September 12, 2017

Keep Saving and Investing Simple

In this day an age, we have access to an impressive variety of financial products. It sometimes feels like every time you blink, the financial industry comes up with a new gimmick promising you to astonishingly make your money grow faster or to protect it from any danger.

But, as we will explain today and contrary to what many suppose, you probably can successfully save and invest simply understanding just three main financial vehicles. 

No Need to Become a Financial Wizard Capable of Grasping Every Intricacy

For most people, all that financial mumbo jumbo can be overwhelming and apart from inevitable death, the only thing guaranteed is probably that they, the financial institutions, will make a big chunk of money selling these. And most of the time, it will be at the expense of the consumer…the ever poor consumer.

On top of it, almost nobody really has spare time to manage and invest money during busy workdays. And we are not even talking about developing the necessary skills to do so.

To continue of argument, let’s face it; several strategies like trading stock options may sound appealing but can be complex and are not for everyone. Even with all information easily accessible to the mass in our digital era and contrary to what many think, it isn’t that easy to master most of these so-called wonder-making products and strategies. In practice, it takes a lot of time to digest all that data, to develop experience and to translate all that knowledge into tangible technique and success.

The same way, many dream of getting rich quick, for instance, making a fortune day trading but won’t even put up the necessary time and effort to study and research. For others, the learning curve is just too difficult and out of their scope. The few capable ones really trying still have to have chance on their side. That’s a lot of ifs and buts for the rare lucky ones making a living speculating that way.

Even presumably less risky strategies like swing trading can be a reach as you may yet again consume a lot of time and energy getting somewhere with them.

Oops! We wondered off pretty far from our initial straightforward topic…We kind of got caught up in all the complexity we are denouncing. Forgive us for getting that carried away as we tend to take these matters truly at heart.

Bare with us as we get back to our original reflection of how can the average person avoid getting lost into all that financial gibberish, wasting time while potentially leaving a lot of money on the table?

Fortunately, we can just forget about complex products we don’t need.

Focus on Simple Products That Procure Value

In the end, our ultimate concern is indeed how can the majority of us have access to quality financial vehicles that won’t chew up too much of our time? Putting particular emphasis on access, value and time…  

Our way to deal with that existential problem has been to keep it relatively simple and we think you should consider doing so too.

To start off, logic dictates you should understand the financial products you intend to use. That’s why we basically prefer to put our money in simple straightforward products we can easily comprehend.

Understanding the products you use is a must but do you really need to thoroughly know all financial products out there? Probably not! Being familiar with general concepts is okay but you should concentrate on better understanding the few basic ones that procure you the most value. Ultimately, that’s the only ones you need.

This is how we view it. We think most folks should essentially stop wasting time studying complex financial schemes and products they will most likely never truly understand or use effectively.

Saving & Investing Thru 3 Fundamental Stages

So, when it comes to saving and investing, our experience has led us to believe that most individuals can successfully climb the investment ladder by basically narrowing it down to only three main stages.

In fact, that’s exactly the approach we took and still use in real life, for our personal affairs.

By now, you are probably eager to know more about these less complicated financial products that are somewhat accessible to everyone, that provide good value and are manageable without devoting too much of your time.

Without further due, let us introduce you to our simple 3-stage method: depend on High Interest Savings Accounts (HISAs) to park cash, start long-term investing by Indexing and slowly but surely build your way up to DIY Dividend Investing.

The following sections will insightfully talk about characteristics of these three financial notions we try to focus on and how they pan out in our overall saving & investing strategy.

1- Foundation: Put Cash in High Interest Savings Accounts

High interest savings account: boy do we hate this name as it can be rather misleading… personally, we would never dare calling 1-2% high interest. Nonetheless, HISAs can be quite useful and you could say they offer higher interest than their traditional counterparts.

They still provide a very solid basis for your savings. HISAs are safe and secure like traditional savings accounts. They constitute a great place to park cash you could need in a foreseeable future. Use them for your emergency fund and to put money aside for your short and mid-term projects.

We also use our HISAs to save any extra cash and manage our cash flow. We have no problem frequently getting money in and out of them as long as it’s probable it will remain there for at least a week or two. We consider any shorter period a waste of time and energy. Amounts are adjusted regularly and money usually comes in every two weeks after we get our paychecks. Money is taken out to cover big upcoming payments.

Online, you can easily open a High Interest Savings Account that will charge you minimal fees while paying you a little more interest than most traditional savings accounts. All this without giving up too much liquidity as funds can usually be accessible within a couple business days.

Even though other options exist out there, we really like Tangerine (formerly ING Direct) as they kind of were the pioneers, as least in Canada, to offer us that type of valuable yet less expensive banking services.

