My Own Advisor

Thanks to Mr. CBB’s email question recently today’s post will retrace my investing journey, how I became a do-it-yourself (DIY) investor.  The purpose of today’s post is to shed some light on my investment journey to date and build upon this article for future blogposts including how I’m managing my retirement portfolio today.

Image courtesy of The Star.

In the beginning…

I became interested in personal finance, probably in my early 20s.  Reading The Wealthy Barber cover to cover a few times over was definitely the trigger for me.  Dave Chilton’s tale was extremely well-written and inspiring.  I figured if Roy the Barber could amass that much wealth then maybe I could too.

Early focus on investing products

In my early 20s, I invested solely in mutual funds at one of Canada’s big-5 banks and did so for many years thereafter.   With my meagre RRSP contributions set up every month as a young 20-something living in Toronto, I contributed to each mutual fund held for many years and did little to question the composition of these funds, their performance or their management fees.  Like some of you I suspect, I got my RRSP statements in the mail and immediately filed them under “G” after I noticed the numbers seemed to climbing every month.  Everything was fine and good.  It certainly was good times for many investors in the late-90s.

Boom, bust and now fed up

With the tech boom, my returns were rather stellar but on the other side of the curve when Nortel and other companies came crashing down, so did part of my portfolio.  I incurred some hefty losses.  I wondered how this could be avoided?  What had I done wrong?  Maybe most importantly, why the hell did someone at the bank not call me and help me?  Money is an emotional subject and to put it bluntly after the tech-bust, I got fed up with the performance of my investments and needed some answers.  In retrospect, I’m glad my emotions took over…

I read and read and read some more

Annoyed and frustrated with my investment portfolio and the bank’s products, I bought books and started to read.  And then I read some more, and some more.  What I found out was not really that surprising but enough facts that gave me a kick-in-the ass to change my ways:

• Active money management fees will steal from your portfolio returns – for every $25,000 invested in a mutual fund that charges around 2% in fees, you’re kissing $500 per year goodbye.   That might not sound like much, but keep paying that 2% every year for another 9 years.  That fund will cost you $6,400 to buy and hold.
• If your money is being managed by someone else are you really going to follow it closely enough?  Some might but I’m not one of those people.  I’ve learned nobody cares about my financial future more than me.
• Contrary to what some financial institutions may advertise I am not richer than I think and I need think for myself in order to become wealthy.  This means taking ownership over my financial plan and clearly understanding the products or securities I am investing in and the risks associated with them.  This also means setting some goals and working towards them.  They include simple things like having some financial discipline to delay gratification, consistently pay down mortgage debt and avoid making big purchases unless I have the money to do so.  In short, there is only so much money to go around I can’t do everything I want with it as much as I’d like to.

The game plan

I’m far from a great investor and I don’t rub my pennies together.  I am however becoming more picky where and when I spend my money and definitely more disciplined regarding how I invest it.  I am much more competent on many financial matters and probably most importantly, I’m on a financial journey that I’m committed to.  You can read more about that journey here and here although many more blogposts in the future will cover that.  DIY investing does take some work but like most things in life, the more you learn the more you know and the more you know the better your chances to succeed will become.

I hope today’s post inspired you to take a firm grasp of your financial future and make a pact with yourself to learn a bit more every day so you can enjoy some of the financial freedoms this tool called money may provide.  Thanks to Mr. CBB for your email question.  Stay tuned to my blog for more posts about my investment journey and strategy.  In the meantime, if you have any questions all you need to do is ask.

Thanks for reading and sharing this article.

A few weeks ago on my blog after Three Steps to Plan Your Portfolio was published, there was a lively discussion about risk after I suggested investors should consider answering the following questions before diving into product selection for their portfolios:

• What is my current risk tolerance for investing?  Risk, what are you talking about?

Some comments ensued and some folks suggested risk and volatility are one of the same.

I beg to differ.

Let’s take a look at some classical definitions:

(General) Risk – possibility of loss; something that creates or suggests a hazard; the chance of loss, the chance that an investment (as a stock or commodity) will lose value.

Definitions courtesy of this site.

(Financial) Risk – chance an investment’s actual return will be different than expected; possibility losing some or all of the original investment.

