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Will Actively Managed Mutual Funds Ever Go Away?

Nelson Smith — Thu, 02 Feb 2012 10:00:04 +0000

These days, the passive investing movement is gaining momentum faster than I get rejected for dates by attractive ladies. And for good reason. Actively managed mutual funds may sometimes outperform the index, but are more often than not surpassed by their passive brethren. Math would indicate that the average fund would match the overall stock market, since mutual funds are such large participants. And this is true, except for one little caveat: fund fees. The fees cover all sorts of things – like paying the advisor who sold the fund to the investor, as well as paying the fund manager and the fund’s expenses. The fees also include advertising to expand the mutual fund, as well as ensuring the mutual fund company makes a healthy profit.

It seems like every blog is touting the advantages of passive investing. And yet, millions of Canadians continue to invest in mutual funds that, thanks to fees, will continue to underperform the underlying index. Will passive investing ever make actively managed mutual funds go away? I don’t think so, and here’s why:

Marketing

Between Canada’s big 5 banks and our handful of actively managed mutual fund companies, billions of dollars are spent promoting their wealth management products. They’re clever at their advertising, never actually pushing their products directly, rather preaching a message of security. Financial security is only a few trips to the bank away, at least according to their advertising.

TD uses two old men primarily in their advertising, along with a big comfy green chair. Just go to TD, the commercials say, and you won’t have to worry about money. The old men seem pretty happy with TD’s offerings, after all, they do hang around outside of the bank.

I’m picking on TD specifically, but each bank in Canada is guilty of using the same marketing techniques. And why shouldn’t they? They don’t really care about how much investors in their products make. All they care about is driving results for their shareholders.

The Way They’re Sold

Let’s divide mutual fund salespeople into two groups, the people who work at banks and the people who work for separate wealth management companies like Investor’s Group.

Both groups are similar in the way they get compensated, which is a sales fee when the investor buys the fund, as well as a fee every year the investor holds the fund, called a trailer fee. Advisors are thus rewarded for getting more business.

In a bank, there isn’t much need for the mutual fund folks to go out and drum up new business. The bank places promotional materials around the branch, especially during RRSP season, urging investors to contribute to their investments. Bank tellers are also encouraged to upsell products to people with large chequing account balances, or people who just don’t have any investments with the bank. Bank mutual fund representatives have a whole branch funnelling prospects their way. So they don’t have to work that hard to sell.

Meanwhile, the independent salespeople do have to drum up business. They do the usual things to drum up business – networking, marketing and the like, all in the hopes of increasing their assets under management and their trailer fees. With several different companies offering very comparable products, it’s a dog eat dog world out there. They work hard to get the business the banks do not.

And then we have the world of exchange traded funds and index funds. The companies who manage them make money, but once a product is introduced that seeks to replicate a certain index, that’s it. You can only have one product per index. Since management fees on these products are minuscule, (hence making them best for investors) nobody has any financial interest to push them. Financially savvy people learn about them, while Joe Investor does not.

There’s a whole army of people selling actively managed mutual funds, and hardly anybody singing the praises of passive investing. This is starting to change, but it’s not going to be an easy fight.

A Lack Of Education

Fellas, if you ever want to ruin a date, start talking about investments. You might catch a woman who’s legitimately interested, but for the most part, the ladies don’t care about this stuff.

Okay, to be fair, I also know a fair share of guys who don’t give two hoots about investing either. People can’t be bothered to learn even the basics. The terminology is hard. The content is boring, and often too math-y for people. People just aren’t interested in learning about how to be better investors.

Then comes along the friendly mutual fund salesperson who caters nicely to this attitude. Don’t worry about anything, they say, just give your money to me and some smart investment type people will manage it. This appeals to somebody with little investing education, so they’re happy to oblige. Some might call it preying on the uninformed, but banks call it good business.

Until everybody becomes better educated financially, I don’t envision actively managed mutual funds with high fees to go away. What do you think?

Will Actively Managed Mutual Funds Ever Go Away? originally appeared on Canadian Finance Blog on February 2, 2012.

