Wednesday, April 9th, 2008
As investors, we can spend a lot of time managing various risks within our portfolio.
There is inflation risk, political risk, systematic and non-systematic risk the list goes on. However, the average investor may not pay a lot of attention to the effects of currency risk.
Currency Risk Example
If you are a U.S. investor and you have stocks in Canada, the return that you will realize is affected by both the change in the price of the stocks and the change of the Canadian dollar against the U.S. dollar. Suppose that you realized a return in the stocks of 15% but if the Canadian dollar depreciated 15% against the U.S. dollar, you would realize no gain.
The Kicker
In most cases, bearing more risk gives the investor and opportunity for a higher return. However, this is not the case with currency risk. Actually, several academic studies (without 100% certainty mind you) have determined that a portfolio with no hedge against currency is at no particular advantage to gain superior returns than the same portfolio for which currency risk is hedged.
What does this mean?
Essentially, this means that if you are carrying currency risk, meaning your portfolio is not hedged against currency fluctuations, you are carrying a needless risk.
As you can see, currency risk can have a dramatic effect on your portfolio’s “real return”. It is for that reason that you should not only pay attention to the stock markets, but also take a glimpse at the currency markets from time to time.
How Currency Risk Affects Your Retirement Plan
Yes, currency risk does have a place in retirement planning. For example, if you are a Canadian who is nearing retirement and you have a steady (and growing) stream of dividends coming in from Canadian companies you are set. Or are you? If you are like many retired Canadians, you will travel during your retirement to different countries. Currency risk may not affect the casual traveler too much during retirement if most of their expenses are in Canadian dollars.
On the other hand, many retired Canadians travel for extended periods of time, particuarly in the southern United States. Therefore, they bear a lot of expenses that are in United States Dollars. In this case it would be prudent to hold some investments in high quality, dividend growth stocks that pay their dividends in United States Currency.
If your retirement plan is one in which you expect to travel extensively and/or have many expenses in another currency, you might want to remember this little article. It just might save you some headaches in the future.
Here’s to retirement!
Posted in Investor Education | 3 Comments »
Saturday, April 5th, 2008
Here is why you must start buying dividend paying stocks now!
It has long been a strategy of mine to invest in high quality Dividend Growth Stocks as a for retirement and I’m about to show you why you should do the same!
The beauty about this strategy is that it is not rocket science and that everyone can understand the basic principles behind it. I’m not promoting trickery or complex technical mumbo jumbo, just good old fashioned common sense with a side of logic.
The Stock Market Crash Scare Tactic
I’m sure that we have all heard that the baby boomer generation is aging and entering into retirement. We have also been told that all of these individuals are going to make a mass exit out of the stock market, causing the greatest stock market crash that we have ever known.
Some so called “Gurus” have suggested that the aging demographic is going to cause havoc with the markets by selling all of their stocks to fund their retirement.
Is This Possible?
In theory, the outlined scenario could be possible if all of the baby boomer’s withdrew their money from the stock market at the same time. But, as we know, the boomer generation lasts for a couple of decades…they were not all born in the same year! And even if they were, not everyone can or will remove their equity from the markets at the same time.
Therefore, we can clearly see that this scenario is highly unlikely.
But Aren’t All of The Baby Boomers Going to Buy Bonds?
While conventional wisdom dictates that fixed income (bonds) should comprise a larger portion of ones portfolio as they near retirement, it might not be as simple as black and white these days.
For instance, as time goes by the life expectancy of retirees becomes longer and longer. This means that a retiree will need to make their nest egg last for several more years than they my have previously thought.
Therefore, the retiree will need to take on additional risk in order receive higher returns in order to ensure that they do not deplete their principal prior to death. Taking on more risk means investing in more equities (stocks) gaining capital growth in their portfolio to fund a longer retirement.
So Why Should I Buy Dividend Paying Stocks?
