Apr 092014

Last Fall I made some bold predictions that low interest rates are staying until 2016, which will keep the housing market stable. I also suggested that investing in parts manufacturers like Magna International would be a profitable venture due to the consumer’s love for cars :D

Fast forward to today and it looks like events are unfolding thus far :) The Prime lending rate is still at 3%, unchanged from last year. Mortgage rates have not moved higher. Home prices have not corrected. And Magna International’s stock price is now 25% higher since last year’s post.

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Anyway, the International Monetary Fund (IMF) recently published their growth projections for countries in 2014. Canada’s economy is expected to grow at 2.3% this year, lower than that of the U.S. at 2.8%, and the U.K. at 2.9%.

So we must create a plan to make the best of this current economic situation, because if we fail to plan – then we plan to fail ;) The following image demonstrates the importance of planning ahead. Can you figure out what’s wrong with this sandwich?

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Today I will make some more predictions :) I think the overnight lending rate in Canada, currently at 1%, will increase to 1.25% in 2015. And by 2018, it would only be at 1.75%. Since rates are going up so slowly I would continue to own instead of rent, because I think the national average real estate price will move higher in the next few years :D

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Apr 032014

The following is an article written by Scott, who works in financial services.

The world of finance is one of the most sophisticated markets of them all. Today’s consumers expect far more from a wide-range of financial institutions than they did in the past, and this means that services have to make use of cutting-edge techniques and technologies.

The Financial Consumer Agency of Canada (FCAC) oversees the workings of companies offering different financial products and services in the country. Under the auspices of the Financial Consumer Agency of Canada Act, it has a wide remit for the administration and enforcement of all relevant federal laws and regulations.

As well as ensuring that companies comply with federal consumer protection measures for the protection of customers, the FCAC also promotes the adoption by financial institutions of methods designed to strengthen the financial literacy of Canadians.

Companies such as Amex Canada play an important role in moving the whole industry forward, whether by offering 24/7 Customer Service facilities to deal with concerns or ensuring swift solutions for customers who need replacement credit cards for whatever reason. However, there are many other areas which are also benefiting from innovative approaches.

Fraud protection

One of the most important ways in which financial services can protect customers is by offering up-to-date protection against fraud or unauthorized usage with bank accounts or credit cards. As long as reasonable care has been taken to protect account and PIN details, fraudulent charges are no longer anything to worry about.

Digital commerce

A great deal of the most cutting-edge innovation at work in the financial sector is actually done away from the limelight. The ever-expanding network of both Card Members and merchants around the world means that a truly global overview is needed to ensure that the newest technologies are implemented to enable transactions on new platforms across multiple channels.

Mobile payments are playing an ever-increasing role in day-to-day activities across the board and Canadian consumers and businesses are leading the way in the uptake of new systems.

Financial innovation

With major multinationals seeking to constantly improve financial services for their clients, demographic changes and aspirational attitudes means that new ways of accessing capital and offering personal financial management and savings tools are constantly coming onstream.

With official figures showing that real gross domestic product rose 0.5% in January, after a 0.5% decline in December followed five previous consecutive monthly increases, Canada’s Finance Services are certainly playing their part in moving the country’s overall economy forward.

ref: http://www.statcan.gc.ca/daily-quotidien/140331/dq140331a-eng.htm

Mar 242014

In ancient Rome, the Denarius currency started out as a 4.5 gram coin made of almost pure silver. But over time the amount of silver content in the coin was reduced to just 2%. The Denarius had become almost worthless thanks to inflation and had to be replaced by a new currency, the Argenteus.

In the 17th century the colonial currency suffered the same fate. The famous English economist Adam Smith criticized colonial currency in his work, The Wealth of Nations. The inflationary nature of the currency, he wrote, was a “violent injustice” to the creditor; “a scheme of fraudulent debtors to cheat their creditors.” A creditor is someone who lends money to someone else. In 1775, the colonial pounds were replaced by a Continental currency, which of course also failed.

In 1794 the first American dollar was minted :) These were made from almost pure silver. But they are no longer produced today. And starting in 1965 American quarters were minted with a combination of copper and nickel, which replaced the original silver content.


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Mar 132014

Some people have a fear of losing money. This prevents them from taking the necessary risk with their investments, like buying stocks, to give the best probability of a long term return. The S&P500 returned 20% over the last 12 months, so anyone who holds American stocks like me have probably done well with their net worth over the last year :) Despite reaching new record highs however, we don’t hear people talking about the stock market too regularly these days because things are going really well. But what if the S&P500 had lost 20% over that same period? I bet it would get a lot more attention wouldn’t it :) Bear markets certainly give the media more to talk about.

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This is because many people can’t stand losing money. In economics the tendency to prefer avoiding a loss rather than making a gain is called loss aversion. This psychological behavior prevents many people from making smart investment decisions.

