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Saving/Investing for Beginners
garroad_ran
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A couple of years ago (much later than I would like, at the age of 25), I started putting away a reasonable percentage of my income every month into a savings account with the idea of starting to save for retirement. By now it has grown into a nice little sum, easily accessible in the case of emergency, and enough to get me by for about six months with little to no work.
Now that I've reached that particular goal, I'm anxious to start putting my money into situations where it can work for me, or at the very least where it will do more for me down the line than in a savings account with very low interest. The problem is I know absolutely zero about investing, stocks, savings, etc.
Does anyone have any tips on where I can go to learn about this, or what books I should be looking into? Preferably keeping in mind that I am Canadian, and that I am self-employed.
Now that I've reached that particular goal, I'm anxious to start putting my money into situations where it can work for me, or at the very least where it will do more for me down the line than in a savings account with very low interest. The problem is I know absolutely zero about investing, stocks, savings, etc.
Does anyone have any tips on where I can go to learn about this, or what books I should be looking into? Preferably keeping in mind that I am Canadian, and that I am self-employed.
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That being said, we can help you here if you so desire, but we need to know where to start. Are you looking for some definitions of what things are? Are you familiar with things but just need a plan based on your situation?
Let 'em eat fucking pineapples!
http://en.wikipedia.org/wiki/Exchange-traded_fund
Home Inspection and Wind Mitigation
http://www.FairWindInspections.com/
Having 6 months of savings is great! Big Congrads on achieving that, not an easy task. You could always look to ladder out your savings on some bank CD's so you can get some better interest then a savings account. Bankrate.com is a good resource for a lot of financial information. http://www.bankrate.com/
To be honest, interest rates right now are very low, so even a CD is not paying much. It may not be worth the hassle depending on what rates you can get.
For investing, probably look at index funds, they have the lowest expense ratios and track the market. Any of the big name firs will have them. Schwab, Vanguard, Fidelity.
Try to max out tax sheltered accounts before non tax sheltered. So SEP IRA (as your self employed) IRA, or better yet a ROTH IRA. then if you have cash left over still, invest in other stuff.
If you have any specific questions, ask away.
Also, use your tax free savings account (TFSA) room. Interest earned from TFSAs is non-taxable.
I won't get into stocks and ETFs and mutual funds, because that's not my forte. But one thing to consider is the management fees associated with these products. They can really hurt your expected return.
There's a lot to learn when it comes to investing, take your time and educate yourself as much as possible before pulling the trigger.
Bookmarked. Thanks!
This would be one of my first courses of action, were it not for the fact that I'm not actually living in Canada at the moment. It's one of the many things about my particular situation that has me completely lost, and further necessitates a good advisor.
I have seen a number of these finance threads come up, and have followed them with some interest. As a result, I feel more comfortable in my understanding of US matters than of Canadian ones (still, that's not saying much). For the moment I guess I'm looking for general definitions, some idea of what my options are, what things I should be aware of, etc. If I were to go in to talk to a personal finance advisor or something like that, I'd want to have some understanding of what they are telling me, and know what questions to ask.
An RRSP or a TFSA is basically what I've been looking into the last couple of days. I know the deadline for 2012 contributions is on Thursday, but I'm not sure that I'm in any sort of a hurry considering I haven't had to pay Canadian income taxes for the past two years (on account of living abroad). The meager interest I'm earning on my Canadian accounts isn't getting taxed anyway, for the time being.
I'll look into it!
If so chances are (in the UK at least) your mortgage rate is significantly higher than any investment rates going. In that situation, once you have your six month emergency fund in a fairly easy access account, the best thing you can do is start overpaying that mortgage (assuming no penalty charges associated with that).
Also I hope you mean future money you accumulate now your six month buffer is safe somewhere. You always want a six month easy access fund for emergencies, don't go tying that money up in any long form investments.
While I am generally a big fan of getting the mortgage paid off early, it should also be put into consideration, that mortgage interest has a tax advantage. So for paying things off early, high interest lines of credit/credit cards, car, then home, however with many people having 4 and 5 percent interest rates, and being able to write off home interest, it is often advantageous to invest in lower risk investments while paying the minimum.
so the market is climbing right now, funds are climbing with relatively low risk
funds are sensible long term investments because the principles of high finance dictate that the market, over a long period of years, is going to trend upward basically no matter what (barring World War 3)
but that stuff is not accessible. you put it in, you aint gettin it out without fees and taxes and penalties
but the gains are undeniable
the only thing you can do that's better than that is, as I think some other people are hinting, is PAY OFF ALL DEBT 100%
the repayment of debt is the greatest investment any person can make in their life. it's called "Guaranteed Rate of Return"
we also talk about other random shit and clown upon each other
Not being argumentative, just trying to get where you're coming from, but what does the resale value of the house have to do with the mortgage you owe on it? Whether the value goes up or down, you still need to repay that debt in full.