The reason we must invest in dividend paying stocks now is because they will be the investment of choice to fund the retirement of Baby Boomers.
You see, dividend paying stocks have the potential for both capital gain and income production. Not only that, these investors will be looking for stocks that have a track record of increasing dividends…giving them yet another hedge against inflation. This combination, as explained earlier, will be necessary to fund the lengthening retirement that comes with a greater life expectancy.
If we combine this factor with today’s low interest rate environment, we can see that fixed income instruments (with the exception of TIPS) such as bonds and CD’s provide little, if any, protection against inflation.
Factor that in with the fact that historically, dividend paying stocks have outperformed non-dividend paying stocks.
So what do I do now?
In order to provide potential capital growth, income, and protection against the erosion of purchasing power, we must buy the best dividend growth stocks and hold them for a very long time. Read How To Choose Dividend Growth Stocks.
Even if you are young, the generation of retirees that are looking for this 3-part combination of shareholder yield to fund their retirement will start to accumulate shares in high quality, dividend growing, blue chip companies in order to fund a long retirement and help to hedge against inflation.
The accumulation of these stocks will, of course, drive up the share price which means big profits for you!
The Closing
You see, it doesn’t take rocket science to see what is going on. I’m certainly not leading the charge with this idea.
Get out there and search for some great companies that grow their dividends year after year. You won’t get rich overnight, but the strategy works.
Remember to always do your due diligence and as Charles Kirk reminded me, don’t buy a stock just for the dividend!
Posted in Stock Studies | 13 Comments »
Wednesday, March 19th, 2008
There is but one constant in building wealth and that is to spend less than you earn. If we boil it right down to the simplest of forms, you can never be rich if you spend more than you make.
How Much To Save?
Every financial book out there will throw out a number or percentage of your pay that you should save and invest for retirement etc. but there is no magic number that works for everyone.
Some have said that saving or investing 20% of your income is a great amount and this is attainable by most folks if they make the correct lifestyle choices.
Some have loftier goals, such as Trent over at the Simple Dollar, who recently advises newly graduated workers to save 50% of their take home pay! While that may seem unattainable, let’s look a little closer at the idea.
Buying Freedom
If you are reading this blog, then you are looking to make more money, save more money, or find a way to retire earlier. Now that we have agreed on that point, let’s examine another point.
When I recently wrote about automatic savings accounts like ING Direct and why I believe they are essential, I also mentioned that they are useless unless there is a goal attached to it. The reason that they are useless without a goal is that there is really nothing stopping you from spending that money unless the reason that you are saving it is stronger than your desire to fulfill your “need” for immediate gratification.
For most of us, saving 50% of our income seems unrealistic. I’ll admit that it seems daunting to me at the moment as I am expecting my first child in a few weeks (kids are expensive pregnant wives are expensive).
Making Choices
The amount that we save really just depends on our choices. This is no secret, but it has been the basis for many successful personal finance books, from the Automatic Millionaire to the Wealthy Barber, it’s really all about choices.
I made the choice to save more than 50% of my income for nearly two years as I saved in order to write that big cheque that paid off my $40,000 in student loans less than a year after leaving college.
What was the trick?
I lived like I was still in school (I was still in school for one of those years, but working full-time too).
Back to the conversation at hand.
We must have a certain level of income to provide us with shelter, food, water, and clothing; everything else is optional.
The Options Make The Difference
The optional items that we choose to purchase with our disposable income are what make the difference in our wealth. Again, a simple concept that has sold many millions of books.
The optional items that we choose in order to increase our comfort cost us money. That is the surface of the conversation. However, when we look deeper into what it is really costing us is time/freedom.
The argument for saving 50% of your income translates into buying one year of freedom for each year worked. In addition to this, the effects of compounding also come into play.
For each year that we save and invest 50% of our income, we are earning more and more freedom - assuming we keep our expenses at the same level relative to inflation (annual salary raise).
