Jul 302020
 

It’s all in how you think

In the book, The 7 Habits of Highly Effective People, author Stephen Covey explains that “most people are deeply scripted in the scarcity mentality. This means they see the world as containing only so much, as though there were only one pie out there. And if someone were to get a big piece of the pie, it would mean less for everybody else.” This leads to a zero-sum paradigm of life. People with a scarcity mindset have a very difficult time sharing recognition and credit. Not surprisingly they also have a hard time being genuinely happy for the success of other people.

“The abundance mentality, on the other hand, flows out of a deep inner sense of personal worth or security. It’s the paradigm that there is plenty out there and enough to spare for everybody. So it results in the sharing of prestige, recognition, profits and decision-making. It also opens possibilities, options, alternatives and creativity.”

Here’s a table outlining some of the thoughts people may have depending on if they’re in a scarcity or abundance mindset. (Click to enlarge)

People with an abundance mentality tend to be more financially secure, successful in their careers, and feel more empowered. So if you ever catch yourself thinking with a scarcity mindset, try to reframe your perspective and approach it with an abundance mindset instead. The difference between who you are now and who you want to be is what you do. And don’t forget to be thankful and confident. ๐Ÿ™‚

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Jul 272020
 

Stock picking vs index investing

There’s a common belief that attempting to outperform the stock market is futile. A thread on the r/investing subreddit asked if anyone can beat the market. Here are some direct replies from the community:

  • “I know I am statistically extremely unlikely to beat the market, and if I do beat it, itโ€™s through luck, not skill.”
  • “The only way you can really beat the market is to hold a highly concentrated portfolio and hit it big in 1 stock”
  • “As a retail investor, if I beat the market picking individual stocks, it was mostly from luck.”

Even an investopedia.com article suggests that successful stock pickers like Warren Buffett may have just been “exceptionally lucky.” It appears the online investing community is generally against the idea of individual stock picking. This short comment from the forums of RedFlagDeals sums it up well.

But allow me to go against the grain and push back a little. ๐Ÿ˜Ž I believe you canย beat the market if you have the right decision making process. ๐Ÿ™‚ My net worth today is largely built on my stock picking history.

Internet consensus: Amateur investors can’t beat the market over time. That’s why you should just buy index funds and forget about stock picking.

Me:ย 

beating the index

12.87% is the annual rate of return on my TFSA portfolio over the last 9.5 years according to TD portfolio statistics. It’s one of my oldest investment accounts. As readers will know I share all my stock holdings publicly for accountability reasons.

It appears the couch potato method of index investing is very popular with netizens. In the subreddit, r/PersonalFinanceCanada even the moderators have admitted that, “the general consensus on PFC is that people should look for low-cost, passive index investments.”

Don’t get me wrong. The Canadian couch potato aggressive portfolio performed quite well over the last 10 years. I’m just saying maybe there are better investment strategies out there. ๐Ÿ™‚

Source: https://edrempel.com/outperform/

 

Why index investing isn’t all that passive

Index funds may appear to be passive, but they are actually more actively managed than most realize. This is something the index investing community doesn’t like to admit because it undermines the strategy’s reputation of being objective, hands off, and untainted by human biases.

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Jul 202020
 

Let others make your mortgage payments for you

If you’re tired of paying your mortgage on your own then this post is for you. The MIC manoeuvre is a legal tax strategy that allows you to effectively get other people to service your mortgage, so you don’t have to. How does it work? You simply borrow money to purchase Mortgage Investment Corporations (MICs) which generate investment income. This income is then used to cover the cost of both your new loan and your mortgage payments. ๐Ÿ˜€

Get help with your mortgage payments for free.

