Boomer & Echo - Financial Freedom At Any Age

Weekend Reading: TFSA Book Giveaway Edition

On Monday, I wrote a review of Gordon Pape’s new book, How TFSA’s Can Make You Rich. We promised to give away a copy of that book, plus a copy of, Money Savvy Kids, to one lucky reader.

Congratulations to Bryan, whose comment left at 7:33 AM Monday proved to be the winning entry. I’ll get in touch with Bryan today to make arrangements to send out the books.

There was an interesting discussion on Rob Carrick’s Facebook page that stemmed from Rob’s article about how homeowners should handle higher interest rates in the coming years:

Homeowners: Don’t be caught flat-footed when interest rates rise

Low borrowing costs are creating a spoiled generation of homeowners who have never experienced the adversity of rising interest rates. Bulletin for people buying homes today: If you opt for the very popular five-year fixed rate mortgage, you will pay a higher rate on renewal. That you can bank on. Open this article

I suggested homeowners prepare themselves now by setting their mortgage payments above the minimum. Start with an extra $100 per month and keep adding to that when you get a raise or can free up some cash flow.

A few people responded, saying it would be foolish to aggressively pay down your mortgage while rates are so low and that you’d be better off paying the minimum and investing the difference.

While I understand the rationale behind this approach, there’s no guarantee that investors can beat the risk-free return that comes with paying off your mortgage.

We often hear that, over the long term, investors can expect to achieve annual returns of 7 or 8 percent. But market volatility can lead to poor decisions, which leads to poorer performance.

In fact, a study by BlackRock revealed the average investor achieved annual returns of just 2.1 percent over the 20-year period between 1992-2011. Meanwhile, the S&P 500 Index delivered annual returns of 7.8 percent.

The Average Investor Underperforms

The average investor under-performed most asset classes over the past 20 years. Investors even under-performed inflation by 0.5%. Open this article

So we all know that, in theory, putting your excess cash flow into stocks would be a great idea if we could achieve market returns of 7.8 percent. But, in reality, it looks like the better option for the average investor would be to take the risk-free, guaranteed return of paying down your mortgage.

Weekend Reading

Here are my top 10 personal finance reads from around the web this week:

Seven ways today’s economy is like the NHL playoffs

May 15, 2013 · brighterlife.ca · By Kevin Press

Telling a Leaf fan he has nothing to fear with 82 seconds left is a little like telling Angela Merkel to stop sweating that whole inflation thing. It only adds to the pressure. And let’s face it, the Stanley Cup playoffs offer up a level of tension not unlike the global economy. Here are seven ways today’s economy parallels the post-season: Open this article

Money talk: 20 questions to ask your significant other

May 18, 2013 · Financial Post · By Melissa Leong

Couples who disagreed about finance once a week were 30% more likely to split up than couples who said they argued about finances a few times a month. So for the health and success of your relationship, here are 20 questions to get the conversation going. Open this article

Learn to get Uncomfortable to Save Money

May 15, 2013 · Canadian Finance Blog · By Alan Schram

Living in a consumer culture is pretty amazing. We have the strength of international industry and commerce allowing us to do a wide range of jobs while enjoying the benefit of agriculture and machinery half a world away. We don’t need to rely on our immediate neighbours to repair our vehicles or get some bread. Open this article

Thoughts on Retirement

May 22, 2013 · Timeless Finance · by AdinaJ

One of the most common topics in PF has got to be retirement. More specifically: early retirement. Just look at all the blogs whose writers advocate it. You might be led to think that retirement is the ultimate point of reaching financial independence — the two are conflated often enough, after all. Open this article

Financial Lessons over the past 20 years

May 23, 2013 · Retire Happy · Written by Scott Wallace

What has someone like me, who is approaching 20 years in the financial industry, learned over the past two decades, what financial lessons have I learned and what advice would I give to others? Open this article

When Women Earn More: Can This Destroy Your Marriage?