Going Overboard
This example is very extreme and may be viewed by some as going overboard. However, it does prove the point that it was intended to make.
At some point in your quest to save more money, you will reach a crossover point where you begin sacrificing your basic lifestyle for savings. This is not healthy either because you can never tell what tomorrow will bring.
I believe that each person or family must find that delicate balance between a comfortable and enjoyable lifestyle and the emotional and psychological benefits of a secure financial future. I am sure you will agree that this is much easier said than done.
How To Start Saving
The way I started automatically saving money was to set up a separate high interest savings account to which I began having automatic transfers made on each pay day. I have since kept increasing that amount as I find new way to make more money or spend less. Some months I am able to increase the transfer by just a few dollars, while other months I find ways to make a significant increase in the automatic transfers.
Try it out for yourself and see how far you can push yourself and just how much you can save when you are consciously thinking about it.
If you don’t already have a high interest savings account, you can sign up here at ING. They even offer sub-accounts so that you can compartmentalize your savings. I have a sub account strictly for the new baby and another for funding my brokerage account. I find that sub-accounts make it easier for me to organize my saving goals.
There is no “one size fits all” solution, but I hope that this example will help you to find yours!
Posted in Saving Money | No Comments »
Monday, March 3rd, 2008
I’m about to let you in on the secret of how I used my student loans to build wealth. Now, coming from a frugal individual like myself, this secret may shock you.
Are you ready? Do you have your notepad and pen? OK.
I maxed them out.
Yes, that is correct. I completely maxed out every penny that I could in student loan funds. I took advantage of every student loan program that I could find and you should too!
Why You Should Max Out Your Student Loans
No Collateral Needed
The premise behind student loan programs is that the financing institution is banking that your education will allow you to repay the loan at some point in the not too distant future. These programs are put into practice to assist those of us who came from poorer backgrounds as a way to enhance our futures by financing an education. The education is then supposed to lead to a successful career that will allow us to be a contributor to society instead of a drain on society.
This means that your future is all you need for collateral. This is great for students, if it used correctly. When you view student loans in this light, they hold more wealth building power as financial tool of leverage than a mortgage does!
How To Leverage Student Loans To Build Wealth
First off, don’t take my heading the wrong way. I lived rough in college - but I had a purpose!
Most student loan programs, or the ones that you should take advantage of, have deferred payments until after graduation. Essentially, this means that you have access to FREE MONEY for at least 4 years!
*Note: Some programs require minimum - interest only payments.
Student loan money is meant to be used for tuition, books, and living expenses. The first trick to leveraging this student loan money is to ask scholarship or grant money after you receive your loan. I accomplished this by simply approaching the financial aid department at my University for additional funding. I would make an appointment and plead my case days before the semester would begin. It wasn’t often that I received less than an additional $500.00/semester.
So there I was with an extra $500 in free money along with my student loan that would pay for my tuition, books and allow me to live comfortably. This was the beginning of my strategy. Read on to the end of the article to find out how to leverage this money!
Get A Job
Put time and experience on your side.
It is essential that you have a job in college. I know that sounds obvious, but I’m heading in a different direction with it. I don’t suggest working full time or finding the job that pays the most money; I’m suggesting that you get a part-time job in your field of study.
Working at even a menial job within your field of study will at least give you some experience when you head out into the workforce with your hard earned degree. This will often allow you to skip the entry-level positions and actually earn a mid-level salary right after graduation.
The Strategy
Live like a peasant and invest like crazy.
Because repayment of student loans is deferred until after graduation, sometimes up to one year after, it provides the perfect opportunity to leverage free money to your advantage and harvest the growth of investments over a short time period.
As long as you invest the money and don’t use it to live “high on the hog” in your college years, this strategy works. Depending on the investments you choose and their performance, you could graduate with a positive net worth! So, don’t go and blow the money - be smart.
