Sometimes, I have the feeling that people think that managing their investments is as easy as making a peanut butter sandwich in the morning…
From what I’ve read in the financial industry for the past ten years, high management fees (called MERs) charged on mutual funds hurt a small investor’s portfolio. In fact, if we look at the Canadian industry, most investors pay about 2% (and sometimes more!) to invest in mutual funds. In other words, if you invest $1,000 and your fund make 5%, you only earn $30. The other $20 is paid to the mutual fund company to cover their management fees (and the advisor selling the fund). When you think about it, this is a 40% commission based your investment return.
It gets worst: imagine if the fund you invest in dropped -5% during a bad market. Your statement shows -7% or a loss of $70. Mutual fund companies will get their 2% no matter what, the rest goes in (or out!) of your pocket.
Unfortunately, mutual funds were, for a long time, the only way one can diversify in multiple products (company shares or bonds) managed by professional in a single trade. An investor could buy one mutual fund including a part of safer investments (like bonds), Canadian companies along with American and international company shares. For someone who doesn’t know how to invest, mutual funds are expensive but do the job.
As is the case in any industry; when a product is overpriced or shows high profit margins, other players come to the market to offer an alternative. The first player to come with an alternative to mutual funds was probably Vanguard, one of the first ETF firms in the US. ETFs (exchange traded funds) are another way to buy multiple stocks (or bonds) with one trade.
Explained simply, an ETF is a group of investment products (mostly company shares or bonds) representing a “basket”. For example, the ETF iShares S&P/TSX 60 (XIU on the stock market) represents the 60 biggest companies traded on the Canadian market (the TSX). Someone buying 1 unit of XIU is buying a basket containing the 60 biggest companies traded on the Canadian market. He doesn’t have to know them, he doesn’t even have to manage them in his portfolio, the ETF does it all for him.
What’s the difference between buying a Canadian stock mutual fund or the XIU? About 2% in management fees! While most Canadian stock mutual funds will charge over 2% in management fees, the XIU fees are set at 0.18% (source ishares.com). Therefore, the portfolio manager taking care of the mutual fund must outperform the ETF by 2% before generating $1 for the investor. Here’s a quick example:
|Investment||Fees||Investment Return||Net Return||$1000 Invested|
As you can see, there is a big discrepancy between the mutual fund and the ETF even if they show the same investment return (before fees).
Here’s my answer: because it’s harder to manage your portfolio than it is to make peanut butter sandwiches!
Then, some people will suggest a “coach potato” investing style. The coach potato approach is to select a few ETF indexes that reflects your risk tolerance. Let’s say you want a balanced portfolio (roughly 50% in the stock market and 50% in bonds). You could build a portfolio with only 4 ETFS:
50% in a bond ETF replicating the DEX universe (Canadian bonds in general)
25% in an ETF tracking Canadian stocks
15% in an ETF tracking US stocks
10% in an ETF tracking International stocks
I agree that pretty much anybody with a calculator, a sheet of paper and a pen can build such portfolio. Then, you rebalance your portfolio twice a year to make sure you always show the same % (sell high, buy low). That’s a pretty effective method to manage your portfolio and track your investment return to the markets (95% of portfolio managers don’t beat their benchmark on the 5 year return). On top of this, your management fee is under 0.50%… this is at least 1.50% cheaper than the same investment in a mutual fund. If you invest $100K in this portfolio, you save $1,500 per year just in fees!
But it’s not that easy. Nope: managing your portfolio is not that easy.
Last years, bonds were paying a ridiculously low interest rate and bonds started to lose value upon the rise in interest rates. This is why XBB (a Canadian ETF tracking bonds) shows a negative return of -2.37% over the past 12 months. Add the bond interest rate paid by this ETF (3.26%), you get a small investment return of 0.89%.
How can you explain that most mutual funds did better with their fixed income (bond) portion? After a good talk with a friend of mine who’s a super fan of ETF investing, I noticed that his bond performance weren’t that great over the past 3 years. This was mainly explained by the poor Canadian bond returns.
