scary investing for canadians

SCARY INVESTING*as according to Elliot

Thursday, August 11, 2011

MYTHS

Cash issafe

I’ll doublemy money

Investingis hard

I’ll lose allmy moneyInvesting

is risky What about Gold?

My retirement willwork out somehow

Investingmeans stocks


• Anyone who bought real-estate is Vancouver is an investor – they’ve bought an asset that can appreciate (or drop)• How can you invest money?• Buy assets (like real-estate)• Buy bonds or GICs* (income over a period of time)• even Guaranteed Investment Certificates are only as guaranteed as the issuer

• Buy shares of a company that pays dividends• Buy shares of a company that appreciate in value

• There is no such thing as a sure bets, but there are good bets (Vancouver real-estate, oil, banks)

MYTH:INVESTING IS STOCKS


MYTH: CASH IS BESTNot with inflation!

450

900

1,350

1,800

1991 2001 2011 2021

Your Cash Cost of living

A $1000 is always $1000, but it buys less

as time continues.In 2011, you need $1500 to buy the same as $1000

did in 1991* data from bank of canada


0

1,250

2,500

3,750

5,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11

TSX CompositeInflationGoldCash10 year Govt. Canada bond*

$1000 investment in 1991


• For 2011, the values are for August 10 (worst-case data), and don’t include TSX Dividend yields (2% annually)• The TSX Composite has done well (comprised of well

known Canadian companies: Cable companies, Banks, Communication, etc)• 10-year Canadian Savings Bonds in 1991 offered a 9%

yield. In 2001 a 5.8% yield. In 2011 a 1.4% yield. Right now they don’t even beat inflation.• Gold is an interesting investment – its value is based on

fear. It will keep increasing in price as long as fear is prevalent. (Which it has been for the last 10 years).• The best investment approach is a combination

ANALYSIS


WHATS THE TSX?• The Toronto Stock Exchange is a list of 1,500 Canadian

companies owned by the public•Within this Exchange, companies are grouped, like the TSX

60 and the TSX Composite. These are what you hear about in the news when they say the market has gone up or down.• The TSX 60 is a list of the largest 60 companies in Canada,

and include BMO, Bombardier, Potash, Royal Bank, Enbridge, Shoppers Drug Mart to name a few• The TSX Composite is a list of the largest 260 companies in

Canada, and represents a much broader cross-section of Canadian business.• You can find ETFs for the TSX 60 and TSX Composite; and

these are good to invest in if you are bullish about Canada


SHAREHOLDERS• As a shareholder of a company, you own part of the

company•Many companies like banks pay quarterly or annual

dividends. Basically they share their profits as a percentage with the shareholders. Dividends tend to range between 0.1% to 4% (the biggest banks)•Dividends are a good way to build compounding

growth, especially if use the dividends to buy more shares of the same company• You use products and services by these companies every

day, so by owning a part of a company – you get some of that money you spend back.


• The idea behind mutual funds and ETFs is that you are buying a grouping of companies, and therefore spreading your risk, instead of investing all your money in one company. • When you buy 1 share of a Mutual fund or ETF, you are buying a

portion of every company represented by that investment• Someone figured out that investing against the broader stock market

beat 90% of Mutual Funds, and the ETF (Exchange-traded-fund) was born. Most ETFs match an existing market index (like the TSX Composite)• The idea behind a mutual fund, is that there are experts picking stocks

and trying to beat the stock market for you. In reality 90% of them fail.• Mutual funds also take a higher commission than ETFs.

For example: if you make 5% on a mutual fund, 2.5% of that goes to the Mutual Fund company. If you make 5% on an ETF, 0.5% goes to the ETF company.

MUTUAL FUNDS & ETFS


• There’s all types• Sector ETFs: Energy (Oil, coal), Consumer Staples

(shampoo, toothpaste, soap), Consumer Luxuries, Tech (PCs, Smartphones), Utilities (Water, hydro), more...•Market ETFs: You can find ETFs by company size

(large, medium, small), by currency (USD, Cad, £, ...), by risk (blue chip, junk stocks), by geography (NA, Europe...)• Bonds ETFs: Canadian govt bonds, US Treasury govt

bonds, Corporate bonds, bonds for Greece and Italy, and bonds for emerging countries in the world. The differing factor is return vs risk. These are a good way to invest in bonds. But make sure you know the quality of the bond you buy.

ETFS


RETIREMENT PLANNING

• Simple to calculate:• what is your current age?• when do you want to retire?• how many years of retirement?• general rate of inflation• how much do you have saved now?• how much income do you want when you retire?• The earlier you’d like to retire, the more you need to save

If you think you’re too young to think about this now, you’re not, especially if you don’t have a pension


Annual RRSP contributionAnnual RRSP contribution $10,000Return on investmentsReturn on investments 7%Inflation 3%

Age Savings35 $50,000

36 $62,400

37 $75,296

38 $88,708

39 $102,656

40 $117,162

41 $132,249

42 $147,939

43 $164,256

44 $181,227

45 $198,876

46 $217,231

47 $236,320

48 $256,173

49 $276,820

50 $298,292

51 $320,624

52 $343,849

53 $368,003

54 $393,123

55 $419,248

56 $446,418

57 $474,675

58 $504,062

59 $534,624

60 $566,409

Annual Retirement income (60-80)Annual Retirement income (60-80) $28,320

Annual RRSP contributionAnnual RRSP contribution $12,000Return on investmentsReturn on investments 8%Inflation 3%

Age Savings35 $50,000

36 $65,100

37 $80,955

38 $97,603

39 $115,083

40 $133,437

41 $152,709

42 $172,944

43 $194,192

44 $216,501

45 $239,926

46 $264,522

47 $290,349

48 $317,466

49 $345,939

50 $375,836

51 $407,228

52 $440,190

53 $474,799

54 $511,139

55 $549,296

56 $589,361

57 $631,429

58 $675,600

59 $721,980

60 $770,679

Annual Retirement income (60-80)Annual Retirement income (60-80) $38,534


AGE VS RISK

0

25

50

75

100

20 30 40 50 60

Cash Bonds Stocks

Rational:

- keep low cash because of inflation- as you get older, your ability to absorb risk lowers and you have more invested- stocks provide the best chance of large growth over a period of time, so start early

What about Gold?


• Do think about retirement and invest as much as you can when you’re young to take advantage of growth and compounding• Maximize TFSA, then RRSP

• Don’t buy individual stocks unless you really understand the business model behind the company, or they are a sure bet. It’s akin to gambling.

• Don’t buy mutual funds – they only make banks rich

• Do buy ETFs – they spread out your risk• Do buy when the markets are down. Don’t buy when the market is halfway

through a rally and everything looks rosy – wait till it falls• Do look at the price chart to see if the investment you’re buying is on sale

(below its average price)

• If you speculate (look for quick wins) in the market; you might end up a lot poorer

• And try not to be swayed by your emotions

DOS & DON’TS


• So what can you invest in today?•With the market down 5-10% in the last 2 weeks, the TSX

Composite representing the largest 260 Canadian companies – is a fantastic buy. (Buy an ETF called XIC)• For a Bond ETF, I wouldn’t recommend any Canadian Govt

ones (due to their low yields), but a Corporate bond ETF like XCB will give you a 3-5% return annually.• If you’re willing to take on more riskier bonds, a ETF named

ELD focuses on Emerging Market bonds which offer yields of 5-7% annually, and is much less volatile than the general stock market.• I can’t give any recommendations for stock picks or gold;

they are just too risky.

TIPS


scary investing for canadians

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