Dragon boat with friends

Save by taking money off the top

Dragon boat with friends
Dragon Boat with friends

Money can’t buy you happiness but it can eliminate a lot of unhappiness

Most of us have dreams and ambitions. Realizing those dreams and ambitions could be so much easier if we have some financial comfort. For example, if you want to spend a vacation in the Caribbean, you need money. If you want to help less privileged people, you need money. Money is the medium of exchange which can help you realize your dreams and ambitions. Money does not guarantee happiness but it can eliminate a lot of unhappiness. It’s a great relief when you don’t have to worry about money for essential needs such as food, shelter and medicine.

How do we make sure we have enough money to cover our essential needs and to achieve financial security?

It’s my belief that anyone in North America (and in most industrialized countries) has an opportunity to make money. Since the arrival of the sharing economy, anyone with an extra room can create extra income ( affiliate link ) and anyone who knows how to drive can start earning some money with Uber ( affiliate link). For the first time in North American history, women have an equal opportunity to earn money as drivers (See this article by the National Post). And there are so many other ways in which a person can start earning money almost immediately. You can earn money by walking dogs. You can earn money by putting together Ikea furniture. The idea is to start earning money today while you build a medium-term and a long-term plan to continue earning money in the future.

Money is a tool with great leverage capabilities. For example, if you want to buy a $200,000 house and you have good credit, you can give a down payment of only 5% ($10,000). If your house goes up in value 5% in two years ($210,000), you would have made 100% return on your investment.

But, in order to acquire this fantastic tool that you can use as leverage to realize some of your goals, you need to start saving today.

OK, so how do you save money?

Most personal-finance books and/or websites advocate the use of budgets. Budgets to track your spending habits and to make sure that you don’t spend too much in consumer items such as lattes, restaurants, and designer clothes.  Hopefully you will notice all the ways in which your money is being mismanaged and you will fix it. The problem with creating a budget is that no one likes to budget.

I don’t like to budget either, that’s why I suggest to save by taking money off the top, to pay yourself first, even before the government takes its cut. Talk to your employer or to your bank and ask them to automatically take a percentage of your paycheck and to deposit it into your registered retirement account.

Reduce your tax bill by saving for your retirement

When you take money off the top and put it into your registered retirement account, you are also reducing your taxable income.

Here is a quick example: Let’s say you earn $40,000 per year. If you take $10,000 and put it into your registered retirement account, your taxable income is only $30,000. You pay less taxes because you’re in a lower tax bracket.

Unfortunately, ours is a progressive tax system ( I prefer to call it “oppressive” ), which means that if you earn more, you are taxed at a higher rate. In Canada, at the upper scale, people are taxed way in excess of 50%. Can you imagine? More than 50% of your work is taxed away from you.

Start saving today, even if you save a small percentage

My suggestion is to start saving 10% of your income. For many this is a big move. If saving 10% is too much, then start saving 5% or even 2%. The important thing is to get started. Once you get started, once saving money becomes a habit, then you can gradually  increase the percentage of your savings year after year.

My saving habits

Once you have decided to save a percentage of your earnings, then you need to figure out how to live with what is left over. Life is made of a thousand small decisions. This is how I go through the process of spending less so that I can save more.

  1. I don’t have cable. When I want to watch a movie I use Netflix. A great movie which was released two years ago, is still a great movie today. Movies don’t go bad after two years.
  2. I buy my clothes at Walmart. I am not endorsing Walmart, but I think it is dumb to spend $80 for a pair of designers jeans when I can pay $20 for normal jeans. Also, I only buy new clothes when my old clothes begin to tear.
  3. I cut my own hair. One day I was frustrated because my favorite barber (the one who only charges $15) was too busy. I went across the street to his competitor who charged me $35 for a haircut that wasn’t any better. I was so upset with the price that I went to buy my own hair cutting machine. It took me half an hour to learn how to cut my own hair and now I have become an expert. I spend 5 minutes cutting my own hair every Tuesday and the cost is $0.00. I believe Mr. Money Mustache also cuts his own hair.
  4. For transportation, I prefer my bicycle, then public transportation and finally Uber. Taxis are too expensive.
  5. Recently a friend of mine invited me to celebrate her birthday at an expensive restaurant. In spite of liking this friend very much, I decided not to go. My budget for restaurants is $20 or less.
  6. For wine, I try to stay below the $10 price range.
  7. I have a thing against Apple products. I think they are too expensive. My Android phone does just as good a job sending texts for a lot less money.

