Transcript InvestingPPT - My Lifeskill Journey

Investing
Growing wealth through passive income
Everyone should put some money aside, whether you want to save for
retirement, or you want to invest your money to grow passive income. You can
invest in the long term, through RRSPs for example; or you can invest in the
short term like day trading in the stock market.
My advice to the new investor (as a friend of mine says) have a tortoise
mentality, not a hare mentality (for those familiar with the fable). Start with
slow, steady and long-term goals. Once you’re comfortable with investing,
adjust your goals and strategies.
Nobody likes to risk their hard-earned cash, but if you keep your money under
your mattress, considering inflation, you are actually losing money in the long
run. Put that cash to work for you!
Why should I invest my money?
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The short answer is: because you don’t want to work until you die.
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‘Money isn’t everything, but happiness alone can’t keep out the rain’
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You don’t want to spend every paycheck when you receive it. You want
to create some ‘piles’:
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Retirement
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Loved ones
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Don’t leave loved ones with your debt
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Send your children to school
Major purchases
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Car, house, chalet, boat
Rainy day expenses
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Repairs, surprises (good and bad)
How should I invest my money?
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If you are starting out, either you have some homework to do, or
you have to find a broker you trust.
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Brokerage can be in the form of a full-service investment adviser
or a discount broker. The former usually works for a bank, a firm
or an insurance company. He will charge you considerable
commission and management fees, but you will have access to his
services and advice. When using the latter, a discount online
broker, you are on your own, but you will save on those fees that
eat at your returns.
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There a few online brokerages that seem respectable. I
personally use Qtrade, but you can google and do your homework
on those. There are a few good options out there.
In what should I invest my money?
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You can invest your money in anything that you feel will be
profitable.
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You can do it via stocks, bonds, mutual funds, options and futures,
precious metals, real estate, or your own business.
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No one can predict the future, but you can look at trends in the
past, and you can keep up to date on upcoming events and products
that you feel will be profitable.
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You decide on your risk tolerance.
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Based on your age, when you want to retire, how much money you have
to invest, how ‘brave’ you are and what your goals are.
Your goals
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Figure out what you are investing for and create your financial goals. WRITE
THEM DOWN. Seriously.
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First, figure out your net worth, which is your assets minus your liabilities.
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Assets include your cash, (paid) car, (paid) home, investments, anything you own.
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Liabilities include your debt, your mortgage, your (unpaid) car, your loans.
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Create some goals: short term (1-4 years), mid-term (5 to 9 years) and long
term (+10 years).
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Create your budget. ON PAPER. Or computer screen. You get the idea.
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Your salary against your predictable expenses.
Returns
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Returns are profit you get in exchange for buying shares in a company (stock)
or for lending money to a government or corporation (bond).
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When you invest, you hope to get
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Trading profits (capital gain): increase in the value of your purchase
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Income
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Interest: what the corporation pays you for lending them money (bond)
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Dividend: share of a company’s revenue (stock)
If a public company earns a profit, it can either reinvest it in the business or
pay part of it out as dividends to the shareholders.
Returns
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Few things to keep in mind…
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Canadian dividends and capital gains are lightly taxed. Only 50% of your capital
gains are added to your taxable income. Whereas interest is fully taxed. This
means that if you are investing out of registered accounts, stocks are a better
option, since they provide high capital gains. Keep bonds inside your RRSPs as they
usually return more interest, which would otherwise be adding to your income.
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Capital gain is only on paper unless you actually sell your holdings at that price.
You have made no physical money until you sell your investment.
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Note the importance of compound interest in long-term investing. It simply means
that you earn income on income. If you have 1000$ and you earn 10% interest
annually, in year 1 you make 100$ of interest. In year 2, you receive 10% again, but
this time, it is based on 1100$, which means you made 110$, and so on and so
forth. Try to imagine the exponential effect of this over 30 years!
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Currency can also affect your earnings. Our currency gets stronger and weaker
against other countries’ currencies. That affects the value of your investments if
you invest internationally, and out of the Forex market (the market in which
currencies are traded).
