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. 🙂 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. 🙂

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. 🙁 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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Oct 292018
 

Short Term VS Long Term Bond Funds

Earlier this year I put together a list of high quality bond funds for readers to check out. There was a lot of good feedback, but some people questioned why I didn’t include any short term bond funds in my list. More recently reader Carla also asked about my indifference to them.

Well, to be Frank, I would have to change my name. 😎 But rather than doing that I will answer Carla’s question. 🙂

Retirement portfolios are usually associated with long term planning. Short term bonds tend to be less volatile and less sensitive to interest rate movements. But since I don’t plan to sell any time soon, short term volatility doesn’t really affect my bottom line. On the other hand, long term bonds pay a higher interest rate (or coupon) which more than compensates for the higher volatility in the long run. For evidence of this, let’s compare 2 bond funds with different durations.

Comparing Returns of ZCS and ZLC

For consistency purposes we’ll isolate the duration variable and look at the following 2 funds.

  • BMO Short Bond ETF (ZCS)
  • BMO Long Bond ETF (ZLC)

Both funds are from the same company, and hold corporate bonds. The only key difference is the duration of bonds they hold. Below shows the annual total return of these funds from Morningstar, highlighted in yellow.

bond fund comparison between short and long

As we can see, over the last 5 years the short term bond index fund (ZCS) returned only 2.21% per year. The latest inflation rate number from Statistics Canada is 2.2%. So holding a short term bond fund such as ZCS would have earned an annual real return of 0.01%. I think we can all do better than that. 🙂

Meanwhile the long term bond fund (ZLC) returned 6.21% per year on average. Even the 1 year return shows that long term bond fund ZLC came out ahead. Keep in mind this is during a rising interest rate environment, which should hurt long bond funds more. But short bond fund ZCS currently has a weighted average coupon of only 2.91%, while ZLC’s is at 5.29%. The longer investment time horizon we have, the bigger the difference in returns we should see between ZLC and ZCS. 🙂

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May 242014
 

To become successful investors we have to think like marathon runners, because we have to stay committed to the long run 😀 So when it comes to the stock market the short term fluctuations are not important. Our perception of risk and performance should be placed on looking further down the road.

14-05-funny-Netflix-Marathon-TV-running

Below are two made up scenarios for the stock market. Let’s pretend they are index funds that track the overall market performance. Both indexes start at $100 per share and play out for five years. If we were to consistently invest $10,000 every year into one of these funds, which of the two scenarios would likely make us more money by the end? Take a guess 🙂

14-05-stockscenarios stock market perspective performance

If you picked the bottom red chart then congrats! Because you will probably learn something new today and become a smarter investor 😉

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