The CAD vs USD

Teacherman — Tue, 31 Jan 2012 10:00:36 +0000

How cool is it to be a Canadian these days? I mean, we’re weathering the economic storm as well as any other G8 country, our banks are the envy of the world, and our dollar has been trading at par with the US Dollar for roughly three years now. I find the whole idea of an equivalent exchange rate very appealing to most Canadians in a patriotic sort of way. After all, if you live in Canada and rarely travel outside of it, you probably don’t notice the effects of the changing exchange rate much at all. Sure, a few luxuries might cost a little more, but it won’t be anything noticeable. Businesses and people that live near the USA border however, notice some fairly substantial differences in their life as our currency floats higher or lower against the USD. I grew up in a Manitoba border town. Much of our shopping was done “across the line,” and the economies of the area were a very international mixture. I even lost my hockey team (the Winnipeg Jets… who have since returned, thank god) in large part because of that dastardly exchange rate. So I know my exchange rates pretty well.

Being The Little Brother Sucks Sometimes

Two things that I believe most Canadians don’t realize in light of the last three years is that the Canadian dollar is artificially high right now, and that it isn’t good for the long-term health of our economy. Our trade relationship with the USA is still the biggest in the world. A few years ago (I couldn’t find anything to verify if this was true any longer) my political studies professor shocked us when he said there was more trade between the Detroit/Windsor port of entry than between any two countries in the entire world! That’s crazy when you think about it. Over 80% of Canada’s population lives within 100 miles of the USA border and according to The World Factbook in 2007 over 84% of our exports go to our big brother to the south, and we receive over 56% of our imports from them. Long story short, we need the USA… a lot! When the dollar goes up, it definitely appeals to our “little brother” complex and it feels like we’re punching above our weight. It’s also nice to go on a shopping trip and get a lot of bang for your loonie/greenback. In the bigger picture though, a higher dollar means that we can’t sell as many exports to the American consumer (the engine of the world economy) and with more and more “buy American” laws coming into play (despite their questionable legality), this is going to put a serious dint in our economy.

Liquid Gold? I’d Rather Have Real Gold!

We haven’t yet noticed this dint because we are awash in commodity and energy dollars. Our oil and other natural resources have given us some huge advantages and have allowed us to show strength at a time when few countries appear to have any. Eventually this cycle will go back around as it always does and our economy that is heavily dependent on petro dollars will shrink back to its average, while the American one will likely leap to the forefront again if it can ever solve its political gridlock problem. Most analysts I’ve read, and a brief look at that statistics since 1971 (when the USD allowed itself to start “floating” independent of the gold standard), reveals that our natural exchange rate is likely somewhere between 80-85%. When you look at the relative size of the economies involved this seems fairly logical.

As Close To a Sure Thing As You’ll Get In Investing

So, if you’re like me, you’re probably wondering how to take advantage of this unique exchange rate situation right? Well, the first thing you can do is look seriously at cross border shopping. The Canadian Border Services Agency (CBSA) allows you to head down to the states for 48 hours and return with $400 worth of goods for each person in your vehicle tax- and duty-free. If you know anyone that smokes or drinks then the sin taxes you save on those products alone can be worth a short jaunt. The far more lucrative option that I would recommend is to invest with the idea that the CAD is extremely likely to sink back to its average over a long enough time horizon. I wouldn’t try to speculate when this change will take place, but when you consider the size of our respective economies, and the cyclical nature of commodity prices, I think the eventual return to the mean is a near certainty.

Those Yankees Sure Do Fees Right

Instead of merely trying to make money off of straight currency conversion, I would use this opportunity to add some non-hedged American investments to my RRSP account (where their withholding tax won’t hurt you). I personally love the Vanguard low-cost ETF series. It allows you to track huge segments of the American or world markets for extremely low fees (probably 1/40^th of what your mutual fund charges). By purchasing a basic Vanguard ETF product form your discount brokerage you should see a nice little capital gains run in the long-term (I still believe the USA will rise again, stronger than ever), but you will also likely gain when you eventually sell the ETF and convert the currency back into Canadian funds again. Right now there are a few brokerages that allow USD holdings and at par conversions within RSPs. Off the top of my head I know that Questrade, Qtrade, and RBC Direct Investing offer these advantages. These minor currency exchange fees used to eat into returns big time, so it is definitely worth looking into if you plan on taking advantage of the current economic situation with non-hedged investments.

