*10-year growth compares 2017 to 2008. Example, Royal Bank’s 2017 dividend was 1.8 times larger than in 2008. This blog is the 7th in my series with Grainews. It beings together all previous columns written. Please share with others on your social media if you […]
Stocks for FUN and PROFIT: Questions and Answers about adventures of an amateur investor
Fans of this site will know for many years now, I’ve reviewed a host of personal finance and investing books.
Over years, these books have improved my financial IQ, matured my investing behaviour and in some cases, changed my ways for the better. Some books that I’ve read have been insightful, not because I didn’t know some of this financial information, but rather they are packaged from much different perspective – Stocks for FUN and PROFIT is one of those books.
Each chapter of this book, written by amateur investor Herman VanGenderen, takes the reader through Herman’s ups and downs with investing over the last four years (since June 2014) – highlighting how he has invested (and his opportunities missed) using three investing accounts: TFSA, RRSP and a non-registered account. His objective for the book was to share his learnings, help demystify the market and educate Canadian investors through his own personal journey. Basically, a blog in print format with “20/20 hindsight” for reflection.
I got a chance to chat with Herman about his book recently. Here’s what we discussed….
Welcome to the site Herman! As you know, I use this site to chronicle our financial freedom journey. I think most readers know who I am and how I invest. I’m curious about your background. Can you provide some details for readers? Also, why write the book now?
- Name: Herman VanGenderen
- Age: 60
- Family status: Married with 2 sons. One working as a financial analyst, and the other just starting grad school in bio-chemistry.
- Background: A career in agricultural sales and sales management. Still operating a seed business in the Calgary area.
- Semi-Retired since 2009, when I was 51, but as busy as ever.
- Retirement plans: I never plan on fully retiring, even though we’ve had the financial means to do so for quite some time. The annual dividends on our stock portfolios would sustain a very nice lifestyle, which is the goal of My Own Advisor! One of my goals with the book is not just to demonstrate that it can be done, but that’s fairly easy if the right approach is taken. The other reason is to help others, especially younger readers, avoid many of the “knocks” from the “School of Hard Knocks” that I experienced in my investing career. My wife and I are both very active and really enjoy traveling and hiking. We plan on increasing those activities this next decade. We also enjoy wine and while she hates beer, I love craft beer. For those who wish to retire, stock investing can provide a great and productive pastime, to help keep one’s mind active and engaged.
Interesting path! You just completed a 200+ page book on investing. How did your investing journey evolve for you?
I started immediately after graduating university. The company I worked for had a stock purchase plan that I participated in. My first decade of stock investing however, was relatively unsuccessful. The reasons for this are all described in the second chapter of the book, but basically came down to over-reliance on the stockbrokers I worked with. Therefore I initially focused more on real estate than stocks. I re-evaluated the situation in 1992 and moved my RRSP into a self-directed stock account.
My real estate journey, which is chronicled in Chapter #12, has also been successful. However, having over time gained confidence in stock investing, and given the workload of real estate, I started to de-emphasize real estate in favour of stocks. But I still do some of both.
There is lots of debate in the personal finance community on investing using the TFSA first vs. RRSP first vs. simply paying down your mortgage. What’s your take based on your experiences?
Technically speaking Mark, a lower income person should focus on their TFSA and a higher income person should focus on the RRSP. However, in my books a higher income person should strive to max out both accounts, because they have the means to do so! I have always maxed out all tax-advantaged accounts, the reasons for which are explained in a couple of the early chapters.
My first focus would be the TFSA because of its simplicity and flexibility. I know you’ve written about that here – why you continue to maximize contributions to this account…
On paying down the mortgage…well….how I feel about that is in Chapter #12 as well. Let’s just say I don’t even consider the house lived in as an investment. This may be controversial but I think the culture of believing your house is your biggest and most important investment is flawed, and is a key factor keeping people from achieving financial freedom.
That said, my first house mortgage was about 14% interest, and today mortgage borrowing costs hover about 3%. This changes the picture. Since I believe 9-12% average annual returns can be achievable with stock investing a case can be made for keeping the non-tax deductible interest expense and at least maxing both the TFSA and RRSP. I had this discussion with my oldest son when he purchased his first vehicle. He was 23 at the time and chose to take the 2-3% finance charge on the vehicle and stay fully invested in the market.
Let’s break down how you invest for folks that haven’t read the book yet. How do you invest using your TFSA? Why?
Both my own and my wife’s TFSA are 100% common shares of dividend paying corporations, located in Canada, the UK and Bermuda. This way I avoid paying dividend withholding taxes. I max our contributions every year in early January. My compound annual return since we started the accounts has been 17.4%, and my wife’s has been 13.9%. I feel really bad I’m not doing as well for her as myself J! Then again, I always tell others the 17.4% is not sustainable and will moderate in time.
How do you invest using your RRSP? Why?
