Investing - nothing
fancy here, just simple, straightforward advice, written for the
intended benefit (hopefully) of nieces, nephews, former students, et al:
I don't think it is a coincidence that
for
most of my life I've considered one of the most important,
significant
and useful stories in the Bible to be the story of Joseph and
his time
serving the Pharoah, where he convinced the Egyptian ruler to
save his
grain for seven fat years, in order to have it during the seven
lean
years. During my lean younger years, I learned to be a creative saver, and able
to
enjoy life at an expense ratio that is well within my means,
even
while paying my own way through university, including several
extra
years
that had nothing to do with my eventual choice of career.
It
also allowed me to travel
extensively in my twenties and early thirties, between a variety
of
jobs.
When I began earning a
decent salary in my mid-thirties, I treated much of that as
excess to
my needs, and I
learned to invest the surplus. I know that many people,
perhaps
most, expand their lifestyle as their income improves - new
cars, fancy
wardrobe, a bigger house; I admit that I did a little of that,
but
always less than someone else might. Except for
travelling, my
savings program was of
paramount importance.
Once as a young man, when I was opining
insufferably, no doubt, someone said to me: "So, if you're so
smart,
how come you ain't rich?" That rocked me back a little,
and I
made a
secret promise that I'd figure out how to do that. The
first step
is to define what you consider as "rich". The word
"comfortable"
might be more appropriate in my case, because I'm actually
content with
less than most people I know. I also like the word
"independent",
with the freedom and insouciance that term implies. In my
case,
it is also defined by early retirement in spite of a late start
in my
longest and most "serious" career choice.
I didn't want to choose a
hard-scrabble corporate career, reaching for the high salary
brass ring
in order to make it happen; I wanted an idealistic and somewhat
artsy
career with fair compensation, and teaching was the one I fell
into,
and loved.
The
lesson
here
is
that
anyone
can
do
it
-
it
isn't
an
either/or
choice,
getting rich versus an honourable career.
Now, investing should be a
life-long process, but it's never too late to start; I began
"investing"
with my first teacher paycheque, in my mid-thirties (having used
up my
savings to go to teacher's college for a year - that's another
kind of
valid investment). Some investors start in their fifties,
or
later. The net result may be smaller if you start later,
but
it's still going to be positive compared to where you
started.
Saving toward financial independence began
right
away for Deb and me. We began with an inexpensive wedding:
I did
the
caligraphy invitations and decorated the cake; we prepped and
froze
hors d'ouvres in advance; friends decorated the church hall, and
my Dad
performed the ceremony. The ring was a pebble rather than
a
boulder, and the
honeymoon was simply a drive west to visit family. Once we got
home, I
taught piano on the side to make extra
income, then made over our basement and rented it out; Deb and I
scrimped and paid down our first mortgage to zero in ten years
flat. I quit smoking...made my own wine in the basement to avoid
buying
highly taxed government booze...bought second hand cars and
repaired
them in my driveway...I picked out second-hand work clothes when
I had
my
shop teaching position...Deb sewed...we cooked
and entertained at home to avoid restaurant prices, tax,
tipping...we
taped movies with the VCR and made our own popcorn instead of
going out
to the cinema. That sort of thing.
Some people might say that it was easier for
us
because we had no kids, but that's a red herring: there are
successful
investors who've retired quicker than I have, and written books
about
it, who brought up well-adjusted children as well, and taught
their own
children to become knowledgeable savers and investors in the
process -
an awareness which must be one of the greatest inheritances you
can
provide for a child. These days you
can benefit from websites that inform, inspire, and give great
tips on how to save money - and of course, the money saved
should be invested. It's a
mindset, more than anything else; you'll discover your own
clever
money-saving methods once you're "in the zone".
There's a debate about whether one ought to
pay down
a
mortgage before all else, or even whether one should own a
principal
residence at all - mathematically, you can argue successfully
that
renting is smarter than owning, although David Olive claims that
buying
is better than renting after six years in a home. Of
course, your
home debt should not overextend you: the traditional comfort
zone is
between three and four times your annual income. "Safe as
houses" is an
old refrain that's been refuted by the economy and the market
several
times in the last fifty years; timing is more important than
most young
people realize. Right now (fall of 2010; Canadian Centre
for
Policy Alternatives) we're being warned that current prices are
between
4.7 and 11.3 times average income, and there's talk of a bubble,
which
could "burst" as it did in the U.S., or could at least "correct"
by
about 10%.
However, if you do choose to own,
it makes a lot of sense to remove the risk of carrying a
mortgage by
paying it off as quickly as you can, with balloon payments -
after all,
what happens if you get caught in an interest rate
squeeze? Many
people have lost their homes and credit ratings by unlucky
timing. Some choose to drag out their mortgage and invest
excess
income in equities and other real estate, but you are creating
unnecessary risk exposure for yourself if you do that.
Sleeping
soundly at night is also worth something, after all.
Richard
Florida (Rotman School of Management) describes how the
"mobility trap"
works: you can sell most falling investments at a loss, but not
a house
- you are stuck in it because you've committed to paying the
mortgage;
during a recession, that keeps a lot of workers from moving to
places
where they have better prospects of work, which causes a drag on
the
recovery and, of course, anguish for the individual home-owners.
