This is where your finance takes place

Most of my clients are looking for the same thing and I don’t blame them. We all hate loosing money and we all feel that we could finally found an investment making double digit returns. However, this is more fiction than anything else. In fact, the next big thing in the investment world is not even related to the stock market.

Play with stuff that you know

We all wish that our investment would earn a stead 8% years after years. And if we do and our brother-in-law made 9% during the same period, we get pissed and we want to switch our investment over his broker / financial advisor. However, those are things that nobody controls. If you advisor is telling you that you will make X% guaranteed within the next 5 years, that is complete BS. The only thing he can mention is “yield expectation”.

However, there are things we know and we can control on our investments. There are two major thing that I think will be the next big thing in the investment industry: Fee management and Tax efficiency.

We all know that our government won’t change is tax practice all of a sudden by 15%. We have been paying taxes since I don’t even remember when and we will keep paying this way for a while. When you think about all massive investments that must be done in the health care system, on roads and structures and all the liquidity required now to save the US financial system, we will surely keep paying taxes. Therefore, by optimizing your investment according to taxes, you might save much more than you can actually earn by switching your investment around. The key is to keep a well diversified portfolio that is tax efficient.

This is exactly the same thing with MERs and trading fees. Regardless if you have EFTs, mutual funds, stocks or bongs, there are always trading fees charged here and there. In Canada, management fees are really high and it will definitely become a main issue in the future. If you are able to save 0.5% in management fee, that is being added to your investment yield right away. Then again, compounding interest will make its magic with this additional yield.

Next week, I will write two other post on fee management and tax efficiency in your portfolio so you can get some trick to improve your situation.

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Save a buck and get a 50 cents reward

The first trick to beat inflation is to save money that you would usually spend. Saving is definitely the ultimate way to put money in your pocket because you are working on after tax dollars. So if you want to increase your cash flow by a buck, you need to earn $1,50 to $2 (that is my case in Canada) to net $1. However, if you save this dollar by being frugal, you don’t need to calculate the taxes.

Gasoline and food

There are several tricks to be found on the web in order to save on gas or on food. While I won’t list all of them, there are some tricks that will help you out getting money back in your pockets:

For Gas:

- buy a more efficient fuel car

- lower your speed on highways

- use the bus and metro to get to work

- walk! (it’s good for health and your wallet J)

- plan ahead in order to use your car less frequently

For Food:

- use coupons

- buy in bulk and buy specials

- plan your meal for the week (instead of wasting fruits and vegetables)

- buy a freezer in order to store more food

- find cheap recipes (ask Frugal Trader from Million Dollar Journey, he has some of them!)

Earn more money

While this may not be the most effective way to beat inflation because of taxes, earning more money is always a good thing! While some employers will tend to increase your income according to the inflation every year, it is not the case for all of them, especially when the inflation is going over 3%!

It is really important to keep up with the inflation rate as both your salary and inflation are benefiting from the effect of compounding interest.

Since I started working, I always gave more than what was expected. I concentrated on doing a good job on the task I was expected to do and then, I worked on other side project in order to improve efficiency at work. By only doing what you have been told to, you will be getting your pay check and that’s it. However, if you always do more, you have big chances of getting promotions or bigger raise years after years. Some people may say that they won’t work for free in the hope of getting something in return. I say that I always “worked for free” and I got 4 promotions in 5 years and raise that beat inflation every year.

If your overtime is paid, you can always work a few hours more to increase your salary. However, the problem is that you would have to increase the number of hours worked by 3% every year to keep up with the inflation!

Another classic of PF blogs when it comes down to make more money is to create an alternative source of income. I suggest you read more about this option in the series I wrote about it.

So hopefully you will be able to find your way to beat inflation and keep up with your lifestyles. If you know any good tricks, please share it on this blog so we can all benefit from them!

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The human instinct of survival tells you that when it burns, you need to get away and fast. That was good enough when we were fighting with bones and arrows against Yaks and Mammoths. However, The TSX, the S&P 500, the Dow Jones and the Nasdaq are completely different beasts.

They can only hurt you if you are willing to hurt yourself. It’s the only type of beast that will never attack but only pretend.