At first, I assumed it was the same environment for everybody… until I checked a few mutual funds performance records. Most mutual funds show better returns during the same period… how can this be possible? It’s not because portfolio managers were better. It’s because they included other classes in their fixed income portfolio such as high yield bonds, international bonds and US bonds. This is how, for the past 3 years, mutual funds are able to beat a classic coach potato portfolio: because they include several other investment classes.
It is true that if you had replicated the exact same model with 8 or 10 ETFs, you would probably have beaten the mutual fund. But here’s the thing: who is going to tell you how to make such a portfolio if you adopt a coach potato investment style? Not your online broker, he simply performs the trades. Not your advisor because you don’t have any. Your neighbor? Maybe.
I guess now you can see where the problem with ETF investing lies: you still need a good financial background to build and manage your portfolio. If you do it only after reading a few books, chances are that your investment returns will be lower than mutual funds even after their huge fees.
I wouldn’t risk opening the hood of my car to start working on the engine to solve a problem, I wonder why people think it’s that easy to invest money…Comment: 1 Read More
Last week, I started an interesting discussion with my post about making more money instead of cutting from my budget. After debating the point of cutting my expenses or making more money, I chose the latter and started to make some real progress on my balance sheet. But I’m not using all my extra money to pay off debts. I also use my extra money to save more money.
For some people, being debt free is their main goal and they will reach it at all costs. They actually think it’s the best way to save money and become financially free. I definitely don’t agree with this. The choice of saving money or paying off your debts should be more mathematical than psychological.
Two years ago, I made a personal commitment to take care of my debts. While I didn’t achieve my aggressive repayment goal, I’m still in a better position today than I was two years ago. During the same period, I also manage to save up $7,362 for my children’s education and added $10,000 to my RRSP account.
It is true that I could have used this $17K to pay off my debts and I would have been able to complete my debt repayment plan. But I feel a lot better about my current balance sheet. Here’s why.
As I live in the beautiful country of Canada, I’m blessed with one of the highest marginal tax rates in the world. But this also comes with generous tax advantages for retirement savings and subsidies for education investment plans.
The first reason why I decided to save money instead of paying off my debt was the immediate tax impact on my investment vs the low interest rate paid on my debt. For example, I saved 45% in tax (my marginal tax rate) on my $10,000 RRSP contribution. This equals $4,500 in taxes saved. Then, I received a 30% subsidy on my RESP contribution. This subsidy is directly invested along with my money and will be taxed in my children’s hands upon withdrawal.
The second reason why I decided to invest part of my extra cash instead of increasing my debt repayment was the fact that my potential investment return is higher than the interest rate paid. Last year alone, my dividend stocks made 22% (including dividends received) while my highest interest rate is 6.5% on the loan for my pool (I know, what a shame to have a pool loan!).
If you are unsure about whether you should pay off your debts or save more money, a good trick is to list how much you make in investment return vs how much you pay in interest. If you are a conservative investor and yield 2-3% per year, there is no point for you to keep this money invested if you have consumer debts. But if you are invested more than 50% in the stock market and pay a low interest rate, you should keep investing.
The power of compounding interest will work its magic on my investments while it doesn’t apply on a loan. Take $10,000 invested at 5% vs a $10,000 debt at 5%. During the first year, the $10,000 invested will generate $500 (5%). But the second year, you are now at $10,500 invested at 5%. Therefore, you will earn $525 (5% of $10500), not $500. The extra $25 on your gain will continue to grow year after year. This is the magic of a compounding interest rate.
On the other hand, if you have a $10,000 debt and pay $500 of interest during year 1, you will still have to pay $500 in interest in year two. The interest doesn’t compound on a debt. This is why it’s almost always better to invest than pay off your debts even if the interest rate / investment yield are the same (assuming there are no taxes on your investment).
