Posts filed under ‘Personal Finance’

The Investment Clock

The Investment Clock

The Investment Clock

What is the Investment Clock?
The investment clock is one of the best indicators on the movement and condition of the finance, property and equties markets. It was first published in London’s Evening Standard in 1937 and showed the movement of markets within a decade cycle. Many people, however did not readily accept the probability of events turning out in a cyclical fashion so it took a while for some to warm to this new area of thought.

History clearly indicated that this probability was very high so it was suggested that the sooner people understood and embraced the time clock indicators the better.

The usual length of the cycle trough is 7 – 9 years, although it can move up to 8 – 11 years. The investment clock seemed to always indicate that real estate property was the last asset to respond and move. When the cycle enters a credit squeeze mode, property becomes the most difficult of all assets to sell and therefore the most dangerous to own or deal in. High quality real estate with little or no debt was seen as being able to weather any storm but where there was debt involved then trouoble could occur as debt affected cash inflows.

The Bottom of the Clock
At the bottom of the cycle when fear and bankruptcy are abounding and interest rates are down, remember that this is the time to be positive. It is the time when there are bargains galore, ready for the taking.

The driving factor behind the business cycle is the capitalist system itself. Recessions are a way of ridding itself of excesses. Things like speculative lending by banks, high risk real estate trading and inflation. Society simply starts going a bit faster than the economy and places a lot of strain on resources. This means we are left with inflation and high interest rates. The bank then imposes a credit squeeze for a period, long enough for those excesses from the system to force inflation down.

Always remember that during a slump the price of most things will fall, but the value of cash does not. In fact, the value of cash goes up because it is measured by its increased ability to buy things more cheaply. This is the best time to hold cash and come out of those holdings when the economy is in the doldrums.

When Business Cycles Occur
Most new investors will wait until the market starts to move up before they buy shares or property. The trouble is, by the time they are aware that the market has moved, the experienced investors have already moved away from the market to the next level.

Experienced investors around the world do this because they buy before the market starts to inflate and prices rise. One way they understand the movement in the market is by knowing about the investment clock. The investment clock is based on the well-known phenomena that business cycles occur on average every 7 – 9 years.

Understanding the Investment Clock
As an investor you need to understand fully the movement and the implication of the investment clock. Once you have lived through an investment cycle and seen the recurring nature of the booms and the busts and the rises and the falls, then you will become a better investor because you will understand the importance of timing in your investment decisions.

You have to be totally familiar with the workings of the investment clock because it is an important tool that will guide you along your journey to financial success. The value of the investment clock is its ability to show the cycle relationship between investment such as shares, property and fixed interest, as well as the order in which they all occur. It is not a good indicator for predicting the timing of various trends in the market with any accuracy.

The investment clock tells you the most appropriate investment medium after taking into account the prevailing indicators such as interest rates, commodity prices and inflation. It shows that the share cycle, for example, is followed by the real estate and then the fixed interest cycles. The investment clock has proven accurate in reflecting the market forces that drive the various types of investment cycles and the order in which they all occur.


The Investment Clock
For example, look at the clock:

* 12 O’clock
12 o’clock is the boom and there is a rapid increase in demand for real estate with property rising. These are the boom times for property. The increased demand for property causes interest rates to rise because of the demand for funds. As interest rates rise, companies find it hard to make profits, and because of the rise in the property as well as fixed interest investments at this time, share prices tend to fall.

* 3 O’clock
3 o’clock in the investment clock the sharemarket is doing very little and offers few prospects to investors. Interest rates are now too high to make borrowing for property an attractive option. At this time fixed interest or cash investors will cash up their investments, to take advantage of the high interest rates on offer to lenders. High interest rates slow the economy and start to lead the country into a recession. This brings the cycle down to 6 o’clock.

* 6 O’clock
At 6 O’clock recession has reached its depth and this usually occurs every 7 – 9 years. Investors are now too scared to invest, or they can’t afford to borrow the money, so interest rates slowly start to fall. Companies have had to become leaner and increase productivity during these times. The economy slowly starts to improve, and with it company profits start to grow, which stimulates the share prices to recover.