We have all heard the stories of the poor college student living on Ramen noodles and kool-aid. Well, that’s how I did it. Actually, mine was more of a macaroni and cheese and canned tuna - I need my protein!
Anyway, I took all of the money that was left over from my scholarships, student loans and part-time job and rolled it into certificates of deposit that matured in the year I was to graduate. I would have invested in the stock market, had I had the knowledge that I do now.
Hindsight is always 20/20!
This has been the basic strategy of leveraging student loans, if I have skipped over something or if you have any suggestions, please share them in the comments below.
Coming Up!
Find out how I used Credit Cards to my advantage and still do! If you can’t wait for that article, part of the secret is using the right credit card to suit your needs. There is a website that helps you sort through the thousands of cards to find one that suits your needs - you can try out that site for free here.
If you have children that are heading off to college in the next few years I have an even more powerful strategy for you to use. I’ll be posting that article within the next week - so stay tuned!
Posted in Investor Education | 5 Comments »
Friday, January 25th, 2008
Yes, I used it…the dreaded “M” word.
To be honest, I am sick and tired of everyone and their dog running around spouting off about the housing market and sub-prime mortgages etc. Aren’t you?
The fact of the matter is that for the average person, the only mortgage that actually matters is their own!
A mortgage is a tool used for financial leverage. In fact, it is one of the best wealth creation tools available to the general public. It’s true…if you don’t believe me just try to go to your bank and borrow $100K to invest in the stock market.
Furthermore, the majority of the general public could not afford to “buy” a home without the assistance of a mortgage. A mortgage is a contract between you and your financial institution that says you promise to make the payments in certain intervals for a certain period of time and that you are using the real property as security for that contract.
It is really pretty simple when you break it down.
The key component of the mortgage lies in the fact that it is a financial tool of leverage. You are leveraging the power of your own funds (down payment) and the bank’s funds to purchase real property.
Leverage Can Be Good Or Bad
The leverage that a mortgage provides can be good for you when home prices are rising because if you sell your home for more than you purchased it for, the bank just wants the original mortgage paid off. In this instance you are left with a tidy profit (one that also has tax advantages…but we’ll leave that for another day).
Let’s say we purchase a home for $200,000 and decide on a 5% down payment. Our investment in the home is now $10,000 (plus some incidental closing costs etc.). If home prices were to rise by 10% and we decide to sell our home for $220,000 ($200,000 + 10%) we are left with a profit on the sale of $20,000. A 10% return isn’t that bad! But wait…we actually only put in $10,000 of our money to start with, so we actually doubled our money! This illustrates the positive power of financial leverage.
(please note that this is a very basic example)
Let’s take a look at the negative effects of leverage.
Supposed now that we purchased the same home for $200,000 and decided again on a 5% down payment of $10,000. In this instance home prices drop by 10% and we are forced to sell the home for $180,000. In this instance, not only have we lost the $10,000 down payment, but we still owe the bank $10,000! ($200,000 purchase price - $10,000 down = $190,000 mortgage)
As you can see, the mortgage is a VERY powerful financial tool and has the ability to create exponential wealth if used correctly. It also has the power to decimate wealth as well.
Margin Vs. Mortgage
Leverage can be utilized when purchasing stocks as well; this is called “margin”. Margin has the same basic effect as a mortgage, but is not nearly as much of a concern to the general public. Margin, as a tool of financial leverage is granted to those investors who have proven themselves to be worthy of such credit.
What makes mortgages so dangerous is that they are granted to most anyone in the general public regardless of any evidence of knowledge of the effects of financial leverage. Sure there is a credit check and the bank assesses your capacity to make the payments, but when banks start offering interest-only ARMs and other product to try to make homes affordable, there is bound to be trouble.
Know The Score
In fact, a lot of your ability to qualify for a mortgage and the interest rate you will pay is based on your credit score. The banks have access to your credit score and place a lot of faith on that number when making decisions. Qualifying for a mortgage and getting a great rate can be easy when you have a good credit score. However, the average person doesn’t even know what their credit score is - let alone how to improve it.