In June, I should get a small pay raise. Since I’m already making a good income, my pay raise should just about match inflation. This should be around 2% this year. But 2% of 80K is better than a slap in the face, right? This will result in about $60 gross on my pay check. Technically, I should get about $25 net in my pocket. Not the end of the world, but this will help my goal of increasing my TFSA contribution to $150 bi-weekly. Regardless the amount of my pay check raise, it will go directly in my TFSA.
I still believe I will be making more money with my TFSA that what it cost me in interest. And if it’s not the case, I will always be able to cash in my investments and pay off my debts at anytime. This gives me more flexibility than being debt free and borrowing in the future to fund my kids’ private college.
If I use my extra cash to fund my children’s education and retirement plan, this doesn’t leave much room for debt repayment, right? This is where the budget comes into place! I already put a monthly payment down on my debts. Then, I will cash my employer stocks (which are already at $5,000 right now), use my tax return (another $2,000 or so), some dividends from my company (we started to pay ourselves again!) and year-end bonus (calculated based on what I already earned, very conservative).
I do some calculations on a monthly basis to make sure I’m still on track for this aggressive plan and so far, I’m right on track! This will be an amazing year: vacations + debts pay off!
How about you, do you focus on yours debt or your savings?
Comments: 3 Read More
You know that already, I started a fight with my consumer debt back in… 2012. We will all agree that I lost the first round (2012) when I failed to go drop under 300K of debt. In 2013, I used a similar technique… and got similar results.
Einstein defined madness by doing the same thing over and over and expecting different results. I guess that there is always a little bit of madness in each of us!
But towards the end of 2013, I started to get very sick of seeing so many debts on my balance sheet and began to look around to find a solution. I sat down for hours looking at both columns; revenues vs expenses, and found out the solution wasn’t in the latter.
When I decided to pay off my debts back in 2012, I did what made sense: I created a sound budget. I thought by looking carefully at how cash was flying out of my wallet, I would control my personal finances and my debt would drop. It didn’t happen in 2012 and the same result happened in 2013. I was very good at finding excuses:
#1 The addition of central A/C
#2 The addition of a pool
#3 Car repair$
#5 etc, etc, etc,
But I ignored the most important part of my budget during this exercise: my sources of income. I’ll go back to this point later on in this post but I want to finish about how to do create an effective budget first.
Making a good budget doesn’t require a fancy online app where you get 3D graphs in multiple colors. All you need is a pen and a piece of paper (or an excel spreadsheet if you don’t feel like using an old fashioned calculator!). I’ve made a list of all monthly expenses and classify them into three simple categories:
What I can’t do anything about: mortgage, taxes, electricity bill (you can’t cut that forever), healthcare (mainly products for kids), savings (pay yourself first!), gasoline.
What I can reduce: food, restaurant, wine, car payment, insurance, etc.
What I can waive: car expenses.
At that time, there was only one expense I could completely waive without affecting my lifestyle too much: sell my second car. I didn’t have a car payment on my RX-8 but it was costing insurance, gas and car maintenance bills on a monthly basis. By selling my old car, I was getting rid of a few hundred each month.
Then, I attacked what I can reduce. I actually sold my two cars to replace them with a new one back in September 2013. It has increased my total debt but my monthly payments were greatly reduced. Since my car value drops as fast as my new car loan, it had no effect on my net worth; only on my budget. I’ve slowed down on wine and cut out restaurants. I went to my own limit of my lifestyle.
After cleaning up my budget and reducing expenses, the numbers still didn’t work perfectly yet. I faced a dilemma: I had to either cut back on lifestyle or find another solution. I consider that I’ve worked too hard when I was younger to give away on my current lifestyle. I love the way I live and don’t want to sell my house, miss going on vacation or reduce my children’s activities. This brings me back to finding another solution.
For several years, I was able to both increase my lifestyle and not increase my debt level. It just happened recently when I’ve lost control over my personal finance temporarily. My first reflex was to cut down on my expenses and try to manage my budget tightly. This was a mistake.
