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Finance 101 (for Canadians!)Farhan ThawarApril 2013!
AgendaSavingSpendingDebtInvestingInsuranceRetirement2
Warning!3Source: The Black Swan
Financial Planners“The Stock market is the only game in town where the guyswho drive Rolls Royce’s take advice from those ...
SavingHow much should you save?Saving strategies that work1 Pay yourself first (automatic)2 Credit/debit cards (leave at h...
Alice vs. BobAlice starts saving at 25 ($4k/year)– Stops saving after 10 years– Contributed $40k totalBob starts saving at...
Compound InterestEinstein called this– the 8th wonder of the world– the greatest force in the universe– Greatest invention...
Alice vs. Bob
Spending“It is preoccupation with possesions, more than anythingelse, that prevents us from living freely and nobly” –Bert...
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%– Insuranc...
Spending“Never keep up with the Joneses. Drag them down to yourlevel. It’s cheaper”– Quentin CrispTeachers are pretty happ...
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 sav...
CashtrationThe act of buying a home, which renders the subjectfinancially impotent for an indefinite period of time.Remind...
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 st...
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...
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. ...
Investing - MERsManagement expense ratio– THERE IS NOTHING MORE IMPORTANT THAN MERThe expense ratio is the only reliable p...
Investing – Active vs. PassiveWhat’s the difference?Moneysense: http://www.moneysense.ca/2010/10/21/six-strategies-to-buil...
Sleeping scale of major investments
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-buil...
Investing – Active vs. Passive28Passive Rules!
Investing – Active vs. PassiveCouch Potato strategy– It pays to be lazyCanadian Shareowner– Limited stock selectionMutual ...
Investing – Couch PotatoSample portfolio– %Age in bonds– 1/3 of rest in CA equities– 1/3 of rest in US equities– 1/3 of re...
Couch Potato 201231
Investing – PassiveWhy it works:– No sales commissions (if you use Mutual funds)– Low operating expenses (MER!)– Tax effic...
Investing – Passive“The conclusions [supporting trying to beat the market] canonly be justified by assuming that the laws ...
Investing - BarbellNasim Taleb’s strategy (The Black Swan)Made 99% of his money in one day (Oct. 1987)Made $150MM in fall ...
Investing - DividendWhat’s a dividend?Derek Foster’s strategyBuy stocks that will pay dividendsMake money with your moneyW...
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...
How to start!40
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Finance101

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Finance101

  1. 1. Finance 101 (for Canadians!)Farhan ThawarApril 2013!
  2. 2. AgendaSavingSpendingDebtInvestingInsuranceRetirement2
  3. 3. Warning!3Source: The Black Swan
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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?
  8. 8. Alice vs. Bob
  9. 9. 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
  10. 10. SpendingSpending SummariesFinding deals (RFD): www.redflagdeals.comIf you have to use credit cards– Credit card rewards
  11. 11. 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
  12. 12. 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
  13. 13. Debt?Good vs. bad debtWho has credit card debt?– Re-finance!– Clear LOC method ($7k)
  14. 14. 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.
  15. 15. CashtrationThe act of buying a home, which renders the subjectfinancially impotent for an indefinite period of time.Reminder: Mortgage means “death pledge”
  16. 16. Investing1 “First rule of investing, don’t lose money2 Second rule of investing, see rule #1.”Warren Buffet
  17. 17. InvestingDo you have a mortgage?– Easy strategy Should I open an RRSP/TFSA?– If you don’t have a mortgage, than yes!
  18. 18. RRSP vs. TFSASource: The Wealthy Barber Returns
  19. 19. 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
  20. 20. InvestingA year later: Market performed at 8%• Buffet: 12%• Soros: 9%• Munger: 3% ((Buffet + Soros)*-1 by definition!)
  21. 21. 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%
  22. 22. 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%
  23. 23. 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
  24. 24. Investing – Active vs. PassiveWhat’s the difference?Moneysense: http://www.moneysense.ca/2010/10/21/six-strategies-to-build-your-wealth/24
  25. 25. Sleeping scale of major investments
  26. 26. Sleeping scale of major investmentsSource: A Random Walk Down Wall Street
  27. 27. Investing – Active vs. PassiveWhat’s the difference?Moneysense: http://www.moneysense.ca/2010/10/21/six-strategies-to-build-your-wealth/27
  28. 28. Investing – Active vs. Passive28Passive Rules!
  29. 29. 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
  30. 30. 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
  31. 31. Couch Potato 201231
  32. 32. 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
  33. 33. 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
  34. 34. 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
  35. 35. 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
  36. 36. Investing – DIY – no strategyReally hardLikely impossible to beat the Russian PhdsHard to exploit market inefficiencies36
  37. 37. Health InsuranceDo you have dependents?If yes:– Term life insuranceOther types:– Critical illness– Disability
  38. 38. RetirementModels1 Make money for a while, then start spending it (Traditional)2 Make less money all the time (4HWW)38
  39. 39. 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
  40. 40. How to start!40

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