“A fundamental idea in finance is the relationship between risk and return. The greater the amount of risk that an investor is willing to take on, the greater the potential return. The reason for this is that investors need to be compensated for taking on additional risk.”

Definitions courtesy of this site.

Financial risk usually manifests itself when assets are poorly balanced or not diversified.  In the insurance business, you avoid risk by insuring against a catastrophic loss.  For example, if you want to take on more financial risk that usually means more stocks and fewer bonds in your portfolio.  Boring bonds provide safety and thus promise less growth.  You can read an article about that on Canadian Couch Potato.  Diversification is also a hedge against risk.  Too few securities, in too few industries will increase your risk.  You can lower your risks by investing in broad market Exchange Traded Funds (ETFs) across many markets.  When it comes to insurance, many people choose to buy it to transfer the risk to someone else (for a fee).

Volatility – a statistical measure of the dispersion of returns for a given security or market index; price fluctuations over a defined time period.

“In other words, volatility refers to the amount of uncertainty or risk about the size of changes in a security’s value. A higher volatility means that a security’s value can potentially be spread out over a larger range of values. This means that the price of the security can change dramatically over a short time period in either direction. A lower volatility means that a security’s value does not fluctuate dramatically, but changes in value at a steady pace over a period of time.”

Definition courtesy of this site.

As you can see, the terms risk and volatility are not interchangeable although they are related.

What is an investor to do, focus on risk or volatility, both?

I’ll speak for myself.  As a long-term investor I’m not worried about volatility in my portfolio since price fluctuations will always occur.  If your investment plan stretches 20 or 30 years, I’d argue you shouldn’t care about volatility either.  Mr. Market will always try and trick you (or I) into selling or buying something at the wrong time.

Instead of worrying about volatility I will focus my energy on reducing risk across my portfolio through primarily good diversification and asset allocation.  I will also reduce risk by owning life insurance to offset the debt and liabilities I have.

Thinking and acting long-term, I recall the KISS portfolio from the Elements of Investing.  The authors of this book claim if you follow the KISS portfolio (Keep It Simple, Sweetheart) almost every investor will be successful.  Here are a few KISS elements:

• Save early and regularly, for as long as possible.
• Set aside a cash reserve for when “stuff happens”.
• Make sure you are covered by insurance, especially life insurance.
• Diversification will reduce your anxiety.
• Ignore the short-term sound and fury of Mr. Market; the biggest mistakes investors make are letting emotions dominate.
• Use low-cost index funds.
• Focus on major investment categories; avoid “exotics”; most investors should focus on owning common stocks, bonds and real estate (via home ownership).

What are your thoughts when it comes to risk and volatility?  Do you focus on risk?  Do you care about volatility?

Do you have other definitions of risk or volatility to share?

Thanks to Glenn Cooke for the blogpost idea.

Thanks for reading and sharing this article.

In the My Own Advisor inbox recently, I got an email from a reader wondering the following:

“Hi,

I would like to invest in dividend paying stocks.  Do you know where I can find a good list of companies that have been paying stocks for 20 years or more?  I really don’t know where to start other than looking for companies individually.”

Thanks for your question and you’re luck.  I’ve selected a list of U.S. and Canadian companies that have been paying dividends for generations.  Here they are:

U.S. Stocks

These U.S. companies have been paying dividends for well over 100 years.

• Stanley Works (SWK:US) – paid dividends since 1877.
• Exxon Mobil (XOM:US) – paid dividends since 1882.
• Consolidated Edision (ED:US) – paid dividends since 1885, increased for 38 years.
• Proctor & Gamble (PG:US) – paid dividends since 1890.
• Coca-Cola (KO:US) – paid dividends since 1893 and a quarterly dividend since 1920.
• Colgate-Palmolive (CL:US) – paid dividends since 1895.
• Dupont (DD:US) – paid dividends since 1904.

If you want the oldest of old, you’ll have to buy York Water.  They made history last year when it comes to dividends; they are the oldest investor owned utility in the U.S.

