Saving for retirement

Investing rules and tips

Living within your means...

● Spend Responsibility: buy a used vehicle, buy a house below the amount the bank approves and limit frivolous expenses.

● Tackle your debt: prioritize paying off high-interest loans over saving.○ Ensure you continue to pay down lower interest loans while saving as well.

● Create a budget: journal your expenses for three months. ○ Compare with your net income and decide what you can afford to pay.

● Start early: compound interest is your greatest ally. ○ Make regular contributions to your savings through automatic deductions.

What not to do...

● Avoid high risk investments!○ While the potential for high returns can be alluring, you are more likely to lose money!

● Avoid high commissions and management fees!○ These fees can cost you thousands of dollars in the long-term.

● Do not focus on past performance..○ There are no guarantees in the stock market!

● Don’t buy investments based on the recommendations of sales people, the advice of friends/acquaintances or online discussions.○ Remember that many advisors are pressured to sell their employers products.

What to do...

● Choose diversified, medium risk investments:○ A combination of stocks and bonds/GICs are ideal for long-term growth.○ Low MER mutual funds and ETFs are good choices for most people.

● Shop around:○ Stocks: choose a discount brokerage for stocks such as Questrade rather than a bank!○ Mutual funds: avoid the funds the major banks are promoting! <1% MER is ideal.

● Do your own research:○ Read personal finance books. The wealthy barber and the millionaire teacher are great

choices.○ Read columns in reputable papers such as the Globe and Mail.○ Other online resources can be useful but be aware that advice will vary in quality.○ https://www.reddit.com/r/PersonalFinanceCanada/ and http://canadiancouchpotato.com/

The problem with mutual funds..

Mutual funds are popular as they provide the diversification and active management of your money! Requires very little time and effort.

● However, academic evidence shows that statistically, the vast majority of mutual funds will lose to indexes over the long term. ○ Some years a MF will outperform the market, others they underperform.○ After management fees (MER most common), few will be worth it

Ask if your advisor if most mutual funds beat the total stock market index in 2008? Did your advisor correctly pick the top performing funds for his portfolio?

The problem with mutual funds:

Survivorship Bias:

While some MFs may outperform the market for 5, 10 or even 15 years, they tend to “revert to mean” or even crash spectacularly in the following decades.

44 Wall Street was the topped ranked mutual fund of the 1970s outperforming the market for 11 years before losing 73% of it value in the next decade.

○ With its brand name in the mud it was merged into another mutual fund. ○ This skews the performance statistics used when selling mutual funds.

Consider choosing an index fund or ETF!

● Index Mutual funds and Equity Trading Funds (ETFs) track the market.○ An index essentially is a single product with thousands of stocks in it.○ These stocks represents the US or Canadian markets and are passively managed○ Think of an index of a book!

● Index funds have low fees and high returns!○ Highest statistical chance of success over a 30 year period○ Fees usually well below 1% helps your savings grow,

● Build a diversified portfolio with three indexes:○ Canadian Stock Index○ International Stock Index○ Government bond market index

●

Index Strategy

● Avoid self-destructive behaviours:○ Many investors panic and sell their funds when they have a bad run or rush to a fund when it

is doing well.○ Your goal is to buy low and sell high.

● Rebalance your portfolio at least once a year:○ When stocks are performing well purchase more bond indexes!○ When the stock markets are low, sell some bonds to take advantage of this sale!

● Move more of your assets into bonds as you age:○ Rule of Thumb: Bond allocation that's roughly equivalent to your age○ Ex. At 30 you will have 70% stocks, 30% bonds○ Ex. At 60 you will have 40% stocks, 60% bonds