If you happen to think about opening a Tangerine account, we could both get a 50$ Bonus!
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Another useful practical technique is to open a different account for each purpose. Most HISAs will permit this. For instance, Tangerine allows you to create and name several sub-accounts within each principal account. That way, you could compartmentalize and set money aside for «Property Taxes», «Car Registration», «Next Exciting Trip», «New TV», etc.    

HISAs can also remain tax efficient. Canadians could avoid related taxes all together by registering them with the TFSA label.

2- Intermediate Stage: Experience and Learn About Investing by Indexing

Even though we rarely talk about it here, indexing is still one of the best ways to invest for most people. 

Before hand, the primary prerequisite to investing is having a long-term investment horizon (we believe at least 10 years is adequate).  With enough time on your side, you can afford to wait out market slumps. We just wouldn’t recommend getting into stocks for any shorter period as we would plainly consider it speculation.  Ordinary folks like us are just not talented enough to win at that type of very risky game. For instance, gambling money stashed away for a house downpayment you plan to buy in only 2 years would be foolish and silly. Just leave that hard-earned cash in something safe like HISAs in those situations.

Now that we got that essential condition out of the way, indexing is probably the simplest way to access de stock market and start your investing career. It can even be a breeze for rookie investors. Your local traditional financial institutions (we’ll talk about an even more interesting alternative further down this section) can easily help you to get you into Exchange Traded Funds (ETFs) or indexing funds to achieve so.

The main strategy behind ETFs is to bluntly replicate indexes. Buying an ETF is almost like buying all stocks composing the index all at once. In practice, it’s not exactly that simple and it may even not be possible for a single investor to buy that many stocks (often hundreds) as for one thing, it would mean paying humongous fees. That’s where you, along with many other investors, can entrust your money to a professional investment firm that will manage your combine buying power and deal with all technicalities involve in the process.

ETF managers don’t have to make difficult investment choices as their only option is to reproduce index return as best as they can. That’s the main reason why ETFs management fees often represent a fraction of other mutual funds fees.

So, after accounting for relatively small fees, leaving your money in ETFs will produce no-hassle long-term return equivalent to stock market (index). Because ETFs provide ample diversification, that performance should remain somewhat worry-free in the long run.  

Using indexing can be a great way to get your feet wet, to develop discipline and to gradually learn more about long-term investing. With that precious experience, you’ll find out how to react to inevitable market fluctuations and to keep your emotions in check. Keep in mind most successful investors stay humble when markets go up and have the capacity to stomach downturns.

Remember to keep ETF investing simple. We like the idea of buying only a couple different ETFs, a single ETF is already diversified enough. Starting with only one broad Canadian ETF and complement it with one US ETF should do the trick. After a while, a third international ETF can be added to your portfolio if you choose to.

Picking specific ETFs goes outside the scope of this post as we are not authorized investment professionals that can provide you that type of advice. We will just say we actually still hold XIU shares to provide our DIY Portfolio some broad Canadian exposure.

ETF investing also gives you the opportunity to familiarize yourself with online brokerage and can prepare you for the following step in DIY investing.

Opening an online brokerage account and buying your ETFs thru it can get you acquainted with boring yet inevitable technicalities that will help you in your future DIY investing career. We consider it a better alternative that many traditional banking ETFs as it may help you avoid or reduce some administration fees.

Depending on the online broker you choose, you should probably consider at least 1K$ installments to minimize transaction fees.

You will learn that with most online brokers, buying ETFs in not that different from buying actual stocks.

One of the online brokers we like and use is Questrade. If you happen to choose them, feel free to click of the following banner to get 50$ reducing your transaction fees. Note that it will also help us as you will get compensation from it.

3- Final Stage: Work Up to DIY Dividend Investing

Many of you will be content to stop here. Letting others manage and fairly effectively grow your money. We respect that honorable reasonable approach but we’ll still expose our view on yet another exciting alternative and try to convince you to eventually take the decisive step.

For a while now, DIY dividend investing has been kind of the ultimate goal for us, at least as personal finance goes. We are very happy we took matters into our own hands and chose that crossroad about ten years ago. We believe many of you can also grow up into becoming successful DIY investors.

First, it’s a given that our previous long-term assumption still applies to DIY investing. We will never put emphasis on it enough; short-term stock investing aka speculating is a bad idea.
Basically, DIY stock investing becomes relevant if you have at least 10K$ to work with. With less than that, transaction fees and diversification may pose some problem.

As an example, buying about 2K$ worth of 5 stocks across 5 different economic sectors (5 x 2K$ = 10K$) can be an effective plan to get your portfolio started. It would provide adequate diversification while still minimizing transaction cost. You could then afford to buy your sixth stock from one of the initial sectors if you wish. Just make sure to spread out all subsequent purchases across at least 5 different sectors.