Other selected U.S. companies that have paid increasing dividends for decades include:

• Johnson & Johnson (JNJ:US)
• Diebold (DBD:US)
• Emerson Electric (EMR:US)
• 3M (MMM:US)
• Target (TGT:US)
• Kimberly Clark (KMB:US)
• Pepsi (PEP:US)
• McDonald’s (MCD:US)
• Clorox (CLX:US)
• Walmart (WMT:US)
• Becton Dickinson (BDX:US)

The list is longer than this.  You can find a list of U.S. dividend aristocrats here.  The S&P 500 Dividend Aristocrats index measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years.

Canadian Stocks

These Canadian companies have been paying dividends for well over 100 years.

• Bank of Montreal (BMO) – paid dividends since 1829.
• Bank of Nova Scotia (BNS) – paid dividends since 1832.
• TD (TD) – paid dividends since 1857.
• CIBC (CM) – paid dividends since 1868.
• Royal Bank (RY) – paid dividends since 1870.

Other selected Canadian companies that have paid dividends for decades include:

• Enbridge (ENB)
• Fortis (FTS)
• Bell Canada Enterprises (BCE)

As you can see, dividend histories are not as established for many Canadian stocks when compared to U.S. stocks.

You can find a list of Canadian dividend aristocrats here.  Alternatively, you can visit the iShares website.  Look up CDZ.  CDZ is the iShares S&P/TSX Canadian Dividend Aristocrats Index Fund aims to track the S&P/TSX Canadian Dividend Aristocrats Index, less fees and expenses.  For holdings to quality, securities must: “a) be common stock or income trust listed on the TSX and in the S&P Canada Broad Market Index (BMI); b) have increased ordinary cash dividends every year for 5 years, but can maintain the same dividend for a maximum of 2 consecutive years within that 5-year period; c) have a minimum C$ 300 million float-adjusted market cap.”

I hope this information helped, providing you with a starting point for further research.

Got a question for My Own Advisor?   Ask away in a comment or contact me.

Thanks for reading and sharing this article.

In the My Own Advisor mailbox recently I got an email from an eager young investor.  Thanks to Dylan for allowing me to post these questions.

“Hey Mark

I’m 21 years old and looking to start investing.  I have a similar goal to yours when it comes to passive income.  I am just wondering what I should put my money into.  I would also like to know how much of an investment will I need to start off.  What is a good amount?  I currently just put money into a RRSP and TFSA.  I am a beginner, where should I start?”

Well Dylan, for you and others, before I go any further I must disclose I’m not a financial expert.  My Own Advisor is not responsible for any investment decisions you make and before you make any important investment decision, you should consider consulting a professional.  That disclaimer provided, I know what I would do if I was 21 again so I’ll tackle your questions that way when it comes to what to invest in as a 21-year-old or not investing at all just yet…

1. I would pay off any credit card debt I have.  Snowballing debt is another great idea but I’m a fan of paying down high interest debt first, which usually means focusing on credit cards.  When I was 21, I was in my third-year of university and I didn’t use a credit card very much; for books, big ticket items and train tickets home to get my laundry done, that was about it.  It was cash and debit at the bar almost every time.

After credit cards are paid off every month then my 21-year-old self would…

2. Focus on paying off my student loan.  After my degree, I finished a year of college which included a co-op placement at what would become my first employer in Toronto. I needed student loans to get me through college, I recall about $7,000 in total.  After I started my first full-time job in the industry I had trained for, my focus was on killing that debt.  I took me just over 2 years after I started my job but that loan was finished when I was 25.

After the student loan wwere paid off my 21-year-old self would…

3. Focus on paying off my car.  I’m not sure what Dylan has or doesn’t have for a car payment but some, ahem 15+ years ago I remember it would have sucked to have a car payment when I lived in Toronto as a young 20-something.  Insurance was costly enough let alone a car payment.  I owned an old Plymouth coupe (does that brand still exist?) and after the rent was paid, bought some groceries, paid that car insurance, put gas in the coupe and after some spending money was set aside for a few wild parties, I didn’t have much cash left over.  Not having a car payment though allowed me to have some great years enjoying Toronto which allowed me to start working on priority # 4 in my mid-20s…

4. Start investing in my RRSP.  I opened my RRSP account when I was 24.  I didn’t contribute much early on but after the credit cards were under control and the loan was nearly dead, I started contributing $50 per month to this account.  Based on the big-bank advice I received at the time I put my money into two big bank mutual funds – a Canadian bond fund and a Canadian equity fund.  Since opening this account, I haven’t stopped contributing to my RRSP thanks to some great early advice although some contribution years were leaner than others.

