baby bushel. They just sit there, do nothing and you have to pay insurance and storage. Commodities are non producing assets, they are no different from any household item in your house, like a chair or a table, therefore they are not investments.
Anyone who insist that commodities are investment class, they want to sound smart, they want to make you feel as if you need their services and they are direct beneficiary of the service they are selling you.
Supply and demand
In the long run commodity prices increase at the rate of inflation. In the short run, commodity prices are influenced by the laws of supply and demand.
If there is higher demand than supply the prices go up. When prices go up consumer buy less and producers produce more, bringing the price to some equilibrium.
If there is higher supply than demand the prices go down, consumers start buying more, producers produce less and the price comes back to equilibrium.
Here is a graph of the Commodity index ETF for the past 5 years. As we have become more efficient producing commodities, supply have increase, the prices have gone down and if you were a believer of commodities as an investment, you have lost 50% of your money during the past 5 years. Show that to the person who recommended commodities for your portfolio.
Governments stop subsidizing commodities
While I am on the subject. I want to express that I dislike it when governments get involved in commodity markets. It costs million of dollars to taxpayers and to consumers. Governments all over the world subsidize all kind of agriculture products. This subsidy comes out of tax payers pockets. This is the subject for another blog.
Hire me 🙂
I am a money coach, if you would like to talk about your financial life, if you need help, write me a message….
There are hundreds of ETFs in Canada. Which ones are my favorites?
The evolution from Mutual Funds to ETFs
First of all, what is an ETF? ETF stands for Exchange Traded Fund. Many investors are familiarized with the term “Mutual Fund,” whereas many investors pool their money, give it to a mutual fund manager and that mutual fund manager would buy and sell stocks according to his investment style.
Mutual funds were the favorite investment vehicle for many small investors. With a small amount of money, they bought instant diversification. Imagine that your capital is only $10,000. By giving this amount to a mutual fund manager, the manager takes your money, along with the money of hundred of other investors and he buys and sells hundreds of different stocks during they year.
Other advantages of mutual fund was to have a professional making those decisions on your behalf.
The disadvantage of Mutual Funds were many. The number one was the cost. Most Canadian Mutual funds charge 2.5% to 3% management fees. This is fine if the end result is great performance, but the problem is that investors were not receiving great performance, they were receiving less than mediocre performance. When compared to a benchmark, let’s say the average return for Canadian stocks, they were under performing.
Another disadvantage of mutual funds is the compensation for financial advisors. Financial advisors would have a conflict of interest. They would feel tempted to recommend to their clients the funds which would give them the biggest commission. If there was a fund which didn’t offer a commission, the advisor simply didn’t recommend it, even if it was the best fund for their clients interest.
And so the Index fund was invented. The index fund simply buys all the stock that have similar characteristics, lest say: All Canadian Big Companies, or All Canadian Banks, or All Canadian Oil. The index buys all those stocks, without doing any individual stock research, picking and choosing. It so happens that when you pool all those stocks together, and charge small managing fees (because you have no research staff, nor experts choosing and picking) the returns are consistently higher than the returns of managed mutual funds.
The problem with Mutual Funds and Index Funds is that you have to buy them directly from the mutual funds company. This only happened at the closing at the market.
The birth of ETFs
And so, the ETF was invented. The ETF is the same index fund, but now it can trade freely in the stock market as if it was a regular stock. This means that the process to buy an ETF which represents the whole Canadian economy is no different from buying a regular stock. You can log into your trading account and just buy it.
Another great advantage of ETF is their low management cost. Generally, a good ETF had management cost of less than 0.5%. When you compare that with the cost of Mutual Fund with a cost of 3%, the decision is a no-brainer.
This brought me to one of my most important investment philosophies: Invest in low-cost ETF costing no more than 0.5%.
Which ones are my favorites ETFs and from which Suppliers?
I will not include bonds in this list and will not include a whole bunch of new ETFs called Smart Beta nor Sector investing. I will only include plain vanilla ETFs.