To provide a solid basis for Canadian portfolios, it would also make sense in the beginning to favor less volatile sectors like Utilities, Consumer Staples and the very popular strong Canadian Financials. Riskier cyclical sectors like Consumer Discretionary, Energy and Basic Materials further down your initial buying list should also remain less prominent all and all.

At some point, Canadian investors should strongly consider getting into US stocks. The US market can provide robust additional options to achieve even better geographical and sectoral diversification. Note that we like to hold our US dividend stocks in registered RRSP accounts to avoid US withholding dividend tax. Talk to an accountant for details about it.

In the present system, online brokers allow you to pay the lowest fees, discounted fees. Many offer you stock transactions under 10$. Buy and hold infrequent traders like us can usually get by with less than 10 transactions per year (our actual average is around 6). These conservative assumptions result in annual transaction fees easily under 100$. That’s still 1% for a 10K$ portfolio but fees gradually get relatively smaller as your portfolio gets bigger. It would be 0.2% for a 50K$ portfolio and about 0.05% for a 200K$ish portfolio like ours. That’s quite little!

Because your only get charged fees when you buy or sell stocks, non-recurring DIY investing fees really get proportionally smaller as your portfolio grows. Over your investing lifetime, it can be much more beneficial than recurring mutual funds or ETFs management fees that proportionally stay the same. For instance, paying 1% recurring fees on a 100K$ portfolio or 1000$, each and every year can really add up over time and drag down your return.

Forgive us for saying it once again but we just love the fact the bigger our DIY Portfolio gets the lower of relative fees get.

It’s normal to get almost nonexistent management fees when you manage your investments yourself: that’s the point of DIY investing. At first, you may be afraid and hesitate to manage your portfolio all by yourself. Fortunately, in this day and age, a lot of insightful resources can help you understand the whole process and learn the ropes.

Managing your portfolio will become easier with experience. By now, it only takes us a couple minutes a week to achieve so.

Focusing on dividend stocks like we do can help too. It will condense the extent of your study and research, reducing time spend finding potential candidates and validating their metrics. We think concentrating on somewhat conservative, solid dividend stocks allows us to achieve interesting returns while taking acceptable risk.
In the end, DIY investing gives you better control. You won’t be forced to follow the crowd in all situations, like selling low out of panic. We will also keep the power to decide how much risk you are willing to tackle on.

Furthermore, DIY investing can allow you to avoid over-diversification. Diversification is a good necessary thing for investors yet some ETFs or mutual funds can give you too much. Blindly investing in hundreds of companies will give you access to several superior stocks but also many bad ones. Picking and choosing only a couple dozen stocks with quality over quantity in mind, can reduce the ill effect of those bad apples on your portfolio. You can’t expect to always choose perfectly but sure can expect to improve the average.
All and all, owning shares of quality corporations while limiting fees and crowd influence; DIY stock investing may result in better performance. Don’t pretend you can crush the market. Just try to stay 1-2% ahead of it maintaining the initial margin fees and your individual freedom give you. Over your long haul investing life, it can make a huge difference.

Additional Considerations

Note that it’s possible and desirable to remain tax efficient in all three proposed stages as registering accounts is merely a technical formality. The versatile TFSA program is a no-brainer for most Canadians. Most people making a decent salary should consider RRSPs. Having a child, we also greatly benefit from the somewhat overlooked RESP program.

Some of you may ask why we don’t genuinely consider and use other investment vehicles like bonds, GICs or real-estate. We really like to keep things simple and think many of these possibilities are often just not worth the effort.

Let’s take as an example why we don’t sometime use Guaranteed Income Certificates (GICs) instead of High Interest Savings Accounts (HISAs).

To make it noteworthy and interesting, you would have to know in advance how long a significant amount will sit in your HISA. It has to be enough money but also long enough.

That’s the thing with short-term money. For most of it, you usually don’t know exactly when you will need it (emergency fund). When timing is known, large amounts are rare (2-3K$ for your next trip).

Getting an additional 0.5% on only 2K$ for a year in not worth the trouble (10$). Paying 0.5% less on a 200K$ mortgage for 5 years is much more significant (more than 3K$). Getting 0.5% more on your long-term investments is also worth mentioning.

One day, some of you may have to consider bonds. We probably will never hold bonds as in retirement; we will rely on generous pensions and dividends for fixed-income.

We won’t deny other strategies may be appealing and useful to others depending on their specific financial circumstances. For instance, getting into real-estate and being a landlord can be a great option to invest your money and diversify your assets. We would not hesitate to recommend it but it’s simply not in our genes.

That’s all from us for now. Hope our simple way to deal with saving and investing can help and inspire you.

*Please note that some links may refer to affiliate programs and that we may receive compensation from affiliate partners if you purchase products using those links.

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