How about you? What are your money saving strategies? What are your consumer habits? In which ways are your frugal? In which ways do you spend too much?

I know many of you don’t agree with me in one way or another, please feel free to speak your mind.

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The case against the “Buy and Hold” strategy

f2Enticing Investment Headlines

We’ve heard it all over the news, on TV, in the papers, on the radio, the internet and every communication medium there is. Here’s the typical headline:

  • Hot stocks to own for 2016
  • Undervalue stocks you must buy NOW
  • Stocks with amazing growth potential
  • Here is the new Apple

Every reporter has a story to sell, a reason to pitch a company. Your financial advisor has some recommendations of his own. Even your Uber driver will tell you to buy.

However, no one tells you to sell.

When to Sell a Stock

It is my belief that knowing when to sell is as important, or even more important than knowing when to buy.

According to Hewitt Heiserman author of the book “It’s Earnings That Count,” only 25% of the stocks in the US stock market accounted for 100% of its gains. The other 75% broke even or lost money. He also claims that 1 out 5 stocks has gains in excess of 300%. Conversely, 1 out of 5 had losses of over 75%.

If you look at the NASDAQ for example, most of its gains have been driven by a few stocks such as Apple, Google, FaceBook, and Amazon.

The way I see it, there is one way to significantly tilt the chances of winning  in your favor: to sell the stocks which are draining your resources and of course, keep those who continue reaching new highs.

Create systems to buy and sell stocks

I believe that every investor should have systems. There are many systems which can work as long as the person sticks to it and creates some selling rules.

For example:

  • Invest dividend paying stocks. And sell as soon as the stock stop paying dividends.
  • Invest in companies with net profits. And sell as soon as there is a loss.
  • Invest in companies with increasing earnings. And sell when earnings stop increasing.

There is one thing for sure. Even the best companies will eventually go down. Backberry has gone down from $148 in  June’08 to $6 May ’16? If you don’t know when to get out, if you don’t have selling rules, you might end up with a net loss.

You might say: Well, the Dow Jones and the S&P 500 are great indexes to invest over the long term.

That is completely right. But even major indexes like the Dow Jones and the S&P 500, they don’t just buy and hold. They have a system. They have a set of requirements for companies to be part of those indexes. Once a company doesn’t meet those requirements, that company is kicked out of the index.

A word from legendary stock traders

Here is a great quote from legendary trader Nicolas Darvas from his book “How I Made $2,000,000 in the Stock Market

“I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn’t you call that good odds?”

In the stock market we have this opportunity to get out of a position and to limit our losses.

Here are some lessons from trader and entrepreneur William O’Neil author of the book “How to Make Money in Stocks.”

“I make it a rule to never lose more than 7 percent on any stock I buy. If a stock drops 7 percent below my purchase price, I will automatically sell it at the market – no second-guessing, no hesitation”

“The whole secret to winning in the stock market is to lose the least amount possible when you’re not right.”


Here is another lesson from legendary trader Bernard Baruch:

“If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he is wrong.”


Learning when to sell is more important than knowing when to buy. For example, let’s say that you buy  100 companies at random. If you believe Mr. Hewitt Heiserman, 1 out 5 of the stocks will have gains in excess of 300% and 1 out of 5 will have losses in excess of 75%.

If you follow William O’Neil’s advice to sell when a stock trades below 7% of your purchase price, you can eliminate all the big losers and you can let your winners ride. If your winners start going down, let’s say 10% to 15% from its top price, you sell them  and lock-in those gains.

Do you have a buying strategy? Do you have a selling strategy? Share it with the rest of us.