Picture this: you are on the border of a cliff. There is about 300 feet before you get to the small river by jumping (that is considering you won’t hit a rock in the process). I am facing you and I tell that there are 20 marines with their guns pointing at you. They will make you a war prisoner and torture you until you die. So you basically have 2 options; you either jump or you get captured. Most people don’t even turn their back and they just jump…

Nobody told you to jump, you just though it would be better to take your chance in the river than facing 20 marines. What if those marines were there to rescue you? What if you jumped for nothing? One thing is for sure, once you have jumped, there is no turning back. If you sold your stocks and went to fixed income all the way, you will never know what the market truly have to offer.

The stock market is a psychotic personality and nobody knows when it will be high or down. However, the fear provoked by its fluctuations is 3 times stronger than the optimism created by good news on the stock market.

Some people are referring to the 1929 crisis these days. They might be wrong, they might be right. The only thing I know is that when the market jumped back, people that were invested fully in stocks were making 30 to 50% returns for several years in a row. I wonder what was the GIC’s yield during the same period? Do you think those people got their money back? Even if they still live today, I doubt they got everything back yet!

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I don’t care if the oil barrel is dropping down below $100, I still pay the same high price for gas than at the beginning of the summer. We get filled by so many lame excuses (the last one was Ike!) than we are just a bunch of sheep, resigned to go to the slaughter house. NICE!

One of the purposes that we are waking up every single morning to go to work is to pay for our bills, maintain our lifestyles and hope for a better future. But how can we actually survive when our income is kept as is and the inflation is playing around 3 to 4% depending where you live? Here is a two part post about how to kick the inflation in the nuts and run away with something in your pocket!

Protect your investment

I think it is now obvious that GIC’s won’t protect your investment anymore. We are having a hard time to get 4% on the market. If the investment is held outside your RRSP or 401(K), you have to pay taxes on this interest income. Therefore, you are left with a net of roughly 2% and the inflation is between 3 to 4% right now.

There are many ways to protect your investment from inflation. The first one is to hold your fixed income inside your RRSP and 401(K). You should technically hold your more secure investment within this type of account since they are tax sheltered.

If you still want to invest into fixed income in your non registered account, I suggest you consider Corporate Class Funds which enables to grow your investment without paying taxes right away. In addition to that, interest income, dividend income and capital gains are all considered to be taxed as capital gains with this type of investments. Therefore, you can invest into bond funds or money market and deferring taxes in time.

Another option for Canadians will be the TFSA (Tax Free Saving Account) that will be available starting in 2009. This will allow you to put 5K per person per year into a tax sheltered investment account. Savings on taxes would definitely help prevent the damage caused by inflation.

Another investment type would be companies or other investment vehicle that provides dividend. For example, banks are reputed to give good and steady dividends that cover the inflation over time. The advantage which such high paying dividend stocks or funds is that they increase their dividend over time so you can always follow the inflation. I truly believe it is a good timing to invest into financials as they are taking a beating. Good banks will get out of this mess and still give a good dividend yield.

These are obviously not advices for your personal situation as I don’t know each of you personally. You should seriously sit with your financial advisor and discuss those points before making any decisions. Stay tunes as tomorrow, I’ll write about more tricks to beat inflation.

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The above graph is not one of a penny stock collapsing over the last month. Not quite… In fact, it is the graph of the Dow Jones Industrial Index, one of the more known indexes and most discussed by mainstream media. While it is certainly a great way to gather what’s happening in the economy, a lot of traders and managers actually prefer looking at the S&P 500 a lot more. Why? A few reasons. First, the Dow Jones has only 30 companies in the index, the biggest generally in the most important sectors of the US economy.

Not bad but that usually makes for a rather steady index as it includes only “big big caps” meaning, the biggest and most mature companies. So the Dow Jones is usually seen as an index that is very stable. In fact, a year ago, variations of over 100 points were seen as important and almost volatile.

Forward that one year later and we now have an index that has lost 1400 points in the last 5 trading days, simply unthinkable not too long ago. And what about the Dow Jones being stable? You can simply look at the past 2 days of trading to see huge intra-day variations. At one point yesterday, the index was down a record 800 points, but ended up losing a bit less than half of that.

Movements are violent and a lot of the better traders and portfolio managers that we know are now not even trading, as they do not think it’s possible to make sense of this market. It’s almost like playing the casino right now. Think the market will go down.. think twice about going short the market (imagine a joint announcement of decreased rates by major central banks for example)…

These markets are as violent as they have ever been and it’s very difficult to come to any conclusion right now except that a lot of what is going is irrational.

There are major problems in the current US economy, that is for sure. But how much of an impact will this have on the market and how much of it is already priced? Let’s hope the worse is past us…

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