Monday, January 12, 2015

Investing Basics: Saving - The Absolute First Step to Investing

It's a new year and I'm back on the blogging bandwagon.  I'm starting the year off with a summary of some investing basics that I've so far neglected to cover in great detail, here on the blog.

One of the unsung heroes of the investment world is the principal, that is, the money that you invest in order to make more money.

"Grow, my precious"
An investor without money is like a car without wheels: expending a lot of energy, but not accomplishing much.   

Just a nice relaxing Saturday afternoon drive to nowhere.
Saving and investing goes hand in hand; investments require money in order to produce returns.  Simply stated, you can't invest money unless you have money to invest.

"Grow... but also turn into money."
Now in the interest of starting with the basics, I will answer the question:

How do you save money for investment?


The first step is to earn money, preferably on a regular basis.  You need an income.  

Please don't glare at me.

I'll glare at me for you.
I'm not saying that to be glib.  I think some people have a vision of investing like it's a thing that you do once.  You get a big chunk of money and plant an investment seed and then you wait 20 years and then you harvest a big giant investment tree.

It's not like that at all.  Investment isn't something you do once, it's something you do again and again in little increments.

Your initial sum doesn't have to be big.  Instead of a money tree, you'll be planting a money forest.

Your retirement!


Quick: don't think of a clown in a super hero costume doing the chicken dance.  

Yeah, that.  Don't think about it.  Put it out of your head.

Now don't think about it again.  

Na na na na na na na.  Bawk bawk bawk bawk.

Now continue to not think about a clown in a super hero costume doing the chicken dance for the next twenty years.

"I will haunt your dreams."

The hard way to try to not think about the weird clown is to stare at his photo whilst simultaneously trying not to think about what's in it.  

"I am NOT thinking about a..."

"Augh!  Why?!?"

An easier way to avoid thinking about something is to distract yourself with other things.

Pictured: A distracting thing.

Saving money is kind of like that.

Where does investment money come from?  Investment money comes from your savings.  Where do savings come from?  Savings come from your income, money that you earn but don't spend.  If you can say "No", you can save money. 

To save money, you have to not spend money.  You have to not spend money over and over again.

No.  Not affordable.


That's better.

The hard way to not spend money is to shop routinely, while trying to maintain a strict shopping budget.  

"No."  Sigh...

The easier way to save money is to limit your exposure to opportunities to spend money.

Not tempted to spend money.
Of course, that's just my opinion.  There are zillions of ways to not not spend your money.
So now you're a pro at saving money.  How do you turn savings money into investment money?  Read on.


Your savings is composed of the money that you earn but don't spend.  If you are a person who has a bank account with a positive balance, you are a person with savings.

Even if you are a person with savings, you are not necessarily a person with investments.  To make your savings turn into investments, you have to move them from your regular account--the one that you use to pay your bills and to take out cash--and send it to a dedicated investment account.


No, I'm not talking about a brokerage account or anything fancy.  I'm talking about a second bank account, preferably one that's at a different bank than your normal account.

It's easy to do almost everything online these days, and bank accounts are one of those things that it's easy to do.  Heck, you can pick which bank you want to open an account at online.  Here!  And here!  And here and here and here.

Apart from a power outage, there is no reason that anyone can't open a bank account whenever they feel like it.

...and then feels like mailing copies of two pieces of identification to that bank that prove their identity.

Why not leave it in the regular account?  

Apples: not just a fruit, also a useful symbol for temptation.

Most people who keep a positive balance in their bank account have a psychological limit to how much money they need to keep in that account.  Even with the best intentions, no one saves money above that set amount.

For example, let's say that you're walking through a mall and you come across an object of interest.  I'm imagining a lovely pair of riding boots, but you can think of something else.  This object will make you into the coolest, most interesting, most amazing person in the entire universe, at least for the next six months.

"So cool... so interesting... so amazing..."

This object costs $750.  You remember checking your bank account recently; it has a nice, fat $20,000 in it.  