Scientists have done experiments where they give monkeys a single banana each. Predictably the monkeys would appear satisfied :) The scientists then gave two bananas each to another group of monkeys and then took one banana away. Note that these monkeys still ended up with a free banana each, but they become noticeably angry and agitated at the scientists, as if they had just been robbed. So sometimes  1 ≠ (2-1).

In terms of behavioral finance,  we’re not that much different from monkeys. We feel pretty good about getting a $20 discount on a new pair of shoes, but we feel a whole lot worse if we realize we lost $10 because it had accidentally fallen out of our pocket. But learning how to process and react to losing money correctly is important to understanding the financial system. In fact Canadians who describe themselves as more knowledgeable investors are more likely to have experienced a major loss.

Here’s an easy experiment to find out if you are risk adverse. Pick a stock to follow and imagine you own it. Record how much it has increased or decreased after each day, and your feelings about it. Over time if you notice that you feel emotionally stronger toward losses than gains of the same magnitude then this means you have a lower risk tolerance for investing, which is fine. You simply value capital preservation more than potentially larger gains. Just be aware that the time when we should be taking on the most risk is when we’re young. If our investments fail at least we would still gain valuable knowledge and experience, which we probably can’t afford to do when we’re old and crusty :P

To me a dollar lost has the same emotional intensity as that from a dollar gained :) I don’t get upset if I lose on a stock trade because I know I can just as easily make it back next time. I can also sleep well at night during a recession because I know bear markets don’t last forever. Thinking about losses logically can make us more happy :D

Random Useless Fact: While sitting in front of your computer, lift your right foot and make clockwise circles.
While doing that, take your right hand and draw the number 6 in the air.
For some people, your foot will change direction all by itself. Try it :)

Feb 272014

The following is a guest post by Scott who understands how the 401k works in the U.S.

Do You Feel Lucky Today? Investing with 401k Funds. Your employer 401k is designed to gradually build a retirement fund that can ensure you maintain your standard of living after your career…but that isn’t good enough for you, is it? No, after 40 or more years of the daily grind, you may want more to show for your decades of hard work. Perhaps you’d like to be able to afford a beautiful high-end car or an extended vacation abroad in your golden years, and to be frank, the slow and steady approach is probably not going to place you on a Tahitian beach for a few months after your last day of work.

Many people dream of a more immediate way to build wealth, but some actually have viable ideas and investment prospects that could earn them the funding they need for the retirement of a lifetime in a much shorter time than a 401k fund. Unfortunately, not all of these savvy visionaries have the capital on hand to fund their initial investment. However, there is a way for such individuals to obtain the money they need at present by borrowing from the future: by withdrawing money from their 401k fund. You can consult Suncorp if you need help planning for your retirement, they will be able to let you know how much you need to retire, the best use of your retirement fund & provide peace of mind for your future.

Most types of 401k fund allow the holder to withdraw money from their 401k, but the funding comes at a heavy price. All money withdrawn from a 401k is considered taxable income and is taxed at your income rate. Many withdrawals also include a 10 percent IRS penalty, the exception being individuals over the age of 55 at the time of withdrawal as long as they separated from their employer during the same year.

All told, a withdrawal could lose well over 30 percent of its value to taxes and fees regardless of age. Obviously, a withdrawal decreases the amount of your 401k fund as well, limiting its full growth potential. If you are unsure you’ll be able to restore the funds to your account, a withdrawal for investing makes your entire nest egg little more than chips on the table.

There is a way to avoid many of these taxes and fees when borrowing money from your senior citizen self for investment purposes. Money can be taken from your 401k account tax free as part of a series of SEPPs, or “”substantially equal periodic payments.” However, this comes with its own set of difficulties. You cannot choose the amount you receive; it is calculated using a standard formula based on the amount in your account and your life expectancy before being issued as equal payments.

In order to avoid the tax penalty, you must take money from your account at least once every year until the age of 59 ½. The account associated with the SEPPs is also effectively frozen, and you cannot make any further withdrawals or deposits to it for 5 years or until age 59 ½, whichever is longer. You are free to transact with other accounts, and you can also establish an account specifically for SEPP withdrawals by transferring money from other funds so that your primary fund is not affected.

If you modify or cancel your SEPP payments, the tax penalty will be applied to all previous payments with interest. This means that if you find that hot new investment at 29, you should be prepared to drain your 401k for the next 30 years. You should also hope your investment is all that it seems, because th

e only ways out without penalty are death and disability. If your income situation changes during this time and you no longer need the payments, investing them elsewhere is a much better option than canceling the plan.

Your 401k is one of the best benefits most employers provide, but it is meant for much later days. If you have a surefire investment plan that just can’t wait until then, your 401k can be an excellent source of capital…you’d just better be sure about it.