Unless there's some magic way of getting out of repaying your mortgage I'm unaware of.
I do fully concur that almost all other debt is preferable to pay off before mortgage, but I maybe mistakenly figured that was a given.
Regarding Mutual Funds, they are an advantage as they help diversify your investment over many companies, which can help insulate you from single incidences of poor performance. However I encourage you to examine not only the returns, but the Management Expense Ratio on the fund, before investing in it. The MER is expressed as a percentage, and reflects the amount of your investment deducted to the institution managing the fund. This can vary wildly, typically in Canada it is anywhere between 0.18% and over 2%. In my opinion, an actively managed fund (i.e. one in which a single investment banker is choosing which stocks to buy and sell) is often a poor decision in comparison to a passively managed fund (i.e. one that uses an algorithm to track a financial market and make automatic purchasing decisions). It's rare for a person to be able to beat the average market performance, and actively managed funds typically have a high MER because you're paying for a real person to administrate the fund.
The lowest MERs typically belong to a class of investments called Exchange Traded Funds (ETFs). These differ from traditional mutual funds in that they are purchased and sold all day long on the stock market, rather than in daily increments. You just need to watch out for transaction fees when purchasing shares in ETFs, as they do behave a little bit differently. Some investment companies will absorb that cost for you if you invest in a fund that they own.
Where you should put your money depends entirely on when you think you're going to need it, and how much risk you're willing to expose yourself to. If this is for retirement, and you're in your twenties, it'll be a long time before you have to take that money out, so you could invest in something like an ETF that tracks an index like the S&P 60 or something similar. That way, even if 10 years down the road, the value crashes, you can stick it out and wait for the value to rise again. If your goals are short term, and you are risk averse, you should look into GICs. GICs offer a guaranteed rate in return over a specific lifespan of an investment (typically 1 to 5 years). Usually this rate of return is low in comparison to other forms of investment, but you are guaranteed the payout. This makes GICs a great investment vehicle for money you need to hang on to, that you can't wait out through a fall and rise in the market. The way GICs usually work is that if you withdraw the money before the agreed upon time, there's some financial penalty to your return. The terms and conditions on each one of them vary.
A popular technique to take advantage of 5 year long GICs without losing long term access to your money is something called 'Laddering'. It's basically splitting your money up into separate, but equal piles, then buying into GICs of different durations or at different times. For example, if you wanted to participate in a 1 year GIC, you could take your investing cash, split it into six, and every two months use a portion to purchase a 1 year GIC. This means that after a year, you'll have GICs coming due every two months. At that point you can re-invest in another 1 year GIC, or if you needed the money right then, use it. Similarly if you wanted to invest over a 5 year GIC, you could split your cash into five parts, and use each part to buy a sequentially longer GIC (i.e. 1 year, 2 year, 3 year, 4 year, 5 year). That way you'll always have some of that money freeing up every year, and you can make that decision to invest/use again.
That's 25-30 cents you didn't get back from renting, that was probably calculated into its cost.
It depends on the state, but if its your primary residence, generally if you walk away lender has no recourse other than foreclosure, or they have to choose between suing you and foreclosing.
Tho in Canada, that is apparently not the case.
The share holder are the owners of the fund. The company, like Vanguard is the manager of the fund, and takes a fee for that service. If the fund company goes out of business. The fund company can not liquidate the assets of the fund to pay its debts. What would happen is that the fund would most likely be sold to a different manger, and would continue as before. Worst case, the fund could be liquidated with all underlying securities sold at market. Then the proceeds divided on a pro rata basis to all underlying shareholders.
That is not to say that a fund company can not abuse the record keeping of a fund to inflate returns or attempt to hide losses. However, the mutual fund industry is fairly transparent and highly regulated. With the notable exception of a few high profile cases like Bernie Maddof. Investing in a mutual fund is one of your safest ways to invest in the broader market. Doubly so with a mutual fund run by one of the larger firms.
You are far more likely to have issues investing in individual securities where you become an owner on a company, by buying stock or a creditor to a company or bank by buying bonds. You would be directly exposed to that company, and could lose your investment if that company went bankrupt.
