Sep 232019
 

The lump sum or monthly dilemma 

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. 🙂 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. 🙂

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. 🙂
  • 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.

 

 

____________________
Random Useless Fact:

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

Apr 292019
 

Earlier this year hedge fund manager Ray Dalio gave 3 financial recommendations for millennials in an interview.

His first recommendation is to focus on savings, and to think about how many months of living expenses your savings can get you through. Savings, explains Dalio, is “freedom and security.” Savings can also provide you with opportunities. If you need to further your education, start a new business, or invest in a discounted asset, it’s easier if you have extra money. If you can accumulate enough savings to last you for the next 300 months then you can be considered financially independent. 🙂

Dalio’s next advice is about what to do with your savings. He says “it’s important to realize that the least risky investment that you can make, which is cash, is also the worst investment you can make over time. You can judge that by comparing the rate of inflation to the after tax rate of return you will earn.” So if inflation is 2%, and you’re only making 1% on your cash investment then you are actually losing purchasing power and getting poorer. “So you have to move into other assets that will do better over a longer period of time.” This is why some people like myself don’t have a cash emergency fund.

The last advice Dalio gives is a bit of surprise to me. Instead of going with the mainstream and buying an index fund, he suggests that millennials should do the opposite of what their instinct tells them to do. This can be emotionally difficult to pull off. The market reflects the crowd and your instincts will usually lead you to do the same thing the crowd is doing. But herd mentality won’t get you any further than the rest of the herd. So you want to buy when no one else wants to buy. Famous investor Warren Buffett has a similar saying: “Be fearful when others are greedy and greedy when others are fearful.” The best way to approach this last advice for me is to apply original research and critical thinking to your investment strategies if you want to outperform the market. But then again, a lot of people are perfectly happy earning market returns and I think indexing is an acceptable way to invest as well.

Ray Dalio created a 30 min YouTube video about his famous work, Principles for Success. He believes that dreams, reality, and determination can all help to create a successful life. And that pain plus proper reflection will give us the tools to progress. It’s an interesting watch if you’re into mental models and self development.

 

__________________________________
Random Useless Fact:

An actress posted a photo of a man’s rear because she was tired of being harassed online by people leaving lewd comments on her Instagram account.

Apr 152019
 

Actionable Advice – From Rags to Riches

I recently came across Quora contributor Kevin Yue’s response about the best financial advice he had ever received. The surprising answer comes from his dad, who escaped to the U.S. as a broke, war refugee. Over time Kevin’s dad turned his life around and eventually became part of the top 1% richest in the country. So here are some of his financial rules.

1. When making a purchase ask questions from an investment point of view instead of one based on consumption

There are financial ramifications to every spending decision. If you buy that new laptop, will you also need a case for it? What about extended warranty? If you buy that car, will you need to buy premium gasoline every time you fuel up? Will the vehicle hold its value well over the next 5 years? If you buy a house, how will that impact your taxes or gas bill? Will your maintenance and repair costs go up over time?

What is the potential for land appreciation in that neighborhood? The point is just because you buy something once doesn’t mean it will only cost you once.

Kevin warns that people usually ask all the wrong questions when they shop. For example, “when buying a new pair of shoes, do not ask how good they look or what brand they are. Instead, ask how long will they last, and in what kind of weather, and what the warranty is. If you get a good pair of warm waterproof boots with a lifetime warranty, they could literally be the last pair of boots you’ll ever buy. It is much better to buy a $400 winter jacket which will last you 20 years than a $200 one which will last you 6.” And both of those options will be better than the $800 jacket that will be out of fashion in 2 years.

2. A dollar saved is $20 earned

$1 invested will become $20 in 40 years.  “This is the magic of compound interest,” Kevin explains. “In practical terms, it means that your go-to option should always be to tighten your belt. Put away some money every week, and it will eventually pay itself back 20 times over.”

3. Never lose money for free

“Paying extra tax is losing money for free. Never pay your credit card late. Late fees are losing money for free. Paying interest is losing money for free. Always comparison shop. Why pay more for the same product? That’s losing money for free. Turn off your heat when you leave the house. Leaving the heat running is losing money for free.” Kevin’s dad used to turn off the heat entirely, but left his apartment door wide open to steal heat from the hallway.

