Investing Brief

There is no “true” financial advisor; most are salespeople or an information source, as people truly “good” with money don’t need to work for someone else and are busy managing their own money. The world is investing is very vast and people rarely agree on anything; you are best to do your own research and undergo your own experience. The general rule is no risk, no return. So the more risk you’re willing to take, the more you can potentially make… and everyone’s appetite for risk is different.

The standard measurement of your money you make is the ROI – return on investment: profit (or loss) divided by your initial investment; how much you put into it. There is also ROA (return on assets) and ROE (return on equity), but ROI is the one you should be looking at right now.

Generally the safest end of the investment spectrum is cash savings accounts, GICs, or the like, where the interest rates hardly keep up with inflation…. that is, your money rots quicker than it grows.

Next in line is mutual funds or ETFs (exchange traded funds; “collections” of stocks bundled into an individual stock you can buy off the exchange).

• These offer a broad exposure to part of the market of your choosing for relatively low cost and formalities. Mutual funds charge much higher fees, but some people have emotional attachments to their banks.

• You can buy these through your TFSA trading account so you don’t get taxed on gains. Generally most people are happy to make a few % or a bit under 10%.

• Being so spread apart with your money, your money likely won’t fluctuate very much.

• They are a lazy way to make a decent return without debt, hence the term “couch potato investing” – as you don’t have to worry as much about individual stocks.

• The downside is the bad eggs (bad stocks) will pull down your returns, as each fund is a collection of a widespread collection of stocks.

• They also do not pay dividends, unlike individual stocks.

Then the next most common is leveraged real estate – using other peoples’ money to make money through mortgages.

• This is relatively easy to understand – get a mortgage, collect rent cheques, maintain the place and your tenants, pay down the mortgage, and make cash when you sell your appreciated property down the road.

• You also can claim CCA (fancy word for depreciation; 4% of the property value) every year, so it helps you get a bigger tax refund.
• You can write off mortgage interest, maintenance costs, etc… basically mostly anything related to the cost of business.
• Contrary to popular belief, as per Revenue Canada regulations, your profit is: rent + appreciation – mortgage INTEREST – maintenance – legal fees – other carrying costs… NOT rent + appreciation – mortgage payment – maintenance – … etc.
• Contrary to popular belief, your return on investment (ROI) is profit/initial investment, where initial investment is how much money YOU put into it, not the total asset size. So if you buy a $400,000 condo that makes $40,000 net profit, and you put $80,000 downpayment, your return is 50%, as 40000/80000 = 0.5… it is NOT 40000/400000 = 0.1; 10%. Most bankers/financial advisors, general public, etc. will not tell you this as debt is usually frowned upon, and banks are usually risk averse. They rather you buy their expensive but low-return funds. Also, mortgage interest is a tax write-off, and we all know the government wants to collect more tax; you pay LESS tax this way. This is one of the main draws of real estate, as you can use others’ money to make high returns.
• Now as for ROE – return on equity. Return on equity is your profit divided by your equity – how much money you currently have sunk into your profit-bearing asset. ROE will differ from ROI for mortgaged income properties because it decreases as the mortgage is paid down. That is, per dollar you have sunk into the place that you can be potentially using for something else, you’re making less money. At some point it becomes more profitable to re-mortgage, or sell and re-buy another property – to obtain a more efficient use of your dollars.
• The public’s fear/savings (bank) is the cheapest source of money, but also the hardest to get… there are many formalities involved, many transaction costs, many upkeep costs, many risks involved with the housing market and bad tenants. It’ll also be a nightmare if you’re a business owner, as the system is designed to be in favour of the lifelong consistently indebted employee. e.g. Almost EVERY tax write-off you use to put MORE cash in your pocket, is used against you; the bank considers you less credit-worthy. But compared to most other investments, you can access more of other peoples’ money.
• Without other peoples’ money, real estate is often not worth it over funds or individual stocks, since your ROI/ROE is much lower – per dollar you’re using, you are making less. Say for example, in Edmonton most people are happy to see about 4% property appreciation; $400,000 home going up by $16,000. You’d collect about $20,000 in rent, then pay $3,000 in property tax, $600 legal fees spread over 5 years, commission $1200 spread over 5 years, then maintenance say, $1,200. Net profit is $29,000. This is only 7.25% return, so given all your headaches, you’re just better off buying many ETFs or individual stocks… goes against the common “paid off, cash flowing properties” retirement dream as the best dream.

Then there is individual stocks and futures, which are an entirely different world of their own. You can make (or lose) anywhere from around 10% return to 100%+ (doubling your money).

• “Blue chip dividend stocks” are most peoples’ favourite, as most of the major outfits such as BMO, TD, Bell, Rogers, Apple, etc, are relatively safe buys and pay in the high single percentage points in returns, plus 3-5% dividends (which is cash dropped quarterly usually into your account).

• You can collect these in your TFSA to start.

• You can get a margin account where you can go up to 2x leverage on some stocks. So with $50,000 – you can have the power of $100,000 – with the cost of some interest. A trick is to use this to buy solid dividend stocks, and use the dividends to pay the interest. Interest also is a tax write-off, as per cost of doing business. The drawback aside from interest is that if the stocks drop too much, then the bank can seize them (margin call).

• Individual stocks are also much more volatile than funds, as your money is less spread part. You also will have to pay commission for each transaction.

• Futures are a colourful way to hedge other investments or to bet on prices of commodities or even stocks, such as oil (one of the most commonly traded ones). You can say, buy one that gives you a right to buy a barrel of oil at $60 for next 3 years, or the right to sell a barrel of oil at $60 for the next 3 years. So if the price of oil goes higher than that by then, you can get a “deal” on oil for the buy. If the price of oil drops, then you would have “hedged” that risk since the other party has to still pay you $60 for the barrel. This is what a lot of oil companies do to protect their production, especially as of late among the oil prices bouncing so much – at a cost of course. Or, you can buy a fund that follows 3x the performance of oil. So if the price of oil goes up by 5%, you make 15%. If the price of oil drops 5%, you lose 15%. Some people make a career out of this.

• As for stocks categories, there are endless books written on these topics. The big money is in the “growth” companies – the small companies that are just getting started out and have a lot more potential, especially the exploration ones looking to make a producing oil/gas well or mine. But they are extremely volatile and risky, so most investors are not comfortable with them.