Our RRSPs are almost entirely made up of dividend paying corporations located in the US and Canada. We hold about 60% American assets. We put U.S. assets inside the RRSP since there are no dividend withholding taxes on U.S. companies held inside this account – you just referred to that in a recent post actually Mark!
My 25-year record is 11.7% annual gains and my wife’s 22-year record is 9.3%. You might think with the performance of our TFSAs and RRSPs we employ some kind of rocket science approach, but that couldn’t be further from the truth. I still own Bank of Nova Scotia purchased at about $5.50 per share in 1992. I also own other companies purchased in the 1990’s. My annual portfolio turnover is only about 5-10% per year, and that’s mostly the result of corporate takeovers. If one adopts a true investor mentality (vs. a trading or speculating mentality), workload and stress are reduced, and performance is enhanced. Model TFSA and RRSP portfolios, based on our own approaches, are outlined in the book.
How do you invest using your non-registered account? Why?
Our non-registered accounts are similar to the registered accounts with a couple of additions. I employ ETFs to gain exposure to some specific sectors, like gold, and other geographies such as Europe and Emerging Markets. I also employ options very successfully.
I started a non-registered account specifically for my newsletter which is outlined in the book. That account is now about 2.5 years old and has a total return of 53.9% as of June 30th. Again, like my TFSA, I will warn readers that that kind of return is unsustainable but it sure is FUN right now! And let’s face it, the FUN and the PROFIT parts are highly correlated for me!
Before we wrap up, what are your investing plans for the future?
Well, after a lot of trial and erroring if you will, I believe I am now on a sustainable and repeatable path, which is another reason for writing the book. I would not have had the confidence 10-15 years ago that I knew what I was doing. It takes a long track record with stock investing to be confident that it isn’t $___ luck (fortuity). Therefore, my plans are to stay-the course, and help others learn from what I did.
You look like you’re on a similar path Mark. I applaud My Own Advisor for sharing your journey (and your mistakes). Financial literacy is extremely weak across North America, leading to many of the social problems we face as a society.
Lastly, a final plug – why buy your book?
I have read over 40 investing books. Some are better and some not so good, but in the end they tended to deal with just one aspect of investing. They were like one piece in a puzzle. I have attempted to put together the entire puzzle using my lessons learned, success stories and my own account information in detail – few books actually put that type of detail in print!
My book shares true bottom-line performance and tracks the portfolios over time. It is a real-life demonstration. This unique approach has resonated well, as reviews to-date have been exceptional.
Thanks for this interview Mark. I look forward to the comments on your site and anyone that might have questions about my journey or my book. Your audience is welcome to check my website anytime: www.you1stenterprises.com. Thanks again.
I came across two articles this past week that deal with housing affordability and values across Canada. They are very much worth reading. The first one is from the Royal Bank discussing affordability. Housing in Vancouver and Toronto are now at their record worst level […]
(Photo: Pexels) This is an excerpt from my latest newsletter, expanding on how fear based media and marketing have become so prevalent. As I was leaving my book signing session on Saturday, the radio news featured a clip that went something like, “Experts predict that […]
(Photo courtesy of Microsoft Clip Art) This blog is the 5th in my series in Grainews. It beings together all previous columns written. Please share with others on your social media if you find it informative, and if you have read my book please write a review on the site it was purchased. Much Appreciated.
With the groundwork for international diversification laid in my previous column, let’s now complete “construction” of a prospective TFSA portfolio begun on March 27. This prospective portfolio would be suitable for an account of $15,000 to $57,500, the current maximum TFSA contribution if you hadn’t made a previous contribution, and you were 18 years of age when the program started in 2009. Please recall our big secret to success is common shares of solid companies, held for a long time. (Disclosure: My wife or I have an interest in all the companies mentioned, but not all in our TFSAs.)
And now… drum roll please… shown in the table above is a titanium-strong, hurricane-defying, bunker-bomb-surviving prospective TFSA edifice.
If you fell asleep for 10 years and woke up just once a year to reinvest the dividends, but otherwise didn’t touch the portfolio, you will be almost guaranteed to double your money. More likely you will have tripled it (recall the rule of 72).
This portfolio is 50 per cent Canadian and 50 per cent international, exhibiting much greater international diversification than most Canadian investors’ portfolios. The dividend yield is 4.2 per cent on the Canadian side and a lower 1.9 per cent on the international side. I purposely picked stocks with slightly lower dividend yields on U.S. stocks, as the U.S. government will withhold 15 per cent of the dividends in a TFSA. This makes Berkshire Hathaway (BRK.B) an ideal U.S. company for a TFSA. Warren Buffett’s approach is to assume that his company is better at investing than most people, so his shareholders are better off letting them manage their profits, rather than distribute them. He has the track record to prove he’s right.
In theory, when dividends are not paid to shareholders a company has more money to invest in and grow its business, with profits manifesting as share price appreciation. In practice, that much money jingling around in CEO’s pockets tends to get misspent on overpriced acquisitions or can otherwise be misallocated. One reason I like dividends is because they generally motivate greater corporate fiscal discipline, but I’m not about to argue that point with Warren! I’m actually pretty sure he would agree with me in general, but he’s proven that his company can exhibit superior fiscal discipline.