My favorite ETF supplier is Vanguard. Vanguard has built a reputation of low-cost ETFs and it has transformed the industry. The lowering of ETFs prices has been called “The Vanguard Effect.” Vanguard has done for the personal finance industry what Amazon.com had done to the retailing industry. It offers great products at very low prices. Either way these are my favorite funds.
Most people have little interest in personal finance and investments. It’s hard to believe that one day your money could earn more money than you earn yourself, so the idea of living out of your investments is in the same area of your brain as winning the lottery.
Then, as we get a job, we start seeing advertisement about investments about Retirement Savings Plans promoted by many banks and employers. Canadians see these savings plans as a way to reduce their tax bill.
Little by little we start getting bank statement and we discover that in fact our investments are making money. Our investments go up and down in value but on the long run, we should see the balance of our account steadily increasing.
How we optimize our investments
It is at this period that many of us become interested on how to optimize our investments. Maybe we make the following discoveries:
We discover that most actively managed funds under perform Index funds.
We discover that most fund companies have high management fees 2.5% to 3%, these high management fees rob us of a big chunk of our investments.
We discover that it is better to own Index Funds and ETFs than individual stocks. The average return is the same but the risk is much lower.
We also discover that Canada is only a small part of the global economy and that we will be missing out by staying invested in Canada and ignoring the rest of the world.
We discover that bonds under perform stock and unless we have hit our wealth number, we should continue preferring stocks over bonds
We discover that investing in gold, does not produce higher return nor more security. Instead it adds a lot of risk to our portfolio.
We discover that commission based advisers have a conflict of interest. Would they recommend the best investment for us even if it didn’t pay them any commission? I doubt it.
The process of learning all these lessons is long and many times painful. It could take many years to discover that you are overpaying for actively managed funds. It could take years to diversify out of Canada. It could take years to stop believing in having gold as a fundamental part of your portfolio.
Winning the lottery and investments
Other investors get seduced into investments by the big technology companies. The Googles, Apples, Amazons of the world. They say: “If I would have invested $10,000 in Amazon 10 years ago, I would be a gazillionaire by now.” These investors might jump into a stock just based on the mass enthusiasm of the moment and many time they could win but also, the probabilities are high that they lose. “When to get in and when to get out” remains the most important question. After getting burn a few times, these investors (like me) might look for more conservative/predictable approaches or might pull out of investments all together.
On the long run, who are the winners?
The people I have seen succeeding over time, are the people who year after year make small improvements to their portfolio without increasing their risk. They find a better way diversify, to cut unnecessary cost, to get rid of expensive commission. After 10, 20, 30 or 40 years, they see that their asses have grown substantially and now they have reached the second stage of their financial life, the decumulation stage.
The decumulation stage
At this stage of their life there are many questions which come up:
Will I have enough to retire?
Will I outlive my money?
Will I have some money left over to leave to my heirs?
How much can I safely withdraw each year?
Will I invest my money any differently?
What it the correct asset allocation?
From which account should I withdraw first.
What are the tax implications when I start withdrawing my money.
How much should I rely on my Canadian/Quebec pension plan.
All these are difficult questions to answer. Investors find bits and pieces throughout the years. Many times the information is not complete or many times there is too much information.
Filling the information gap
There are two alternative to fill the information gap.
To educate yourself and buy books on how to approach asset decumualtion
To hire a fee only financial expert for a second opinion. Please don’t consider talking at a commission based adviser. There will always be a conflict of interest.
I will do my best to continue writing blog post to narrow the gap between not enough information and too much information.
Imagine that you want to invest in a business. If your objective is to maximize profit, your main question should be: How much money do I get to keep? What’s my profit margin?
The new trend in investing is to just put all your money in broad based ETFs, set and forget it. And I must admit that since I have been reading about personal finance, this is the best deal in the market for the little guy and for many big guys as well.
This new approach is effective because of its simplicity. If we can just manage to find the low cost ETF provider (avoid actively managed funds) then success is the most likely outcome.