* 7 O’clock
At about 7 o’clock people have left the market, having sold their shares as a result of the downturn. They retreated to other investments, such as cash or fixed interest, or even property. Interest rates have moved low and eventually the point is reached where the long-term investors see the value in the market and they start to accumulate shares, which are better performing.

Thus, the seeds of the next recovery are sown and eventually shares and commodity prices start to rise.

Why the Economic Cycles
Understanding this cycle and the relationship between the various types of investment is critical if you want to maximise success in your investments no matter what part of the world you live in.

The question is, why do economic cycles occur in the first place? The simple answer is that the world economy is a collection of many nations, each at their own individual point within the economic clock. Each nation is made up of millions of people, each making their own financial decisions in reaction to other people’s decisions.

The sheer momentum of all these economies means that they always over-swing the mark and this results in the economic movements of the cycle.

Advertisements

December 24, 2008 at 6:19 am Leave a comment

That will take us to 2012

Authored by Garth Turner — Greater Fool – The Troubled Future of Real Estate

So, first we have a deflationary recession, lasting maybe two years. Then, as the recovery takes hold, as those trillions need to be repaid and as the world is awash in liquidity, we get inflation, probably severe. That will immediately start reflating real estate and oil and Vespas, and cause central banks to ratchet up interest rates in order to choke off too-rapidly rising prices.

That will take us to 2012. Ask me then what comes next.

December 18, 2008 at 5:02 pm Leave a comment

Expect these things to happen in following 3 years

Authored by Garth Turner — Greater Fool – The Troubled Future of Real Estate

Expect these things to happen

* Falling house values until at least 2010

* A large and growing federal budget deficit in Ottawa, starting in 2009

* Unemployment rising almost continuously for at least two years

* The banking and financial system rocked with bad assets and a few failures

* Stunning stock losses before a market-led recovery starts

* Banks suspend dividend payments to stockholders

* Reduced exports and corporate failures as the US tries to protect jobs

* Fewer services as governments at all level struggle with a funding crisis

December 18, 2008 at 4:57 pm Leave a comment

12 tips for financial independence

Canadian Business Blog » Blog Archive » 12 tips for financial independence

12 tips for financial independence

Jonathan Chevreau’s Findependence Day is an entertaining read. I picked it up for a review of some financial-planning topics but found myself flipping the pages to see what was going to happen next to the central characters. To make sure I didn’t miss some of the pointers, I skipped back through the text and drew up a brief summary of some of the main ones (see below). Perhaps it is serviceable as a companion piece to the book (which, as I mentioned, does not have such a wrap-up).

1) You can become financially independent without the big score in business or investing by spending less than you earn (cut out lottery tickets, booze, restaurant meals/coffee, cigarettes, candy, etc.)

2) To stay on track, pick a date to be financially independent (“Findependence Day”); to get there, have a financial plan and even an advisor (whose value added includes advice on taxes, household finances, estate planning, insurance, registered plans, and so on).

3) Get rid of all credit-card debt and consumer loans.

4) As a foundation for financial independence, buy a house and pay off the mortgage as fast as possible. A 30- or 35-year mortgage is fine if you use the prepayment and accelerated-payment options to extinguish within 10-15 years.

5) Don’t start investing until at least half the mortgage is paid off; for investing, consider a preauthorized chequing account (PCA) that automatically transfers 10% to 20% of your paycheque into an investment account in which you have set up a Lazy Portfolio (mostly a diversified basket of exchange-traded funds such as, if I may suggest, the Couch Potato Portfolio).

6) If your job is secure and comes with a good pension (e.g. government, teacher), emphasize equities; if job income is insecure (e.g. commissioned sales), emphasize bonds and other less risky assets (alternatively, dollar-cost average into equities through a PCA).

7) Don’t invest a large part of your financial portfolio in your employer – diversify your portfolio to avoid having too many eggs in same basket

8) Save and invest job bonuses and pay raises.