May 22, 2013 · Planting Money Seeds · by Miranda Marquit

Traditionally, the man in a relationship is the “provider,” earning most of the money. What happens to marriage/partner relationships when women earn more than men? Open this article

RRSPs: Hunting Season

May 21, 2013 · Spring Personal Finance · by Sandi Martin

Go into any bank between January 2nd and February 28th and you will be haunted by the specter of an underfunded retirement. The point: buying an RRSP sometime between January and March doesn’t mean you have a retirement plan. Open this article

My Very First Investment: An 11 Year Old’s Stock Pick

May 23, 2013 · moneymamba.com · by JT McGee

Dollar General was the first stock I ever purchased. If I remember correctly, it traded for something like $12 a share, paid a robust $.13 annual/quarterly dividend, and was a model that made sense to me. But did I really understand Dollar General? Hell no. Open this article

New HELOC Rules and How it Affects Smith Manoeuvre Mortgages

May 23, 2013 · Million Dollar Journey · by FrugalTrader

When I started this blog, I wrote about the Smith Manoeuvre in the first month and implemented the controversial strategy in 2008. Up until recently, home owners could access up to 80% of their home equity in a revolving line of credit/HELOC and pay interest only on the balance. Open this article

Dear Canada: Your mutual fund fees still stink

May 22, 2013 · MoneySense · by David Hodges

When it comes to mutual funds, the first thing any investor should pay attention to are costs, as high annual fees and expenses can easily eat up a substantial portion of your returns. That’s what makes it so disconcerting—actually, repugnant—to know that, globally, the average cost of mutual funds in Canada are the absolute worst. Open this article

I hope you all enjoy your weekend. Thanks for reading!

The Three C’s Of Canadian Investors

What are the biggest mistakes people regularly make when trying to reach their financial goals? Canadian investors are often guilty of being too cautious, too conservative and too cheap.

Cautious

While no one would advocate taking imprudent risks, being too cautious with long-term investments and sacrificing long-term return for short-term “safety” makes it harder to meet retirement objectives.

Being too cautious gives rise to procrastination. It’s a big decision. When people don’t know what to do, they don’t do anything because they’re afraid of making a mistake.

When stocks have fallen they’re too scared to buy into the market. When stocks are high they fear the market is too expensive and that a downturn is imminent.

On the other hand, some beginning investors become overly aggressive and chase returns following short-term industry performance ratings and are not prepared for any downside.

They sell their assets when they fall in value, thereby ensuring they take a loss. After being burned they become overly cautious and swear they’ll never invest in equities again.

For many retirement plan investors this is their life savings, no matter how large (or small) the account, and they don’t have any other monies to fall back on.

Many of these investors are cautious because they can’t afford to lose anything. The first sign of a drop in the market causes them to go into protection mode and try to salvage what’s left. This leads to the high probability of not recouping their losses.

Conservative

Failure to understand your own personal objectives, risk-tolerance level and time horizon makes you unable to make the right investment decisions for yourself.

Some people fear risk unduly when it comes to investing, so too many save instead of investing for the long term – putting billions of dollars into low interest savings accounts, term deposits, money market products and GICs.

As we approach and enter retirement our ability to take financial risks decreases so it’s logical to lower our equity allocations.

However, one of the biggest mistakes people make is being too conservative. It might seem smart to be very conservative with your money, but it might not grow enough to support you in retirement.

After inflation and taxes, the return on these is next to nothing leaving you with loss of purchasing power in the future. For most people, investing in this manner just won’t get the job done. The real risk they face is running out of money, not losing it.

Cheap

“Why am I paying my advisor for something I could easily do myself?”

“I took his advice and ended up losing money!”

“Financial planners are a waste of money.”

“These investment fees are way too high!”

We’ve all heard some version of these outraged comments.

People are cheap. If they don’t see any value from the fees they pay, they bail. They open a low cost discount brokerage account and begin on-line trading.

For every proficient do-it-yourself investor, there are probably at least 10 who have no clue how to choose and research an investment purchase. They make decisions based on their emotions and get tips from their co-workers.

They choose investments with the lowest MERs regardless of relative performance. They attempt to time the market. They don’t have a plan.

They try to do their financial planning by themselves without seeking outside advice. They think a financial planner is going to cost them money when they can often save them money.

Final thoughts

It’s never too late to improve your financial health.

Work with an advisor.
Pick an asset allocation and stick with it.
Educate yourself. The more you improve your investing knowledge, the more comfortable you will feel.
Don’t look at short-term media reports.
Invest in great companies and, apart from monitoring their performance from time to time, forget about them.

There’s a good chance that you are in better shape than you realize.