The CAD vs USD originally appeared on Canadian Finance Blog on January 31, 2012.

Is Gold In A Bubble?

Nelson Smith — Thu, 05 Jan 2012 10:00:04 +0000

This is part two of the bubble series here at Canadian Finance Blog. Part 1 explored whether the run up in Canadian housing prices was a bubble. Today, let’s talk about gold.

As Warren Buffett has famously said:

[Gold] gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Of course, astute readers will know gold’s main purpose, which has evolved into a tool to enable speculators to place bets on the direction of world economies and their monetary policies. Basically, investors will buy gold if they think major governments will be printing money to stimulate the economy. Or, these people can take it one step further in their thinking, buying gold because they feel a major economic catastrophe is upcoming. Gold also has some industrial uses, as well as being used in jewellery, but these actual demands doesn’t really move the price.

Naturally, as the economies of the developed world have gone through their problems over the past few years, gold has done well. The yellow metal closed 2011 at $1564 per ounce, declining from a high of nearly $1900 just a few months ago. 5 years ago, gold was trading at just $600 per ounce, meaning the precious medal has gone up more than 150% over the past 5 years.

Is gold just beginning it’s upward trajectory? Or is there a gold bubble and gold bugs in for a world of pain?

The Bullish Case For Gold

Central banks around the world are loosening monetary policy. Essentially, they’re both printing money and giving banks a ridiculously low rate to borrow money, which they hope will help kick start lending. Every central bank needs to slowly increase the supply of money in an economy, because a growing economy needs a growing money supply. But, what happens if the supply of money grows faster than the rate the economy is growing? In that situation we’d have inflation begin to spiral out of control, since printing too much money essentially devalues the current money supply.

This is what gold nuts are banking on. They believe that, over the long term, large government debts around the world are going to lead to economic disaster. To get out of their debt problems, governments will either be forced to admit defeat and default on their loans, or create enough money to pay them off. If either of those events happens to a large economy, (like say, Japan) this would be extremely positive for gold.

And if it does, you know your neighbour/friend/whatever who bought into the gold hype will be happy to profit off of others’ misery.

The Bearish Case For Gold

There’s two reasons why gold may not be a good investment going forward.

Firstly, there’s no guarantee that these large government debts lead to defaults. Remember, after World War 2, governments around the world were stretched thin because of the massive borrowing it took to fund a war. The soldiers came back home, the economy picked up, and the world grew out of its debt problem. It’s still quite possible for governments to do the same thing now. Even guys like me can figure out there are certain countries with debt problems. There’s still time for governments to do something about it.

Secondly, it’s possible the bad news scenario is mostly priced into the current gold price. If every gold bull thinks the same thing is going to happen, then they’ve already bid up the price in anticipation. If bad things happen, the price might actually go down, because so many people will want to take profits on the catastrophic event.

What Do I Think?

This is why you’re here, right? To get my awesome unsolicited advice? Well, here it is.

I’d stay away from gold. Firstly, as the investing axiom goes, buy low and sell high. Gold is trading close to an all time high. It has already priced in some pretty bad things happening. But what if they don’t? By buying after such a run-up, you’re setting yourself up for a long tumble down.

The faster an investment goes up, the faster it comes down. When the bubble pops, things go badly, quickly. One only has to look back a few years to the subprime mortgage crisis to see how quickly the market can turn from positive to negative. By buying an asset near the top of the cycle, an investor is setting themselves up to be caught up in the panic selling.

Look at silver, which is often thought of as a poor man’s gold. In the past year alone, silver has lost 25% of its value in a week twice. Those types of price movements aren’t characteristics of a rational market.

I won’t be putting any of my money in gold soon. How about you? Do you think there is a gold bubble?

Is Gold In A Bubble? originally appeared on Canadian Finance Blog on January 5, 2012.

Starting To Invest: The Case For Being Conservative

Robb Engen — Tue, 20 Dec 2011 10:00:14 +0000

When young people are just starting to invest their money, it’s common to make a few mistakes along the way. I started investing in mutual funds when I was 19, mainly because they were easy to set-up with a pre-authorized purchase plan at my bank. Looking back, I think I made a lot of mistakes that are fairly common for young investors.

