Becoming a Successful Entrepreneur

Friday, September 02, 2005

Time, Return, & Amount

If inflation averages just 4% over the next 35 years, an income of $30,000 today will have to grow to $118,000 just to keep up. You can better prepare your future by focusing on the following principles when investing:

Time: If you invest $200 a month for the next 35 years and earn 8%, your RRSP will grow to $426,000. If you wait five years (oh, first I’d rather pay off my student loan, take a trip, buy a cat, etc.), you will end up with $283,000. Waiting a measly five years has cost you close to $143,000.

Rate of Return: Let’s say that you could average 9% on your $200 a month instead of 8%. Now you’d find yourself with $537,000 (difference of $111,000). What's this mean? Do some research and get the highest rate of return you can!

Money Invested: Let’s take that $200 a month and increase it each year (say 4%) as you get raises to keep up with inflation. At a 9% rate of return, you’d have $817,000.

Adjusting just one of these three factors by a small amount will affect your future drastically.

- Information quoted from "The Investment Book", by Kevin Cork.

Wednesday, August 31, 2005

Diversification

Preserving your principal, growing your savings, and sleeping well at night are likely what you're after with your retirement savings. How can you find a balance between all three? Through diversification.

Diversification is about not putting all your eggs in one basket. By carefully choosing where you invest your money and offsetting weaker investments with stronger ones, your entire portfolio won't be as adversely affected, by market changes.

- Information quoted from Sun Life Financial Canada

Monday, August 29, 2005

Dollar Cost Averaging

Dollar Cost Averaging is an investment strategy that is as simple as it gets allowing investing to be as painless as possible. It requires investing the same amount of money on a regular basis (once a month, once a week, once a quarter). By investing the same amount of money on a regular basis in the same stock or units of a mutual fund, you actually reduce the risk of investing! How? By receiving more shares when the market is down, and fewer shares when the market is up. This lowers the overall cost of the investment. This is a handy investment strategy for those funds or stocks that fluctuates in value. If you're not convinced, read the scenario below:

Scenario: Let's say you can see four months into the future. Let's also assume that you have the choice of two different stock funds in which to invest $100 a month.
Fund A: Goes from $10 a unit in the first month to $12.50 in the second month (a 25% gain!) to $20 in the third month. By the fourth month, it will be worth $25, for a total return of 250%!
Fund B: This fund will have a rougher time. It will also start at $10 a unit. During the first month, it will drop to $5 (a 50% loss!). It will drop even further in the second month, to $2 a unit, before crawling back to $10 in the final month.

Given the results, which fund are you most likely to invest your $100 a month? Exactly! Fund A! I mean, really, who doesn't want an investment to go up 250%?

Surprise! You don't... at least not for many, many years. Why? Because you still have to invest! What good does it do to have your total $400 investment grow so much? All it means is that you now have to pay 250% more for the same investment you started four months ago. This means you are getting less investment for each dollar. In our example, here are the actual results of the four month investment scenario:

At the end of the four month period, the final value of your investment is determined by multiplying the current number of units by the current unit price. In this case, the investment in Fund A is worth $675 (25 units x $25/unit), which is pretty good. However, an investment in Fund B is worth $900! (90 units x $10/unit)!

The reason Fund B earned so much money is that you kept buying units during the low-cost second and third months. Your average share price was only $4.44! By contrast, Fund A had an average share price of $14.81, since your automatic purchase plan continued to buy shares, even when the price rose. And remember, at this point the papers would all be telling you how lousy Fund B is with its 0% return in the last four months compared to the amazing 250% return of Fund A.

- Information quoted from "The Investment Book", by Kevin Cork

Sunday, August 28, 2005

Owning Rental Property

Owning rental property can be very rewarding financially. It can also be a pit to toss money into for a long time. The upside of owning property is obvious. You do a monster leverage loan from the bank (called a mortgage) and then have someone else pay it off while your asset appreciates. Sweet. As long as:

  • You can come up with the 25% of the house value you need for the down payment;
  • You can find half-decent tenants relatively quickly, and they don’t end their marriages partway through their rental lease;
  • The house does not need major repairs, such as a new roof or a major renovation to repair the flood damage left over from the frozen, burst pipes;
  • You can maintain the property over the next few years and do not have to sell into a falling market;
  • You recognize that the net rental proceeds and eventual sale of the property are taxable events; and
  • You don’t mind heading over to the house at 4 a.m. on a Tuesday morning in January because the furnace stopped working OR paying some expensive 24-hour repairman to go for you.
Becoming a successful rental property owner requires you to think like a business person and be prepared to devote time and energy to keeping tenants happy. You need to think about the best locations, which may be different for a landlord looking for tenants than for a homeowner looking to raise a family. You don’t necessarily want property in an expensive area, because it’s likely that those who can afford to rent in the area can also afford to buy. The property should be relatively central, or at least close to public transportation. And you need to have the resources and time to handle repairs and upgrades to the property. You also need an emergency fund to cover the mortgage during those periods when you don’t have renters. A rental property is really more like a small business than an investment. Proceed with caution.

- Information quoted from "The Investment Book", by Kevin Cork