Do you know what your credit score is? If you don’t, you can access it here for no cost through Experian. I highly suggest that everyone identifies what their credit score is and learns how to maintain and/or improve it.
On The Other Hand
It is unlikely that large stock brokerages will offer enormous margin accounts to “Joe Common” because he decides it’s “time I started investing in stocks”. Why then should mortgage lenders offer up hundreds of thousands of dollars in “leverage” simply because Joe decides it’s time to buy a house. Or, to make this worse Joe decides…”Buying a house is a great investment”!
I’m not going to tackle the subject of whether or not one’s home should be viewed as an investment; that is best left for another day.
However, if you’re itching for some good discussion, you can read a great debate on this subject at Ramit’s I Will Teach You To Be Rich and a breakdown of the financial decision to Buy vs. Rent from Jim at Blueprint for Financial Prosperity. Trent over at the Simple Dollar also unleashed a similar discussion while reviewing Rich Dad Poor Dad.
Posted in Investment News | 6 Comments »
Wednesday, January 23rd, 2008
Yes, you read that headline right! (and no, the crazy markets don’t have me on some wacky buzz)
Potash Corp. (POT) has been under heavy selling pressure of late and I think that the current share price is unjustified and here is the research to back it up!
- Potash Corp. has recently announced its intention to buyback shares of the company to the tune of 5% of the outstanding stock at the prevailing market prices over the course of the next year. This leads me to believe that company management belives the shares are undervalued at this time.
“We have a long history of using our strong cash flow to create value for our shareholders,” said Potash Corp. President and Chief Executive Officer Bill Doyle. “We believe there is no better assets in our industry than the ones held by our own company. We have tremendous potential today and in the years ahead, with expected increasing global demand, rising prices for our products and the unique capability to capitalize in this environment. Reinvesting in our own company positions us well to maximize long-term value for our shareholders.”
- The company also announced a quarterly dividend payment of $0.10 per share.
- It was also announced that delivered prices for standard potash in S.E. Asia will increase from $425/tonne to $525/tonne in Q2/2008. The increase is slightly higher than the $75/tonne expected which means more profits for Potash Corp.
- According to this chart, the stock is trading near a support level at $110.00.
What does this mean?
- POT’s net realized price could increase to $385/tonne by 2009.
- POT’s shares are significantly undervalued given its outlook for higher potash prices, the willingness of the company to aggressively buy back shares and tight fertilizer market conditions.
- There appears to be buying support at the $110.00 level, which may give us an ideal entry point for this stock.
The S.E. Asia price announcement is consistent with analyst’s potash price outlook. In addition, analyst discussions with industry participants suggest that potash inventory levels at customer/distributor warehouses may be at historically low levels.
Based on these fundamentals, this sharp decline in Potash Corp’s share price appears vastly unjustified and presents us with a valuable buying opportunity.
UPDATE: 01/24/2008 - Looks like I called this one as POT is trading up over 10.0% this morning!
Posted in Stock Studies | 4 Comments »
Thursday, November 29th, 2007
I’m sure that from time to time we have all fallen victim to the lure of wealth and riches. After all, we are all devoted to investing and developing wealth through the ownership of stocks and other assets.
However, once in a while there are times when we find ourselves so caught up in the market and the performance of our portfolio, that we feel completely stressed. I suppose that some would say this is simply the “nature of the beast”. If you want to have a fantastic life and become wealthy, then you have to pay the price.
What Exactly Is that Price?
- Must we pay with sleepless nights worrying about which way the market futures are pointed?
- Should we be spending hours examining the relationship between the price of oil and various world currencies?
- Is it healthy to spend our weekends devouring every newspaper article, blog post, podcast, iTune, Powerpoint presentation, instructional video, stock chart and Egyptian Pyramid Hieroglyphic to squeeze an extra percentage point out of our portfolio?