I got really serious about investing in
stocks when
I became anxious about the threat of government misappropriation
of
teacher pension funds. I spent twenty years building
my stock market portfolio,
tweaking it,
steering it through market downturns, and ultimately reaping the
rewards. It's actually been twenty-five years since my
first
stock
market purchase, in a small cap company which predictably tanked
in the
'87 crash, and never
recovered. I
learned to diversify, avoid "professional" advisors like the
plague
(the few that I knew made bad calls or no useful calls, took
hefty fees
and made bogus performance claims), sidestep most pitfalls and
profit
from market crashes; sometimes I still get stung, but I average
out
well ahead
and avoid risk with a portfolio that is still fairly aggressive
for my
age and stage in life, but also inflation hedged. There's a statistic that
85% of private investors lose money in the market, but that's a
meaningless statistic without defining the terms of analysis;
there are
more
useful aphorisms, such as "Time in the market is more important
than timing the market".
[Note: I do have a very close friend of many
decades who is a professional advisor, and who reminds me that
advisors
vary in quality as much as humans vary in character and
personality. He was quick to point out that I didn't need
his
help when I asked him about that some years ago, but it is also
true
that there will always be a need for responsible, caring advisors
to
help those with limited time, limited experience, and those of a
nervous disposition (who wouldn't be, in a market like we've had
for
the last few years!) You have to shop carefully for an
advisor
you can feel comfortable working with, but I'd happily recommend
my
friend for someone who is looking for that kind of help.]
I'd
happily
share my expertise with anyone who wants to learn to save and
invest,
but who is confused or a little scared to get into it - my motto
is the
same as Nike's: "Just do it!" Every ten dollars I've saved
and
invested pays me back a dollar a year for the rest of my life,
and I
still have the original ten dollars to blow all at once if I
ever feel
like it,
inflation-adjusted...heck of a
good deal. Of course, that still won't impress everyone,
and I do
invest in things that can make more money than that, but
with bigger reward comes higher risk; you have to get the timing
right,
be diversified, and
be willing to roll the dice with a portion of your portfolio to
benefit
from those choices. You will have losers as well as
gainers, and
you will have to have ice water in your veins when the market
tumbles,
as it periodically does.
I prefer the stock market now, after years of
learning how to enjoy the fascination without being fearful, but
not
all good investments are to be found in the stock market.
There
is a clean-and-simple, easy-in, easy-out feeling to buying and
selling
stocks; but real estate was actually our best investment.
Not the
house we lived in, but the house we rented out. Here's an
excellent read about comparing real estate to stocks: Investplus
article
It works like this: you live in the smallest
space
that you can feel comfortable in, rather than stretching
yourself
financially to live in the largest space you can impress the
Joneses
with. The benefits of a smaller space for your principal
residence include lower taxes, lower maintenance costs, lower
carrying
cost, and less time spent cleaning and repairing your
dwelling.
(A countervailing opinion comes from David Olive: he suggests
that you
buy "shelter you expect to enjoy for many years, regardless of
its
assessment value at any given time"; it should be "in a
neighbourhood
characterized by a high quality of living, and by gradual but
steady
increases in home values".)
Now, since you would qualify (hopefully) for
a much
higher mortgage than you've taken on for your modest home, take
any
extra income and put it into a mortgage that you hold for
someone else who doesn't have one, for whatever reason - i.e.,
a tenant. Rent out your second property. Do as much
of the
maintenance and management as you can for yourself, to cut
expenses. Make the lowest downpayment you can get away
with, and
keep the mortgage high - you'll be able to deduct the interest
as an
investment expense, as well as the taxes, insurance (never sidestep insurance!)
and any
maintenance costs that you have to contract out. There are
two
caveats: one is that you must be able to meet the monthly
mortgage out
of your other
income in an emergency - if not, you are over-extended. We
had
friends who lost their own home as well as their investment
property by
overextending financially, and going bankrupt. At the
very least, you must have an emergency savings fund for any
unanticipated repairs, unpaid rent, months when the property is
untenanted, etc. The second caveat is that you must
calculate and
choose carefully between going long or short on your mortgage,
and plan
ahead on how you'll weather a spike in interest payments that
might
happen just when your mortgage comes up for renewal.
Speaking of unpaid rent, keep the rent as low
as you
can justify using market comparables, and you'll have fewer rent
payment defaults
and fewer no-rent months between tenants, not to mention lower
advertising costs to continually attract new tenants.
Deborah
screened applicants thoroughly for references and credit
worthiness,
and we only lost one month's rent in seventeen years; we "paid"
our
tenants to
maintain the property by lowering their rent in exchange for
services,
and stating so explicitly in their lease - this wasn't always a
foolproof system, but most of the time it was, and they often
came up
with voluntary improvements on their own simply because they
were
optimistic about staying in the home for a long time, and they
wanted
to make it more attractive and liveable.
If you time your purchase well, screen your
tenants,
and keep your investment small enough to cover even through a
time of
no revenue stream, you'll have an asset
after twenty years that is worth ten times your initial
downpayment,
and the tenants will actually have bought the property for
you.
There are occasional rare "ten-baggers" on the stock market,
always
very small or microcap stocks; but they are very high risk and
you have
to time your buys and sells impeccably, which is harder than you
might
think (timing the sell is even harder than the buy, for most
people). Real estate, on the other hand, carries far less
risk
and the downside is limited.
For some people, being a landlord will never
be an
option, or even a preference. In that case, just save and
invest
in sensible blue chip stocks - try to buy when the market is
low, and
learn about "seasonal investing", but
if that's an anxiety-ridden process for you, read about "dollar
cost
averaging" instead, and just keep adding to your portfolio
whenever
you've got
enough spare cash built up. Make sure you get good
dividends, and
reinvest them -
use the DRIP program for any company that has one in
place.
Two "investments" that I generally don't
favour are
annuities and reverse mortgages. Study those, in the light
of
your own situation, in very great detail before you fall into a
contract that often favours the financial institution more than
the
client.
Questions? Email
me...