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“Buy And Hold,” Money managers don’t follow their own advice

Spending time with friends
Spending time with friends

Practically every financial adviser in North America gives the same piece of advice to their clients:  “buy and hold”. Of course financial advisers have a strong economic incentive to keep your account in their books, they don’t want you to sell because they get a trailer fee of 1.5%. This fee is paid to the adviser for as long as the client stays invested. .

A common meeting between financial adviser and client
  1. You meet your financial adviser. Either you choose someone at random at your local bank or one arrives at your kitchen table because a friend or a family member referred him.
  2. The adviser asks a few questions to determine your risk tolerance so that they can classify you in one of five investment risk tolerance categories. These categories are: Conservative, Moderate Conservative, Moderate, Moderate Aggressive, and Aggressive.
  3. Once your risk tolerance has been identified, the adviser chooses one of their company’s mutual funds and buys it for you.

If at any time the value of the mutual fund goes down in value and you call in order to inquire about your account, you are told in firm terms. “Our strategy is to buy and hold.” You are told to hold until you need the money, and if you cannot handle the volatility, you are advised to switch to a more conservative category.

Given this piece of advice, “to buy and hold,” do you think that mutual fund managers follow it themselves?

Of course not.

While investors are told to buy and hold, many mutual fund companies have a portfolio turnover of over 100%. This means that 100% of the securities within the fund are replaced over the span of one year. It is not uncommon to see portfolio turnover as high as 500%. This is not the buy and hold strategy which is pushed down your throat.

Side note: The turnover of Index Fund is close to zero, but a financial adviser would never recommend and Index Fund because Index Funds don’t pay any trailer fees.

How is a portfolio with a high turnover a detriment to a mutual fund’s performance?

Lots of commission. The more turnover, the more buying and selling. The more buying and selling, the higher the commission expense. The higher the commission expense, the less money for you the shareholder of the mutual fund. .

Bid and ask spread. Stocks always have a price spread. For example, someone might be willing to sell shares of Royal bank for $21 and someone might be willing to buy shares of Royal back for $20. The difference of $1, between the bid and the ask is called the spread. When a mutual fund wants to buy, they buy at the “Ask” price and when they want to sell, they sell at the “Bid” price, therefore they are always losing on the spread.

Market impact. The size of a big order to buy stocks can influence their price. Imagine that a mutual fund wants to buy one million shares of Royal Bank which is trading at $20. The mutual fund buys all the available shares which are selling at $20 and in order to buy more they have to offer more money, let’s say $21, and if they buy all the shares available at $21, then they have offer to buy at $22 in order to be able to buy more shares. The bigger the quantity of shares a fund buys, they bugger the impact they create in the market and the more they end up paying for the shares they want.

Taxes. When a mutual fund buys and sells stocks, some of them are sold at a profit. When stocks are sold at a profit it triggers a capital gain. When there are capital gains, there are taxes to be paid. Unfortunately, it is owner of the mutual fund, you, the individual investor who ends up paying those taxes.

Why do mutual fund companies have high turnovers?

There are two main reasons.

Seeking for Alpha: Mutual fund managers are always trying to outperform their peers and their benchmark. If they outperform their peers and the benchmark, they will want to use that outperformance for marketing purposes. In order to outperform, they are constantly buying companies they think will outperform.

Window dressing: Every quarter, mutual fund companies disclose to their clients the names of the companies they are holding. Right before the disclosure, they get rid of all their losing stocks and they purchase the most popular stocks of the quarter. This activity give the impression that the fund always has the best stocks in their portfolio.


Statistic research shows that buying and holding good companies is a long term profitable strategy. If investment advisers want their clients to follow that strategy, maybe they should make sure the mutual funds they recommend also follow the same strategy.
What should an individual investor do? If you have a financial adviser, tell him that you like a buy and hold strategy and for that reason, you want to invest in mutual funds company which follow this philosophy. To be more precise, you want to invest exclusively in Index Funds and/or ETFs.

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Net worth Statement May 1st, 2016

studentsThere were many exciting changes last month.  These are the highlights:

  1. My Airbnb revenues are increasing at a fast rate.
  2. A high net worth individual has hired me as a consultant to give a second opinion about his portfolio. This is the equivalent of getting paid for doing something which I love doing.
  3. A friend lent me $20,000 to increase my stock market holdings.

