September 30, 2009, 5:00 am

Real Return Bonds and Gold: How to Hedge Yourself against Inflation

by: The Financial Blogger    Category: Investment, Market and Risk

canadian-flagInterest rates are pretty low, companies are cutting back staff, improving their productivity and the US government is printing money (just think about their stimulus checks and Cash for Clunkers programs) like there’s no tomorrow. It seems pretty clear that sooner or later, inflation will surge.

So, you would think many investors are trying to find a way to protect themselves against inflation. While the rise of inflation is not unanimous among financial analysts, there is a definite interest to hedge against the inflation: the Canadian Government just issued $500 million in inflation hedged bonds (real return bonds) and Asian governments are seriously considering similar products in the near future. This is the first time we have heard about real return bonds since the Lehman Brothers’ failure.

Best ways to protect yourself from inflation:

#1 Buying real return bonds (hedged against inflation)

Real return bonds are exactly like regular bonds except the fact that the interest (usually semi-annual coupons) is payable based on an inflation-adjusted principal. At Maturity, they repay the principal in inflation-adjusted dollars as well. Therefore, real return bonds gives a perfect hedge against inflation.

In this world of volatily in the stock markets, buying bonds has been one of the most comforting actions by investors. Therefore, buying real return bonds can be even more comforting as you get the hedge against inflation!

There are 2 ways to buy real return bonds:

– You can purchase real return bonds with a minimum investment of $1,000 (you can see the complete real return bonds prospectus from the Bank of Canada here (it’s a .PDF document).

– You can also look at a real return bonds ETF. For example, Pimpco recently launched 2 new TIPS (Treasury Inflation Protected Securities).

#2 Buy gold (a natural hedge against inflation)

If your stomach is strong enough to handle even more volatility, you can leave the real return bonds and look at buying gold. Recently, gold hit $1000/ounce even though gold purchased by jewellers dropped by 22% during the last quarter. The investors’ enthusiasm towards gold thinking they need more protection against inflation was good enough to push the value of the golden metal.

As is the case with real return bonds, there are several ways you can buy gold:

– Buy gold coins or gold bars: probably the most expensive (and unlikely for an investor) way to buy gold. You have to consider the cost of making the gold bars along with shipping and insurances fees. But you would look pretty cool having a gold bar sitting on your desk at the office 😉

– Buy gold coins or gold bars in a pool: several gold brokers offer the possibility of participating in a pool of buyers (as you would do with a mutual fund for example). You would not benefit from holding the bar in your hand, but you would avoid shipping and insurance costs.

– Buy gold certificates through a brokerage account (like Quest Trade). You can buy certificates of gold and hold them in your brokerage account.

– However, the cheapest and easiest way is definitely buying a gold ETF. Buy My Stock Picks has recently made a list of the best ETF gold stocks. The most popular are GLD (created by SPDR, in US dollars) and HGU (created by BetaPro, no leverage and in Canadian dollars).

Unfortunately, buying gold may hedge you against inflation but will also create other trading concerns on stock, demand from jewellers and capacity of mining companies to find new gold mines. I must say that the perspective for gold over the next 2 years looks pretty good. And if you are too scared of gold, real return bonds still provide a great way to gain maximum hedge against inflation.

Edit: here’s the Canadian Real Return Bond definition for dummies 😀 along with a few ETF / Mutual funds of real return bonds and gold:

Ticker                         Name                                         Ytd           Last price

TIP US EQUITY ISHARES BARCLAYS TIPS BOND
6.45
102.34
TIPZ US EQUITY PIMCO BROAD US TIPS INDX FN LESS THAN 1Y OLD
50.53
IPE US EQUITY SPDR BARCLAYS CAPITAL TIPS E
8.004
50.53
GLD US EQUITY SPDR GOLD TRUST
12.113
97
HGU CT EQUITY HORIZONS BETAPRO S&P/TSX GLO
-8.088
12.16
AGFPREIF CN EQUITY AGF CN CONSERV INF MNG IN-MF
5.406
8.83


Image source: Herman Cheung

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September 29, 2009, 5:00 am

2008-2009 Recession Being Good for You!

by: The Financial Blogger    Category: Personal Finance

recessionYup, your heard me right, the 2008-2009 recession is actually pretty good for all of us! Instead of looking at the recession as a walk in the desert, I prefer to see it as a cold winter of great warnings and doors of opportunities. It is true that recession hit very hard as a cold winter on those who didn’t protect themselves enough. When I talk about cold winter, I am talking about minus 40 degrees with 10 feet of snow… Many people have suffered from it but there is still a lot to learn from the current recession:

Investment opportunities

Buy when there is blood on the street”. This is probably my favourite quote from Wall Street. It is a bit violent, but it clearly determines the only moment where you should use market timing: when everybody else is avoiding it! Investing during a recession will make your investment portfolio jump like you could not have imagined. It’s a classic but nobody’s doing it L. As the cold winter strikes and everybody goes inside at the first sigi of snowflakes, you can be brave enough to stay outside. You will get your stuff ready for next spring while everybody is looking at you through the window with their hot chocolate thinking “what a crazy, poor man, he has to work all winter…”. Who’s going to be the crazy, poor man after the recession? Huh?