Bonds
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Bonds are basically loans. When you buy a bond, you lend money to the
government or a corporation. When the bond matures, that corporation pays you
back with a specified rate of interest.
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A company can finance through debt (bonds) or through equity (stocks). Creditors have
bonds, get paid first in case of bankruptcy, make a ‘guaranteed’ amount. Owners have
stocks, get paid last in case of bankruptcy, can potentially earn a lot if the company does
well, but also risk to lose it all if it doesn’t.
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The principal is called the face value or par value. The rate of interest is called
the coupon.
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Unlike stocks, you do not own or buy any part of the corporation. You are simply
betting on the issuer’s ability to pay you back.
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Given that bonds are often issued by governments or big corporations, they are a
pretty safe investment. As with all investments, the smaller the risk, the smaller
the potential gain.
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NOTE: When interest rates are low, bond prices are high. When interest rates rise,
bond prices fall. It is the same dynamic as with house prices dropping when
mortgage rates rise. People are not willing to pay as much for the item, if they
have to pay more in interest.
Stocks
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Companies can be privately owned or publicly shared. When a company goes
public, parts of it (shares, stocks, equity) are sold in the stock market via an
Initial Public Offering (IPO).
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Common stocks: Voting rights, but last to be paid if the company goes bankrupt.
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Preferred stocks: No voting rights, but gets paid before common shareholders (but
still after debt holders aka bonds).
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Don’t put all your eggs in one basket. Diversify is the magic word. Own units
in multiple companies and in multiple sectors to minimize the risk and
compensate if and when one falls or experiences volatility.
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The higher the risk, the higher the potential for return. For example,
companies called Blue Chip (the most valuable poker chip) are big, stable and
safe companies that typically produce consistent, less risky returns, but they
won’t make you a millionaire overnight.
Exchanges
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Most stocks are traded on EXCHANGES, which are places where buyers and sellers
can meet, decide on a price and buy and sell stocks. It basically facilitates the
exchange of securities between buyers and sellers.
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New York Stock Exchange (NYSE)
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NASDAQ
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Toronto Stock Exchange (TSX)
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Some exchanges are physical locations where transactions are carried out on a
trading floor (like in the Wall St movies). Some exchanges are virtual, basically
just a network where trades are made electronically.
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Primary market: This is where securities are created (by means of an Initial Public
Offering (IPO).
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Secondary market: This is where investors trade previously-issued securities
without the involvement of the issuing company.
Sectors and Industries
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Financial
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Computers, electronics
Telecommunication
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Oil, forest, wind, solar, electricity,
minerals, pipelines, water, nuclear,
natural gas
Telecommunication goods and
services
Basic materials
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Mining, metals, coal
Consumer goods
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Leisure, restaurants, gambling
Industrials
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Retail (food, auto, household,
tobacco, etc.)
Consumer services
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Technology
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Banks, investment funds, insurance
companies, real estate
Energy & Utilities
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Railroads, disposal services,
aerospace
Health Care
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Pharmaceuticals, health care
providers, medical supplies,
biotechnology
Stock Indices
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A stock index in basically a grouping of stocks, based on trade, region or
sector. These are a few common examples.
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Standard & Poor 500 (S&P 500)
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NASDAQ 100
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Russell 1000
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NYSE Composite
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Amex Composite
Why do prices vary in the market?
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Stock prices can be very volatile. They change as a result of what’s called market
forces. Share prices change based on supply and demand. If more people want to
buy it than sell it, the price goes up. If the supply is greater than the demand, the
price goes down.
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To be successful at investing in the stock market, you need to figure out whether a
company is well-run and well-established, and also whether it is worth what you
are paying for it.
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Public companies are required to report their earnings four times a year (earnings
seasons).
Investors have developed many ratios and indicators to evaluate and predict stock
prices. Most of them are useless on their own, but reflect the stock’s value and
quality when compared to similar companies in their sector.