However, A few of us would like to squeeze a little bit more profit out of our invested dollars. To do so we have to look a little bit deeper into the numbers.
Let’s imagine your are considering buying two different business.
One is a grocery store: After you finish paying for all the merchandise, rent, salaries and taxes, you are left with a net profit of 3%.
The other business does computer programming. After you pay the rent and all your programmers, you are left with a net profit of 20%
Which one of these two seem to be the better investment? I would say the computer programming business sounds better to me.
How about if we apply the same logic to the stock market. How about if we look for companies with fat profit margins.
The S&P 500 is divided into 10 different industries. As a whole, the profit margin of the S&P 500 is about 9%. But of course, there are some companies that have a fatter profit margins than others. Let’s figure it out.
In short, the profit margins of 20% and the stock return of the technology sector of 35% for the last 12 months can lead us to believe that there is a correlation between fat profit margins and stock returns. But there is no such correlation when we look at the other profit margins and compare it to their stock returns.
Conclusion: Maybe the implied relationship between profit margins and stock returns is not as strong as I believed to be true.
Recently my friend Elijah asked me about ethical investing. His concern is that he doesn’t want any of his hard earned money going towards oil companies.
I sense that Elijah is really interested in socially responsible investing (SRI). The idea goes by other names such as: green investing, ethical investing, sustainable investing, impact investing, or socially conscious investing.
In general, Elijah and millions of others like him want to avoid investing in companies involved with alcohol, tobacco, gambling, pornography, weapons, human rights violations, or poor employee relations.
At this moment Elijah is invested in a the TD Canadian Index e with 20% allocation towards the energy sector. For this index he pays 0.32% management fees. He makes a monthly contribution of whatever he can afford.
I did a bit of searching and I found:
Jantzi Social Index Fund (XEN) This is a Canadian ETF with 16.82% allocation in the energy sector and 0.55% management fees.
iShares MSCI KLD 400 Social ETF (KLD) in the US. with 0% Energy and 0.5% management fees.
iShares MSCI KLD 400 Social ETF (DSI) in the US. with 0% Energy and 0.5% management fees.
In short, ethical investors don’t have much choice.
If you invest in the US and want to avoid oil, one option is to buy all the sectors except the Energy sector if this is the sector that worries him the most, but this option is a bit unrealistic if he’s only investing $100 or $200 per month. And all the other sectors have companies that would not qualify as socially responsible investing.
As opposed to the US, the Canadian market is so small that there are not ETFs or index funds which separate different sectors of the Canadian economy.
Another option is to buy individual stocks and only buy those stocks which meet his criteria. But again, this will expose him to risk of lack of diversification and he doesn’t have that much capital.
One of the problems with ethical investing is that people’s moral values are different.
Some examples are clear cut. If a company makes bombs or machine guns, there is no doubt that those weapons are for killing people and I think that most ethical investors would want to avoid those companies.
But what about companies like Walmart? Some people say that it violates human rights because it prevents workers from forming an union. Other people say that Walmart is a savior for poor people by providing good quality products at low prices.
Another example is a chicken farming company. Some people say that it provides affordable chicken and eggs to the masses. Other people say they represent cruelty against animals.
A winery in California. Millions of people see nothing wrong with drinking a glass of wine after dinner. Others see the sale of alcohol as a complete violation of their moral principles.
And to address Elijah’s distaste for oil. We depend on oil products every second of our modern life. From the plastic keyboard on our computers to the plastic toothbrush we use every morning. We can get our oil from the oil sands in Canada (this is considered dirty oil) or we can get it from the middle east where there are constant human rights violations, but there is no replacement for oil derivatives products in modern day society.
Sure, green energy is advancing rapidly but I don’t see how green energy could replace all the plastic, rubber, and other chemical byproducts which are derived from oil.
The truth is that a portfolio is not the best way to express one’s moral choices.