A MIC is a Canadian investment that holds mortgages secured by real property. It’s similar to a mortgage REIT in the United States. Some borrowers can’t get a mortgage from traditional lenders. But they can still obtain financing at a higher interest rate from alternative lenders such as MICs. If you invest in a MIC, the mortgage payment of someone else becomes your income! ๐Ÿ˜Ž

Similar to its cousin the Smith Manoeuvre, both strategies make use of tax deductible debt and financial leverage to increase your net worth. But unlike the Smith Manoeuvre, the MIC Manoeuvre also increases your cash flow. It does this by removing the biggest expense from your household budget – the mortgage payment!

 

How to implement the MIC manoeuvreย 

Why service a mortgage like a sucker when you can get others to do it for you instead?

 

To keep calculations simple let’s say your current mortgage balance is $100,000. According to TD bank’s mortgage calculator, your monthly mortgage payment in the current interest rate environment would be $379. This works out to roughly $4,500 a year.

Everyone knows the best way to get rid of a home loan is to talk to actor Mortgage Freeman. But if you’re not that well connected, using the MIC manoeuvre will still save you that $4,500/year in payments. Here’s how it works.

Step 1

Start by opening up a home equity line of credit (HELOC.) Then take out $150,000 from it and put the money into a discount brokerage account. You can generally borrow up to 80% of the value of your home. HELOC rates are about 3% these days, and payments can be interest only. This means the minimum payment you will have to make on your HELOC debt is $375 a month, or $4,500 a year.

So far your combined debt is $250K ($100K mortgage + $150K HELOC.) Your annual payment to service this debt is $9,000 ($4,500 + $4,500).ย 

Step 2

This is where the magic happens.๐Ÿ˜‰ You take the newly funded $150,000 in your brokerage account and purchase a basket of Mortgage Investment Corporations, which can be publicly traded or private. In the past I’ve blogged about which ones I like and hold. Currently popular MICs such as Timbercreek and Atrium have yields around 8%. Disclaimer: I currently own both of them.

Using 8% yield as a benchmark, a handful of MICs worth $150,000 can expect to generate $12,000 in annual investment income.

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Nov 182019
 

Time + Ownership = Financial Freedom

When financial writer David Bach was just 7 years old his grandma took him to McDonald’s and explained to him that there were 3 types of people in the world: The minimum wage employees working there, the consumers who pay money and eat there, and the owners who aren’t there but can still make money from the restaurant. David’s grandma helped him buy 1 share of McDonald’s, and taught him how to read and follow MCD’s stock chart.

The next time they went to a McDonald’s restaurant she told him, “now you are not just a consumer here, you are also an owner. Every time you eat here you are paying yourself.” It’s a brilliantly simple concept; easy enough for a child to understand. Yet it’s an inspiring and powerful idea. David became hooked on investing. He bought other stocks over time to eventually become a millionaire. ๐Ÿ™‚ From the time he bought his first stock to today in 2019, MCD shares have increased in value by over 250 times! But it didn’t happen overnight. It took decades.

McDonald’s menu in 1973 when David Bach was a kid.

Fortunately anyone can become an owner by investing in established companies like McDonald’s. And the best part is you get to earn all your money while you sleep. ๐Ÿ™‚

It all comes down to saving a percentage of your income, and investing it on a consistent basis. And then simply wait. The longer you wait the more your money will have time to compound and grow exponentially. Although you can schedule to invest every month, or every quarter, studies suggest you should invest as soon as possible to maximize potential returns.

People who try to get rich quick stay broke long.” ~ David Bach

If we understand that financial success requires patience, then investing will appear to be easier and less risky. For example, imagine if 2 investors held 2 different views about buying a house.

Investor 1) I’m afraid prices might drop in the next year or so. ๐Ÿ™ And it’s a rather large investment so I question if now is a good time to be buying.

This mindset makes it difficult to pull the trigger when a good opportunity comes. We act based on what we believe. If we believe prices may fall then of course we will experience more hesitation and concern when buying a house. But let’s look at the second mindset where patience is paramount.

