Finance 101 (for Canadians!)Finance 101 (for Canadians!)

Farhan Thawar

April 2013!

2

AgendaAgenda

Saving

Spending

Debt

Investing

Insurance

Retirement

3

Warning!Warning!

Source: The Black Swan

4

Financial PlannersFinancial Planners

“The Stock market is the only game in town where the guys who drive Rolls Royce’s take advice from those who take the subway”

- Warren Buffet

• Most financial planners make money via• Transaction fees

• MER

• Kick-back on certain investment choices

* If you do use one, make sure it’s a fee for service

SavingSaving

How much should you save?

Saving strategies that work

1 Pay yourself first (automatic)

2 Credit/debit cards (leave at home)

• Create barriers (wait a day before you buy anything)

3 Jar method

Emergency fund (6-12 months)

– Cash or LOC

Alice vs. BobAlice vs. Bob

Alice starts saving at 25 ($4k/year)

– Stops saving after 10 years

– Contributed $40k total

Bob starts saving at 35 ($4k/year) till 65

– Contributed $120k total

How did they do?

Let’s assume 8% growth

Source: The Wealthy Barber Returns

Compound InterestCompound Interest

Einstein called this

– the 8th wonder of the world

– the greatest force in the universe

– Greatest invention of mankind

If you put 1 penny on the first square on a chessboard and 2 on the second square, and continued on doubling, how many pennies would be on the last square?

Alice vs. BobAlice vs. Bob

SpendingSpending

“It is preoccupation with possesions, more than anything else, that prevents us from living freely and nobly” – Bertrand Russell

“I can resist everything but temptation” – Oscar Wilde

– Stop going

Experiences vs. stuff: [NYTimes] Will it make you happy? - http://bit.ly/cQu4ui

SpendingSpending

Spending Summaries

Finding deals (RFD): www.redflagdeals.com

If you have to use credit cards

– Credit card rewards

11

SpendingSpending

Rough Guide (The Motley Fool Money Guide)

– Housing and Utilities: 25-30%

– Food: 10-15%

– Vehicles: 10-15%

– Insurance: 5%

– Saving and investing: 10-15%

– Entertainment: 5%

– Clothing: 5%

– Medical: 5%

– Childcare and Education: 1-8%

– Gifts and Charity: up to you

12

SpendingSpending

“Never keep up with the Joneses. Drag them down to your level. It’s cheaper”

– Quentin Crisp

Teachers are pretty happy (because they hang out with other teachers)

Debt?Debt?

Good vs. bad debt

Who has credit card debt?

– Re-finance!

– Clear LOC method ($7k)

Good DebtGood Debt

Money borrowed to buy an appreciating asset where the cost of servicing the loan doesn’t affect your abilty to save to the appropriate level and where the principal will be fully repaid before your retirement.

CashtrationCashtration

The act of buying a home, which renders the subject financially impotent for an indefinite period of time.

Reminder: Mortgage means “death pledge”

InvestingInvesting

1 “First rule of investing, don’t lose money

2 Second rule of investing, see rule #1.”

Warren Buffet

InvestingInvesting

Do you have a mortgage?

– Easy strategy

Should I open an RRSP/TFSA?

– If you don’t have a mortgage, than yes!

RRSP vs. TFSARRSP vs. TFSA

Source: The Wealthy Barber Returns

InvestingInvesting

Imagine a market with just 3 investors (Buffet, Munger, and Soros)

What should you do with $30k?

1. Pick your own stocks

2. Invest in an index fund

3. Invest in all 3 managers

4. Pick a manager

InvestingInvesting

A year later: Market performed at 8%

• Buffet: 12%

• Soros: 9%

• Munger: 3% ((Buffet + Soros)*-1 by definition!)

ResultsResults

1. Pick your own stocks (?)

2. Invest in an index fund (8%)

3. Invest in all 3 managers (8%)

4. Pick a manager

• Buffet: 12%

• Soros: 9%

• Munger: 3%

What about costs?What about costs?