Every new investor is asked to fill out a risk tolerance profile to figure out what type of mutual funds they should be investing in. Young people have the longest time horizon and are typically more aggressive with their investments so they are steered towards expensive growth mutual funds.

That was how I started investing, and most Canadians have similar stories. If I could go back in time I would have invested in low cost mutual funds (ETFs weren’t available back then) instead of expensive growth funds. But when I talk to young people who are just starting to invest, I tell them to forget about finding the perfect investment products. As a young investor, it’s your savings rate that matters most. Be conservative with your money and preserve your capital before you make too many mistakes.

Starting to Invest

Many new investors are focused on the wrong things when it comes to investing their money. Rather than worrying about where to find the highest returns or how to lower their investment costs, young people should just focus on their savings rate while they figure out their short term goals.

Once enough money has been saved and all other financial obligations have been met, then it’s time to start looking for higher returns with index funds, ETFs or individual stocks. Your investment costs will also be lower if you have a larger portfolio to work with.

In my case, I saw all the fancy charts telling me to start saving for retirement now so I could put the power of compound interest to work. If I started saving $300 per month at 19, I would be a millionaire by the time I was 60. I was chasing higher returns instead of focusing on increasing my savings rate and building up my capital.

The Case For Being Conservative

The problem with risk tolerance profiles is that they naturally skew young people towards aggressive investments. I had a good savings rate, but I was in the wrong products and didn’t have an investment plan.

I was investing in expensive growth mutual funds in both my non-registered account and in my RRSP contribution. A few years later when I needed the money, I ended up selling everything and incurring huge penalties for early withdrawals.

If I had just put that money inside a high interest savings account, after three years I would have ended up with over $10,000. I would have had plenty of options to use that money for paying off debt, for a down payment on a house, or for starting to invest.

Now that I’m older and have developed a financial plan for the future, I’m much more aggressive with my investments. I look for higher investment returns and lower investment costs. But for young people just starting to invest, I think there’s a case for being conservative until a significant amount of money is saved and short term financial obligations are met.

Starting To Invest: The Case For Being Conservative originally appeared on Canadian Finance Blog on December 20, 2011.

What Exactly Is Contrarian Investing?

Nelson Smith — Thu, 01 Dec 2011 10:00:59 +0000

There are some people that, for whatever reason, are just drawn to being a little different than everyone else. Something about it just feels right to them. They’re constantly questioning authority and conventional wisdom. Rather than blinding accepting what’s presented as fact, these people will prove it for themselves. As the cliche goes, they march to the beat of a different drummer.

Welcome to the world of the contrarian. As a card carrying member, I invite you to grab a beverage and spend a little while reading what we’re all about. You’ll probably think that us contrarians are a little weird. It’s fine, we do point and laugh at you and your blind faith in following the crowd.

Contrarian Investors

Being that we’re on a financial site, let’s keep the conversation focused to money topics, specifically investments. You might think a contrarian is one of those guys who always thinks the market is going to go down. Humans are generally pretty optimistic, so someone who constantly predicts doom would have a differing opinion most of the time. Being contrarian is a little more complicated than that.

Yes, often contrarian investors will predict a market sell off, particularly when the rest of the world is bullish. The main identifier of a contrarian investor is the ability to pick their spots to go against the heard.

Let’s take, as an example, the European debt crisis. I think, like a large portion of the investing population, that it isn’t going to end well. I also think the ripple effects of that will affect most of the industrialized world. It’s a pretty standard opinion. Saying that though, I think the price of gold already has a European crisis already factored in, so gold is a pretty bad place to be going forward.

There are other contrarian investing myths too. We don’t just pick stocks or investments that are simply out of favour. There are all sorts of reasons why a stock could sell off. Painstaking research is applied to determine whether the company in question can actually return to former glory, or whether the company will be left to wander aimlessly like a zombie.

Ultimately though, even after hours of research, trying to predict a turnaround is still an inexact science. This doesn’t bother contrarians, since they look for investing home runs, instead of singles. If one company triples or quadruples in value, it easily makes up for the dog of the portfolio that fell 75%. Remember, a stock can only fall 100%, but can go up much more than that.