I have been investing in the stock market since January 2015. At that moment I started with about $37k of my own money. Now, 16 months later, there is about $95K in that account. My own equity is about the same, the rest is borrowed money, but it feels good to be in control of such a nice chunk of change.

My stock market goal is to manage one million dollars. How long will it take me? Let’s shoot for January 2020.

With the newly borrowed $20,000 I bought two companies:

  • 100 shares of CM.TO (CIBC Bank) at $98.02 and
  • 400 shares of IPL.TO Inter Pipe Line at $26.84.

This is what attracted me about those two stocks.

CIBC Bank:

  • The stock is going up. I like stocks that are going up. There are other people who look for stocks that are going down. They say they are getting good companies at a discount. The thing is that stocks are not like groceries which you can store in the pantry, stocks like Kodak, Blockbusters and Nortel can go to $0.
  • The Price/Earning (PE) ratio is 11.24. When people buy a stock, what they are buying are the earnings of the stock. For example, if the earnings of a company is $1 and you pay for that stock $10. You are paying 10 times its earnings or a PE of 10. Generally, the less you pay for a stock the better you are, but not always, sometimes a low PE means that no one wants to buy the stock. If no one wants to buy the stock, many times there is a good reason for it. Imagine buying Blockbuster. A cheap stock got even cheaper. Eventually, no one wanted the stock nor its products.
  • The dividend is 4.64%. Since I borrow money at 4%, Even if this stock doesn’t go up in price, I still make a profit.
  • Earnings per share increased 8% during the last quarter. When earnings increase, there is high probability that the stock price will increase.

Inter Pipeline:

  • The stock has good upward momentum.
  • The PE is 21.01. This PE is a bit higher than what I like to pay for, but I believe that earnings will rise fast and that the stock price will continue increasing.
  • The dividend is 5.81%. This is an amazing dividend. Even if the company doesn’t go up in value, I will earn enough from the dividend to pay for my loans.
  • Earnings per share increased 69% last quarter.

Here is breakdown of my net worth.

Date Cash Car Stocks R. estate Debt Total
May 1st 3,249 1,750 95,029 153,408 101,808 148,379

Goals for May. To increase my net worth to $149,000. This goal should be attainable, but a lot depends on the fluctuations of the stock market.

My projection is that my portfolio will increase at the rate of 6% per year. This will be the equivalent of $5700/ year or $475/ month.

As for the real estate part, if my mortgage gets paid every month, my debt is reduced and my equity increases by about $500 per month.

Long term goal

As soon as stock portfolio reaches $100,000 I should concentrate on paying down my debt. I feel happy with a $100,000 portfolio. From this moment on, the wise thing will be to reduce leverage and go into a more secure situation.

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Case study: Surviving with the Canadian Pension Plan

Dancing with friends

I will work until I die, maybe

My friend Carlos (fictitious name) always refused to save money for retirement. He always said that things will turn out fine, that he loves his job and that he would work until the day he dies.

Well, my friend Carlos is in his early 60s. He still loves his job, but things are no longer the same. It takes him so much more effort to do the job than it used to. He loses his patience easily when talking with his clients, and he finds that he gets tired easily.

What is the Canadian Pension Plan
Judgement day. Retirement at 65
Judgement day; Retirement at 65.

At this stage of his life, he has started wondering about the Canada Pension Plan. What is it? How can he benefit?

Because he wants to work less, he has decided to start collecting benefits before the age of 65. What are the consequences of that?

There are millions of people like my friend Carlos. People who earn just enough to live and who have the capacity to save for retirement but don’t. If by any fortuitous event they earn more, they take longer vacations, or they simply work less. They live life for today and they will deal with the future tomorrow.

What if I save for nothing?

Last year, I was speaking about personal finance in front of a group of college students. One girl asked me: “I could die tomorrow. Why would I save all that money for nothing?” My answer was: “What if you don’t die tomorrow? What are you going to tell your older self when you are struggling to pay the rent?”

