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July 16, 2009, 5:41 am

6 Investing Rules Revisited Part 1: Stocks Always Go Up

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

The year 2008 showed us the worst face of capitalism and made several people rethink their investment strategies. The stock market fluctuations were bad enough to actually shake some of the most fundamentals financial lessons we have learned. Blinded by our greed (or by our naivety!), we though, once again, bad things could only happen to others; that our economic system was stupid proof. Well, we actually proved that it was stupid 😉 Based on what recently happened on the stock market, I decided to revisit some fundamental investing rules.

Stocks always go up

Before 2008, most people agreed that if you buy stocks and hold them long enough, you are able to make a decent profit. Or at the very least, get back your initial investment ;-). While I still believe that stock markets always go up over the long term, there is a problem with this investing rule: defining what is a long term investment horizon.

Most projections are made for investment over 5 to 10 years when we talk about investment yield or investment expected return. The sad truth is that someone who would have invested $1,000in the S&P 500 in 1999, would be left with the devil in his pocket ($666 so -33%)). I let you imagine if he would have decided to invest in the NASDAQ ;-).

On the opposite side, investing in bonds for the past 10 years would have given a positive return.

The theory still stands

If you consider an investing horizon of more than 25 years, all graphics will show a better return for stocks than bonds or any other investment products (rental properties, GIC’s, etc.). However, you must be able to stay in the market for at least 25 years! If you are 30, this is not a problem, but if you are 55, you might think about it twice.

It also all depends on the timing. As you may conclude, you can make say anything to numbers. If you wait 2 years and you take the numbers from the S&P 500 from 2001 to 2011, I’m pretty sure you will show very positive results. The proof is that the S&P 500 shows a positive annualized return of about 7% on the past 15 years (this brings us back before the techno bubble).

Stocks always go up: revisited:

The key is to define long term investment for more than 10 years. Therefore, you age and the age you want to retire will play a determinant rule in regards to investing in the stock markets. As you age, you should slow down on stocks and buy other investment alternatives such as bonds, linked notes, GIC’s or rental properties (is you wish to manage renters 😉 ).

However, if you invest in the stock market today, consider long term as being 15 – 20 years to make sure you don’t lose your money. I have seen too many people thinking they could make good returns within the next 5 years and crying a few years later.

One last point; I would not give too much importance to past returns showed by mutual funds. Looking behind won’t give you much information about what is coming up on the stock markets. Investing rules are changing since last year and it will never be the same…

For more information on stocks, you can look at free video at INO TV. They offer great videos answering all kind of questions about trading.

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September 25, 2007, 7:00 am

There are no needs for an emergency fund

by: The Financial Blogger    Category: Financial Cliché


You are being a good man; you decided that you will take care of your personal finance. The very first thing you realize is that you require help to manage your investments, debts, insurance, budget and so on. Then, you decide that having a personal planner or a financial advisor would be a great help to create wealth. I can guarantee that they will talk to you about creating an emergency fund.


While I am definitely not convinced that you need a financial consultant to create wealth, I am even less convinced that an emergency fund is something useful! It is definitely a financial cliché.

What is an emergency fund anyway?

Here’s a definition of an emergency fund: it is a highly liquid part of your assets invested in non-risky investments in case you need money to cover for a job loss or unexpected expenses. This money should remain dormant unless a financial catastrophe strikes your wallet.

This money is a waste of potential return

Obviously, if you invest in a low risk financial product, you are wasting your potential return. As an emergency fund requires to be available on the spot, most funds are deposited into a money market account or a savings account. In both case, you can rarely expect more than 4,5%. Therefore, this money could have been used to pay off debts that may bear a superior interest rate or you would have simply invested this money into something that is more profitable. Since higher return is often meaning higher risk, it defeats the purpose of an emergency fund. The goal when you invest your money into an emergency fund is primary to protect your capital. On the other side, if you are 30, you could loose a good 30 years of good returns.

