Investing for Financial Freedom

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Homeownertoo
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Investing for Financial Freedom

Post by Homeownertoo »

I'd like to start a new topic of interest to people who already invest in the stock market or wish to do so. The purpose is to have a place to discuss specific investment vehicles or stocks or bonds but is also intended to develop a forum for exchanging information and advice of practical use to investors and people saving for their retirement, however far off that may be.

I'll start the ball rolling to give some idea. As relatively young retirees, my wife and I are heavily invested in the stock market (and very comfortable with that). Almost all of our investments are currently in Canada. What do you see as the pros and cons of investing outside Canada at this time, which dividend-paying stocks do you favor for that purpose, and why?

Also, what Canadian dividend-paying stocks do you favor now and why?

Of course, I am aware of currency risk and the loss of tax benefits on foreign dividends within non-registered accounts. So take these issues into account when offering opinions on potential benefits.

Depending on response, I can also see this morphing into a variety of topics. For now, we'll start with a single forum.
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Captain Awesome
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Re: Investing for Financial Freedom

Post by Captain Awesome »

I'm interested in this topic though I don't have much to offer. We just started our path to financial independence and it looks like it will be a long one. Up until recently we just saved money, but now we'd like to start investing it.

Homeowner how long did it take you to get where you are today? How much money (%-wise) of your income were you investing?
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Homeownertoo
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Re: Investing for Financial Freedom

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I began investing (after reading the book Start with $1,000) in 1984, but had very little to work with. Then in 1986 we quit our jobs and headed overseas, not returning till 1988, pretty much broke. I think we had about $30,000 at that point. Didn't get back on track investing till we were both working again in 1990, and retired in 2008 at age 52.

I didn't budget (except for the year I put together our financial plan in 1993) or save a given percentage, just maxed out my RRSP every year once my income reached about $50,000. Since my marginal tax rate was higher than my wife's and she had a pension plan, I also contributed to a spousal plan. She also invested in a non-registered account as her limit was much smaller than mine. I think the limit is 18% of income, so that gives you a rough idea. That put a lid on our spending though we never really felt constrained by it as we were used to living cheaply during our early years.

The real estate roller coaster never hurt nor helped us as we always bought and sold into the same market cycle. Nor did we ever make any killings on the stock market, just invested regularly. Were I to do it over, I'd have stuck with dividend-paying stocks from the start rather than try to outguess the market by aiming for 'growth' stocks. But who knows about the future.
Last edited by Homeownertoo on Apr 12th, 2011, 10:01 am, edited 1 time in total.
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Glacier
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Re: Investing for Financial Freedom

Post by Glacier »

Hypothetically speaking, let's say that someone received their inheritance equating to around $100,000 about 10 days ago. There are many options available to this person. Buying a house seems a bit of a money loser right now, the stock market is at an all time high, banks pay very little interest, bonds don't seem much better, etc.

What advice would you give such a person and what would be the most prudent way to invest this money?
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Homeownertoo
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Re: Investing for Financial Freedom

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Glacier wrote:Hypothetically speaking, let's say that someone received their inheritance equating to around $100,000 about 10 days ago. There are many options available to this person. Buying a house seems a bit of a money loser right now, the stock market is at an all time high, banks pay very little interest, bonds don't seem much better, etc.

What advice would you give such a person and what would be the most prudent way to invest this money?

Very apropos question. Last week my mother died. We, her kids, will be selling the family home (Vancouver) so I'll have a similar inheritance to spend or invest.

My first reaction is that it very much depends on your situation. But if I were to consider someone in mid-career and planning for retirement, this would be my advice.
1. Have a written financial plan.
2. Pay off debt that faces an interest rate greater than 4%. You could argue that should be 5%. But beyond that, there is no solid argument. That is 5% in after-tax dollars. You can't get a guaranteed return that beats that.
3. Max out TFSAs. Sure, there's no tax rebate, but it will grow tax-free and is money available for emergencies without tax consequences.
4. Max out RRSPs to the extent possible. That's a general rule subject to your specific situation.

As for investing, why would you say the market is at an all-time high? It's not. The TSX topped 15,000 three years ago. And there remains, IMO, investment cash on the sidelines or in bonds that will be looking for a new home when interest rates start to rise. I like dividend-paying companies for any stage of a person's life cycle. They simply work best, long or short term. And there are quite a number of decent ones available in Canada, where they offer tax advantages and no currency risk. If you want to accept that risk, there are even better pickings in the US.