There are two big problems with financial planning:

  1. We don’t know when we are going to die, and
  2. We don’t know what rate of return we will get for our money.

So, it is very difficult to plan for the future. Will I save enough? Will it be too much?

Why we are forced to contribute to the Canadian Pension Plan

At one time in history, I used to resent the government for forcing us to contribute to a Canadian Pension Plan. How dare they take such a paternalistic stance and force us to save for our retirement? We can make our own decisions. Now I understand. The government has taken such actions because there are millions of people who think like that college student. There are millions of people who think like my friend Carlos. The future will take care of itself, and I will spend my money now, in the present, because we don’t know if there will be a tomorrow.

Unfortunately, in spite of the government’s good intentions, the Canadian Pension Plan sucks. It takes money from us all throughout our working lives and when we need it, at age 60, 65, or 70, it is never enough.

The average pension pay that Canadians are receiving today is about $664/month. Can you imagine living on $664? The rent for one person is about $650 in Montreal in a mediocre neighborhood. If they pay the rent, how are they going to eat?

My friend Carlos, who decided to start collecting now, before turning 65, will be getting about $350. This amount is nice, now he can afford to work even less. But what is he going to do when his ability to work will decrease even more? How is he going to live on $350 per month?

Generally, when someone retires at age 65, they might collect full benefits ( about $664). If someone decides to retire at age 60 their payment will be about 30% less. In the case of my friend Carlos, he is collecting about $350. If someone delays retirement until age 70, their payments will be 30% higher (about $865 ).

It’s hard to live on so little

We have to wake up to the reality that it is difficult to live out of our pension benefit. Assuming that we retire at age 65 and we live until 81, we have to have a significant amount of savings to carry us for 16 years.

My solution is simple: my solution is not to depend on the government, not to depend on the Canada Pension Plan. My solution is to take your fate into your own hands, to think that you will live at least until your life expectancy. My solution is to save money, at least 10% of your income. The earlier you start, the better off you will be.

Living a long life should be a gift from the universe, not one more thing to endure.

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Using debt to increase your wealth

Having a beer with friends
Having a beer with friends

I owe a lot

I owe more than $500,000. This debt is composed of mortgage debt and personal debt. I use this debt to invest in real estate and in the stock market. In other words, I borrow money to make money.

I am aware that excessive debt could be dangerous, but what constitutes “excessive debt.” In my case, I have bought two condominiums with down payments of over 20% each. This means that 80% of the property was financed with money from the bank. In the real estate world, this is not excessive. Every month I am making my mortgage payments which in turn reduces my debt and my risk.

As far as the stock market, I am leveraged to about 50%. This means that for every dollar I have in stocks, I have borrowed an additional dollar. I have borrowed money from friends and family at  an interest rate of 4%. However, my gains in the stock market are bigger than my expenses.

Toxic debt

Debt is one of the most misused tools in our financial toolbox. Many individuals use debt for consumer items which have no return on capital; vacations, automobiles and clothes come to mind. Sure you feel pleasure as you spend that money, but you should know that immediate gratification, in the long run, brings more pain than pleasure.

The only reason to get into debt is to invest in assets which can produce returns in excess of your cost of capital. For example, if I borrow money at 4%, I have to make sure that my return will be enough to cover my interest expenses.

A future of deleveraging

I have reached my short term goals as far as owning real estate and stocks. My next goal is to pay down my debt. If I can, I will pay my debt to the tune of $1,000 per month.

What about you, how does this apply to you?

If you have a plan, if people and banks trust you, and if you can produce returns which are higher than your interest expenses, then borrow money and put it to work. Just be careful, always expect that something will go wrong and be ready for it. There is always something more precious than money at risk: your reputation.

Book Review: How to Work a Room by Susan Roane

book cover. How to work a room

How to create and build relationships

The most valuable assets anyone can have in business and in life are their relationships. In order to build strong relationships, we have to step out of our comfort zone and meet people.

Susan Roane tells us how to use any occasion to meet people and to build relationships. She teaches us how to work a room, from social events, to business events, to many of the different social media.