Many years later Dylan, I’m still investing, in the RRSP and other accounts.  Thanks to the TFSA, I now have another retirement tool at my disposal.  I also have a fat mortgage, that’s another big priority.  At our current payment rate, if things go well, this mortgage will be non-existent in 9 more years.  It’s our highest interest debt, so in a way, history has repeated itself – it’s a big part of what I focus on today.

Dylan, if you’re lucky enough to have NO credit card debt, NO student loan debt or ANY car payment at 21, I think you’ve done very well and you’re ahead of the game as they say.  I certainly wasn’t in your position at 21.  As a young 20-something the world of investing is an open door to you, to pay yourself first in your TFSA or RRSP account or create a savings account.  I won’t revisit the debate of picking one account over the others but ANY contributions to these accounts are excellent in my opinion.  If you can afford to pay yourself first today, do it and keep doing it.  Whatever account you choose to contribute to, at 21 you have the luxury of taking your time, reading some great personal finance and investing books and establishing your financial plan long before most.

Thanks for your question and good luck with your plans.  See you around my blog.

Do you have a question for My Own Advisor?  If so, send it along here or comment below.

Thanks for reading and sharing this article.

A little while ago Matt wrote me asking:

“I read your About section and thought I’d send you this quick ‘hi’.  Do you have any advice where I should start reading on your site?  Thanks for reading this quick email and double-thanks for putting together your site!”

First of all, thanks Matt for reading My Own Advisor and reaching out to find out more.  No doubt after a couple of years of blogging, you end up with a host of online material.

Where should you start reading on my site? 

That depends on what you are looking for really.

Based on your question to me and what I can infer, I suspect you’re looking to find out more information about my savings or investment approach or both.  If that is true Matt, I suggest you keep reading below.

On the topic of debt

I don’t like it.  It is largely a necessary evil for homes and cars but for me that’s where it ends.  I don’t currently have nor do I ever want to have any credit card debt.  You can read more here about my view on debt.

On the topic of saving

You can’t invest what you don’t save, at least I can’t.  This is why my wife and I pay ourselves first, like a bill payment to Enbridge, Rogers, Hydro One or any other company we consume services from.   Bill payments are made to Us Inc.  You can read more here about what we do and why we do it.  I think regardless of your salary or where you are in life, contribute what you can and stick to it month after month after month.  Every little bit counts and it will add up over time.

On the topic of emergency funds

I have no idea what the future holds and if you do kudos to you, please give me some stock market predictions!  Since I have no such gift I prefer to plan for the unplanned as conservative and geeky as that sounds.  This means I have an emergency fund that will get me through some rough patches for a little while if and when they occur.  My emergency fund value might be higher or lower than some but I encourage you to determine your own comfort level and work towards that.  This is where your savings should start, before investing.

On the topic of investing

Where do I begin Matt?  Maybe I should tell you where I started with my investing journey…

I used to be an investor in big bank mutual funds.  In my early 20s, there was no animal like a tax-free savings account (TFSA).  In my early 20s, the only investment account I had was a registered retirement savings plan (RRSP).  It wasn’t a self-directed account either, meaning, based on the account I had at the time, I could only own the bank products from the bank I was affiliated with.  I had two mutual funds; 1 bond fund and 1 equity fund – not very diversified but “a good start”.  I kept these mutual funds in my RRSP until a few years ago.  That’s because a few years ago I got smarter and I decided to leave the mutual fund industry and I think you’ll learn from what I did here.

What do I invest in now?  I invest in broad-market Exchange Traded Funds (ETFs) and dividend paying stocks.  I have a few investing accounts, all of them self-directed.  These accounts provide me with the flexibility to own what I want when I want.

In closing, I’ve got a bunch of other articles I could share with you Matt but I hope these ones above give you the insight you are looking for.  If not, fire me another email and I’ll write another blogpost.

Do you have a question for My Own Advisor?  Contact me via my About & Contact page.

Thanks for reading and sharing this article.