Becoming A Contrarian Investor

There are essentially two ways of becoming a contrarian investor. You can either pick individual stocks or pick whole sectors that are beaten up.

Take, for example, American banks. Over the past few years they’ve had to deal with a mortgage crisis, a liquidity crisis, a bailout just to keep them alive, a cap on some banking fees, as well as general economic weakness. It is not a good time to be an American bank. Share prices of these institutions have fallen sharply from their highs in 2008. To participate in a recovery you could either do a bunch of research and try to find the best of the bunch, or just find an exchange traded fund that tracks the sector. You’ve just knocked your risk down considerably by investing in every company in the sector, but in exchange for knowing you’ve capped your return by spreading out the risk. Or you could buy Bank of America, thinking that it will outperform the others in the sector.

If you’re committed to picking individual stocks, be prepared to spend a lot of time using stock screeners and reading annual reports. The contrarian investor is looking for something that represents a catalyst of change. It might be a new CEO, or the introduction of a new product, or anything in between. Knowing that significant changes can take years to turn a company around, a contrarian is prepared to hold investments for a long time. The contrarian knows that there is a risk of the company eventually going bankrupt as well, but is willing to make that trade off.

Should You Be A Contrarian

Of course you should. We’re always happy to welcome new members into our little club.

If you can’t wrap your head around the idea of going against the masses, you’re not going to make a very good contrarian. Being contrarian will involve things like having an argument with a friend of a friend about the long term viability of Netflix, because you just can’t help yourself. It’s kind of a lonely existence.

Taking the concept a little larger, being a contrarian in your life isn’t such a bad thing. Instead of blinding believing societal norms like you should always have a car payment or you should get married by the time you hit 30, take a little time and think about whether they’re right for you. Independent thought is good. Sometimes us contrarians can be guilty of taking it too far; we think too far outside the box. Which is worse- thinking too far outside the box? Or failing to leave the box in the first place?

What Exactly Is Contrarian Investing? originally appeared on Canadian Finance Blog on December 1, 2011.

Benefits of the Pooled Registered Pension Plan (PRPP)

Jim Yih — Tue, 29 Nov 2011 10:00:08 +0000

Being someone who works with Group Retirement Savings Plans, I am watching the development of the Pooled Registered Pension Plan very closely. I’ve also been quite vocal on how I think the PRPP should work.

Most recently, the government has released it’s framework for the Pooled Registered Pension Plan. Ted Menzies, Minister of Finance, said “the PRPP will be aimed at the self employed and workers at small-and mid-sized firms, companies that often lack the wherewithal to administer a private sector plan.”

It seems the new framework for the PRPP is being highly criticized by many people in the financial industry:

In my most recent appearance on Alberta Primetime’s Money Panel, we discussed the merits and shortfalls of the PRPPs.
York University Professor says the PRPP is not a Pension Plan
Labour Unions across Canada are not fans of the PRPP
Personal Finance blogger Mike Holman is skeptical about PRPPs
Media personality and blogger Preet Banerjee also has some reservations that they may not help the people who need it most
Even I have expressed some concerns that the PRPP missed the point of saving

At the end of the day, despite the criticism, there are some really strong points about the PRPP that should not be forgotten. It’s easy to criticize what others are doing but if the plan helps some people save for retirement then maybe it’s not such a bad thing. Here’s a few of the good points I see coming out of the new PRPP:

The PRPP is targeting the right people

Over 60% of Canadians do not have a workplace pension plan. This is not a good statistic because saving through work is one of the best ways to pay yourself first and develop the critical discipline of saving money for retirement. I’ve always believed if we can get more people saving through work we would close the retirement gap more effectively. People who retire with pensions tend to retire earlier and have better incomes in retirement than people who have no workplace savings programs. Although the PRPP is targeting the right people, will these plans be mandatory? I doesn’t look like it! Will employers step up and match employee contributions? I hope so but it looks like the only incentive is employer contributions will not attract payroll tax like CPP and EI deductions.

The PRPP will have low fees

There’s no question in my mind that low fees are better than high fees. That being said whether you like it or not, some investors have to pay higher fees if they want advice, help, service or plans from financial advisors.