I found great value in every chapter and I felt that I learned a lot. Most of the information is common sense, but in this changing world, with technology transforming everything around us, sometimes we lose track of what is common sense and what is a new trend. Susan reminds us and assures us that many of the rules of engagement and socializing are still the same.

Dinner with friends after a Toastmasters competition
Dinner with friends after a Toastmasters competition

However, I found the book difficult to read for many reasons:

It is difficult to find a flow from one chapter to the other. It feels like a chain of disjointed little chapters that jump from one section to another. She mentions that in her day-to-day life she has accumulated a file of stories which she had jotted down. It almost seems that she just copy and pasted all those different stories to put together this book.

Susan gives us a lot of her personality.  She uses so much Yiddish slangs that she had to add a Yiddish glossary at the end. This is great if you are part of that community, but not so great if you are not Jewish, it makes you feel isolated. I am from South America. Her Jewish background and slang say nothing to me and I don’t feel like flipping back and forth between the text and the glossary. Make it easy for the reader, easy to understand, easy to read.

Susan uses hip catchy titles for each of her chapters. At the beginning, I thought that it was cute and original, but halfway through the book I got tired of it and began to see it as corny and outdated.

The author uses a lot of quotes and testimonials from other sources. I wish she would put these sources in the footnotes. It seems that every other paragraph starts with Mr/Mrs  ——– says, “Blah, blah, blah.” She goes on for about half a page and then gives credit to someone else. It is good to give credit to others and to acknowledge them, but when you overuse that technique, it stops adding value to the reader and it becomes one more hurdle to get through before getting to the real message.

Overall, I give the book three stars out of five. The book is full of useful information, but her writing style gets in the way.

Thank you Susan, for sharing all your knowledge.


Net Worth: April 1st 2016, up $1,055

FriendsMarch was an amazing month

Several amazing things happened during the month of March.

  1. A lady hire me to do 2 hours of investment consulting. I love money coaching, but I love even more to speak about investments.
  2. A gentlemen hired me do consult about his portfolio. This kind of meeting is my definition of paradise.
  3. A friend of mine lent me $20,000 so that I can increase my investments in the stock market.
  4. I acquired one more apartment to do short term rentals.
Following my dream

My dream has always been to be a full time investor. Somehow, after many years of talking about finances, things have aligned in a way in which my dream is becoming a reality. During the past few week I have received capital in form of loans, from friend and family and it is enough for me to be able to self sustain.

My financial progress

Here are the results for the month of March. My net worth increased by $1,055. Hopefully it will continue increasing in future months.

Cash Car Stocks Real Estate Total
April 1, 2016 5,700 2,000 36,768 97,507 141,975
January 1, 2016
10,300 2,275 34,052 99,450 146,077
Nov. 1, 2015
10,242 3,250 33,240 98,838 145,570
How my portfolio is doing year-to-date

Compared with the TSX (Toronto Stock Exchange) and with the S&P 500 ( Standard and Poor’s 500), I am leading. My portfolio is composed of many ETFs (Exchange Traded Funds). I have Canadian, U.S., European, and Emerging market ETFs . So far, I am leading in both the Toronto index and the S&P index because I am taking higher risks. I have borrowed money from friends and family to invest and in addition, I have leveraged my account about 35% in my margin account.  The result is that any small change in the market creates a big difference in my account.

TXS: 4.00%
S&P 500: -0.50%
Alain: -0.05%

Last month I bought a new stock: CALM at 52.98 for several reason:

  • The stock price was above the 50 days moving average. I take the 50dma as direction indicator.
  • The company beat earning expectations
  • The company pays a 3.39 dividend.

During the following weeks I will be buying some Canadian Financial.

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Breaking away from the 9 to 5 lifestyle

Alain and a little dog
Relaxing, watching a movie

There are three ways to build wealth:

  1. Working a regular job and investing the savings
  2. Real estate investment
  3. Creating a business

Today I will talk about having a regular job and investing the savings.

We are trained to be good employees

Most of us are trained to be employees, from the moment we go into grammar school to the moment we finish our university studies. The goal of our education  is to be able to get a job from a well established company, work for 40 years, save enough to retire at 65 and enjoy life until we die at age 81.