I put a higher percentage of the portfolio into Royal Bank, as Canadian banks also have an enviable track record of consistent profit growth and as such deserve prominence in any portfolio.
While I mentioned that this would be a great portfolio for up to $57,500, if you are a married couple, you can both contribute for a total of $115,000. I would be very comfortable with these 11 companies for a portfolio of that size. I would also suggest that, rather than rush in all at once, you build the portfolio over time.
There are a few ways you can manage the two accounts. You can have the same portfolio in both accounts, or you can split it up, placing half the stocks in one account and half in the other. Another option that might make management easier, is to put all the Canadian companies in one of the accounts and all the international companies in the other. I think this approach could work well if you look at bottom line results as a combination of both accounts. You will likely experience bigger differences in annual performance, from one portfolio to the other, with this approach. It is best to discuss details of account setup with your financial institution.
The chart includes a dividend yield and a dividend growth column. There is much more to evaluating a company than the dividend but it provides a good benchmark. I am increasingly watching for dividend growth. This column shows the dividend increase of each company based on what they paid in 2017 vs. 2008. On average, these companies are paying two times the dividend they did 10 years ago. Again, if you fell asleep for the next 10 years there is a very strong likelihood these companies will have once more, on average, doubled their dividend. That makes me pretty happy as a shareholder!
(Photo courtesy of Pexels) This was the fourth column in my series for Grainews. There are many reasons to diversify outside of the country. My first three columns have covered a lot of ground, but there is more to cover. The stock market presents endless […]
(Photo courtesy of Pexels)
So you have emptied your piggy bank, read my book, and are now motivated to start a stock investing account. Or you already have accounts at a few different places and want to consolidate them to start managing yourself. Perhaps you are working with a financial advisor but want to take more control yourself. How do you actually set up accounts so you can self-manage your investments? This area has been generating a number of questions.
Always trying to take the simplest approach, I simply went to my local bank branch and met with one of the branches financial advisors. We filled out and signed the appropriate forms to set up accounts at that banks internet brokerage division, and within a few days had the accounts ready to operate. All major banks have an internet brokerage arm. I like that I can go into one website to manage all my accounts. Transferring money between accounts is also easily done. My wife’s accounts are set up so that I can manage them, and expect many families will have one person doing the investing.
There are also a number of independent internet brokerages like QTrade, Questrade, Virtual Brokers and Interactive Brokers, for those of you comfortable doing everything on the web, but I still prefer a bit of the old fashioned way. All internet brokerages have help lines to ask technical or account questions, but the onus will be with yourself to make the investing decisions.
One consideration for account set up is to look for an institution that allows both Canadian and US dollar TFSA’s and RRSP’s. All institutions have taxable accounts in both currencies, but not all allow registered accounts in both currencies. With small accounts it may not be necessary, but as the account grows and when you wish to diversify internationally, it is better to avoid paying conversion costs every time a dividend is paid or you buy and sell a foreign stock. With a USD based account, you only pay the conversion cost upon depositing and eventually withdrawing the money. I expect in-time all our major Canadian banks will allow both currencies in registered accounts.
For a married couple, if you both have a TFSA, RRSP and regular taxable account, that’s six accounts. Potentially seven if you have an RESP. Let’s say you are working with a financial advisor and want to start learning to invest on your own, I might suggest moving just one or two accounts to start with. Perhaps start with just your own TFSA. When you’re meeting with the bank to set up the account, simply bring in a statement from your current TFSA, and the bank will take care of transferring that account into your new account at the banks internet brokerage. You don’t need to sell anything prior to moving it. It can all be transferred in-kind, and when moved you can begin to manage on your own. You don’t even need to talk to the financial advisor where the account currently resides, but I would suggest a courtesy call and explanation, especially if leaving some accounts with that advisor. If the account has mutual funds you may want to ask the advisor if there are any penalties for cashing them, as many mutual funds have what are referred to as deferred sales charges.
If you have a few accounts and are just moving one, that advisor shouldn’t be upset. If they are upset, that’s not a good sign. Any advisor adding value should not feel threatened when you move one account to try taking greater responsibility yourself.
A great way to save is by having money automatically transferred each week or month from your bank account to your investing account. This is very doable with a self-directed stock account. Let’s say you want to begin your TFSA by transferring $105.00 weekly from your bank account to a TFSA. This will almost max out your TFSA contribution for the year. I would suggest waiting until $1000 has accumulated in the TFSA and then buy $1000 worth of one of the stocks mentioned in “Start Small, Build Confidence and Prosper.” When another $1000 accumulates, buy another company mentioned. Over time you can build a very nice portfolio.
This all might sound like a bit much but it’s worth it. A wonderful thing about stock investing is the endless learning opportunities. Building financial independence is very liberating, and stock investing is a truly fascinating activity.
(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 […]