There are alternatives

My favourite alternative is the line of credit. In fact, this financial product doesn’t cost a penny if you don’t use it. You can withdraw money from your line of credit at any time, so it is very liquid and the available limit is stable. Having a 20K flex line would be the best alternative to having an emergency fund. In fact, it is more convenient as you don’t have to put money aside to build a reasonable fund. The money is available 24/7 upon the opening of the account.

Another solution is to build equity in your property. Banks will more likely lend money if they have collateral. Therefore, if you can give your property as collateral and refinance your mortgage, you will be able to access enough money to survive for three to six months.

What is the difference between borrowing or having liquidity

This is where it gets interesting. Normally, an emergency fund is used to cover for regular expenses for a period of three to six months. Let’s say than an individual’s monthly expenses are 5K and that he would be able to borrow this money at 10%. If he takes off the full amount (30K for six months) on the very first day, he will have to pay $250 per month in interest until he can pay back the full amount. This would be the real cost of borrowing money instead of keeping 30K into a savings account. However, you have to figure out how much time it will take to actually gather this sum of money and how much could you earn from it if you would have invested in the market.

I think it is a small risk to take when you think about how much you could earn on the market over time. If you invest money already, you probably have a part of it invested in low risk investment. Why don’t you use this money if anything bad happen? Worst comes to worst, you will still have your line of credit to cover for the unexpected.



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August 16, 2007, 7:00 am

Financial Cliché VI: Leveraging Is (NOT!) Only for Rich Individuals

by: The Financial Blogger    Category: Financial Cliché

I don’t know about this post… Honestly, just by writing the title I feel that I will get crucified. However, I do think that leveraging is for everybody. As previously mentioned on “You might not be aware of this: you are leveraging”, leverage tools are part of our daily life. We leverage over our cars and buses to go to work, while we could walk. Between you and me, it is safer to walk than to drive as you have slick chance of getting implicated in an accident on your too foot then when your feet is to heavy and you are driving/racing to work. However, it will take you forever to work and surely cost more money into new shoes!


Nonetheless, it is a fact leveraging strategies were first designed for wealthy people. Why is that? It is pretty simple. As it is the case with any other new techniques, the first tries implicate way more risk as many factors might not have been considered up front. This is the reason why planners were looking for people that could afford loosing money to try leveraging. They are more likely to take this kind of risk.


Not only that but the more you have money, it is easy to make money. You can diversify your assets over many investment vehicles such as rental properties, private companies and investments. Rich people are leveraging on most of their assets. But is does not mean you can not do the same thing. Pay yourself first is a good way of thinking. But pay yourself first with other’s people money is even better!


If you are a home owner, you are probably leveraging over your main residence. Your mortgage is a great example of leverage for your own benefit. This benefit turns into money when we are talking about leveraging strategies. There are two rules of thumb to respect in order to not over leverage. In “How Much Should I Leverage?” I explain that as long as you are comfortable with the loan payment and that you never borrow more money than half of your net worth; you should be in a good position.


You definitely not need to be rich to leverage with a 25K investment loans. At 7% interest rate, that makes monthly payments of $145. Technically, you need a net worth of 50K and about less than half of your car payments as cash flow. By eliminating your debts through a defined plan, you should be able to liberate enough cash flow to afford a payment on a 25K investment loan.


As previously mentioned on this blog, risk is a perception of a “possibility”. Thinking leveraging is too risky for the middle class is wrong. Not knowing what you are doing is risky. Therefore, get yourself a good planner, make your own researches, ask questions to financial bloggers (or to The Financial Blogger 😉 ), bankers and financial advisors. You will find out about a new world of financial opportunities.

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July 2, 2007, 3:17 am

Financial Cliché VI: GIC’s preserve my capital

by: The Financial Blogger    Category: Financial Cliché

Before I start with my post of the day, I would like to thank you Blogging Away Debt for hosting the 107th carnival of personal finance. My post about “The Way Banks Look at You Part3 : It’s A Baseball Game” is featured. Be sure to check it out!

Individuals with an aversion to risk, senior citizens or simply those who listen to most bankers have GIC’s in their portfolio. They hold on to this product the same way my son is holding to his mom’s leg when he is scared. Is it good to keep this product in your investment portfolio thinking that you are preserving your capital? I don’t think so.

