Feb 202017
 

For buy and hold investors, some like to actively pick and choose individual assets to buy, while others prefer to invest in the entire market. But which is a better investment strategy? Similar to a cronut, the answer is simple, but may not be obvious.

passive vs active

Which Investment Style is Better: Passive or Active?

The Cronut is a pastry that combines together a croissant and a doughnut. It was invented by New York City pastry chef Dominique Ansel and is trademarked. You should try one if you ever visit NYC. 🙂 They cost $5 each. But you can also find cronut knockoffs in Mexico that are much cheaper than the real thing, so you don’t peso much. 😄

Anyway, why is this relevant to investing? Because much like a cronut, the better investing strategy between passive and active, is not one or the other, but both. 😀 By combining individually selected assets, and index funds into one single pot, we can create the ultimate investment portfolio. This takes advantage of low-cost index funds, while adding alpha (excess returns) in certain segments of our portfolio. 😉

So how can we implement this? First, we actively pick and choose specific investments in the areas that we have extensive knowledgeable about. Then use the passive investing method to buy index funds for all other asset classes that we have insufficient knowledge about.

For example, I selected individual farms to buy in 2012/2013 because I knew how to look at soil quality, flood risk, earnings potential, etc. Therefore, I knew how to find undervalued land. Historically speaking higher quality farms appreciate faster than lower quality ones so I made sure to only buy farms above a certain quality. Farmland funds however, invest in all quality land. As a result I have outperformed every farmland or agricultural based ETF I could find on the stock market. So within the context of this asset class, passive investing would not have done me any good.

On the other hand, when I decided to get into the United Kingdom stock market last year, I decided to buy a low-cost stock market ETF. European stocks are beyond my comfort zone. I wasn’t about to perform due diligence on all 250 stocks of the FTSE 250 index. So that’s why I invested in a broad market UK index fund instead which contains those 250 individual stocks. 🙂

This is why self knowledge is very important for investors. We should try to use our strengths and specific knowledge to produce better than average outcomes in certain types of industries or asset classes. Then we can aim for average market returns in all other areas that we do not understand. Overall, this should give us a higher investment return than either a completely passive approach (which will give us average market returns), or a completely active approach (which will most likely result in under-performing the market.)

But in order for this combined investment approach to succeed we have to know the limits of our knowledge and capabilities.

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Feb 132017
 

Some psychologists believe that you are the average of the 5 people you spend the most time with. Whether this is accurate or not, the truth is we are influenced by everyone around us to some degree. This is why it’s important to surround ourselves with positive and highly productive people. Our environment should work for our success, not against it. 🙂

It’s not that we should trivialize or avoid negative people. We can treat everyone with the respect they deserve. But it would be beneficial to us if we make a conscious effort to spend more time with successful people. For example, to reach my goal of becoming independently wealthy I like to surround myself with friends who have the following personality traits.

  • They can see the big picture.
  • They don’t make excuses and know it’s up to themselves to make things better if it’s important enough to them.
  • They have or plan to have lots of resources, ie: wealth.
  • They are optimistic about the future.
  • They are curious about the world.

This is just my personal list I’ve thrown together. But there are many different definitions for what a high quality or successful person is. Of course if you work in the music industry, then you should surround yourself with “creative” people. We should also be aware of our biases. Being surrounded with too many “like minded” friends may trap us in an echo chamber of similar opinions. Doing so could make it difficult for us to expand our knowledge.

Unfortunately we can’t change the cards we’ve been dealt. But we can make the most out of our situations by developing the best environment for us to thrive. Part of this means choosing the right people to surround ourselves with. We can’t control what other people think, but we can manage our social circle, and choose who to hang out with. 🙂

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Random Useless Fact:

Even though the children below are born from different parents, they are actually siblings, genetically speaking.

 

Jan 302017
 

How to Find the Best Financial Planner

Financial planning can be simple, but it can also be very nuanced. So who is the best person to help you create your perfect financial plan? The answer is simple.

That person is you. 😀 Here’s why.

Unlike a meal plan or other short term aspirations, a financial plan isn’t an event that you can predict and design a specific result for. Financial planning is more of an ongoing process, with assumptions and approximations. Money is a part of life, and as long as we’re alive, we’ll need to make plans for it. 🙂 Financial professionals can give us guidance, but who will look after our money when they move, or retire? The best financial planner for you is you because you are always with you.

Give a man a financial plan and he’ll probably be okay until his plan needs to be adjusted. But teach a man to make financial decisions for himself and he will be free to explore the endless possibilities on his own.