No worries.
To elaborate, the resale of the house has the only connection to the house in the sense that if you sell it for less than you owe you need to put in out of pocket expense to get the transaction done (mortgage servicer needs to be paid off).
With respect to primary residence and retirement planning, for a lot of households (typically married with children) the primary residence is the single largest source of wealth. In the US we even make tax-free proceeds for sales of long-term primary residence up to $250K-500K, so there is federal incentive to shrewd household purchase and ownership.
"what does the resale value of the house have to do with the mortgage you owe on it? Whether the value goes up or down, you still need to repay that debt in full."
I'm in complete agreement with above statement. The point I was trying to make is if all your retirement funds go into the house and there is some life event (retirement, kids going to college, major hospital bills or death of an income-earning spouse, whatever) that necessitates you to take stock and free up equity, then rolling it all into the house means you are subject to whatever real estate market conditions exist when the event happens. If instead a substantial portion of your retirement funds were in equities/funds/bonds you can liquidate easier and not be subject to specific industry risk (real estate).
An imperfect analogy would be to put all your money into Google or Apple vs putting it into an S&P 500 tracking fund. You have single company risk. Though the analogy fails in that you have pretty much perfect liquidity in selling off your stake, whereas when you have a house it may take several months or a year to sell, all with the backdrop of an evolving real estate market.
Then I would find a good financial adviser, cause shit get intense when it comes to investing money.
As far as retirement is concerned, find something low risk and put it there
As long as you can read at a high school level and aren't impatient, it's pretty easy to dissect the risks and rewards of the spectrum of savings options
we also talk about other random shit and clown upon each other
Starting with lending money, pretty much the most basic way to do so nowadays is to have a bank account. You are essentially lending the money to the bank with the ability to redeem it at any given moment, and they turn around and lend that money out on longer terms for higher interest rates. In the current economic environment the rates you are going to get from a bank account are going to be low, and since from what I've heard of Canada's financial system their banks have done among the best in the face of the financial meltdown.
In general with lending money, there will be a few factors that determine how much or how little interest you get back from a particular loan or bond relative to others. Perhaps the most important one is risk of default. Just like how there is a chance you as an individual can run out of money and not pay your credit card bills or your mortgage payment, so to can others not pay you back if you lend money out, and that includes companies and governments. The higher perceived risk that someone will not pay back the loans or bonds and default, the higher yield will be demanded. So the less willing you are to risk losing your money due to someone or something going bankrupt, the lower the rate of return you will have to accept.
The second main factor determining yield on bonds and loans is the length of time the money will be lent out. The longer money is lent out, typically (but not necessarily always) the higher rate of return is demanded. The reason for this, and this is crucial to understand if you delve into the bond markets, is because of interest rate risk, the effect of changing interest rates on the present value of your loan or bond. If you buy a bond at par value for $1000 that gives you 5% coupons per year, or $50 a year, until expiration and immediately the market demands higher yields on that sort of bond above 5%, for whatever reason, then if you want to turn around and sell that bond on the market you will be forced to take less than $1000 for it. Conversely, if interest rates immediately go down and the market demands less yield for that sort of bond, you will be able to turn around and sell the bond on the market for more than $1000. This effect is much more pronounced for bonds and loans with a longer duration, so if you buy a bunch of 10 or 30 year bonds because the yields are much higher than the short term bonds, you'll be in for a very rude awakening as to the current value of those bonds if interest rates go up a lot. Or you'll have an opportunity for a payday if interest rates go down a lot (note: unlikely in current environment for safer bonds due to yields being unable to go all that much below zero)
There are other risks that will affect the value of the bond, namely call risk (the risk that the borrower is allowed to pay off a bond or loan early, cutting you out of future interest payments or coupons), and currency risk (buying a bond from another country in another currency can move around in additional ways due to chances in the exchange rate between your currency and the bond's currency). But the main ones that you really want to understand above anything else are the risk of default and interest rate risk.
The second main type of investing is in buying things, typically with commodities or stocks. I won't get into those in quite as much depth, but with commodities basically you are buying a physical thing, like oil or gold or bushels of corn, either because you need them for whatever sort of business you are running, or because you hope that they will go up in price at a later date allowing you to sell for a profit. Buying now to hopefully sell higher later is what is known as speculation.