Indicator
Symbol
Value
Explanation
Beta
β
Represents price volatility compared to the
market.
The S&P 500 : β of 1.0
Stock price varies more : β >1.0
Stock price varies less : β <1.0
Certain industries or sectors are more
volatile (utilities) than others (financial). A
negative β goes opposite the market. High
volatility is not typically desired.
Return on equity
ROE
How much profit is generated by each
dollar.
10% ROE = you make 10¢ on the dollar
Compare this value to other companies in
the same sector. If profits are high, but ROE
is low, management may not be doing a
good job.
Earnings per share
EPS
Company’s profit on each stock.
0,2$ = 20¢ profit per share
The company can chose to give this out as
dividend or reinvest it in their business to
grow.
Price to earning ratio
P/E Ratio
Market value per share
Earnings per share
Lower ratio is better (low value with high
earnings). P/E Ratio of 10 means people
are willing to pay 10$ for every 1$ earned.
40$/4$ = 10 times
Dividend yield
The amount of their profit the company
gives to the unitholders.
4% at 50$/share gives you a 2$
dividend/share.
In the balance sheets, look for increased
earnings and dividends.
Debt to equity ratio
How much debt a company has in relation
to shares.
If a company has 10 M$ in debt, and 100M$
in equity, it has a 10% ratio.
Lower is better. Ideally, try to keep this
under 35%, otherwise you risk investing in a
company that cannot repay both its debts
and its shareholders.
Types of analysis
There are essentially two clans when it comes to choosing stocks and predicting
the winners. A combination of both might not be a bad way to go.
Technical analysis
Fundamental analysis
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Perceived value
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True value
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Emotional
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Logical
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Short term
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Long term
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Based on what people are willing to  Based on a company’s financial data
pay
Economy
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If you want to trade, you need to understand how the economy cycles work. Peaks
and troughs are flat periods, recessions and recoveries are when you see change.
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Peak: Economy is strong, GDP is near maximum, employment levels are high. Prices and
income are high, risk of inflation is also high.
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Recession: Employment levels are declining, as well as production and output. Wages and
prices are level, and might fall if the recession is a deep one.
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Trough: If the recession hits the bottom, the economy levels out here. It becomes a
depression, which is a severe and prolonged recession (like it did in the 20s-30s).
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Recovery: The economy starts growing again. Employment, production and output
increase and things start to look up.
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A BULL market is when the economy is doing well, jobs are being created, GDP is
growing, stocks are rising… You know, rainbows and butterflies. That is why when
an investor is optimistic, he is called a bull.
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A BEAR market is the other side of the medal, economy is not great, recession is
upon us, stock prices fall… Some investors like to sit this out, while others see it
as opportunity to pick out strong companies amongst their competitors. Investors
who are pessimistic are called bears.
Mutual Funds
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A mutual fund is a pool of money that a company puts together from investors
(you and me) which is separated it into units.
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If a fund has a total asset of 10 million dollars and 1 million units have been
sold, each unit is worth 10$.
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A fund manager will chose the stocks and bonds in which to invest this pool of
money. And they will charge you fees and commissions (also referred to as
load) when you buy or sell funds.
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All mutual funds have the advantage of pressure to perform. If the fund does
not do well, unitholders will start redeeming (cashing in) their units. Fund
managers have to perform in order to keep your money.
Types of funds
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Equity funds: These offer the high returns of stocks without the responsibility of
selecting. Over the long term, these will produce the highest returns. They should hold
a wide selection of good companies, which means if one fails, there are enough winners
to pull you through.
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Index funds: These funds simply track an index. It is like buying each stock in the S&P for
example. These do not depend on a manager’s choice of stocks, and yet, they typically
outperform actively managed funds.
Bond funds: These offer greater security, with slightly lower performance. They
perform well in periods of deflation and low interest rates. They lose their value in
periods of inflation and increasing interest rates.
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Well-rounded portfolios should include at least some bonds or bond funds (also called fixedincome funds), as they perform on a different cycle than equity or equity funds.