PRPPs might bring awareness to fees on the group retirement plans but I’m not convinced. When I educate employees in my programs about fees, I think people get it but few people are really interested in becoming do-it yourself investors just to reduce fees.

People already have access and the ability to save in low cost fees for retirement through index products and exchange traded funds. These products have merit but they tend to appeal to the do-it-yourself investor who has the time, passion, knowledge and ability to self-manage and do research. Unfortunately most Canadians lack these qualities and will need help from the financial community. It will be interesting to see if there is any education around these new PRPP plans.

The PRPP offers portability between jobs

One of the biggest problems with the current pension system is it is complicated given that every province has it’s own set of rules. What we have is a mish mash of pension rules that has created a lot of confusion.

Since workers in small business tend to change jobs often, it’s important that their PRPP can follow them to their next job. It looks like it’s going to be easy to roll money from one PRPP to another.

I am still hoping that the PRPP legislation will have one set of rules instead of different rules for each province but if looks like there many be some differences provincially.

Benefits of the Pooled Registered Pension Plan (PRPP) originally appeared on Canadian Finance Blog on November 29, 2011.

Don’t Be Too Safe with Your Money

Tom Drake — Mon, 07 Nov 2011 10:00:00 +0000

The first rule of investing is never lose money and in the financial environment we’ve grown accustomed to over the past four years, losing money seems to be a lot easier than making it. That may feel like the case but investing errors can be the result of being too aggressive or too conservative.

One study conducted by Fidelity found that in the now called Great Recession of 2008, those who pulled their money out of their retirement funds and then reinvested it after the crisis missed out on more than 20% of growth. They took the financial hit as the market went down but they missed out on a large portion of the recovery that would have returned their money to them if they would have left it alone.

As we look forward in to what will come next, we’ve put together a few ideas to consider as you think about your portfolio.

Don’t Give Up On Stocks

Stocks definitely take it on the chin any time the investment markets receive any kind of bad news but that doesn’t mean that they don’t have a place in your portfolio. Stocks come in a variety of risk profiles. Income stocks pay dividends that are sometimes higher than bonds yet still have the ability to appreciate in value.

Some stocks, referred to as low beta stocks, aren’t as sensitive to the overall stock market moves. Coca Cola or healthcare stocks like Eli Lilly tend to hold their value quite well because in both good and bad economies there are goods and services that people can’t live without. Healthcare, fuel, and food are a few examples of industries that tend to hold their value in various economic profiles. A balanced stock portfolio should have growth and income stocks.

Don’t Over Trade

You should know what your money is doing at all times but that doesn’t mean that you should change your portfolio holdings every time the markets go up or down. Staying the course with what you have is the best way to build wealth. If there is a substantial change in the fundamentals of a company you own, sell it and get in to a name you trust.

Stay in the Game

When things get rough it’s easy to want to take your money and run but it’s not good for your wealth. Nobody can time the market. We don’t know when the market will turn for the better or worse but studies have shown that when you stay in the game and leave your money invested you will make more over time.

The penalties for taking money from your retirement fund are substantial so leave your money in the markets. It’s easy to look at today and tomorrow and act on worry but if we look in to history we see that one thing is for certain. Markets go up and markets go down. They hit a rough patch and they recover but in the end, people who leave their money invested for the long term make money.

Don’t Be Too Safe with Your Money originally appeared on Canadian Finance Blog on November 7, 2011.

Employee Stock Purchase Plan

Alan Schram — Thu, 20 Oct 2011 09:00:49 +0000

One of my favourite games when I was a kid was Stock Ticker. It was a board game based loosely around the stock market, where you pick what shares you think will go up, pay your “money” for them, and then watch the stock market rise and fall with the roll of the dice. Each time it was your turn, you could choose to buy or sell more stock. Repeat until rich or bankrupt. I loved the combination of strategy and chaos, however, I seem to always make the wrong choice, and end up slowly losing my stock and money until someone else won. Perhaps that is one of the reasons why I’ve never invested in the stock market.

I’ve had the choice to do so for quite some time. My employer offers an employee stock purchase plan. I make paycheque contributions to an account and with that money shares are purchased. In addition, to every dollar that I contribute, my employer matches a percentage. I’ve decided to start investing in the company that I work for, despite the possible risks and limitations. Here’s why.

