Monthly Archives: November 2015

Which investments do you own, and why?

I wish this was my office
I wish this was my office

More than once I have met friends who don’t know which assets they have in their portfolio. Also, they have no idea how the portfolio is performing. They don’t know if they are making money or if they are losing money. It seems that they don’t even care.

Most people go to their financial adviser and simply do what the adviser tells them, blindly, without knowing why, without knowing what the strategy is? What are they trying to achieve? Do they own regular mutual funds? Stocks? ETFs? Bonds? A combination of all of those? Who knows? Who cares?

A friend of mine chose an adviser because he was invited to a restaurant.  My friend ate a delicious steak, drank a glass of wine and listened to a persuasive presentation. In addition, the owner of the firm was Jewish. My friend has the impression that because many Jews are financially successful, he would become successful by association. I took a look at his portfolio and I saw mutual funds with high expense ratios. Maybe the reason why this owner is financially successful is because he charges high management fees to his clients, which means that the clients will be less successful. Maybe my friend should read:  Where Are the Customers’ Yachts by  Fred Schwed.

Another friend had life insurance in her portfolio. But my friend is single with no dependents. When I asked her why she had life insurance, she told me that her financial adviser suggested it but she didn’t remember the reason. Maybe a high commission for the adviser was part of the reason?

Many people, on the premise of diversification, buy similar funds run by different companies. For example, a big-company-U.S.-fund is practically the same whether it is managed by Vanguard or Fidelity. They are buying two similar products with different brand names. That is not diversification.

Many people have investments which don’t fit their objectives.  I have seen it a few times; Investors in their early 30s owning a high percentage of bonds, and investors in their 60s owning only stocks. But the absolute worst are the investors who have 100% of their portfolio in cash because they don’t know what to do with their money.

Finally, it is extremely important to know if you are making any money. Investors with many assets in their portfolio could have some assets going up in value and others going down. Also, they could have many deposits and withdrawals during the year. It could become complicated to figure out what the actual return is, but the only way to find out if you are getting closer to your objective is by measuring your returns. There are many software which would help you keep track of your returns.

My advice to you:

  • Make a list of all your investments.
  • Figure out what your objectives are. Retirement, vacation, downpayment for a house, education, etc.
  • Figure out what your risk tolerance is and keep the assets which are in line with your risk tolerance and objectives.
  • Divide your investment in the most tax efficient manner. Some investments belong in your taxable account and some belong in your nontaxable accounts.
  • Measure your progress at least once per year, and readjust your portfolio to make sure it still meets your needs.

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How much are you paying for financial advice?

meMost Canadians have their first contact with a financial adviser when they visit their local bank. The adviser asks them to fill out a questionnaire to determine their risk tolerance and then the adviser helps them choose one of the bank’s many investment products.

Most of the time the client leaves under the impression that this service is completely free.  Many consumers don’t know that there is an array of fees which come with the purchase of those investment products.

Most bank advisers get paid either with a base salary, base salary plus commission, or base salary plus a bonus. But make no mistake, at the end of the day, the bank adviser is getting paid with your money. For example, if you purchase a mutual fund, you will pay over 2% in expenses.

How are other advisers getting paid?

Many advisers work at investment firms and earn their living by selling mutual funds and life insurance. The first product the advisers try to sell is called Load Funds. These are funds which come with an upfront commission of about 5%. This means that your fund has to go up 5% in order for you to break even.

Most of the funds sold by a commission adviser also have a trailer fee. That means that the adviser gets a yearly kickback from the mutual fund company of about 1% for making sure you stay invested. Many advisers concentrate on accumulating high volume. At 1% they are getting paid about $10,000 for every million dollars.

The thing that bothers me is that the customer never gets to see this behind the scenes compensation. Let’s say that the expense ratio of the mutual fund is about 2%. If the fund had a gain of 10%, the investor would only see a gain of 8%. I am guessing that if the investor saw the gross gain, minus the expense ratio, they would be upset about the real cost of their fund and they would seek less expensive alternatives.

Another thing that bothers me, is that the adviser gets paid whether the portfolio does well or not. If the portfolio loses 5%, one still pays over 2% in expenses. It is akin to the car mechanic getting paid whether he fixes a car or not.