We are taught to be dependent

We are never taught to be independent thinkers, we are never taught to take calculated risks, or crazy risks, how to go against the grain, how to depend on our own abilities. Instead we are taught to be dependent on big corporations and government.

We are at the mercy of employers

Because we are herded like cattle towards a life as employees and because any other possible way of making a living has been erased out of our imagination, competition for the few jobs that are available puts the employee at the mercy of the employer.

Many demands for little money

We are overqualified servants of the system and when we apply for a job we find that there are hundreds of people competing for the same job. The employer asks for a ridiculous level of competence; fluency in at least two languages, proficiency in several software, availability to work odd hours, four years of college education, five years of work experience, and so on. All that for the amazing pay of $14.50/h with the possibility of a $0.50 salary increase after the first year.

The price of safety nets

When a person finally gets their check, then they discover that the government safety net is not free. There are all kinds of deductions such as: unemployment insurance, corporate pension plan, health service, government pension plan, and a few others.

Taxes, taxes, taxes

When all the contributions towards our safety net have been deducted from our paychecks, then we pay the taxes: federal taxes, provincial taxes, city taxes, school taxes, sales taxes, cigarette taxes, alcohol taxes, gasoline taxes, and so on.

Financial advisers are illusionists

After all the safety net deductions and all the taxes, we get approached by a financial adviser who tells us that we should save at least 10% of our income for retirement, that we should save for our dream home, save for the education of our children. Eventually we believe all the lies spun by the financial adviser and we entrust our savings to him. Soon thereafter we discover that all the profits have been eaten away by management fees, service fees, trailer fees, commissions and so on.

We are original, like everybody else

If we succeed in having any discretionary income, this little amount becomes the battle field of advertisers, people who persuade us to spend our money buying their products and services. Advertisers tell us how to look sexy, how to become smarter, how to become independent, and how to be original like everybody else. And we fall for it to the extent that we end up borrowing and getting into debt to become the character described to us in the media.

How to break from the 9 to 5

The only way out is to start breaking away, little by little, or radically, from this indoctrination. To stop believing that there is a safety net provided by the government. To determine that we are on our own and that there is no one out there to help us. To become responsible for our future and not to trust the system.

Here are some suggestions to break away from the regular 9 to 5 lifestyle and discover something different.

  1. Build some cash reserves for emergencies. The bigger our cash reserve, the more thinking space we can have, the more independent we become from the regular day-to-day drudgery, the more possibilities we have to try new things.
  2. Start educating ourselves about investments. Sometimes we spend months planning our two week vacation, we read books, we do internet searches, we ask questions. But when it comes to our financial life, we blindly trust our future to someone else who doesn’t care about us, to someone else who is more concerned about his commission. We have to take responsibility and get a minimum of financial education.
  3. Create a radical plan to become financially independent in 10 years or less. This is quite possible.
  4. Start living life on our terms.

Most of the future articles in this blog will be focusing on how to increase our earning potential through investments.

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Why having bonds in your portfolio is dumb.

Issam. My college friend and real estate agent
Issam. My college friend and real estate agent

In most of the personal finance books I have read, the experts suggest a constant rebalancing of a portfolio of bonds and stocks. The idea is that as you grow older, you should have more bonds and fewer stocks.

I think that’s the dumbest idea I have ever read.

There are two main reasons why rebalancing is such a prevalent idea:

  1. Financial advisers need to cover their asses when the market goes down.
  2. People, in general, are more afraid to see their portfolio going down than happy when it goes up. The pain is bigger than the pleasure.

The objectives of the client

When people invest, their main purpose is to make money. When they go to a financial adviser and they tell the adviser: I want a low-risk investment, what they are really telling the adviser is: “I don’t want too much volatility.”

The risk element of 100% stock

A portfolio composed of 100% stocks is more volatile but it is NOT riskier. There has never been a 20 year time period in history in which the stock market has lost money.

What’s inside a portfolio

The long term difference between bonds and stocks is impressive.