Do you buy the thing?  Think about it.  I mean, it's only like 4% of your bank account.  It will make you into the coolest, most interesting, most amazing person in the entire universe for six whole months!  It's totally worth it!  You can totally save back up to that amount again later.

Oh yeah.

You probably buy the thing.  

What about if you only had $2000 in that account?  Would your thought process change?

It is far better to take away the temptation, to put your savings money into a protected place that is far away from anything you'd ever consider spending.  As you transfer the money, you make yourself a solemn vow not to spend that money for any reason except investments, ever.

That precious, protected, separately kept money, that is your investment.

If you keep it in a bank account, you don't even have to watch it all the time.


You've spent less money than you earned and you've put some of your savings aside in an investment account.  Now what?

AFTER that.

Now you do it again.

And again.

And again.

In fact, you do it each and every time that you get paid.  Forever.

Sounds daunting?  It isn't.

It takes five minutes to set up automatic money transfers through your online bank.  Don't know how?  Those banks that I told you about in the first section even have helpful tips on how to do this.  Here!  And here!  And here and here and here!

Don't like the internet?  Your banker can set them up too, either in person or over the phone.  Don't like people?  There's probably a way to do them through the instant teller.

Don't like people, the telephone or the internet?
You have options, is what I'm saying.  Automatic options.

Set up the transfer for the day after your pay shows up in your account. 

Once you're done, sit back, relax, and forget about it.



If you've never experienced the wonder that is automatic transfers, then you won't believe me when I say that you will come to forget how much money you are transferring.  You will also forget what it was like to live with spending all of the money that you used to have to spend.  In a few months, you will have magnificently adjusted to your new reality.

"Was I supposed to be upset about something?  I can't remember now..."

 That's when it's time to figure out how you can add more money to your investments.

That's ridiculous!  You might reasonably say.  I am already saving all the money that I can possibly save before my family is reduced to eating bugs for dinner and wearing grocery bags for clothes!

I'll glare at me for you.
You might be right.  But are you sure?

The first question to ask yourself is: have you recently gotten a pay raise of some kind?  If you have, you're golden. You can easily save all of that money without feeling any kind of a pinch.  I mean, you can't miss what you never had before.

The money is falling right into an investment account.

Is the answer no?  Not to worry.  You can try a different approach, slowly training yourself to become a super saver.

Open another savings account.  This account is a half savings, half investment account.  Immediately set up an automatic transfer to that account.  You're a pro at this now.

It's possible that you'll start feeling the burn immediately.  It's possible that an emergency comes up.  That's OK.  Rather than pulling anything out of your investment account (which is sacred and untouchable for anything other than investing), you would pull it out of the halfway account, still leaving some, still saving every week, until you get used to your new reality.

"Was I supposed to be upset about something?  I can't remember now..."
At that point, switch those automatic transfers to your investment account and pat yourself on the back for being awesome at investing.


Saving money isn't scary.  It isn't even particularly hard.  Let's review the steps:

1. Get money.
2. Don't spend much of it.
3. Put some of it aside in a special investment bank account.
4. Add a little more every time you get paid.
5. Every so often, increase how much you invest per pay.

I'm always looking for ways that I can increase how much money I can save towards investments.  As you get more money in your investments, you'll find that there are more and more ways to invest and it becomes much more enjoyable to do the investing.

Note:  My sincere apologies for my two months of radio silence: next time I embark on a giant non-blog related creative endeavor I'll make sure that I give you some warning so that you don't waste any time checking for updates.

For example, if I were going to embark on a journey to learn modern interpretive dance, I would let you know to wait about a month until I broke both of my legs.

This new year, my resolution is to take a slightly different approach in writing here.  I'm going to focus a bit less on my life and give a bit more information about investment.  

But stay tuned for my new side blog: "Let's talk about the minutiae of Liz' life"
Until next time, happy investing!

