(Photo: Thinkstock) This is the second column written for Grainews. Get started soon, with a small portfolio, to build financial returns for your future. Have you kept our secret? You know, our secret about building wealth over time in the stock market. The secret that it’s about buying […]
My book, STOCKS for FUN and PROFIT ~ Adventures of an Amateur Investor, has been out since early November and I thought it would be great to hear from readers, your thoughts of the book and blogs so far. It has at times been the […]
I recently became a contributing columnist for Grainews, a leading agricultural magazine. My profession is agriculture, so it is an honour to be able to write a column on off-farm investing for the agricultural community. I thought I would share the first article here.
Tax-Free Savings Accounts are quickly becoming the investment program of choice for Canadians. There are three main tax-advantaged programs: Registered Retirement Savings Plans (RRSP), Registered Education Savings Plan (RESP) and TFSAs. Personally I have taken full advantage of all three programs, because it hard to beat investment returns inside a tax-free program. The simplicity and flexibility of the TFSA makes it my personal favorite. In future articles I will discuss the other programs but in this, my first such article, will focus on the TFSA and why any entrepreneur, farmers included, might consider having one.
Firstly, let me introduce myself and thank Grainews for the opportunity to contribute to the investment discussion. I am a life-long agriculturalist and remain active in the industry. While building my career I became an active investor in both stocks and real estate. Real estate entails a lot of work, which is difficult when travelling extensively, so I gravitated towards the simplicity of stocks. I sure don’t miss the tenant and toilet days! I recently penned a book, “STOCKS for FUN and PROFIT ~ Adventures of an Amateur Investor” in an effort to help other like-minded amateur investors succeed at stock investing. While I don’t have a formal education in finance, I have graduated from the ultimate educational institution, The School of Hard Knocks! I hope to help others graduate from this school, with a lot less knocks than I experienced.
My first decade of stock investing was relatively unsuccessful. This prompted adoption of a different approach. Many give up on stock investing after a few bad experiences, yet the market has driven about 10% annual returns for the last century, and similar returns are likely in the next century. I was not willing to give up on the markets great wealth creation ability. Over the past 25 years, I have earned an 11.7% annual return in my RRSP. Other family accounts have long-term annual returns ranging from 9.3% to 17.4%. And here’s the first little secret, shh!… rocket science is NOT used to derive these results. The compounding effect of such returns is phenomenal. Twelve percent annual returns, doubles the money every six years. I share these personal results strictly for the purpose of illustrating what a straight-forward approach can achieve. I refer to it as “Success through Simplicity.”
The current maximum annual TFSA contribution limit is $5,500 per year per person over 18. The total maximum limit is $57,500 if you were 18 in 2009, and have not yet contributed. If you can pinch yourself $5,500 per year (just $15.07/day) and contribute for 10 years achieving market returns, you will build almost a $100,000 kitty, away from the farm. Why would any entrepreneur, business owner, farmer consider a TFSA? Here are a few possible reasons:
- All returns are earned tax-free (Yippee).
- Many farm family members are employees of the farm business. Funds in a TFSA can be used for whatever personal choices you make, away from the farm business.
- It’s easy for a farm, like individuals, to find expenses. A structured plan to set aside a small amount of money each week or month helps a farm and farmer, live within their means. It is a good idea to live below the standard of living you can afford.
- Small businesses, like farms, don’t always turn out as planned. An investment cushion can give you peace of mind that you have the means to move on if necessary.
- If you really, really, really have to, in an emergency, you can withdraw all the funds from a TFSA tax-free, to support the business. When the calendar turns to a new year, you can re-deposit all those funds, plus whatever new contribution room is available. It’s a very flexible program.
My purpose here isn’t to fully explain all the details of the relatively simple TFSA program. Those can be learned at your financial institution. My purpose is to try to motivate a savings and a straight-forward investment approach to help readers capitalize on the tremendous wealth creation potential of the stock market. It is a terribly misunderstood entity and we’ll get into de-mystifying it in the next installment. But for now, shhh… I have a secret for you. Don’t tell anybody else, but it’s all about buying common shares in solid companies, and holding them for a long time. Many people in the market aren’t really investors at all. They are traders or speculators. If the market is approached with true investor intentions, effort is reduced while success is enhanced.
Market volatility has returned with a vengeance. The markets had been unusually stable throughout 2017. It was actually record breaking stability, with the fewest number of days with one percent or more daily changes. Said another way it had the most days with small daily changes. This all changed these last two weeks, with some very interesting intra-day and day-to-day changes of up to five percent on the US market. Until February 9th’s late day rally the main US index, the S&P 500, was down about 10% from its peak, and the Canadian market was down a slightly more modest 8.4%. However, the Canadian market has been a severely underperforming market for the past decade, and sits right about where it sat in 2007 and 2008.
What does this all mean? It means OPPORTUNITY. My book was written during a period of high volatility, from the summer of 2014 to January 2017. The Canadian market experienced a full bear market decline of 25% during this timeframe. The US market didn’t officially enter bear market territory, defined as a decline of 20% or greater, but it came very close and experienced a number of days similar to what we had these past two weeks. If you read the book you will see how I took advantage, to bungee jump my portfolios out of the canyon, when the bear market came to an end. What we have seen these past few days isn’t out of the ordinary. The worse it gets the better the opportunities will be.
While we don’t know for sure the root cause of changing market sentiment, it appears to have been around very strong US employment growth numbers, and the highest level of wage gains in quite some time, of 2.9%. What is perplexing is that economists had long bemoaned the lack of wage growth, so how did an improved wage growth number become such a big negative? The fear was that this would cause interest rates to rise faster than anticipated. Personally, I think it just was that the US market had been strong for a year and a half, and there are always periodic market corrections. Wage growth provided the excuse to sell, precipitating a correction. If it wasn’t wage growth, it would have been something else. While it’s impossible to predict what will happen short term, let’s review what we know for sure:
- The markets have returned about 10% per year for the past century and are likely to continue to do so for the next century, but it is not a smooth ride.
- Many excellent companies are now selling at a price 10-20% below where they were in the recent past.
- Corporate profits have been strong.
- The US and world economies have been good and growth has been accelerating. Major bear markets usually coincide with recessions.
- Dividend yields on many companies still exceed paltry interest yields, even though interest yields are rising. Many companies also increase their dividends annually, often by 5-10%.
- The decline in stock prices has increased the level of dividend, earnings and cash flow yields, such that companies now trade at better valuations that they did just a short time ago.
- Your money now goes further when buying stocks.
Nobody knows (see blog titled “Making Money is More Important than Making Predictions”) where the market is going short term, but as I have done before, I have already started trying to take advantage to the current market decline and plan to continue doing so. I personally would like to see another 10% or so decline to make the bargains better yet, but have no idea whether that will or will not happen. I never make major changes, just plan on slowly taking advantage of the current situation.
I will not write a blog next week and hope everyone enjoys a terrific Family Day.
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I had a wonderful opportunity to discuss my book with Meegan Read at CBC. Please have a listen, as this radio clip provides some great insights. There was so much more I wanted to say to help others learn more about investing but time was limited. As an FYI, the book spent most of this week as #1 or #2 in the Stock Market Investing category on Amazon.ca http://amzn.to/2DpXIUl . Thanks to all who have purchased and I sincerely hope you have the same experience as all those who have written reviews to-date. (Also, please note we are having technical difficulty with the email function of the website but it is my intent to e-mail future blogs, as they are written, when we get the issue resolved).
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