9) Run your old car on the road longer; pay cash for a new car by contributing regularly to a Tax Free savings Account (TFSA).

10) Multiple streams of income are good; consider REITs as an alternative to owning rental properties and the hassles of being a landlord.

11) Hold fixed-income investments and high turnover mutual funds in tax-sheltered accounts; hold stocks in taxable accounts (except for U.S. dividend stocks because they are not eligible for dividend tax credits).

12) Portfolio management tips: a general-purpose asset allocation is 60% to stocks and 40% to bonds; favor exchange-traded funds and some mutual funds over individual stocks (except stocks with growing dividends), tilt toward small caps and value investments; diversify into foreign stocks; use currency hedging if foreign holdings over 25% of portfolio; consider real-return bonds for inflation protection; reinvest dividends through company reinvesting plans; and so on.

December 17, 2008 at 12:14 am Leave a comment

Young, Rich, and Retired: An Interview with QCash

Young, Rich, and Retired: An Interview with QCash | Million Dollar Journey

I’d like to introduce a fellow Canadian who has accumulated over $1.5 million dollars in net worth at the young age of 36 and has recently retired. Did he inherit his money? Did he obtain a windfall of some sort? How did he do it?

I had the opportunity to interview the young millionaire about these questions and his secrets of success. Without further adieu, I’m proud to present… QCash!

What province do you live in?

Ontario

How old are you?

I turn 37 at the end of this year (xmas eve)

What is your current net worth?

As of yesterday, $1,735,000

Can you break down your net worth by portfolio and real estate?

Real estate:

Principal Residence $254,000 (purchase price in 2000)
Residential Investment $92,000 (purchase price in 1990 $184,000 but I
bought it with a friend, my first investment)
Residential Investment $181,000 (purchase price in 2002)

Portfolio: $1,200,000

When did you start saving and investing?

My first job was at McDonalds. I was 14 and started saving 10% of everything I earned.

When I was in my mid-20’s, I owned three houses (2 and 1/2) and had mortgages on all of them. I had just got a good job in Toronto and was living the high life. I started using credit cards more extensively and was living beyond my means. I hit a point where I honestly didn’t have enough money/credit for the next mortgage payment and it scared me straight. I got my spending back under control and realized I never wanted to get to that point again. I still had a large positive net worth, but my liquidity was zero.

What is your savings philosophy?

I try to allocate a certain percentage of income to savings. Usually I first try to max out my RRSP and then my non-registered savings.

When my wife and I decided we would start a family, we tried to live on just my salary. We did this for almost 15 months (didn’t hit the nail on the head the first time out 🙂 and my wife was earning a decent living. We saved all her salary, and then banked all her maternity leave.

During your working years, how much did you save / year on average as a percentage of your income?

It would have been about 15-20% on average. Maxed out the RRSP and then used the extra for savings and investing.

Once I started saving, I found it addictive. I resented using any of the funds to pay for anything. I was actually getting quite miserly, but I then started allocating a certain percentage to “mad money” account and then used that to have fun, but didn’t feel I was going to break the bank.

How does your spouse feel about your financial fanatics?

I married someone who shares the same philosophy and approach to saving and spending. She is much more conservative than I and I run all our investment plans through her for her opinion/veto. Having a spouse who is interested in your financial future makes life a lot easier.

What influence did your parents have on your financial knowledge?

My parents split up when I was 7. My dad was always refinancing our home to pay for things. If the house went up in value, he refinanced and spent the money. When my parents split up, my mom, my sister and I moved out.

My mother is not an investment savvy person. She is easily influenced and bails out as soon as a loss is posted. However, it was evident that if I wanted to go to university, buy a bike, car, etc, I had to save my own money to do it. There would be no handouts. (This sounds harsh, my parents were generous, but not with money.)

These circumstances caused me to not ever, ever want to live like that. I decided at a young age that I wanted to be rich.

What was your first investment?

At 16, I bough 100 shares of Laidlaw Class B for $14/share, sold them at $18/share and thought I was the cat’s pajamas of investing. The next time I bought the same shares at $14 only to sell them at $12.00 when I needed money for university.