In fact, a few years ago, I accepted a new position at work. It was a promotion but also a long term move where I could make more money… but only in the future. Since I had to start a new book of clients from scratch, in the beginning bonuses would be smaller than in my previous career. This is exactly what happened in 2012 and 2013. On top of making less from my day job, I also started to make less from my online company. Back in 2010 and 2011, I was withdrawing some good amounts to support my lifestyle and enjoy life. In 2012, Google slapped us big time and we had to reconsider our business model.
While the business is now back on its feet, it wasn’t the right time to withdraw company money for leisure. So back in 2012, the issue I ran into was not a spending problem, it was an income problem.
The key with your personal finance lies within your ability to make money, not to reduce expenses. I can appreciate my “new” strategy as we are now making more money since September 2013 with the opening of a daycare at home. On top of this, the company is now generating more income and we can also benefit from it.
I saw the positive impact instantly on our budget as months are easier to get by and I see my debts reducing each month now. I don’t have to wait for a bonus or a tax refund to apply a lump sum payment on my debts.
That’s right! This year, I will get rid of 15K of consumer debts and go on two vacations! We will have a couple’s vacation and a family vacation! Both can be done because we are making more money than ever.
So I won’t have to sell my house or get rid of my new car and will continue to live the way I want. On top of this, my debts are going down and I’ll be ready for more investments no later than 2015!
The morale of my story is simple: focus on your ability to make more money and you will pay down your debts. You can spend hours to reduce your expenses, do things by yourself to save a few bucks and burn yourself out in a miserable frugal life. Or, you can live the life you want, enjoy all the good things while making the money to pay for it. I’m done fighting with my budget. It’s time to make some more money now!Comments: 7 Read More
I’m back from vacation and I can tell you, it feels great… besides the fact that we are still under meters of snow here! Darn!
The main reason why I’ve decided to post this report again is actually for my own follow-up. Since my third child arrived, my online business has been harder to manage. Producing this report helps me to keep track of my main goal: making 100K online in 2014. A few weeks ago I outlined my business plan as follow:
Therefore, my revenues should be represented as shown on the following graph:
Instead, February shows the following results:
Overall, my online business has generated $7,945.01 (+13%). This is gross revenue and does not account for expenses. My online expenses are around $3,000 per month. I spend a lot on VAs since I want to take care of my family more than I want to spend time on my computer ;-).
The blog business peaked last month mainly due to higher traffic and Adsense sales. I’ve also brokered a few good advertising deals that pushed my results beyond my goal for a second consecutive month.
Since I operate several blogs, I get numerous advertising requests. I don’t do much private advertising on my blogs anymore as I’ve previously mentioned but I’ve kept this part of the business for other sites I own. Most of the time, I don’t have enough sites to complete massive advertisers’ requests. This is why I run this advertising brokerage service on the side. I take a 15% “finding fee” to dispatch advertising across my network. It’s a pretty good deal for everybody as it doesn’t take me forever to close a deal and both the blogger and the advertiser are happy.
I’m losing steam on this part of my business at the moment mainly because I’ve failed with my February campaign. My goal was to offer a combination of two products (an external investment newsletter and my dividend stock investing tool) at a discounted price. I offered a $169 package deal for both services. I had a deal with the external investment newsletter to offer their product with a $100 rebate. Then, I offered them combined, both products and included their promotion within my package. So customers could get 2 products with a total value of over $288 for $169.
Unfortunately, my pricing strategy combined with my product offering was too complex and not straightforward. It resulted in only 2 new yearly memberships. Later in the month, I quickly turned around and pushed the external investment newsletter by itself. It resulted in 32 new sales within a week.
Their product was offered at a rebate, mine wasn’t. This was probably why it didn’t fly that much. I didn’t want to reduce the price of my membership as I think it would be a lack of respect for existing members. I made a decision to not play with my price and not offer additional rebates. Sometimes, I’m tempted to do so, but I always remember the customer who first paid the “full price”. I think it’s important to show them respect.