Monday, October 27, 2014

You shouldn't pick your own stocks, a discussion - Part 1

It was about a year ago that I found out that finance blogs were a thing that existed.  It should have been obvious, given that I've read blogs since I was in high school when everyone (including me) kept them.  Facebook didn't exist yet, so if you wanted to baffle your friends by vaguely alluding to inner turmoil by way of posted text, you did it on your blog.

"Today was... interesting.  It made me wonder about people and stuff."
I forgot that blogs existed when I was in University.  Of course, I also forgot that a few other things existed like regular sleep schedules and homework-free evenings.

And sunlight.
The popularity of blogs was reaching a high point when I graduated from university.  Even then, I assumed that the only topic appropriate for a blog had to relate to you or your family.  Finance doesn't fit very well into that mold.

"The babies screamed more than usual today which coincided nicely with a frenzied day on the stock market.  All of the major indexes rose, just like Olivia's fever."

I love to read about finance.  I'll usually skim over the a few finance articles from the Google Finance news feed on a pretty much daily basis.  I rip through finance books like a finance-crazed hyena.  To refresh my energies for work, I scribble notes on finance in a notebook during my lunch hours.  I love to read about finance.

I decided to write a finance blog in part because a friend of mine at work suggested that I do it.

"You can be just like those other finance blogs and give tips about budgeting and getting out of debt!" she told me.
Or how to make a gorgeous centerpiece out of unused credit card application forms.

I discovered finance blogs and I tried to make up for lost time.
 Power Reading: Intensity 10

Rather than being fabulously inspired as I had hoped I would be, I was instead forced to confront an uncomfortable reality.

I was reading a variety of finance blogs and vehemently disagreeing with more people than I ever thought possible.  

Budget tips?  MY way of budgeting is better!  
Investment advice?  That would never work! 
Debt management tactics?  I'm already a stupendous debt manager; I don't need any tips!
Portfolio/Net Worth updates?  I loathe you for having more than I do.

Do not even get me started on stocks.  See, I'm a firm proponent of picking my own stocks to buy.  I don't have a money manager and I don't follow anyone's stock picks.  My money lives in the stocks that I individually select and buy.

And in my zillion bank accounts.
Some people have a problem with this "stock picking" approach.  They feel that the average person cannot dedicate the time required to fully understand their portfolio without making those efforts a full-time job.

I disagree completely with these people.

The problem is that these people with these opinions have done extensive work to prove why their point of view is valid.  For example: here, here, and here

I read articles like the ones above, espousing the workaholic method of stock selection.  I spend the whole time that I am reading the articles wholeheartedly disagreeing with their content and then I finish reading them and immediately dismiss all of the ideas presented.

For example, I disagree completely with the idea that you shouldn't pick your own stocks to invest in, or that you should dedicate an hour a week for EACH stock that you own.

"I've memorized the company motto and read the minutes of the executive retreat.  Only 29 minutes until I can be bored by a different company's weekly corporate records."
I currently dedicate about 10 minutes a day to skimming finance articles, which may or may not have anything to do with stocks I actually own.  On average, I dedicate 0 minutes per week reviewing each stock holding.  I really see no reason to change my ways; I firmly believe that if I obsessed over each stock that I own for an hour each week (I own 19 different stocks at the time of writing, so that would be 19 hours per week), then I would make some terrible investment decisions.

"The COO changed his hair style?!?  SELL EVERYTHING!!!"

I'm either the most knowledgeable investor ever to walk the Earth, or I have need of some serious introspection.  

Need introspection... who, me?
Science comes to the rescue.  It says that I'm probably suffering from a slew of cognitive biases.

It's a convenient way to say that none of this is my fault; it's all my brain's fault.

I may be suffering from the effects of Confirmation Bias.

"Confirmation bias (also called confirmatory bias or myside bias) is the tendency of people to favor information that confirms their beliefs or hypotheses.  People display this bias when they gather or remember information selectively, or when they interpret it in a biased way. The effect is stronger for emotionally charged issues and for deeply entrenched beliefs. People also tend to interpret ambiguous evidence as supporting their existing position."
"You're not agreeing with me?  No..."


