Mutual Fund Investing

By Boomer | November 4, 2010 |
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Mutual funds are a very popular investment.  For many people they are the core investments in their portfolios.  But, a lot of people are too complacent about their holdings – they don’t know exactly what they have and trust in their financial advisors too much so they end up in the “financial product of the month” that offers the advisor the best commission.

Mutual Fund Investing

Some people are happy when they see an increase, and switch to some other mutual fund company when they see a loss (or cash them in altogether and really take a loss).

Some people worry about high management fees and stick with lower cost index funds or switch to ETFs.  There’s nothing wrong with these products as long as the reason you hold them is not entirely because you save money on fees.  Some higher MER growth funds can outperform the index giving an overall higher return.   ETFs don’t lend themselves to a regular purchase plan because of commissions when you buy them (like a stock).

In my opinion, mutual funds can be a very good investment for people in certain circumstances for these reasons:

  • Easily available through banks and fund companies such as Investors Group.  Generally no fee to set up an account and advisors to assist in building a portfolio.
  • Low cost purchase plans – some as low as $25 – are a good way for younger and/or lower income people to start building up their investments and get them in the savings habit with fixed regular contributions that also have the benefit of dollar cost averaging.
  • An easy way to diversify a smaller portfolio by holding different types of asset classes, management styles and geographic locations.
  • A good way to take advantage of foreign investments that would be difficult to purchase otherwise.
  • After purchasing the initial funds there is no direct involvement in the managing of the securities (done by a professional fund manager) for those who have no experience or interest in making these decisions.

Also, in my opinion, when a mutual fund portfolio exceeds around, say $50,000, it’s time to purchase a stock portfolio.  After the initial purchase fees you will have no other management fees.

You can choose the top 10 stocks of an index or dividend ETF for a good start if you don’t know what to buy.  A buy-and-hold strategy avoids having to make decisions of when to sell.

You benefit from both growth and income if you hold dividend stocks for the long term.  Overall, I think you would end up making more money.

I like to read about different investment styles that other people choose.  What is your investment strategy and why did you choose it?  What are your thoughts on an ETF vs mutual fund?

Changing The Way We Think About Mortgages

By Robb Engen | November 3, 2010 |
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I mentioned in my last post about the old adage regarding not spending more than 2-3 times gross salary on a house.  This rule of thumb was not one that was set by the banks, but it was a belief held by many frugal home buyers who did not want to over-extend themselves.  But is it realistic anymore in today’s environment?  Let’s take a look at some numbers:

According to the MLS, the national average home price in Canada was just over $330,000 in September 2010.  In order to purchase the average Canadian house, a family would need to earn $132,000 per year if they only wanted to spend 2.5 times their gross salary.

According to Statistics Canada in a June 2010 report, the average annual income for Canadian families is just over $70,000.  If the average Canadian family only spent 2.5 times their gross salary on a house, they could only spend $175,000 on their home.

If the average Canadian family is earning $70,000 per year and the average Canadian house costs $330,000 that means Canadians are spending 4.7 times their gross salary on their houses.  And it would take $66,000 to make a 20 percent down payment on the average Canadian house and avoid CMHC fees.

Are houses too expensive?  Maybe in certain markets, but the average price across the country still seems reasonable if you look at the growth of real estate over time.  Perhaps it’s wages that have stagnated and not kept up with inflation?  I think there is a case to be made for this point.  And what about the low interest rate environment that we currently live in?  Larger mortgages seem more affordable when you’re only paying 2 percent interest.

Personally I don’t believe that spending only 2.5 times your gross salary on a house is even close to being realistic anymore.  Even 2.5 times gross salary on your mortgage seems like a stretch.  I would feel comfortable with a mortgage as high as 4 times our gross salary, provided that we didn’t have any other debt (including car payments).  And I strongly believe in paying a minimum of 20 percent down payment on your house and amortizing over a maximum of 25 years.

Do you have any rules of thumb when it comes to your housing expenses?  Is it time to change the way we think about mortgages?

Things I Wish I Had Learned Earlier

By Boomer | November 2, 2010 |
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They say it’s better late than never, but thinking over the things I’ve done (or not done) in my adult life, there are some lessons I wished I had learned sooner.

I wish I had prepared more for retirement.  When I was younger I felt I needed the money more for “today” so I missed out on contributing to my company pension plan and maxing out my employee savings plan and RRSP.

I wish I hadn’t racked up credit card debt to the tune of about $30,000 with multiple cards.  It took a long time to pay them off and interest rates were high.  Now, if I don’t have the cash, I don’t buy.  I have only one credit card and it is paid in full each month.

I wish I hadn’t done business with a friend.   I chose a realtor friend to sell my house and I felt he didn’t do all he could to advertise or have showings.  He had reduced his commission for me, and it’s hard to tell a friend you don’t like his service.  As a result, when my house finally sold I had only a month to purchase a new house and had to “settle” for not my best choice.

I wish I had taken more risks – both personal and financial.  As a single wage earner I was always worried that I’d end up with no back up savings for emergency situations.  I missed out on a lot of family memories by not spending on fun things we could have done.  I also missed out on greater financial growth by keeping my money “safe”.

I wish I wouldn’t have let financial “experts” talk me into purchasing certain products that were not right for me.  I lost money by thinking they knew better and not trusting my gut feelings and my own instincts.

I wish I had finished my university education.  I feel that I missed out on a lot of career opportunities by not having a degree, even though I was well qualified with my work experience.

We all say that if we could go back in time, we would do some things differently.  Are there any things you regret or wish you had learned earlier?