Then why bankers are selling GIC’s as on of the best product on earth? It is because all financial institutions are regulated by compliant rules and investment rules. This is also why you have to fill in one of those questionnaires to create your investment profile. In order to avoid any law suits or any other problem with their clients, banks will offer GIC’s and other similar products to averse to risk individuals. After all, you can’t technically lose with a GIC’s. Therefore, in most cases, banks are protected as they act diligently and clients are happy as they think can not lose money.

This is where the catch is. You can lose with a GIC. Actually, you are almost sure to lose money with this investment product. How can you lose when your capital is 100% guaranteed? Unfortunately for those who think so, other calculations must apply.


First of all, GIC’s revenues are categorized as being interest revenues. Therefore, they are taxed at your marginal tax rate. Let’s take 40% as an example. After all, if you have savings, you must be making at least 45K. On average, a conventional GIC will give you around 4% yield. Taxed at 40%, you 4% become 2,4%. This is how much you are making after taxes.

Then, you are still making money at this point. Really? How about inflation? Inflation rate in Canada is between 2 to 3% every year. You can count on that as the Bank of Canada aim 1 to 3% with at 2% median goal year after year. Therefore, you 2,4% will become 0,4% in the best case scenario and can show a negative return of -0,6% if inflation rate goes up to 3.

This is how banks are selling products that are comforting for your mind, but they are also gradually taking your money away. Don’t blame banks; after all, they are only selling what you have been asking for. I must admit that they are also trying to create products that are very similar to GIC’s with a guaranteed capital so you can hope to make more than 4% and make a few pennies!

Funny note: For those of you who understand French, a GIC is a CPG (stands for Certificat de Placement Garantie). However, there is another meaning for CPG: Certificat de Pauvreté Garantie. Cheers,

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June 28, 2007, 2:52 am

Financial Cliché V: My house is my retirement plan

by: The Financial Blogger    Category: Financial Cliché

First, I would like to follow up on yesterday’s post on “Where is”. I’ve been in contact with David Andreatta from the Globe and Mail and he wrote an article in today’s edition. You can read more about it on the Globe and Mail. I was glad to hear that a lending community will be established in Canada. Many thanks to David for mentioning my blog in the Globe!

Now, back to today’s post :

This is definitely on of the major source of financial discordance between the baby boomers and the generation X (or is it Y? maybe Z? anyway, I’m 25 so you can figure it out!). Several baby boomers think that their property is their retirement plan. If it’s completely paid off, they think they have enough money sitting there to live long and prosper. If they don’t have other source of income other than the government’s pension they are probably wrong.

Your main residence is not necessarily an asset. As we previously discussed on this blog, an asset must create income or positive cash flow. This definition is even more important when you retire and you depends on your assets to meet your financial needs. As most retired individuals are not renting their basement or are not operating a company within the house, their property is not an asset. Every month, they have to pay their utility bills, their taxes and cost of maintenance. With $800 a month, you might find the road to be a little longer than expected.

I just have to sell my house and I’ll make 400K, they will answer back quickly. That part is true, but do they really want to leave their house? All their memories and souvenirs are within those walls. In addition to that, they still need a place to live. The other thing is that they might not be able to find something that suits them for a lower cost. House market is pretty high right now and downsizing often means going back to that small 1960’s bungalow with several reparation to be made.

Cost of retirement home are sky rocketing and you are not getting much service for the price you pay. It will easily be $1,000 a month if you need services such as nurse inside the building. Besides that, you can always rent a nice apartment or downsizing you house. In both cases, you just increase your monthly payment. Therefore, you will need more money to live on and your profit from the sell will slowly disappear.

Your property surely worth something and the day you will sell it, you will get a big chunk of money. I’m not questioning that at all. However, it will never create income as is. Unless you sell it, you won’t benefit from the equity in your property. Reverse mortgage is another option but I will write about it another day.

There is still a way to make you property an asset and still live at the same address. By doing a Smith Manoeuvre, your new mortgage will become tax deductible and you will earn monthly income from your investment. This could be a good way to benefit from the equity lying (I prefer the expression dying) in your house.

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