Finance and investment have never been things that I've had much interest in, at least until earlier this year. I'm a tech guy, and what drives me are new and exciting technologies. But on the financial front I've always had a pretty simple outlook: spend money on things I want, and make sure I always save a small amount each month for the future, which ended up being an average of 5-10% of my monthly income. I didn't really see a big problem with that, and like most people I assumed that savings meant using bonds, CDs or saving accounts at whatever rate the bank happened to provide. After all, I'm not a rich person so investing in stocks or mutual funds is probably not something I should care about, right?
But then I started to watch a couple of YouTube videos about personal finance, investment and the FIRE (Financial Independence / Retire Early) movement, and I realized that as I grew older, I was way behind where I thought I should be financially. You see, there's a massive difference between saving and investing. The phrase "making your money work for you" is very true, and completely necessary if you ever want to reach a point of financial freedom. I realized that all of my savings were earning 1% to 2.5% interest, while people who invested in the stock market have been getting close to 10% yearly return ever since 2009. 10 years of returns where, with compound interest, money can truly work for you if you take advantage of it.
However, as I dug deeper and checked the available options out there, I also found out that there were a lot of caveats. First, the US may be very similar to Canada in most things, but our economic outlook is quite different. Just look at the difference between the Dow Jones in blue, the S&P 500 in red, and the Canadian based TSX index in yellow:
While the US has seen a 50% increase over the past 5 years, we've had 6%. Still, even 6% is better than the pathetic rates I got from banks. The other difference is how in recent years investing has become far easier, at least in the US. Apps like Robinhood allow commission-free trading, something that wasn't possible in Canada until just last year with the launch of Wealthsimple Trade. Traditional trading platforms are not only slow and time consuming to open an account with, but they all charge between $6 and 15$ per trade, which eats into your savings.
The other big concern was of course risk. I come from a family that is very risk averse, which is why I never even questioned the fact that all savings should be 100% secure. Of course any financial expert knows that a proper portfolio should be diversified, and that the risk level should match your age and comfort level. As someone who isn't adverse to risk and has no plan to withdraw large amounts in the near future, it made no sense to be 100% in bonds and cash.
So what am I doing about it? This is the result of my own research and decision making, Note that I'm not a financial advisor and you should of course do your own research and take decisions that match your own profile.
The first strategy I really like is called Dividend Growth Investing, which basically means that I invest in blue chip companies that bring a passive income in the form of dividends. This basically means that every year your portfolio can give you around 3-4% in income, on top of the normal stock appreciation. The keys to success for this strategy, in what I found, is to invest in solid companies that have a decent dividend yield of around 3-4%, a payout ratio of around 60%, and a long growth history, both for stock price and dividend growth. For example, if you look at Coca Cola, you will find that this company has been increasing its dividend payout for the past 56 years:
This means that it doesn't matter whether there's a recession, or the stock market goes down, this company has shown that it will keep increasing its per-stock dividend payout every year, rain or shine. It also means that I stay away from the more recent and volatile stocks which do not pay dividend.
I've come to the conclusion that the very best way to grow your money is in real estate. I watch people who start with nothing and then spend money smartly on rental properties becoming rich in just a few years. However, I've also decided that being a landlord is not for me. Getting calls to go fix a toilet in the middle of the night, or chase down unpaid rent, is not my idea of passive income. But you don't need to be a landlord to invest in real estate.
Since the 1960s, there are these companies called REITs which allow you to buy shares and get a piece of the real estate pie. These companies own hundreds or thousands of rental properties, and give you a regular income from those properties as a shareholder. The other nice thing about real estate is that it's fairly resistant to recession, because people will always need to pay rent, even if they need to cut back on other things due to an economic slow down. In fact, with the 2008 real estate crash, rent actually went up, since everyone who had their homes foreclosed had to suddenly find an apartment and start paying rent.
Another big piece of most people's retirement savings is home ownership. I've rented for most of my life, but always believed that home ownership was crucial for my future, which is why I bought a condo a few years back. Rent is a nasty regular cost that can go up at unpredictable times, and you are never in control of whether you'll have to move out next year. Having a fully paid home is security and reduces your monthly costs massively, since housing is such a big part of everyone's spending. I do have a traditional 25 year mortgage, but in the past I had just accepted the fact that I would pay the monthly amount dutifully for those full 25 years. Now, I've decided to do regular prepayments in order to pay it down much quicker. It's part of my investment strategy, and the way I see it is that the money spent here is equal to the interest saved by not having to pay down the mortgage over a longer term, while still being 100% safe from recession.
There's a lot of debate online between those who believe a mortgage should be prepayed as quickly as possible, and those who would never put a single cent on prepayment, arguing that stock market investments will always bring a higher return. I'm honestly in-between those view points, and edge my bets by doing both. While it's true that for the past 10 years we've had a bull market that brings a rate higher than what my mortgage is, it's also true that the risk is much higher than home equity.
While I've consciously decided to start investing in much more profitable areas, I'm also not going all in. My goal is for my portfolio to be around 50/30/20:
I do still have bonds and also invest in a low fee mutual fund, since I recognize that a recession in the near future is likely, and having a managed investment can be useful especially as someone fairly new to the world of investing. But hopefully, these decisions will mean that I won't sit on cash at 1% returns anymore, at least for the foreseeable future. I think a lot of people who don't work in finance have a big deficit of knowledge when it comes to personal finance (this isn't taught in school after all) and these days it's become easier than ever to invest in many different ways, so it's worth spending some time to learn about it.