Advisory fee. Some advisers don’t get paid commission, they get paid for managing your account. The typical rate for this set up is about 1%. If you have a big account, you can negotiate a lower rate, If your account is too small you will probably be refused. Here again, the main incentive of the adviser it to manage as much money as possible. Here again, if they lose money on your behalf, they will still charge you.

Hourly fee. In my opinion, this is the best service you could get for your money. You could get unbiased advice as to the best stocks, bonds, ETFs, or mutual funds to buy. You could get advice on how to get out of debt, how to give to charity, how to become more tax efficient etc. The only drawback is that when the client gets to see exactly how much they are paying for advice they might try to save money by seeking financial advice less frequently. At the end, in order to save money, the client might end up missing out on great investments or saving opportunities.

My advice to the reader. No one will ever care more about your money than you. Take your financial future into your own hands by following the following steps:

  1. Hire a fee-only adviser, by the hour, not on a retainer.
  2. Tell the adviser to help you put together a portfolio which is in line with your goals and your risk tolerance.
  3. Open a brokerage account and make your own purchase of stocks, bond, mutual funds, ETFs.
  4. Make another appointment at the end of a 12 month period to make sure your portfolio is still aligned with your risk tolerance and your objective.

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Book review: Seven Years to Seven Figures by Michael Masterson

Seven Years to Seven FiguresMr. Michael Masterson starts the book by telling us his financial story, he explained how he became wealthy and why he would like to share his knowledge with the rest of humanity. This part gets us psyched up to read the rest of the book.

The second part is the meat of the book. It is composed of eight stories about how other people have become millionaires in less than seven years.

I found this part inspirational. When you read how others have become wealthy, something in the back of your head starts telling you, “Hey, maybe you can become wealthy too.” Weaved within each story were commentaries on how we, the readers, can become wealthy as well.

Hanging out with my daughter Andrea
Hanging out with my daughter Andrea

I found the book lacked structure. After reading one story after the other, it is hard to see a strategy, a step by step plan which would guide us into wealth. It is almost like taking the the life story of Bill Gates or Warren Buffet and saying “See, you can do that too.” In addition, in a subtle way, Mr. Masterson pushed his own copywrite program, publications, courses and seminars.

I don’t regret reading the book, but I would not go around recommending it either. On a scale of 1 to 10, I will give it a 5.5

Note: If you are an author and you would like to have your book reviewed, send me a message.

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Beware of deadbeat boyfriends

Hanging out with my daughter
Hanging out with my daughter

As a money coach I listen to a lot of different financial problems. Today I want to share some stories about deadbeat boyfriends.

Cuba: Someone I know used to travel to Cuba regularly. Eventually she met a  man during one of her vacations. They fell in love and decided to get married. After the marriage she did all the paperwork to bring her husband to Canada. Shortly after he became a resident he was no longer in love with her.

Dominican Republic: A Canadian woman in her 50s met a man from the Dominican Republic in his 30s during her vacation. All her friends told her that the relationship was not real, that he was using her, but she believed what she wanted to believe. She used to give him and his family money and gifts, and the plan was to bring him to Canada so that they could live together. Her Spanish was getting better and one day she overheard him explaining to a friend that he didn’t love her, that he was just using her to become a Canadian resident.

Toastmasters: This was a speech that I heard at our McGill Toastmasters club: A woman meets a handsome man, they start a relationship, he asks her for a $3,000 loan, shortly thereafter they break up and he never pays her back.

My friend: She met a handsome young man. Within a few weeks he asks her for a loan, she lends him the money. He asks her for another loan, she agrees and shortly thereafter she discovers that he has similar relationships with two other women. They break up and she still doesn’t have her money back.

The overseas lover: I hate to stereotype or to throw blanket statements but I would like to offer a word of caution. When there is a great disparity between ages and economic class, be aware that there might be a motive for the relationship other than love. As Canadians, we have to keep this in mind when we go to places like Cuba or Dominican Republic where there is a lot poverty. We have to question whether the other person is truly romantically involved, or just looking for some money or a passport out of the country.

The local boyfriend who asks you for money: I have nothing against people in a relationship lending money to each other for different reasons, but when the request for a loan is early in the relationship, this is a red flag.

What to do when your boyfriend asks you for money

If you don’t have it, you don’t have it

If you are already in a difficult financial situation, where you are barely covering your expenses, or if you are already in debt, this is the end of the discussion. You cannot give or lend what you don’t have, and certainly, you should never get deeper into debt in order to lend money to someone else.