Most mutual funds are composed of either stocks or bonds. Few are a combination of stocks and funds and cash.

I believe that hold ding cash in a mutual fund is a dumb idea. Many of these mutual fund charge fees in excess of 2.5%.

No too long ago I saw a mutual fund with these holdings: Stocks 60%, Bonds 35%, Cash 15%. The client (my friend ) was paying the mutual fund manager a2.5% fee for holding his savings in cash. My friend can put his money in his refrigerator for free. Please read your prospectus and make sure you are not paying management fees to have cash in your mutual fund.

What is Rebalancing?

Some experts, including many who I respect and admire, suggest that you should always have a certain percentage of bonds and stocks in your portfolio. The purpose of this rebalancing is to diminish volatility and risk.

For example, John Bogle, the founder of Vanguard Mutual Funds ( The biggest mutual fund company in the US) recommends having your age in bonds. This means that if your are 30 years old, 30% of your portfolio should be in bonds. If you are 60 years old, 60% of your portfolio should be in bonds.

Why rebalancing doesn’t make sense

Let’s imagine that you are 65 years old. You arrived at your retirement age. Your $1 million portfolio is now 65% bonds and 35% stocks (as suggested by John Bogle). Let’s assume that the return on bonds is 2% and that the return on stocks is 8%. You will get $13,000 from your bonds and $28,000 from your stocks, for a total of $41,000. The following year, you are 66% in bonds and 34% in stocks. You will get less money from your portfolio while your expenses will be going up due to inflation. With this portfolio, your biggest risk is not market volatility, your biggest risk is to outlive your money.

What the other experts are saying

Warren Buffett has instructed his trustee to invest the money left to his wife this way: 90% in stocks (he specifies low-cost S&P 500 index) and 10% short-term government bonds. Assuming a $1 million dollar portfolio his wife will get $1,000 from  the government bonds and $72,000 from stocks for a total of $73,000. Warren Buffett is 85 years old; assuming that his wife is a similar age, his action totally contradicts John Bogle’s advice.

Ray Dalio: In his book “Money, Master The Game,” Tony Robbins, with a lot of fanfare, disclosed Ray Dalio’s magical “All Seasons” portfolio. I almost puked when I saw it. Here it is: 30% stocks, 55% bonds, and 15% gold and other commodities. If we assume to have $1 million portfolio and that gold and commodities will increase in value at the rate of inflation, this would be our average return: $38,000. To top it all off, he claimed that this portfolio outperformed a 100% stock portfolio. It’s funny, in a 650-page book, Tony Robbins didn’t have space for a footnote explaining how he got his numbers. In short, his numbers don’t make sense.

How I manage my portfolio

My portfolio is 100% stocks: 33% Canadian, 33% US., and 34% International and Emerging Markets.

How do I deal with the volatility? By playing a mental game. I think that the market will give me 8% return in the long run, but I make my retirement calculations based on a 6% rate of return. When I make more than 6%, I don’t consider that money as mine, I consider it as cushion money for when the market goes down.

For example, let’s consider a $10,000 investment and a 10 year time period. At 8% the return is $21,600. At 6% the return is $17,900. The difference is $3,700. I consider that $3,700 my cushion, money that is not mine. If my return drops from $21,600 to $17,900 I would not be disappointed. As the years pass, the margin of safety will grow bigger.

Hypothetical examples for the average person

In Canada, the contribution limit for the Tax-Free Savings Account (TFSA) is $5, 500. Let’s assume yearly contributions for the next 40 years at 8%, 6% and 4%. We will consider these to be High volatility, Moderate volatility, and Low volatility portfolios. For such a long term period we assume the risk to be the same for all portfolios. Here are the results: At 8% (100% stocks) we get $1,642,000. At 6% ( Let’s say 60% stocks, 40% bonds) we get $907,800. And at 4% (Let’s say 40% stocks and 60% bonds) we get $550,000. Wow, what a big price we are paying for having low volatility. More than a $1 million difference in returns.

The end decision is up to you, but you know my opinion. Having bonds in your portfolio is dumb and having cash in a mutual fund is dumber