In the meantime, I got my product approved within an affiliate marketing system. This means that I will be able to give affiliate links to other bloggers or website owners wanting to sell my membership service. I’m offering 40% of the sale price to other blogger. This is definitely a great deal for both parties. I’m definitely looking forward to see how it will go in the upcoming weeks with this strategy.
This business division also includes my two books for sale on Amazon:
Dividend Growth – a 4.5 Star Investing Guide
2014 Best Dividend Stock Picks – After beating the benchmark with my picks in 2012 and 2013, I’m going back for a third year with 20 US and 10 CDN favorite picks.
Sales are stable right now with Dividend Growth (I sell rough a copy a day) and the 2014 Best Dividend Stocks continues to roll as my picks are doing as good or better than my benchmark. The easy money is gone and now investors are looking more than ever for undervalued stocks.
My niche sites produced more income in February but I’ve done nothing yet to improve the situation. I was simply lucky that I got more traffic and more Adsense revenue ;-). I must admit that my click-through-ratio and earnings per click are quite high with my niche sites. For example, I have one site making $30-$40 per month with Adsense with as little as 200 visitors per month. This can give you the kind of potential such a site can have if you bring it up to 2,000 visitors. Then again, 2,000 visitors/month is far from being impossible!
I’m currently looking at how I will improve traffic for these sites. I have a few ideas on the table and I’ll discuss them with my partner soon… we have our annual meeting coming up!
February was another challenging month in terms of time management. In January, the whole family got sick one after another without any breaks. In February, we were completing the earnings season (when public companies issues their quarterly financial reports). We wanted to cover all stocks in our Dividend Growth Portfolios. This makes 45 different stocks across 10 portfolios.
Nonetheless, the final product (three very strong investing newsletters sent to our members) was a complete success. I was very proud to provide an accurate follow-up and performed trades upon our analysis.
Then, second thing that went well was the advertising brokerage activities. We completed several deals and many bloggers benefited from it. Plus, making a 15% commission each time you send a couple emails is always appreciated!
Time management, again, was a big pain. I was stuck between demanding hours at work, children/family activities and my sites. In my latest income report, I had listed 7 tasks to be accomplished in February (this included January’s unfinished tasks as well) listed as follows:
As you can see, I’m not too happy about my overall results. Excuses explain what happened but still, they don’t bring results to the table. I know that my membership site won’t bring in money month after month if I stop promoting only 3 months after launching. I have a good customer base but it won’t increase overnight based on wishful thinking!
Since time is always an issue and I’m starting March a little bit late due to a vacation, I will restrain my objectives and make sure I complete all the tasks on time. So here’s quick list:
#1 Finish the 500K+ portfolio and advertise it
#2 Write two guest posts for my membership site
#3 Offer my affiliate program to three bloggers and walk them through
#4 Finish my niche site development plan
I know it’s not many tasks, but I want to make sure to succeed and finish the first quarter of the year on a strong note. In two weeks, we will already have three months done in the year. It’s crazy how time flies!!Comments: 0 Read More
Price it too low, and people think it’s cheap
Price it too high, and people think you are a nut job!
In marketing, the question of pricing is probably the hardest to answer. Unfortunately, this is a question we must face every time we want to sell something. You can’t start negotiating your price with each client and moving the price up and down all the time will not send the right message to clients and future customers. The early joiners will fell that they got ripped off if you drop your price from time to time and the late subscribers will simply wait forever until you put on a huge promotion before buying (who pays full price at Canadian Tire?).
Before I launched my membership website about Dividend Growth Portfolios, I was very uncertain about the right price. It is a high-end product when you consider the knowledge put in place and the possible return on your investment. On the other hand, this is also a very crowded and competitive industry where giants such as Morningstar and Motley Fool offer services for just a few bucks per month.
My partner and I weren’t able to find a sweet spot where we felt comfortable so we decided to ask around. Based on my own experience, looking for an external point of view won’t help… much. The first problem when you ask feedback about pricing is who do you ask. Asking internet marketing specialists, they will answer: shoot for the sky. Asking friends, they will answer: price it modestly. Ask potential buyers, they will answer to drop your price as low as possible (they are not fools!). Nonetheless, this is what I did; I asked an internet marketer, friends and potential buyers.