At 18, my friend and I bought a house together. We had been roommates in University and his sister was a real estate agent. His sister found us a great place that we could rent to 5 other guys and live rent free for the rest of university. His mother co-signed the loan. We still have that house to this day, paid in full.

What was your investment strategy to get you to where you are today?

Most of my investments early on were in RRSP mutual funds (most still are today). I maxed out my RRSP contributions every year and then put the rebate back towards my realestate mortgage.

After university, I bought my own place, and another, only to sell them both when we got married. Those two sales netted me about $90,000 over 10 years.

What are your favorite mutual funds today?

Mavrix Dividend and Income Fund
BMO Dividend Fund
BMO Monthly Income Fund

How do you pick them?

I was looking for guaranteed rates of return. Both the Mavrix and BMO Monthly Income fund have a Return of Capital portion which makes the cash flow much better from a tax point of view. Yes, it means my cost base is adjusted each year I hold them and I will get hit with the capital gain when I sell, but my intention is not to sell them for a long time to come.

If you were to give some financial tips to someone just starting out,
what would it be?

Don’t get emotional about the markets. Do not put all your eggs in one basket. Real Estate can be a great wealth generator, but make sure you know what you are doing…it has a huge PITA factor.

When did you retire?

I stopped working on December 31st, 2006

Is retirement what you thought it would be?

After only three months, I think I am busier now than I ever was 🙂 In reality, I am enjoying the time with the kids and my wife. We make two days a week family days and do something together. I still volunteer and belong to several committees in Town.

What is your retirement investment strategy?

I am slowly trying to convert my holdings into dividend paying stocks and income generating funds.

Did you have a financial role model? If so, who?

Not really. I read as much as I can.

What is your favorite financial book of all time?

* The wealthy barber, David Chilton
* Stop Working: Here’s How, Derek Foster
* Smart Women Finish Rich, David Bach (this last was for my wife,but I liked it)

Which financial web sites do you read often?

* Yahoo Finance
* Canadian Business Website
* Million Dollar Journey (awww..)

Hope you guys enjoyed the interview as much as I did! Lessons learned? Live below your means and invest your money.

If you guys didn’t notice, QCash’s ACTUAL net worth is WELL beyond the $1.7 million that he tells about because he uses the original purchase price of his real estate assets instead of today’s market value.

Thank you QCash for taking the time to be interviewed. Your story is truly inspirational.

Do you have questions for QCash? Feel free to ask them in the comments.

December 5, 2008 at 9:41 am Leave a comment

Top 7 Financial Tips for Newlyweds

Top 7 Financial Tips for Newlyweds | Million Dollar Journey

After a popular post about the financial disaster called divorce a little while ago, I thought I would chime in with my thoughts on how to get ahead after tying the knot. The tips below are applicable to not only newlyweds, but any family.
1. Before getting married, open your communications regarding money.

Figure out your spouses spending and saving philosophies along with long term financial goals. Make sure that you’re both on the same page or at least have similar views. In addition, all debts should be laid out on the table. As I’ve written about before, one of the leading causes of divorce in North America is money and financial infidelity.
2. Live below your means.

This doesn’t just apply to newlyweds, but to just about everyone. The only sure-fire way to get ahead financially and build wealth is to live below your means. Building a healthy savings can be used to build a down payment fund, contribute to RRSPs, or build other assets.
3. Plan and set your goals together as a team.

As marriage is serious business, money within the family should be planned as a family. Any debt held by a spouse should be considered as family debt and paid down accordingly. Other goals such as buying a house, retirement and vacations should be planned together as a team.
4. Arrange your affairs in a tax efficient matter.

If you’re at the stage of opening a non-registered account, for tax attribution purposes, the high income spouse should pay all the bills while the lower income spouse invests his/her money. Some may have a problem with having separate bank accounts. A solution for this is to have a common bank account for shared expenses, and separate bank accounts for investing and personal spending.
5. Have regular “financial” family meetings.