Let’s imagine two companies: “Good Company” and “Bad Company”
Both companies have shares in the stock market for $10 and both companies pay $1 dollar in dividends every year. In short, return for investment is 10%.
A campaign against Bad Company and in Favor of Good company moves the share price of each company. Now Good Company shares cost $20 and Bad Company shares cost $5. But regardless of their share price, they still pay $1 in dividends.
As an investor, if I pay $5 in Bad Company for my $1 of dividend, now I make 20% return on my investment. If I pay $20 in Good Company for my $1 of dividend, now I make 5% return on my investment.
In the stock market, the Bad Company shareholders will be rewarded and the Good Company Shareholders will be penalized.
How to create an impact
The best way to create an impact is to vote with your dollars. As a consumer your voice is much louder and corporations eventually listen.
For example. My friend Cheryl has been a vegetarian and then a vegan for many years. When I met her she was the odd person with the different eating habits, but little by little the vegetarian and vegan community has continued to grow. Now there are more and more vegan restaurants all over the city. Cheryl and millions of other vegans have voted with their money and corporations are listening.
Another example is the company Gucci which announced that they will no longer use fur in their designs. Obviously they are responding to demands of the consumer. The consumer has spoken and Gucci is listening.
You can have a much bigger impact as a consumer than as a stock holder
The best way to change a company’s behavior is not by buying or selling its share in the stock market, it’s by buying or not buying its products. If you and millions of others boycott their products, management will realize that they have to change quick.
Other ways to create changes is to lobby government and ask government not to buy products from those companies.
You can also express your SRI with your political vote. For example, in the US, the people voted for Donald Trump, a person who denies climate change and who wants to revive the coal industry at the expense of cleaner sources of energy. Many people who care about the environment didn’t bother to vote, and so, they have to live with the consequences of having Donald Trump as president.
In short, you will have a bigger voice if you express your SRI by the way you consume and by the way you vote than by the way you invest in the stock market.
It’s RRSP season. You see advertisements in all the metro stations, all the TV stations and all the social media. You have until March 1st to make your RRSP contribution and to get that tax break you have been hearing about.
You make an appointment with the financial adviser at the bank. You get one hour. In that one hour, your financial adviser, anyone who happens to be available at the time, gives you a questionnaire. From this questionnaire he’s supposed to assess your risk tolerance and present you 5 or 6 mutual funds which fall into your risk tolerance. Sing here, sign there, initial here and here and we are done, thank you very much. Next…
Asset allocation is one of the most important decision an investor must make and yet, we give it so little time, so little consideration.
There are a few problems with this scenario.
The client and adviser don’t get to know each other. The adviser don’t discover anything about the client’s goals, knowledge nor expectations.
The adviser only show the client the products offered by the bank. Most of the time the adviser will try to nudge the investor into actively managed funds, these are the funds which offer the highest revenue to the bank and thus the lower revenue for the client.
If it is a Financial Advisory firm, not affiliated with a bank, the firm will definitely push actively managed funds. They would never suggest index funds nor low cost ETFs and on top of that, they will charge an additional management fee. They will do what I call “double dipping.”
What’s the solution?
The solution is to look for a fee-only financial adviser. These adviser will charge you for their time. They have no conflict of interests, they won’t try to sell you products.
Have a long conversation with your adviser. Let him know about your plans, your goal, your knowledge, your expectations.
Take a holistic view of your situation. Are you planning to work after retirement? Do you have other investments? Are you planning to leave a money for your heirs?
Build a long term relationship with your adviser, but continue informing yourself. If at any moment you detect conflict of interest, you suspect that he is charging but getting a commission somewhere else, his opinion in no longer unbiased and you should question his decisions.
Make sure that the products he offers you don’t have trailer fees, or other kind of compensations. You want to make sure there is not even the perception of conflict of interest.
Finding a financial adviser without conflict of interests is very difficult but not impossible. If you find him, don’t be afraid to pay him his hourly fee, in the long run you will save a ton of money.