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Balanced funds: These will combine stocks and bonds, at different ratios.
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Exchange-traded funds: These are all the rave right now. ETFs are like index funds,
but they are traded on a stock exchange, and are even cheaper. Their MERs are usually
below 1%.
Registered accounts
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These are essentially umbrellas under which you put your investments, so that
taxes don’t rain on your sunshine.
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Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs)
are used to invest in almost anything, from stocks to bonds, to a simple savings
account.
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The government places limits on how much money you can put under these
umbrellas. You can find your deduction limit for your RRSP on your income tax
assessment.
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RRSP: The lesser of 18% of your income, or the chosen limit for the year (2015 was
24,930$). Your pension adjustments and past RRSP contributions will affect this amount.
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TFSA: Starting in 2009, the contribution room accumulates each year that you are 18 or
older. 2009 to 2012 was 5000$ per year, 2013 to 2014 was 5,500$. 2015 was 10,000$.
2016 will likely be 5,500$.
RRSPs & taxes
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RRSPs are a double wammy when it comes to taxes. First, you get a tax
deduction for the amount you put into it (the amount is deducted from your
income).
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Federal and provincial tax rates are calculated into brackets. The more you make,
the more taxes you pay. If you contribute enough into your RRSP, you can step
down into a lower tax bracket, and pay a smaller percentage of tax.
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Any income (interest, dividend or capital gain) you earn in your RRSP will not
be taxed as long as it is left in the account.
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When you retire and start withdrawing from your RRSP, you will pay taxes on
this income, but your tax bracket should now be much lower.
RRSP
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There are two instances when you can borrow from your RRSP without paying
tax or interest:
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When you buy your first home, you can borrow up to 25,000$ and you have 15 years
to pay it back.
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If you want to go back to school full-time, you can borrow up to 10,000$ per year
to a maximum of 20,000$ over 4 years, and you must pay it back within 10 years.
When you turn 71, your RRSPs will mature. This leaves you with 3 options:
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Do nothing. The amount will be withdrawn as a lump sum cash payout. You will be
taxed on the full amount. Ouch.
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Convert it to an annuity. This is slightly better, but still offers some problems.
These are fixed, non flexible regular installments paid by an insurance company.
Your money will no longer grow.
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Convert to a Registered Retirement Income Fund (RRIF). This allows you to
withdraw over time and maintain your investment, so your money can continue to
grow.
TFSA
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The Tax-Free Savings Account provides the same tax shelter in the sense that
income (interest, dividends and capital gains) is not taxable.
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You can also use it the same way for any type of investment.
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But, you do not get a tax deduction for the money you invest, which also
means, you do not pay taxes when you take it out.
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In general, RRSPs are favored for their tax advantage, but there a few cases
where it is a good idea to maximize TFSAs instead:
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You have an amazing pension or inheritance. Your withdrawals won’t add to your
income, so it won’t change your tax bracket.
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You have very little savings. Your government benefits are based on your income.
Since TFSA withdrawals do not add to your income, they will not eat up at your Old
Age Security or Guaranteed Income Supplement.
References and recommendations
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Building Wealth for Dummies
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Investopedia
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I took a few classes on this website: Investing by Andrew Stotz, Investing: The proven
Warren Buffet approach to investing by Wealthy Education, 5 Step Value Investing
Formula by Value Investing Monster.
Apps
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Fantastic website. Perfect source of information for both the beginner and the
experienced. Many resources, and has a great stock simulator if you want to learn to use
the stock market without actually using your money.
Udemy
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6 books in 1, this covers investing, mutual funds, stock investing, trading, day trading
and real estate investing. It is written for Canadians by Canadians, and has the classic
layman spin to it.
I also downloaded these on my phone: Born2Invest, Business Insider, BNN GO, Investing.
Last but not least, your best source of information is a live financial advisor that
you trust. I consulted a few of them before I invested with two of them, and also
through an online broker for ETFs.
Thanks for reading :)
That’s all I got.
Have a great one!!