Financial Planners“The Stock market is the only game in town where the guyswho drive Rolls Royce’s take advice from those who takethe subway”- Warren Buffet• Most financial planners make money via• Transaction fees• MER• Kick-back on certain investment choices* If you do use one, make sure it’s a fee for service4
SavingHow much should you save?Saving strategies that work1 Pay yourself first (automatic)2 Credit/debit cards (leave at home)• Create barriers (wait a day before you buy anything)3 Jar methodEmergency fund (6-12 months)– Cash or LOC
Alice vs. BobAlice starts saving at 25 ($4k/year)– Stops saving after 10 years– Contributed $40k totalBob starts saving at 35 ($4k/year) till 65– Contributed $120k totalHow did they do?Let’s assume 8% growthSource: The Wealthy Barber Returns
Compound InterestEinstein called this– the 8th wonder of the world– the greatest force in the universe– Greatest invention of mankindIf you put 1 penny on the first square on a chessboard and2 on the second square, and continued on doubling, howmany pennies would be on the last square?
Spending“It is preoccupation with possesions, more than anythingelse, that prevents us from living freely and nobly” –Bertrand Russell“I can resist everything but temptation” – Oscar Wilde– Stop going Experiences vs. stuff: [NYTimes] Will it make you happy? -http://bit.ly/cQu4ui
SpendingSpending SummariesFinding deals (RFD): www.redflagdeals.comIf you have to use credit cards– Credit card rewards
SpendingRough Guide (The Motley Fool Money Guide)– Housing and Utilities: 25-30%– Food: 10-15%– Vehicles: 10-15%– Insurance: 5%– Saving and investing: 10-15%– Entertainment: 5%– Clothing: 5%– Medical: 5%– Childcare and Education: 1-8%– Gifts and Charity: up to you11
Spending“Never keep up with the Joneses. Drag them down to yourlevel. It’s cheaper”– Quentin CrispTeachers are pretty happy (because they hang out withother teachers)12
Debt?Good vs. bad debtWho has credit card debt?– Re-finance!– Clear LOC method ($7k)
Good DebtMoney borrowed to buy an appreciating asset where thecost of servicing the loan doesn’t affect your abilty to saveto the appropriate level and where the principal will be fullyrepaid before your retirement.
CashtrationThe act of buying a home, which renders the subjectfinancially impotent for an indefinite period of time.Reminder: Mortgage means “death pledge”
Investing1 “First rule of investing, don’t lose money2 Second rule of investing, see rule #1.”Warren Buffet
InvestingDo you have a mortgage?– Easy strategy Should I open an RRSP/TFSA?– If you don’t have a mortgage, than yes!
RRSP vs. TFSASource: The Wealthy Barber Returns
InvestingImagine a market with just 3 investors (Buffet, Munger, andSoros)What should you do with $30k?1. Pick your own stocks2. Invest in an index fund3. Invest in all 3 managers4. Pick a manager
InvestingA year later: Market performed at 8%• Buffet: 12%• Soros: 9%• Munger: 3% ((Buffet + Soros)*-1 by definition!)
Results1. Pick your own stocks (?)2. Invest in an index fund (8%)3. Invest in all 3 managers (8%)4. Pick a manager• Buffet: 12%• Soros: 9%• Munger: 3%
What about costs?Typical ETF: 0.5%Typical Mutual Fund: 2.3%1. Pick your own stocks (?)2. Invest in an index fund (7.5%)3. Invest in all 3 managers (5.3%)4. Pick a manager• Buffet: 9.7%• Soros: 6.7%• Munger: 0.7%
Investing - MERsManagement expense ratio– THERE IS NOTHING MORE IMPORTANT THAN MERThe expense ratio is the only reliable predictor of futuremutual fund performance– Financial Research Corporation and Standard and Poor’sstudies
Investing – Active vs. PassiveWhat’s the difference?Moneysense: http://www.moneysense.ca/2010/10/21/six-strategies-to-build-your-wealth/24
Sleeping scale of major investmentsSource: A Random Walk Down Wall Street
Investing – Active vs. PassiveWhat’s the difference?Moneysense: http://www.moneysense.ca/2010/10/21/six-strategies-to-build-your-wealth/27
Investing – Active vs. Passive28Passive Rules!
Investing – Active vs. PassiveCouch Potato strategy– It pays to be lazyCanadian Shareowner– Limited stock selectionMutual fund vs. ETF– ETFs get efficient past $20k or so29
Investing – Couch PotatoSample portfolio– %Age in bonds– 1/3 of rest in CA equities– 1/3 of rest in US equities– 1/3 of rest in INTL equitiesSo Boris (if he’s 25):– ~25% in bonds basket– ~25% in CA equities basket– ~25% in US equities basket– ~25% in INTL equities basketRebalance once per year (15 minutes!)30
Investing – PassiveWhy it works:– No sales commissions (if you use Mutual funds)– Low operating expenses (MER!)– Tax efficiency– No need to hire a financial advisor– Higher diversification, lower riskSource: The Boglehead’s Guide to Investing32
Investing – Passive“The conclusions [supporting trying to beat the market] canonly be justified by assuming that the laws of arithmetichave been suspended for the convenience of those whochoose to pursue careers as active managers”– William F. Sharpe (Nobel Laureate in Economic Sciences”33
Investing - BarbellNasim Taleb’s strategy (The Black Swan)Made 99% of his money in one day (Oct. 1987)Made $150MM in fall of 2008Portfolio– 80-90% in bonds (or other fixed income)– 10-20% in ultra-risky investments34
Investing - DividendWhat’s a dividend?Derek Foster’s strategyBuy stocks that will pay dividendsMake money with your moneyWhen you hear: “How do you make your money work foryou?”35
Investing – DIY – no strategyReally hardLikely impossible to beat the Russian PhdsHard to exploit market inefficiencies36
Health InsuranceDo you have dependents?If yes:– Term life insuranceOther types:– Critical illness– Disability
RetirementModels1 Make money for a while, then start spending it (Traditional)2 Make less money all the time (4HWW)38
Top 10 ResourcesMandatory reading/listening:• MoneySense Magazine – www.moneysense.ca• John Bogle podcast interview - http://bit.ly/clwrhTGreat Books/Sites• The Wealthy Barber Returns by David Chilton• The Little Book of Common Sense Investing by John Bogle• www.CanadianCouchPotato.com• The 4-Hour Workweek by Tim Ferriss• Stop Working by Derek Foster• The Black Swan by Nasim Nicholas Taleb