Risks of a Employee Stock Purchase Plan

When it comes to your financial portfolio, diversity is key. Even if you have decent portfolio diversification, chances are good that the majority of your income comes from one source. If the company were to fail for whatever reason, not only would you be losing your income, but by investing in the company you work for, you could lose your savings as well. Obviously this is not something that anyone plans on, but it definitely could. That’s why it is a bit of a risk. In order to mitigate that risk, consider lessening the amount that you invest into your company. If given the option of an amount, don’t do the maximum.

Another risk would be that while the company might not tank, the stock still could. If you work for any business that has a high level of volatility, think twice before investing in your own company. While certain industries can rise in demand quickly, they can also drop in demand as well. Do some research on the industry, like you would any other stock investment, before you blindly sign over part of your paycheque. So before you enrol in the stock purchase plan, check with the plan to see how hard or easy it is to pull your money back out of the plan. Is it locked in for life? Do you have to pay a penalty to move it around or remove it altogether? Employees are often the first to notice when things start to go amiss. If you think there’s a chance that you could lose it all, pull it out before you do.

Benefits of a Employee Stock Purchase Plan

Regardless of the risks, it can often be a good idea to take advantage of your employee stock purchase plan. The most obvious benefit is that it can be a fantastic return on your investment. Unlike some banks or stocks, your purchase of company stock is often matched at a percentage. It can be anywhere from 20 to 100% match. That’s an almost immediate return that you cannot find elsewhere. It is free, guaranteed money, and often times it would be foolish to not take advantage of it.

Another fantastic benefit is that your company may purchase stock at a discounted rate. Meaning when you do sell your stock, you are getting an even higher rate of return. Or, even if the company’s stock does drop a little, you already purchased it as a discount, so that you haven’t lost anything. You just didn’t gain as much. It’s like a built in fail-safe that can give you peace of mind over investing into the stock market. As a final bonus, should the shares go up in price, when you sell it’s like the icing on top of an already sweet cake.

Does your employer offer a stock purchase plan? Do you take advantage of it? Why or why not?

Employee Stock Purchase Plan originally appeared on Canadian Finance Blog on October 20, 2011.

The Three Factors that Will Send Gold Soaring Even More

Tom Drake — Mon, 03 Oct 2011 09:00:00 +0000

Gold doesn’t seem to be going anywhere but up. People are piling in to gold so fast that the media can’t make enough “sell your gold here” commercials and investors have committed what some would call a dangerous amount of money in to the commodity.

A “perfect storm” is emerging in the world economy that may allow gold to continue its unabated move up, according to metals forecasters. These three events could send gold to $3,000 per troy ounce making gold trading one of the most popular activities by traders with a wide range of abilities. Since no savvy investor would ever take somebody’s word as a reason to commit real money, let’s take a look at these three events. Here are the three factors that will send gold soaring even more.

Falling Energy Prices

There’s no doubt that the global economy is struggling right now. There are very few countries in the world who are not experiencing an economic slowdown and as an economy slows, the price of energy tends to fall. This is easily seen in the price of Brent crude oil which also affects the price of gasoline.

Investors in oil and other energy products may not like it but for those who consume the energy, it’s great news. One of those consumers are the gold miners. Some mines are as deep as 2.5 miles below the Earth and it takes a lot of fuel to pull the gold out of the ground. While this doesn’t so much affect the gold trading market, it does allow the gold miners to increase their margins or ramp up mining capacity which does affect the market price.

Momentum is Up

Any time an investment rises in value as much as gold, the media as well as other investors will begin talking about bubble and maybe that bubble will burst. Behind the scenes, gold traders continue to pour money in to gold and momentum tends to produce momentum. As noted gold trader Dennis Gartman says, when a chart starts at the lower left and heads to the upper right, that’s reason to buy.

The Economy is Shaky

For nearly everybody, a shaky economy has disastrous effects but for gold traders, it’s a buying opportunity. With the future of the euro in question, a Greece default seemingly imminent, and a slowing China, investors would much rather be invested in gold instead of just about any currency. This is what has driven short term gold momentum to such a blistering pace and growth based on these factors, won’t slow down any time soon. Tensions in Europe and around the world are catastrophic for the world but profitable for the gold trading market.