My answers to these questions came from my dog!
Yes, an 11 pound Shit-Zu/Poodle named Ralphie provided me the answer these most intriguing questions without even saying a word.
As I was pondering these thoughts, I noticed that Ralphie had picked up one of his toys and wanted to play fetch. Interestingly enough, this toy was the first one that I bought for him (3 years ago). For some reason he always likes to play with the that toy.
Anyway, I played with him for a little while and then he decided that he had played enough to earn a treat. I agreed, so I went and got him a crusty milk bone from the bulk bag that I purchased so long ago that I can’t even remember. After I made him lay down, roll over, play dead and dance I finally gave him the treat. And, per usual, he was just as happy with that treat as the first one that I gave him from that 20lb bag months ago.
After devouring his milk bone, Ralphie decided it was time to curl up and sit down next to me on the couch. He was content to just fall asleep there as he has countless other times over the past few years. Ralphie was happy.
What Does This Have To Do With Personal Finance?
Ahhh…I’m glad you asked. I was just getting to that!
You see, our society puts so much stock in tangible goods and keeping up with the Jonses that we often forget how to be happy. It’s true; as our lives move along we become more and more stressed and worried about how we are going to become rich and famous so that we can buy all this “stuff” and we seriously forget how to be happy.
Why can’t we be like Ralphie and be ecstatic about playing fetch with our first toy(driving that old car you have) or eating that favorite meal that you’ve cooked a thousand times instead of going out for dinner (You know you like it or you wouldn’t make it) or falling asleep on that old couch like you did back in college?
Why can’t all of those things be good enough? My dog is happy 24-7 and he sleeps like a log! He is content with his life, he has the necessities and he enjoys the simple things.
Yes, it is nice to have goals and dreams of wealth and riches but is it worth the cost of enjoying the things that you already have?
This article is about taking time to stop and smell the roses, but more importantly to learn to recognize the roses that are already in your garden!
I encourage you to all take some time to be more like Ralphie (No, I won’t scratch your belly). Schedule some ‘time out’ this weekend to enjoy the fruits of your labor and take a break from the quest for more stuff!
Posted in Investment News | 9 Comments »
Sunday, November 18th, 2007
As a dividend growth investor, I am frequently asked why I don’t invest in high growth stocks and, more importantly, why I believe investing for dividends is a more appropriate strategy.
Here are the 3 most essential reasons that I prefer dividend investing:
1.) Dividends offer investors fantastic flexibility.
Dividends give you tremendous financial flexibility throughout your investing life. While you’ve got an income from working, you can reinvest those payments to speed the process of compounding your wealth. Once you’ve decided to retire, the cash thrown off by dividends spends just as well as any other source of money!
What is even better, a rising dividend payment can help you fight inflation by providing you more cash every single year.
2.) You can’t fake money in your pocket.
Dividends also have the added bonus of being exceptionally difficult for companies to fake. After all, it’s difficult to convince lenders to loan money to a company if that company is going to turn around and hand it over to its shareholders.
As a result, to sustainably make and increase those dividends, the business needs to generate serious cash on both a regular and repeatable basis.
3.) Dividends are paid from the company’s cash flow.
Perhaps most important, a company’s dividend payment comes from its operational success and not from the panic, hype, or analyst interpretations that influence its stock price. Throughout these rocky market periods, dividend payments allow us to make money even when the stock price moves lower.
Why Invest In Dividend Paying Stocks?
- Quicker compounding.
- Increased financial flexibility.
- Cash in your pocket without selling.
- A hedge against inflation.
- An check on the company’s accounting.
- Cash Flow in a down market.
With all of the benefits of dividends, it’s obvious why they can be an integral component of one’s portfolio.
Did I miss any benefits of dividends? If so, let me know in the comments!
Posted in Investor Education | 3 Comments »
