For a lot of people this post will sound very naive, but I’m just starting to figure this out for myself, so please bear with me (and correct me if I’m wrong!).

I was interested in investing since I was 16, but was either too busy or too clueless to do it. Measly $2,300 worth of stocks are really nothing to brag about (I’m including a chart of our current stock holdings anyway, because I like illustrations).

This year I decided to systematically approach investment planning, and I’m putting together a list of books I’ll be reading on the topic of investing and wealth planning in general.

So far all I found out with any degree of certainty is that a portfolio must have a balance of CASH, BONDS and STOCKS. The exact balance should be determined by your age (mainly), because it tells you how much risk you should be willing to take to maximize your return on investment in your working years. Then of course there are things like the desired retirement age, current income and expenses, and desired income in retirement.

Portfolio components: Safety, Income, Growth

  • Safety = Cash
  • Income = GIC’s, Term Deposits, Bonds, T-Bills etc.
  • Growth = Equity (Stocks, Mutual Funds)

Okay, so when they talk about Cash, Bonds and Stock, they may call it as “Safety, Income and Growth” – same thing.

Pretty clear on Safety and Income categories. I’m still figuring out Stocks.

And here’s some eye candy:

Stock portfolio March 2 2007

Markets fell today, by much. I was reading in disbelief how drastic the losses were, and it was actually very amusing to watch people react to the news. The worse the news got, the lower the markets dropped. I can understand if you’re a day trader, this one-day loss probably matters to you, but otherwise, what’s the worry? Don’t the markets always go up, even if eventually?

Interesting article on CNN/Money, Survive a market crash – and make it work for you, says:

“…there’s such a thing as paying too much attention to your money. In the late 1980s, Paul Andreassen, a psychologist then at Harvard University, conducted a series of laboratory experiments to determine how investors respond to financial news.

He found that people who pay close attention to news updates actually earn lower returns than people who seldom follow the news.”

We own very few stocks, for a total of about $2,300, minus paper loss of just $108 today. Percentage-wise, it’s pretty big. A bit offset by the recent stock run-up, so in reality everything is back to what it was just a couple of weeks ago. I’m not worried. Definitely not going to ignore the news, but not so worried that I’ll put off investing.

Moral of the story? Don’t be a sheep, don’t sell stocks on a day like today.

A lawyer who was closing our condo deal – I can’t truthfully call him “our lawyer” because that was the only time we ever hired him 🙂 – told us about this house he bought in the late 80’s right before the real estate market crash of the early 90’s in Canada (I hope I got the dates right). The house lost about 20% of the value, but the guy held onto the house for the next 10 years, and eventually the price went up 40% above what he paid. I’d say patience pays. Over time, of course, but I don’t think it’s such a bad deal. You patiently wait, and it goes up eventually. You get more for doing less.

If you were going to buy a particular stock, it probably went down in price today along with everything else. If you did your research and the company’s fundamentals are good, as they say, it’s gotta be an even better deal now. See the lemonade in this lemon’y market. That’s my plan for the week. I don’t think it’s over yet, so I’ll try to watch for the bottom and buy the stocks I’ve been watching for awhile. They say market-timing doesn’t work, but I think significant drops like this may be one of the better opportunities for trying to time it.

5 minutes later (!). Just got an email from CNN:

Selling is across the board as Japanese investors react to the major decline in U.S. markets.

U.S. looks at Asia, Asia looks at the U.S. and where does it stop?

I bookmarked this article exactly a year ago, wanting to become a Couch Potato Investor but never got around to trying out the strategy. It still looks pretty interesting, and I want to do it – Child’s Play: Do the Couch Potato from MoneySense.

I put together this simple Excel spreadsheet, to analyze what would happen if I had invested $10,000 and $20,000 into a “Couch Potato” portfolio one year ago. Results are pretty good. Here’s a screenshot:
Click the image to enlarge

You can also download the spreadsheet, it’s easy enough to use and should work for any no-load fund. You just enter the 1) amount you want to invest, 2) share starting and 3) ending prices, 4) dividend amount per share, and 5) MER.
It doesn’t account for dividend reinvestments, taxes and initial purchase fee you pay to the broker.

Couch Potato investment calculator (Couch Potato.xls)
By downloading and/or using the file, you agree to hold me free and clear of any responsibility for results you get from the use of the file.

I’m semi-clueless when it comes to investing, and I need to systematize my investment knowledge. I also need to read some good books on investing for individuals. Any recommendations?

This is a list of all the basic types of investments I know, available to an individual investor in Canada:

  • Stocks: these take time to research and are usually riskier than any other type of investment.
  • Mutual Funds: must pay attention to Expense ratios, as high carrying charges can potentially kill all the profit.
  • ETF’s (Index funds): these are nice and relatively safe when the market is up. Some of the more popular – and better? – funds are quite expensive, like the Vanguard Total Stock Market for example (VTI).
  • Bonds: I don’t have either experience or interest in these. Canada Savings Bonds rates have always been below what I get in our daily savings account.
  • Canadian Money Market investments:
    Government of Canada Treasury Bills
    Government of Canada Money Market Strips
    Government Guaranteed Commercial Paper
    Provincial Treasury Bills and Promissory Notes
    Bankers’ Acceptances
    Commercial Paper

    Looks like these may offer slightly higher rates than a savings account, especially if you have at least $10,000 you can leave alone for 6-18 months. Will look into these on Monday, have to call banks to get the rates and need to read more to figure out the differences.
  • GIC’s and Term Deposits: 90% of our money is in these at the moment (savings accounts, Term Deposits and GIC’s), making us only 3.5% for $US and 4% for $CAD.
  • Cash: not an investment but always a good idea to have some easily accessible cash.

Next, I want to figure out an investment ratio that makes sense in our situation. I’ll start with TD’s Mutual eFunds application questionnaire – Wealth Allocation Model, they call it. It’s supposed to help decide on Growth/Safety/Income ratio, as well as proper foreign exposure.

If you want to take a look at their form, download the PDF (link opens up the PDF document in a new window). The work sheet is on pages 6-9.

TD also offers an online Portfolio planner.

TD is not my favorite bank, I think they are alright, but I really like their online tools 🙂