Frugal spending

Badass winters used to strike our country while our parents (or grandparents) didn’t have much to eat, talk about genuinely rough times. As is the case during a recession, it drives to you think about managing your resources and spending more responsibly. This is when you develop frugal habits (that you will soon forget once summer is back…). The 2009 recession will definitely encourage people to save money (Canadian and US savings rates are ridiculous… as close as a 1 year CD actually… near nothing!). Spend less and save more, you will be able to eat throughout winter!


Recession improves ecologic habits

During winter, we all try to use everything on hand instead of wasting it. It is exactly the same thing with a recession. The best example would be the famous Cash for Clunkers. Governments try to stimulate the economy while appearing green (it gets good press even though not the primary goal!). While you have less money in your pocket, recuperating your old stuff becomes the best idea you can have.


Appreciate things we have

I always laugh when I hear people talking about the weather in Quebec. They spend their whole summer complaining it is too hot and once winter arrives, they whine about the cold weather (want some cheese with that) … This is what happens during a recession, we miss the good old days where we had to work 60 hours a week. The human being is a weird beast; it has to lose something before appreciating it. So, if you are lucky enough to not be struck by the 2009 recession, please appreciate what you have and take care of it!


Improves creativity

As companies cut out the fat, the remaining employees have to do more with fewer resources. This is when creativity rises to its best: when there are no other solutions than finding a better way of doing things! This is how most companies will show increases in productivity and the profit margin as well in 2010 ;-0.


Good position for a promotion

As it is the case with creativity, if you stay with your company and you are not part of the “fat”, you have a pretty good opportunity to work hard and show you can manage the stress and pressure. There is a better than average chance you will be in the running for a promotion when things go better as most people around will react poorly during a recession. They will whine about people being laid off while they still have a job. They will complain that they have to work more or do things that was not in their “job description” (don’t you hate hearing that?!?). By being responsible and showing a positive attitude, you will surely make your way through the top despite the recession.

When you think about it, a recession is really like a badass winter. If you work hard and are patient enough, you will get great rewards once springtime arrives! Now, go get your coat on, it’s freezing this morning!

image source: Ed Yourdon

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September 28, 2009, 5:00 am

Going Back to the Basics of Personal Finance; Making a Budget for a Single Income Household

by: The Financial Blogger    Category: Personal Finance

For those who read The Financial Blogger on a steady basis, you have seen a lot of changes in my life in 2009. My wife quit her job, I finished my MBA and I reduced my work week to 4 days while investing more effort in my web company. During this turbulent period, I had given up on Microsoft Money and drifted away from my budget. So, it’s been almost a year that I have been operating without a budget and surfing on the hopes of a big fat bonus and dividends from my company to make sure my net worth increases by the end of the year. Not exactly what I am used to.

I had previously been able to master my tendency to procrastinate and kept my budget up-to-date for 3 years using Microsoft Money. The official date that I stopped was November 2008. This is when I started basement renovations. Money was flying out the window and I had decided to “let go”.

How can I manage a single income household without a budget?

It is actually a big mistake to think you can handle the family’s personal finances just by running quick numbers in your head and thinking wishfully.

Back in May 09, I ran a few numbers to ensure that my cash would hold out until the end of the year. I knew I had to use a few thousand from the line of credit at times and I was ok with that as long as I was able clear all the debt with my year end bonus. ;-D I know we’re all right with a single income but I do not feel under control at all. 8-(

There is something I have noticed; we didn’t slow down our lifestyle by one cent. This is what we call in French; “l’effet de cliquet”. This means that you can easily improve your lifestyle but it is almost impossible to go back voluntary. Simply put: we have a one way ticket when talking about money. So, if you think that you will cut down on vacations, dining out or other discretionary expenses because you have less income; bad news awaits: it is going to be really hard (read painful) to spend less than you had been accustomed to enjoying.

The problem is not really the making a budget for single income family. I can actually use the cost of living approach (take a look at my different types of budgets), use online software like You Need A Budget (YNAB) or even use Gather Little by Little’s Budget spreadsheet designed by the former owner. I really don’t have a concern about the tools available to make a solid budget and manage a single income household. My problem is elsewhere. It comes with procrastination!

While making a budget is not complicated, sticking to it is definitely a challenge! In order to do so, the only way I found success was to track down every single penny escaping my wallet through The Power of the Purse. This is why I desperately need to go back to Microsoft Money and regain my former discipline.

I dream of the day that I won’t have to worry about being the only income in the family because I am making way more than my actual cost of living! In the meantime, I will have to sit down each day and key all the required information into the software.

By writing down your expenses, you realize how far your wallet can go without you having to scrutinize it. A wallet is like a 4 year old child; he can run 3 times around the block before you notice he’s gone! So starting October 1st, I am taking back control my personal finances!!!