Have the credit conversation

When a new boyfriend asks you for money, this means that the bank or the credit card company is not willing to lend him the money. If the bank won’t lend him the money there must be a reason for this. He either has no credit or already has bad credit history. Try to find out why the bank or the credit card company will not lend him the money.

Why doesn’t he have the money?

If your boyfriend is living beyond his means, don’t lend him the money. There could be a reason he doesn’t have money. Maybe he lost his job or maybe he had a series of bad luck incidents (such as sickness or an accident) which have put him in a momentarily bad position. But if being broke is his lifestyle, don’t let him take you down with him.

What is the money for?

Many times the boyfriend asks for money for a new venture, a once in a life opportunity. Be skeptical.

Size matters

If your boyfriend asks you for a small amount, such as $20 or even $50, just give it as a gift. Make sure this is a one time event and not a habit. If the amount is bigger than $1,000 make sure you write a contract.

Put it in writing

If your boyfriend is asking you for a large amount, $1,000 or more, put it in writing. Write a contract stating the amount, the interest rate and the due date.

Listen to your inner voice

If deep inside you think that your boyfriend will not pay you back, listen to that little voice. If your boyfriend breaks up with you because you didn’t lend him the money, consider yourself lucky. If your relationship fails after lending the money, you will be without a boyfriend and without the money.

Talk it over with a friend or with your financial coach

It is easy to get wrapped up in one’s emotions. If you share your situation with a friend or with your money coach, they will be able to see your situation from a different perspective and can better help you decide whether or not lending the money is the right thing to do or not.

Do you want to share?

If you have a personal anecdote to share, please send me a message. I will put it in the blog under a different name. Thank you.

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Book review: The Automatic Millionaire by David Bach

The Automatic Millionaire by David BachWe have all been told that if we save a little bit of money every month, over the course of many years, we can all become millionaires. The idea is simple to understand but difficult to implement.

Pay yourself first

The main concept of the book is that you should pay yourself first. Usually the government takes the first bite out of your paycheck. Then most people pay their debts and and finally, if there is any money left, they deposit it in their savings account. In actuality, people are paying themselves last.

To pay yourself first, you have to open a registered retirement account (RRSP) and have automatic contributions going directly from your employer to your registered account. That way you pay yourself first by putting money into your registered account before the government or any other debtor touches it.

The idea is that the whole process should be automatized. Once the process is automatized you are on your way to becoming a millionaire.

The latte factor

small airplane,
Going flying with friends

Mr. Bach has popularized the concept of “the latte factor.”  The latte factor is the idea that if we cut off minor daily expenses, like a latte and muffin in the morning, the money we save could add up to a lot. Of course, a latte is just a symbol; it could be a pack of cigarettes, a six pack of beer, fast food, video games, etc. We all have a “latte factor” which, if we control, we could save a lot of money.

The book is a great starting point for people who are interested in personal finance, but it has a few shortcomings.

  • The book is centered 100% on saving money. Saving money is nice, but making money is even better. There is not one single reference to how to increase one’s income.
  • As for saving money, Mr. Bach assumes a 10% rate of return on one’s savings. Maybe 10 was possible at the time he wrote the book, but it is difficult to imagine a 10% rate of return at our present time.
  • Mr. Bach and many other personal finance authors suggest saving 10% of one’s salary, and this is a great starting point. But how about the possibility of saving 20%, 30%, 40% or even 50% of one’s salary? Then we can stop working for the man much sooner and we can enjoy our money while we are still young, not when we are 65 years old. Mr. Money Mustache retired in his 30s by saving 50% of his income.

There are some other points with which I disagree:

  • Mr. Bach insists that paying down the mortgage be a financial priority. I would say, maybe. If your mortgage rate is 3% and your return in the stock market is about 6%-8%, I would prefer that you take your time paying the mortgage and invest more money in the stock market.
  • Mr. Bach has his own formula to figure out which credit card to pay first. In my head, the only formula which makes sense is to pay the credit card with the highest interest rate first and then the others.

Overall, the book is easy to read and entertaining. I am quite confident that if everyone put Mr. Bach’s principles to work most of them will become millionaires.

Note: If you are an author and you would like to have your book reviewed, send me a message.

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