Although going into debt is generally not advised, “there are some occasions when borrowing money is not losing it for free.” For instance, investment loans, HELOCs, and mortgages in the U.S. can be tax-deductible. “In these cases, sit down with a calculator. Doing the math wrong (or worse, not doing it at all) is losing money for free.” Another thought is to not leave any money on the table when negotiating.

Continue reading »

Jan 242019
 

Putting Household Debt into Perspective

.

Canadian households currently owe more than $2 trillion. Our average debt to income ratio increased to 170%, making us number 1 among the G7 countries. 🙂

But do we actually have too much debt? Well perhaps not. Comparing Canada to the G7 group conveniently omits other highly developed countries. Australia’s national broadcaster claims its country has a household debt to income ratio of 200%. And reports of Netherlands, Denmark, and other Nordic countries are even higher than that! So in reality Canada is far from being the most indebted country in the world.

The cost of borrowing also affects the degree to which people will go into debt. For example, in the U.S. a typical mortgage today would cost about 4.5%. But in Canada you can get a mortgage for only 3.0%.  If the debt is cheaper to service then people will be naturally inclined to borrow more. 🙂

There’s a whole slew of other economic, legal, and political variables that make it nearly impossible to accurately compare household debt from one country to another. These kinds of comparisons would never be published as a scientific study because you have to correct for way too many variabilities. But they make for intriguing headlines nonetheless. 🙂

Continue reading »

Sep 102018
 

Billionaire investor Warren Buffett recently celebrated his 88th birthday and told CNBC in an interview that he thinks stocks are still more attractive than bonds or real estate. In fact his company Berkshire Hathaway recently picked up some more shares of Apple Inc (AAPL) making it the largest position in the holding company.

The value of BRK.A shares increased by an astonishing 1,000,000% between December 1964 and December 2015. Meanwhile the S&P 500 market index increased by only 2,300% during that time. This is a testament to the will and dedication by Buffett & his team to create wealth for shareholders. I suppose you can say that if Berkshire has a will, Berkshire Hathaway. 😎

One thing to remember when investing is to keep it simple. You don’t have to be a genius to be good at it. 🙂

When we keep track of something it tends to grow. Building up investment experience is no different. That’s why every investor needs to track their investment decisions. This is going back to basics but it’s crucial to becoming better investors.

Investment Tracking 

This can be done by creating a simple table or spreadsheet like the following, and updating it over time. You can think of this like an investment journal. 🙂 I will demonstrate using the 2 new companies I blogged about purchasing earlier this year.

InvestmentTypeActionReasons for decisionDateExit plan
  • Parkland Fuel Corp (PKI.TO)
StockBuy 100 shares
  • Large network of retailers
  • Stable dividend yield (with growth)
  • Recession resistant
01/02/18Hold into retirement
  • Automotive Properties (APR.UN)
REITBuy 190 units
  • High 7% dividend yield
  • Relatively low payout ratio (60%)
  • Canadians love to buy cars
01/02/18Hold into retirement

 

Here are some additional columns we can add to track our investment decisions even more closely:

  • Timeline horizon (how long we plan to hold something)
  • Current market value of said investment
  • How to measure the success or failure of our decision
  • Any concerns that go against our final decision
  • Does the original reason for buying a stock still apply in the present day
  • What process did we use to evaluate the investment, eg: P/E ratio, Graham formula, or analyst predictions

No matter how good we are at evaluating investments, we’re eventually going to be wrong. Sometimes we may be wrong due to unpreventable reasons. But there are many factors that we can control, such as our own psychology and behavior.

Keeping a detailed investment journal of our decisions is the best way to remind us in the future of the feelings we had at that time to avoid making the same mistakes again. We’ll understand why we made the choices we did, whether or not it was worth it, the process behind our decisions, which strategies worked and which didn’t, and do our best to hopefully replicate past successes. 🙂 Hindsight is 20/20, but only if we remember how we thought and what we did in the past that lead to the current moment.

 

__________________________________
Random Useless Fact:

What it’s like having a motorcycle.