This is one of the steps that ensure proper communication about money. Once a month or so (or whatever is convenient), have a family sit down to discuss financial matters, goals, large upcoming expenses and saving strategies.
6. If you have dependents, get disability/life insurance, a will and an estate plan!

Dependents are those who “depend” on the breadwinners income to live. It could be you, your spouse or your young children. Income should be “insured” in the case of long term disability and death. Note that insurance is not a “get rich” benefit, but a lifestyle protection benefit.

For long term disability, I would personally choose a “own occupation” disability insurance rather than a “any” occupation insurance. In the case that you are disabled, this will allow you to collect benefits providing that your injury prevents you from doing your “own” job rather than “any” job. If you’re interested, here is an article detailing disability insurance.

For life insurance, term life should sufficient for most. This will provide fairly economical coverage in the case of the death of the main breadwinner in family. Don’t know how much coverage to get? Check out my calculations for an example of how much term life insurance we needed.

Even though death planning seems far away, you never know what can happen. Check out my article on why you need a will and an estate plan for more details.
7. Read and follow the book “Smart Couples Finish Rich.”

David Bach has some great information on how to plan family financial affairs. If you want a great start in your marriage, read and follow what’s recommended in the book. Make sure to read the ‘Values’ chapter carefully as I feel that it’s among the most important.

What tips do you have for newlyweds?

December 5, 2008 at 9:29 am Leave a comment

Top 4 Tax Free Savings Account Strategies | Million Dollar Journey

Top 4 Tax Free Savings Account Strategies | Million Dollar Journey

With the upcoming tax free savings/investment account in 2009, my mind has been racing about what exactly to do with the account. Between my wife and I, we will have $10,000 worth of contribution room available to us in the first year which we intend to fully maximize.

How do we intend to use the account? I’ve written a few ideas in the original TFSA column which I’m going to expand on below.
1. Income Fund

I am a big fan of passive income which is evident in my dividend investing endeavors. One idea that I have for a tax free investment account is to invest for income. The reason being is that the income is completely tax free.

With my leveraged account, I don’t invest in anything that produces a return of capital like income trusts or corporate mutual funds. However, since taxation isn’t an issue with the TFSA, I will be looking into consistent high yielding equities to produce a tax free monthly income. Some equities that come to mind are REITs and income trusts like Canadian Oil Sands.
2. Aggressive Trading

Another idea is to use the TFSA for aggressive equity/options trading. This one is not as attractive as investing for income as capital losses cannot be claimed within a TFSA account. On the other side of the coin, gains will not face any taxation either.

One lower risk options strategy is to write call options for equity positions that you already own. With this strategy, you set the price that you are willing to sell your position for, but collect a premium in the process. If the stock price raises above your limit before the expiry date, you will be forced to sell. However, if the stock price stays flat or goes down during this time, the option will expire. The result? You get to keep equity position and your premium collected. If you like, you can keep writing call options and collecting those premiums.

Check out this link for a detailed series on how call options work.
3. Credit Card Arbitrage

When I wrote about credit card arbitrage before, I came to the conclusion that the strategy wasn’t worth it due to the thin spread between borrowing and accumulated interest after taxes. However, using a TFSA in conjunction with this strategy eliminates the taxation on the earned interest and makes the strategy more feasible.

Basically, take the free money that select 0% credit cards offer, deposit it into a high interest tax free savings account (approximately 3% these days), and collect the tax free returns on the free money. The biggest caveat being to watch the dates when payments are due.
4. Emergency Fund

This is perhaps the most popular solution for the TFSA as it will allow people to let their “emergency” money grow/withdrawn tax free. While there’s nothing wrong with using the TFSA this way, there might be a bigger potential with using the TFSA as a retirement account.

What do you plan to do with the upcoming tax free savings account?

December 5, 2008 at 9:27 am Leave a comment

Older Posts


Calendar

October 2017
M T W T F S S
« Dec    
 1
2345678
9101112131415
16171819202122
23242526272829
3031  

Posts by Month

Posts by Category