Many people think that having money in cash is the safest investments of all, but in reality, it is the worst investments of all. Having cash money is the only investment where you are guaranteed 100% to lose money.
How do you lose it?
You lose it to inflation, the silent killer of capital.
Why does inflation occurs.
In order to create economic stimulus, governments try to have a stable rate of inflation, both Canada and the US favor an inflation rate of about 2%.
The reason the governments wants inflation is because the government wants to discourage people from holding money. If your money lose value day by day, then you are better off spending in goods and services. If people buy goods and services then businesses make money and this economic activity creates jobs.
Who is the big loser in the inflation game?
The poor and the financial ignorant are the big losers.
The poor are losers because every time prices increases the poor have to pay more for goods and services, but many times salaries don’t increase at the same rate as inflation, therefore the purchasing power is less and less.
The financial ignorant loses out because they don’t know how to invest their money in a way which will produce a rate of return higher than inflation.
Imagine this scenario:
Inflation is 2% and your bank offers you 1% interest for your money, at this rate your money is losing 1% power every year.
Here is the Canada’s rate of inflation for the past 10 years.
Elijah is a friend I met at the McGill toastmasters club. His speeches have always been thought provoking and inspirational.
Elijah is a true hustler. He has several side gigs and job. Due to his many activities he hasn’t much time to think about his financial goals. He only started saving after having a conversation with me about the possibility of retirement or having some money for emergencies.
This interview was held May 2017
Age: 33 Work life: Different jobs at different places and side hustles. Education: Bachelor’s in communication and music.
Alain: What are your professional ambitions? Elijah: After graduation, I never wanted to work a 9-5 job. So far, I have succeeded at that.
Alain: How do you earn your living? Elijah:
I have been a musician for years, I do gigs at different bars and events.
I teach guitar and drums to a few private students
Alain: Can you tell me a bit about your financial planning? Elijah: In the past I have accumulated some savings, but I always ended up spending it.
I haven’t been disciplined about saving because:
I didn’t have the motivation,
I didn’t have the knowledge
It wasn’t that important
I never had a steady income
Only recently I have had the capacity to set aside a certain amount of money to save regularly.
Alain: Have you ever thought about retirement? Elijah: I don’t think that far into the future. I can’t imagine what life would be like at age 65.
I am trying to set up my life so that even at 65 there will be demand for my services. I hope that people will want to have videos made, they will want to listen to my music and will want to learn to play musical instruments.
Alain: Do you have any goal which could affect your financial life? Do you want a house? Kids? Get married? Elijah: Yeah, probably, but at the moment I am more focus on living on the present.
Alain: So what are your financial goals? Elijah: I would like to have a bit of money set aside for emergencies. I would like to continue working until old age without the pressure of having to produce every month. I would like to work because I want to, not because I have to.
The whole idea of financial planning is new to Elijah. He lives a frugal lifestyle and he is happy with it. His priority is to have lots of freedom, not to have a 9 to 5 but not to lack anything either. He doesn’t mind living a spartan life but if he feels like having a beer with friends, or taking a trip to Costa Rica, he would like to have the money to do it without worrying too much about how to pay for it.
We started by opening a brokerage at his main bank
I asked Elijah not to listen to the advice of the financial adviser at the bank. The bank offers actively managed mutual funds with high fees. The more a fund cost, the less money it makes for its investors.
We spoke about choosing and Index fund, a broad based investment products which represent the whole economy of a county.
Elijah opened an account and deposited some money he had in his bank account.
We chose the Canadian Index Fund with management fees of less than 0.33% per year.
He’s making contributions every month.
This is just the beginning, his present savings are not enough to fund a retirement. After a few months he will have enough money to face any short term emergency.
Our first goal was accomplished, to get into a habit of saving and planning for the future.
In future meetings we will speak about the saving a bigger amount and about how to start diversifying his savings.
Next meeting will be May 2018.
Pitch. I am a money coach. If you would like to talk about your financial situation, please get in touch with me.