With stocks, what you are generally doing is buying a piece of a corporation to own for yourself, and with common stocks you'll even get votes to determine the board of directors, who decide on management and the direction the company will take. From the standpoint of a small scale individual investor, what you will typically care about more is the price of the stock and whether or not they give dividends. With the price it is the same sort of thing as you would expect, you want to buy low and sell higher to make money. Dividends are when the company decides to send a portion of their money out to their shareholders, as opposed to keeping it in the company to spend it on investing on whatever line of business they are engaged in. Companies are under no legal obligation to continue paying dividends, or even start paying dividends if they've never paid them before, so keep that in mind if you are looking to invest in dividend paying stock. Their only obligation to pay dividends is that investors looking for dividends may be less than happy if they are cut or eliminated, and then sell off a bunch of stock to send the price down.
There's a whole lot to get into as to what determines the price of a stock, but you'd probably rather have a well run profitable company that will stay well run and profitable if you are investing for the long term than a poorly managed one that loses money left and right. Easier said than done when making such choices. Also, if a company goes bankrupt, typically speaking the stockholders will get left with nothing from their investment and are the last in line while looting the corpse, while the bondholders and others will typically get less than face value but often not nothing. As a result of this and the unlimited upside potential of stocks, stocks are typically considered a riskier class of investment than bonds.
One last bit, since everyone put the cart before the horse a bit getting into mutual funds and ETFs, what those are is an investment vehicle where they will buy up a selection of different investments, be they stocks, bonds, or whatever, and you get a slice of the returns from that amalgamation by buying into the fund. What those funds invest in depends on each particular fund, and nowadays you can find mutual funds or ETFs for all sorts of different things. The key advantage of those is to diversify and buy a wider selection of investments, which reduces the risk from any one particular component of the fund. WARNING: this does not do anything to get rid of systemic risk or the wider risks that apply to the sector or category of things you are investing in. So, for example, say you buy an ETF or invest in a mutual fund that invests in the energy sector, a lot of those will have a mixture of stocks from different oil companies. So if one particular oil company has a bad oil spill and has to pay out billions of dollars to clean it up, you'll be hurt less owning the ETF than you would if you had just invested in that one particular oil company. However, if there is something that hurts oil companies across the board, like say the price of oil plummets or the price of production skyrockets overall, then you'll be screwed either way.
That said I like fool.com for basic advice, and bogleheads.org or seekingalpha.com once you're ready to lose a wad.
so that's the kind of nice thing about it
With Fidelity you have a pretty decent amount of control with the risk you want to assume... I'm roughly the OP's age. Fidelity puts me in their higher risk/higher return fund because I have more time to deal with the (fairly minor) risks before retirement. But if I wanted to I could tell them to use a different fund, I can control what % of my contribute goes into a certain fund... and they give you about 11 or 12 to choose from, including some industry specific ones. For example there's a healthcare one, and a tech one.
I can also tell them to just use my contribution to buy my employers stock in some sort of weird ESPP type of thing. (slight discount)
we also talk about other random shit and clown upon each other
My reasoning is of course still dependant on the situation where your house rate is significantly higher than the best return you can find elsewhere. This is where I find myself currently but could easily change in the mid to long term future.
When the retail investor buys stock in a company it's not really a piece of the company and this is only realized if the company is purchased or goes into bankruptcy.
When you buy stock you are participating in gambling to some degree. You do NOT have a claim to company assets. If you have preferred stock (reserved for institutional investors, VC, and heavies in the company) you may have a partial claim. If you own debt issued by the company you do have a claim. For the retail investor if you buy company stock and company goes tits up you're fucked, you're likely to get pennies on the dollar.
Anyways, we're wandering afield of the OP question in my opinion since he still needs to get some basic education in these matters.
You don't have a direct claim on the assets no, but the equity position is owning a piece of the company. It's just that a colloquial understanding of what it means to own a piece of something may not line up exactly with what it means to own part of a corporation. The basic equation, by definition, is Equity = Assets - Liabilities.
And it is even worse than you suggest when you talking about a claim on the assets, because with equity and stocks your claim on the assets is pretty much behind everyone else in the event of bankruptcy. Since bankruptcy often goes hand-in-hand with insolvency, which for one meaning is that the liabilities exceed the assets of a company, that means the equityholders often don't get anything when the assets are sold off in a liquidation. If you own stock in a company that goes completely under, don't expect to get anything out of it or any of your initial investment back. The benefit of corporations for investors is that when the corporation goes under they don't get less than nothing, in the form of the lenders banging on each and every one of the stockholder's doors demanding that they give back the money that the corporation couldn't pay. For other forms of business, like partnerships or sole proprietorships, the owners of the company can owe more than their initial equity investment if the business goes under.