For Canada, here's a few to consider and their current yields: BMO 4.9%, BCE (5%), Telus 4.5%, CPG 6%, Keyera 6%, GNV 5%, Russell Metals 4.4%, CAR.UN 6%. These provide good yield, reasonable quality and some diversity. And you can expect both their yield and equity growth to at least match the rate of inflation over time. Just watch the commodity cycle. I have them all in my portfolio and they have all performed nicely while I've held them. And I don't worry about the market falling 10% or 20% because, if the downturn of 2008 is any guide, their dividends are safe. But I do watch the individual holdings for changes in quality.

I'm not at all against ETFs, but I'm leery of them when the market is tending to a secular high because they tend to be volatile in bad markets. And if you think the market is frothy, increase your cash portion so that you will be well positioned for a downturn. I like to keep a minimum 10% cash position, would go up to 20% today, and in late summer 2008 I was about 35% cash, which came in very handy the following March when I began buying back.

I've always been heavily into equities, never profited from my few forays into bonds, and don't buy into the idea that you have to spread your investments among bonds and equities in order to manage risk. The greatest risk, IMO, is being out of market when it goes up. Eliminating bonds simplifies my job to just managing my cash position and not having to guess where interest rates are headed or timing the bond and equity markets. And focusing on dividends, which provide the vast majority of gains over time, takes my mind off the inevitable and confusing market gyrations.

Hope that helps. If you want to look at specific stocks, I'd be happy to discuss them, but I'm no expert. I'm just looking for good investments, just like everyone else.
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Glacier
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Re: Investing for Financial Freedom

Post by Glacier »

I'm sorry to hear of your loss, Homey.

Thank you for the input. When it comes to RRSPs, it makes little sense to put much into that right now as my income and deductions are such that I don't pay a lot of taxes. I've been thinking that if my wife and I max an investment TFSA every year, we should be making more money tax-free in 35 years when I retire than I make today (in real terms). In addition, the government could conceivably pay us a lot of money for being "low income" just like they did three years ago when I was a university student. This hardly seems fair, though.
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Homeownertoo
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Re: Investing for Financial Freedom

Post by Homeownertoo »

You raise an interesting question regarding fairness. In technical terms, the tax system is structured to permit us to minimize our taxes but not to evade taxes. How do TFSAs fit into this concept?

First, it should be pointed out that TFSAs, while branded a sop to the rich, are actually of most benefit to lower income people who can put away a few, or a few thousand, dollars a year. Unlike with RRSPs, with TFSAs they can do so without having to worry about eventually paying higher tax rates on withdrawals and upon retirement can supplement their incomes with the proceeds from their TFSAs without worrying about triggering clawbacks from gov't support programs.

Is that unfair, as you fear? To whom would it be unfair, people with higher incomes? I don't think so, as they have been able to structure their savings to minimize taxes through pension plans, RRSPs and, yes, TFSAs.

Would it be unfair to taxpayers in general in that you can portray yourself as poor and eligible for gov't support programs when in fact you have a good income? This is where it gets interesting because it challenges the purpose of those support programs.

My response, however, is that those programs are based on taxable-income levels. And TFSAs are, legitimately, not taxable. Why? Because those savings were generated from after-tax dollars when you put them into the TFSA. What you did with those after-tax dollars is your business. You could have spent them on a better lifestyle when you were younger, and reaped the benefits of that. Yes, that would have incurred some tax in the form of sales taxes or property taxes, but that will happen whenever you spend the money.

Think of the TFSA, in this form, as encompassing a deferred tax. Instead of spending the money and paying sales taxes immediately, you deferred the benefits of that consumption and invested it, deferring those taxes. The return on your investment is equivalent to the benefit you did not receive from immediate consumption of those funds. Eventually, of course, you will cash in the investments and spend them, and at that time will pay the going consumption tax on it. You will still pay your share.

So even though you now (in old age) have a higher income due to your youthful diligence, should you be punished for that by being ineligible for support programs that will support those who were less diligent than yourself. Any concept of equity I know of suggests not. That your savings leave you better off, thanks to gov't support programs, than the non-saver is to be expected and is an entirely equitable outcome.