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September 26, 2009, 3:56 pm

Financial Ramblings

by: The Financial Blogger    Category: Financial Rambling

autumnI am starting to get used to my new schedule… with NO MBA! It feels like having 2 days off to do my things between workdays… wait! This is what I really have now! Yeah!

I changed my training program this week. My workout time drop to 4 days a week but I increased my session from 40 minutes to 65 minutes. With this program, I should finally be able to drop at 170 lbs… still at 180lbs for so many weeks now L

I will look at a nice place for our company congress this weekend. Each year, our web company pays us a congress so we can do our annual reunion. This year it will probably be spa and possibly hiking under changed color maple leaves ;-D

Here are a few good reads:

I had a great success with my 2 posts about top Canadian dividend stocks:

Best 10 Canadian dividend stocks

Best 11-20 Canadian dividend stocks

Stew at Gather Little By Little is giving some thoughts about saving for retirement.

MoneyNing makes you think with  Gambling My Way to Financial Freedom.

Where Does All My Money Go explains how to maximize the sale price of your home.

Intelligent Speculator is asking: feeling like throwing money out the window?

The Smarter Wallet had a great HSBC Direct Review: Top Savings Account.

Four Pillars has a great article on beginner investment strategies to avoid.

Man vs Debt analyzes the Cost of Living Abroad: International Bloggers Share Expenses.

PT Money gives some advice on How to Keep TV from Stealing Your Money and Your Life.

The Digerati Life shows us that dollar cost averaging works.

Studenomist presents 10 Budget Tips for Hungry College Students.

Pinyo compares Money Market Deposit Account Versus Online Savings Account at Moolanomy.

Dividends4Life presents Finding Dividend Stock Gems In An Overbought Market.

Carnivals:

Carnival of Personal Finance

Carnival of Money Hacks

Festival of Frugality

image source: Lutz Frank

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September 25, 2009, 5:00 am

Women Want More

by: The Financial Blogger    Category: Personal Finance

women want more

women want more

What better news to hear on a Friday morning than “Women want more”. Sorry buddy, I am not talking about you, I am talking about the latest study done by the Boston Consulting Group (BCG). In fact both BCG and Goldman Sachs (who recently produced the Power of the Purse) think that economic growth moving forward will come from women. As some of us still remember: Goldman Sachs was the creator of the BRIC (Brazil, Russia, India, China) so, I took a closer look at their study.

Interesting fact: women are less affected by a recession than men! They expect that women’s income will grow from 13,000 billion to 18,000 billion within the next 5 years. This is ever more important than the economic growth of China and India combined! (btw expected to be around 2,800 billions).

Going back to women being less affected by a recession, we just have to look to see that Canadian statistics agree. During the first half of 2009, 50.6% of jobs were occupied by women. Comparing the unemployment rate, 8.4% for men and…. 6.4% for women. In addition to that, the women from 25-54 years of age were the only group to show employment creation in August 2009 (+23,000).

In their latest report, “Women want more”, the BCG explain that women are simply more educated, ingenious and ambitious (do not tell that to your wife 😉 ). Back in college, I remember having 2/3 of the class filled by cute girls, no complaints here ;-). I guess that all of them got their degrees and are now working their way up the corporate ladder as I sit here blogging in a bus ;-).

Working with the wealthy at my current job, I can tell that the recession hasn’t affected them much either. In fact, it is usually a great occasion for them to increase their net worth since there are a ton of deals to be had and interest rates for borrowing are low. So, I don’t doubt that women, that are definitely more educated than men in North America, are less affected by recessions.

According to Goldman Sachs’ Power of the Purse, women are also in control of the family budget in most households. This means they are in charge of approximately $20,000 billion (USD). And we can’t even say that we (men) are putting the bread on the table anymore 😉

According to the BCG, women make the final decisions affecting 75% of household expenses. Again, their buying power will definitely influence our economy in the upcoming years. This means that companies will have to adapt to their “new” clients. No more muscle cars and fatty tacos, they want the latest hybrid Prius car and a nice salad (dressing on the side please). Women are actually known to buy less gas and alcohol (they prefer to use alcohol found in their Coco Chanel flacon instead 😉 ).

More seriously, I don’t think this is a weird idea. Women have been one of the fastest growing economic groups in the last 30 years. Therfore, it should be expected to see them changing our economy. Imagine our economy controlled by women, this would mean…

– More fuel efficient cars (and the final doom of GM 😉 ).

– More ethical funds (and women are recognized as big savers).

– A more human approach towards career/family management, read: more flexible schedules.

– A place for every child in a decent (and government sponsored) daycare.

But this would also mean:

– Cheap hockey tickets as demand will drop since “the new family budget won’t permit it anymore”.

– A decrease in the price of beer for the same reason while wine prices skyrocket as “it is so romantic”.

– The end of the Big Mac (replaced by the Big Cucumber Salad).

– Increase in the price of computers because they would have to include a computer geek for assistance 7/24… in person!

Hum… I really wonder if we will get to this “new equilibrium” 😉

If you want more information on the Goldman Sachs study, you can get a free pdf copy by clicking here.

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