A Few Analogies to Financial Planning

Who’s the best person to write up a business plan? The entrepreneur of said business, of course.

Who’s the best person to create a road trip plan? The person who’s organizing the road trip!

Who’s the best person to design a personalized career plan for Alex, who’s about to graduate high school? The answer is Alex.

In each of these cases the “plan” is based on future probabilities and assumptions with an approximate outcome in mind. As time progresses, events in reality will replace those assumptions chronologically. Adjustments will have to be made to each plan, but the overall goals are maintained. The company may alter its business plans due to unforeseen market forces. Road closures may force the road trip to take a detour. Alex may change his mind about his major in college.

Plans don’t have to be made alone. Individuals can consult business planners, school counselors, or other professionals. But it’s ultimately the responsibility and the decision of the individual to create the best plan for him or herself.

That’s why the best person to create, update, and adjust your financial plan, is you. Nobody knows you better than yourself. 😉

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Jan 232017
 

Beating the market isn’t necessarily hard. We don’t have to outperform everyone else. We just have to do better than the average. By picking individual stocks my investment returns have either matched or beaten the S&P/TSX Composite index every year since I started investing. 😀 But in today’s post I will explain why that doesn’t actually matter.

When Using Debt to Invest Pays Off

Most readers can recall that my Saskatchewan farmland value has been growing at incredible rates year after year. I’ve disclosed my stock performance many times in the past. And owning real estate in Metro Vancouver for the past 8 years has also helped to boost my net worth. However, beating the market is easy when leverage is used during a bull market cycle. Borrowing money to invest will always increase one’s investment gains, as long as the investment returns are higher than the cost to borrow, which luckily has been the case for me since I began investing. 😉

But what kind of returns would I be getting if I hadn’t used any financial leverage? Since I no longer hold any leveraged accounts at TD, there is no margin to exaggerate this account’s performance. 🙂 I have not been meticulously keeping track of my portfolio’s internal rate of return (IRR.) However, we can use the next best thing, which is a performance chart from TD.

Here’s a look at my non-leveraged portfolio for the past 3 years. It appears that my annual return was 11.57%. 🙂

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Jan 162017
 

There is a lot of misinformation online about personal finance, especially from all those amateur blogs. This is why you should read everything on the internet like you would drink a shot of tequila – with a pinch of salt. 😀 Today I will try to debunk some of the most common financial myths out there.

Myth #1. Credit cards are bad.

Credit cards can make you a lot of money. Fellow blogger Tawcan generates thousands of dollars in passive income through the use of his credit cards. My no annual fee Tangerine Mastercard gives me 2% cash back on most of my credit card purchases. Promotional credit card rates can be used to pay down higher interest debt. There are so many benefits to using credit cards. 🙂

 

Myth #2. Renting gives you more freedom than owning.

One argument renters use to justify their decision to not buy property is that they can move around more freely. But don’t be fooled by this appeal to popular opinion. Throughout human history, power and financial freedom actually went to those who owned the most resources and assets. Modern day real estate is no different.

Sure, a renter in Vancouver can move to Toronto. But as homeowner, so can I. A renter has to give notice before moving out. But I can move any time I want. I can choose between selling my existing property, or rent it out to make extra income. There are even professional property management services to help me find a suitable tenant. I received this ad in my mailbox the other day.

Everyone has to live somewhere. Being a homeowner simply gives you dominion and veto power over a real piece of land. This gives you more opportunities in life, not less. Anyone who can afford a security deposit can be a renter, including me. So a homeowner has all the same freedoms as a renter. But not vice versa.

Homeowners are generally more financially free. Most can use their properties to secure a low cost loan (HELOC) for major purchases or other liquidity needs. Over 90% of millionaires own their own homes. Meanwhile, not many renters have become millionaires by investing the difference they’ve saved over the years in the financial markets.

 

Myth #3. You need an emergency fund.

An emergency fund is like an insurance policy. It insures against unexpected financial emergencies. But like any other insurance plan, there’s a cost to having one. In this case it’s the opportunity cost of not doing something more productive with your pile of money. Unless you live in a third world country, consider the probability that you don’t actually need an emergency fund (EF.) I have never created an EF for myself, and I have never run into a financial emergency in my entire life. Most western societies already have generous social safety nets. Frankly, I  can’t think of anything that could possibly happen to me right now that would require me to have 3 to 6 months of expenses saved up.

If we already have proper insurance for ourselves, and stress test our finances, then having a rainy day fund is nothing more than holding a redundant insurance policy. Oh, but wait. I actually do have something prepared for a rainy day!

It’s called an umbrella. 😄

 

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