What TFSAs do, IMO, is offer the opportunity to both help lower-income people and provide equitable treatment for people who do save and invest for their future rather than punishing them for doing so and saying they shouldn't mind such inequitable treatment since they are "rich". We need more such "rich" people in society and gov't should encourage, through such things as TFSAs, behavior that leads to that conclusion.
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Captain Awesome
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Re: Investing for Financial Freedom

Post by Captain Awesome »

Anybody familiar with segregated funds? Is it something one should consider or should I look the other way?
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Homeownertoo
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Re: Investing for Financial Freedom

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Look the other way. High costs, low or average returns, unnecessarily complex. They are good for 'advisors' who flog them, however. Do your homework and stick with ETFs or good quality dividend-paying stocks that reward long-term holders, or if you are retired perhaps an annuity.

Edit to add: There will always be people who craft complex things like seg funds or guaranteed-return funds on the premise that people will pay for the illusion of reduced risk or greater security, or, rather, on the premise that there's a sucker born every minute. Instead, keep it simple, buy quality and buy income (dividends or distributions) and invest for the long haul. And understand what you are buying.
“Certain things cannot be said, certain ideas cannot be expressed, certain policies cannot be proposed.” -- Leftist icon Herbert Marcuse
“Don’t let anybody tell you it’s corporations and businesses create jobs.” -- Hillary Clinton, 25/10/2014
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Glacier
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Re: Investing for Financial Freedom

Post by Glacier »

Homeownertoo wrote:As for investing, why would you say the market is at an all-time high? It's not. The TSX topped 15,000 three years ago.

Sorry to bring this up again, but I think the TSX is close to the pre-crash high. Either that, or I'm not reading the chart properly.

http://ca.moneycentral.msn.com/investor ... CP=0&PT=11

Back on topic, someone told my of a good website where you can easily compare dividend paying stocks, but I cannot remember the name. Does anyone know? Also, how many different companies should I invest in? Is it unwise to stick to only Canada stocks?
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oneh2obabe
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Re: Investing for Financial Freedom

Post by oneh2obabe »

Not sure which one you mean but here are 3 that might give you the info you want.

http://dividendinvestor.ca/
http://www.milliondollarjourney.com/div ... n-list.htm
http://www.dividendinvestor.com/
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Homeownertoo
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Re: Investing for Financial Freedom

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Glacier wrote:Also, how many different companies should I invest in? Is it unwise to stick to only Canada stocks?

The number of companies you invest in, or whether to invest in companies at all, depends on several things: how much do you have to invest, how much time and effort will you put into keeping tabs on those companies.

If you are investing less than $100,000, a good case can be made for using several ETFs rather than stocks. If invested in stocks, I think 10 should be easy enough to handle while providing adequate diversity. I am currently invested at my upper limit of 25 stocks for a portfolio that's north of $1 million.

As for foreign stocks, the only non-North American one I own is BP. I find there are better-valued dividend-paying stocks in the US than Canada, but there are complications. Those I have I own within an RRSP because they are not eligible for the lower tax on Canadian dividends. Within the RRSP they are treated just like Canadian dividends. Also, the dividends are automatically reinvested when held within an RRSP.

Then there's the currency risk of being invested abroad. Whether it's a large risk or not, it doesn't really exist in Canada since you live here. Also, if you think the US economy is in long-term trouble, that may be an issue for American stocks.

As for going further abroad, the risks increase due to smaller markets, greater difficulty getting good information in overseas markets, greater chance of unregulated markets and corporate malfeasance. See the fate of Sino Forest, a big market darling of late that was off 64% Friday due to a report that came out of the blue alleging corporate illegalities in its China operations.
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Captain Awesome
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Re: Investing for Financial Freedom

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Does anyone have any experience with Canadian exempt market investments?
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Glacier
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Re: Investing for Financial Freedom

Post by Glacier »

I have my money all cued up to invest in U.S. stock via a TFSA if they default on their debt.
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Homeownertoo
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Re: Investing for Financial Freedom

Post by Homeownertoo »

Timing a re-entry into the US market is good topic, especially now that the loonie is rising again. Any 'default' is a manufactured event since the debt ceiling is just a legislative creation, not a financial one, meaning it is self-limiting and a good speculative bet if the greenback swoons following a technical 'default'. It could produce a good entry point for any number of quality dividend-paying US stocks.
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“Don’t let anybody tell you it’s corporations and businesses create jobs.” -- Hillary Clinton, 25/10/2014

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