Typical ETF: 0.5%

Typical Mutual Fund: 2.3%

1. Pick your own stocks (?)

2. Invest in an index fund (7.5%)

3. Invest in all 3 managers (5.3%)

4. Pick a manager

• Buffet: 9.7%

• Soros: 6.7%

• Munger: 0.7%

Investing - MERsInvesting - MERs

Management expense ratio

– THERE IS NOTHING MORE IMPORTANT THAN MER

The expense ratio is the only reliable predictor of future mutual fund performance

– Financial Research Corporation and Standard and Poor’s studies

24

Investing – Active vs. PassiveInvesting – Active vs. Passive

What’s the difference?

Moneysense: http://www.moneysense.ca/2010/10/21/six-strategies-to-build-your-wealth/

Sleeping scale of major investmentsSleeping scale of major investments

Sleeping scale of major investmentsSleeping scale of major investments

Source: A Random Walk Down Wall Street

27

Investing – Active vs. PassiveInvesting – Active vs. Passive

What’s the difference?

Moneysense: http://www.moneysense.ca/2010/10/21/six-strategies-to-build-your-wealth/

28

Investing – Active vs. PassiveInvesting – Active vs. Passive

Passive Rules!

29

Investing – Active vs. PassiveInvesting – Active vs. Passive

Couch Potato strategy

– It pays to be lazy

Canadian Shareowner

– Limited stock selection

Mutual fund vs. ETF

– ETFs get efficient past $20k or so

30

Investing – Couch PotatoInvesting – Couch Potato

Sample portfolio

– %Age in bonds

– 1/3 of rest in CA equities

– 1/3 of rest in US equities

– 1/3 of rest in INTL equities

So Boris (if he’s 25):

– ~25% in bonds basket

– ~25% in CA equities basket

– ~25% in US equities basket

– ~25% in INTL equities basket

Rebalance once per year (15 minutes!)

31

Couch Potato 2012Couch Potato 2012

32

Investing – PassiveInvesting – Passive

Why it works:

– No sales commissions (if you use Mutual funds)

– Low operating expenses (MER!)

– Tax efficiency

– No need to hire a financial advisor

– Higher diversification, lower risk

Source: The Boglehead’s Guide to Investing

33

Investing – PassiveInvesting – Passive

“The conclusions [supporting trying to beat the market] can only be justified by assuming that the laws of arithmetic have been suspended for the convenience of those who choose to pursue careers as active managers”

– William F. Sharpe (Nobel Laureate in Economic Sciences”

34

Investing - BarbellInvesting - Barbell

Nasim Taleb’s strategy (The Black Swan)

Made 99% of his money in one day (Oct. 1987)

Made $150MM in fall of 2008

Portfolio

– 80-90% in bonds (or other fixed income)

– 10-20% in ultra-risky investments

35

Investing - DividendInvesting - Dividend

What’s a dividend?

Derek Foster’s strategy

Buy stocks that will pay dividends

Make money with your money

When you hear: “How do you make your money work for you?”

36

Investing – DIY – no strategyInvesting – DIY – no strategy

Really hard

Likely impossible to beat the Russian Phds

Hard to exploit market inefficiencies

Health InsuranceHealth Insurance

Do you have dependents?

If yes:

– Term life insurance

Other types:

– Critical illness

– Disability

38

RetirementRetirement

Models

1 Make money for a while, then start spending it (Traditional)

2 Make less money all the time (4HWW)

Top 10 ResourcesTop 10 ResourcesMandatory reading/listening:

• MoneySense Magazine – www.moneysense.ca

• John Bogle podcast interview - http://bit.ly/clwrhT

Great Books/Sites

• The Wealthy Barber Returns by David Chilton

• The Little Book of Common Sense Investing by John Bogle

• www.CanadianCouchPotato.com

• The 4-Hour Workweek by Tim Ferriss

• Stop Working by Derek Foster

• The Black Swan by Nasim Nicholas Taleb

40

How to start!How to start!