Bottom Line

Of course all of those who worry about a gold bubble could be correct and that’s why any investment in gold should come with protection. Either set a tight stop on your ETF purchase or hedge your investment by going short a currency or other commodity. For less sophisticated gold trading investors, the bottom line for you is that you shouldn’t run out and sell your old jewelry just yet. This gold rush doesn’t appear to be over.

The Three Factors that Will Send Gold Soaring Even More originally appeared on Canadian Finance Blog on October 3, 2011.

The Art of Doing Something with Your Money

Jim Yih — Tue, 27 Sep 2011 09:00:40 +0000

“When walking, walk. When eating, eat.” ~Zen proverb

In my workshops to help improve your personal finances, I have always preached that the best idea in the world is the implemented idea. It is better to have done something and failed than to have done nothing. We’ve all heard the saying “If you always do what you’ve always done, you’ll always get what you’ve always got.”

Is financial education the problem?

Many people and organizations have argued that we have a real problem when it comes to financial education and financial literacy. Although financial education is my business, I’m not convinced that lack of education is the problem. There is no shortage of information on how to become richer, how to have less debt, how to prepare for retirement, how to invest better or hoe to improve your personal finances. Information is abundant. As much as knowledge is important remember that you can have lots of knowledge stored in your head but if you do nothing with that information then what good is it to have the information.

Doing creates results

Reading is good. Researching is good. Discussing is good but doing is great because it is what creates results. Here’s a list of things you can do to improve your personal finances:

Figure out your net worth. This is so simple and yet not enough people know their net worth. All you have to do is take a piece of paper and on one side write down everything you own and on the other side write down everything you owe. How can you get ahead financially if you have no idea how much you are worth. Start with the basics and refine it later. To learn more details about your net worth, here’s an article with a downloadable spreadsheet to how I track my own net worth – Calculate your net worth

Track your expenses. Knowing how much you spend is a key determinant of financial success. Too many people are living paycheque to paycheque or even worse spending beyond their means. How would you know if you have a spending problem or not if you had no idea how much you were spending? Here’s another article I wrote sharing some different ways to track your spending – Know your spending

Take control of your investments. Nobody cares about your money more than you care. Start doing by simply taking stock of your investments and determine why you own what you do. Here’s an article on how to review your RRSP portfolio if you have not done so in a long time. If you are working with a financial advisor give him/her a call and book an appointment for a review. Walk into that meeting with a list of questions because you care about your money.

Get a will done.
Not only should you get your will done but you should also get a power of attorney and a personal directive done as well. In my 20 years in the financial industry I can’t count the number of times I’ve seen people without these key documents and the result is problems, costs, delays and conflicts.

Get the right bank account. A bank account is something we use everyday and in today’s world, not all bank accounts are created equal. My suggestion is to look into high interest bank account options because they are the types of accounts that work in your favour because they pay interest and charge no monthly service fees. I am very passionate about getting the right bank account so here’s a few articles on getting the right bank account:

Have you reviewed your bank account lately?

Every penny counts in banking.

Keeping a minimum balance in your bank account

Start an automatic savings plan. For many saving money does not come naturally. Saving money is one of the four key disciplines to financial success. Putting away money for the future is so much harder when you don’t automate it. Doing is simply a matter of going to your financial advisor or institution and asking them to start a regular withdrawal from your bank account into a Tax Free Savings account (TFSA) or Registered Retirement Savings Plan (RRSP). If your employer has an option to take it off your paycheque, that’s even better. If your employer is willing to match your contributions that’s the best. If you need help saving money, here are my principles of saving money.

This list is far from complete. There are so many things you can be doing. I think this list forms some of the basic skills needed for tour financial health. If you have done these things then keep doing something else. There’s always room for improvement. Doing something is better than nothing. It’s never to late to start doing something. I think Nike said it best “Just do it!”

What kinds of things are you doing to improve your personal finances? What things are you planning to do?

The Art of Doing Something with Your Money originally appeared on Canadian Finance Blog on September 27, 2011.