Investor 2) I have the patience to hold this property for at least 7+ years. So after the year 2026, based on macro trends, house prices will probably be much higher than it is now. Most likely rent in the city will be higher as well. Therefore buying a house now and locking in a mortgage balance is probably better than buying a house later and risk taking on an even larger mortgage.

The first person is thinking about the short term, while the other is thinking only long term. The second investor has a better chance of putting his intent into action because his long term perspective provides him with more investment certainty. That’s because it’s hard to know what the market will do next year. But due to inflation and urban densification, it wouldn’t be hard to predict that Vancouver’s home prices will trend upwards over the long run.

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Sep 232019
 

The lump sum or monthly dilemmaย 

When it comes to investment timing there are generally two recommended strategies – either invest all the cash immediately, or break up the total amount to invest in regular installments. For example, if you receive a $12,000 bonus on January 1st, should you put all $12,000 into the stock market as soon as possible, or invest $1,000 per month over the course of the entire year?

The answer, statistically speaking, is to invest the entire amount right away. This is because the stock market rises about 3/4 of the time over a typical 1 year period. So a pattern of investing as early as possible, will over time, yield lower buying prices than dollar cost averaging which spreads the capital over the course of 12 months.

However, the difference in performance isn’t very dramatic. Investment management company Charles Schwab published a study comparing these 2 strategies along with a few other ones. They gave $2,000 at the beginning of every year to 5 hypothetical investors, each with a different timing style. They are as follows.

  1. Timing the market perfectly by investing the full $2,000 at the stock market’s lowest point of the year, every year.
  2. Invests the $2,000 at the very beginning of each year.
  3. Uses dollar cost averaging, dividing the $2,000 evenly by 12 and investing once a month.
  4. Timing the market in the worst way possible, investing $2,000 at the peak of the market each year.
  5. Investing in government T-Bills and other cash equivalents that are safe instead of the stock market.

Here is how much money each investor built up after 20 years.

how investment timing works

As we can see, investing a lump sum as soon as possible yields slightly better results than splitting up the amount and investing gradually month by month. ๐Ÿ™‚ This is true using older periods as well. The study further analyzed all 68 rolling 20-year periods dating back to 1926. In 58 of the 68 periods, the rankings were exactly the same.

In conclusion, if you plan to invest in the stock market, your best move is to invest the entire amount immediately. Don’t split up your capital to gradually invest it over time. Dollar cost averaging will probably set you back instead of help you. The earlier you take the risk with your money the more time it will have to grow. ๐Ÿ™‚

Here are some questions to sum up today’s blog post.

  • The TSX just reached a record high last week on Sept 17. If you have money to invest now, should you wait for a small pullback before jumping in?
    Answer: The data would suggest no. Believing that lower stock prices are just around the corner is a terrible mindset to have, financially speaking. As a case study, the Dow Jones index in the U.S. reached over 120 all-time highs just in the 2010s alone so far. It’s quite common for record highs to be followed by more record highs. The last investor in Charles Schwab’s study stayed out of the market and ended up with the smallest portfolio after 20 years. Many renters in Toronto missed out on the real estate boom over the last 2 decades because they were waiting for home prices to drop since 2000. Waiting for any correction is generally not a good idea.
  • Are there times when it’s better to dollar cost average rather than invest immediately?
    Answer: Yes. If you don’t already have a large pile of money saved, then dollar cost averaging (DCA) is better than waiting until you save up enough for a larger lump sum investment. The simple lesson is the sooner your money is invested, the better. ๐Ÿ™‚
  • Does timing the market work?
    Answer: In most cases, no. In the study above, after a 20 year period, the perfect market timer amassed only 6.5% more wealth than the investor who put money to work right away. Market timing can easily go wrong. The worst market timer in the study ended up with 12.6% less than the lump sum investor. So the risk is not the worth the potential reward to time the market.

 

 

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Random Useless Fact:

The goal of golf is to play as little golf as possible.