In most situations, the bondholders who lend something to the company will get something out of liquidating the assets of the company, it's just that with an insolvent company the assets will be worth less than how much the company owes, so the lenders will get less than what they are owed. The trade off is that the bondholders and lenders like banks get very limited say and upside in the company if it does better than expected, they just get paid the interest on the loans or the coupons on the bonds following the contractual obligations. And how the lenders get say in running the company is a bit beyond beginning investment, but just for information's sake there can be restrictions the banks or bondholders put on the company as a condition of lending the money out, in the form of covenants, to reduce the risks the management and equityholders do something exceptionally risky or crazy with their borrowed money.
The "getting back pennies on the dollar" thing doesn't just come up with lending to companies, either. For example, if you had been holding Greek bonds going into their recent troubles, meaning you were lending them money, you are only potentially getting back a fraction of what was initially owed, because they partially defaulted. It isn't to the point where the lenders to the Greek government have all been completely wiped out, but a complete default is not out of the realm of possibilities.
If you own debt issued by the company and in some cases preferred stock, THEN you own a piece of the company. Like you literally own a share of the company's assets. You do NOT when you own retail stock shares.
Not trying to get into a pissing contest here, just trying to disabuse readers of a very common misconception. If you own retail stock in a company you do not own a piece of the company. You own a piece of paper (digitized now) that you can sell to others if they value it. You also might get some dividends if the company can pay them. If the board or CEO decided to blow all the cash reserves and take out notes buying hookers and blow, then you as the retail investor own paper, that's worth what the paper is worth. Claimants on assets (preferred stock holders, convertible stock holders, debt holders) may be able to sue for comp against the assets of the company but your retail investor cannot.
Edit: I own retail stock and it's a huge part of my portfolio since stock is what funds own. Not trying to say don't own stock cause unless you're a player that's the only way to get action. I watched my stake in MCI WorldCom go down to zero (in it at $21 I think) and though there was a class action suit that'd give me money it was pennies a share, so fuck it. Similarly I made out like a bandit on AMR during bankruptcy, but I don't kid myself that it was anything other than gambling and dumb luck.
This is an issue of definition, and I think your definition of what it means to "own a piece of the company" is rather weird and outside of the norm in a financial sense. You don't directly own a piece of the assets, which I want to be perfectly clear about, but owning a piece of the company is not the same thing as owning a piece of the assets. The company being owned is itself an active construct, including the results of the ongoing operations and what is left over from the returns from the assets after the liabilities have been satisfied. A company is not just the assets by themselves. And in the case of a corporation, it is a separate legal entity from its owners, the shareholders, and it is effectively a fictional person that owns its own assets and owes its own liabilities and so on.
Anyways, to those who don't care about the semantic issues, when you own stock in a corporation, what you get is potentially a piece of say in how the company is run (depending upon stock classes and how it is structured), dividends if the management can and does distribute them, and what if anything is left over from selling the assets to pay off the liabilities in the case the business is liquidated. Call that what you want.
(As an aside, in some jurisdictions the shareholders can voluntarily liquidate a company if they decide to. So they'll have the company sell off all the assets, pay off everyone they owe money to, and then divvy up what is left to the shareholders and shut down all operations. This isn't the sort of thing you see big publicly traded corporations do everyday, but the shareholders do have options to close up shop and cash out one way or another.)
Edit: There is a qualitative difference between having a claim on assets (what I would define as "ownership") and having a chit you can sell that also means you get a quarterly payment if the company can swing it.
There's really no reason to invest in a mutual fund at this point. Much higher expense ratios (typically 1-2% as opposed to around 0.1-0.2% in a Vanguard index) and tracking them long term shows that only about 30% of them beat the market and none of them do so with any consistency.
Spending money on a financial consultant to manage your money for you would be even dumber IMO. Every percentage point you give away in fees is an additional percentage point that said person needs to beat the market by. The math just doesn't work. Everyone claims they can beat the market but statistically only 50% of them do (less when you factor in transaction costs).
I apologize if this has been covered already. I skimmed and didn't see it.
However, most people own a very small percentage of the outstanding shares of a company, and so their vote is not worth much in the grand scheme of things. However, if you own enough then you can tell the company what to do, including place yourself on the board of directors directly.
I'm taking an Engineering Economic course and it goes over these questions.
BAI VOO
BAI VOO NAO
(VOO is the ticker for a p solid Vanguard ETF)