If you ask a potential buyer what price they would pay for your house, chances are they will shoot low since they think they can get a bargain. But if you ask 1,100 people about your house, now you have a chance to hit a few honest people. This is what I did with my new project.
I’ve built a list of 1,100 potential buyers and told them about my project. I’ve sent a series of 4 emails:
The purpose of my investing website is to simplify the investor’s investment process. I want investors to save time and still make money being a DIY investor. I gave my readers a choice between 3 options:
I received about 400 answers from this email. It took me forever but I personally replied to each one of them. Without any surprises, most readers answered option #1. However, I got about 30 or so (so 7.50%) answers telling me they would be okay with option #2 or #3. This is without counting numerous longer emails explaining their reasoning. I received a lot of details about the current offers on the web along with pricing from other competitors.
We always have the best product as the design, the quality and everything else is better than our competitors. Now that I’ve accepted that, I had to look at my competitors with fresh eyes; with the customer’s eyes. The target price was definitely between $9.95 and $15 per month. Most of them were charging $9.95 which didn’t give me much room to play with. I was happy to notice that most of my competitors offered almost too much info. And this is something I wanted to solve with my site: I wanted to have something that cut the crap and gets directly to the point. One of my competitors offers 20-30 page reports on a bi-weekly basis. Who has the time to read, analyze and take action on over 60 pages of information monthly? I know something for a fact; I don’t! My competitive advantage was to offer high value-added features only if I was going to charge as much (or even higher) than my competitors.
The fact that I had two years of great investment records behind the belt was another factor. Ideally, I would have had to wait until I have five years, but that will happen in three and I will be able to crank my price if I keep beating my benchmarks!
From my own experience, I notice that when you play with additional options or different price ranges, you increase the level of confusion for your potential buyers. And if they are confused, they will likely not proceed with the purchase.
It happened to me yesterday again when I tried to book a couples massage at a spa (I know, I’m a good hubby 😉 ). The item “couple massage” was priced per person, so I added the two items in my “cart”. The next screen was to search for availability. I selected 2pm. The system found 4 massotherapists available for that time. But, the system didn’t allow me to select two massotherapists at the same time! I had to select one at 2pm and another at 3pm. It’s like I had to create another account for my wife and reserve another couple massage under her name to get both reservations at the same time. Do you think I completed the reservation? No way!
Back to my membership website; I offer 2 pricing options: basic with a monthly subscription and premium with a rebate of 2 months + a free book for an annual subscription. In my case, I think it was the right choice. The proof is that I have about 50% of my members choosing monthly and the other half annual.
But I created additional confusion when I did my official launch with a combined offer including another newsletter. For a limited time, I offer both my services along with another investing paid newsletter for a package price. I didn’t sell many subscriptions for that package and I think I know the reason: it gets confusing if you go see the newsletter, then my website and then go back to the original offer. There are simply too many places to find information before you make the purchasing decision.
I thought it would be a good idea since I had run a promotion for that investing newsletter in the past with great success. There wasn’t any big package; just a plain rebate on an investing newsletter.
After looking at how I’ve priced my service, I thought I would have done something slightly different. Instead of going for $14.95/month right up front, I would have started with $9.95 for the first 100 members. Then, I would have increased it to $14.95. It would have created a bigger buzz around the launch (especially if I had told the offer was sent to 1,100 investors!).
On the other hand, I wanted to price the site for what it’s worth and I think investors are getting a lot from it. In fact, feedback is very good to date so I’m pretty confident that people are happy about the pricing. I wanted to make sure I make my money back quickly and it was the case as I’ve come to profit only 6 weeks after launching my site.
I just think that I could have generated a bigger buzz and gotten more members on board at first. Now, I can’t offer a rebate as I would feel unfair to my first members to sign-up.
As you can see, it’s never easy to come up with the right pricing strategy!
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