The confirmation bias could have led me down a path of Attitude Polarization.

"Attitude polarization, also known as belief polarization, is a phenomenon in which a disagreement becomes more extreme as the different parties consider evidence on the issue. It is one of the effects of confirmation bias: the tendency of people to search for and interpret evidence selectively, to reinforce their current beliefs or attitudes. When people encounter ambiguous evidence, this bias can potentially result in each of them interpreting it as in support of their existing attitudes, widening rather than narrowing the disagreement between them."
"Look, this chart even shows how right I am."
"Actually, that chart shows that I'm right."


Is it possible to mitigate the effects of my innate cognitive biases?  It is, by deliberately searching out controversial material and then approaching it with open curiosity.

I can do open curiosity.

Here goes.  Let's assume that the workaholic high intensity investor crowd is right.  I shouldn't invest in anything if I'm not willing to put in the incredibly demanding hours of research.  I, the lazy investor, would need to find someone smarter and more dedicated to invest my money for me.  

Fortunately, there are lots of people who are willing to invest my money for me.  
Take mutual funds, for example.  These are the first investment mechanism that I ever learned about, from the book 'The Wealthy Barber' (which I reviewed, here).

Mutual funds--where an investor buys a small percentage of a large basket of shares, managed by a computer or a money manager--are persistently recommended by financial writers.

It's presented as a nice dream.  You, the scared investor, hand your money over to friendly people who dedicate hours and days and months to make sure every penny of your money works its little butt off to grow and multiply.

"Unless you puke, faint or die, keep going!"
In concept, it's fantastic.

I'm cool with delegation.

In practise, it's ineffective and expensive.  The reason is mathematics.  Of all of the traders in the world, roughly half of them will "beat the market" that is, make gains that exceed the gains of all the other stocks.  The other half will not.

All of the mutual fund managers, whether they make your money beat the market or not, will collect their management fee at the end of the year.  These fees can range from moderate 3% to... I don't know that there's a limit.  I guess that fees could go as high as people are willing to pay.

What does that give the investor?  Let's be nice and assume that they get the mutual fund manager with average performance.  This source estimates that the stock market, averaged from 1900, has returned an annual 10.4% per year.

So what happens?

Year 1:
Starting amount: $100.00
Amount at the end of year 1: $110.40
Deduct 3% management fee from end of year amount: $107.09

Let's suppose instead that the investor was a clever person and managed to follow the average market increase.  It is mathematically possible for every person to have average returns.

Year 1:
Starting amount: $100.00
Amount at the end of year 1: $110.40

That doesn't look like much, but it makes a big difference overall.

Following the average yearly return of the market over 30 years, our hypothetical investor's $100 investment could have grown to either $640 or $9,746, depending on the percentage that their mutual fund charged.  Also known as "a big difference overall".  (Message me if you really want to see my calculation spreadsheet.)
But here I go again, putting the high intensity investor's position in a bad light again.  My chart, above, assumes that a regular person can match the performance of a highly educated professional investor!

Let's investigate my assumption.  The following two quotes are from the same source website, MarketWatch.

"Some research I’ve recently come upon clinches it: Fewer than 1% of mutual fund managers persistently beat the market based on superior market-timing or stock-picking skills. --Source"

"And how many of those “best [individual investor] traders” beat the market after expenses? 10%? 20%? Actually, Barber told me, it’s closer to 1%. --Source"

1% of individual traders and 1% of money managers are beating the market.  Kind of seems like professional investors are regular people.

...who should stay away from my money.

I can't do this.  Being open-minded about mutual funds is just too hard for me to wrap my poor brain around.  

"Wait, come back brain!  I'm sorry I tried to be open minded about mutual funds!"
"Leave me alone!"

Fortunately, there is a second option that high intensity investors think is appropriate for normal people who don't read financial reports for fun.

The second option is to buy an index fund, either through a financial manager or as an Exchange Traded Fund (ETFs).

In the spirit of broadening my horizons and making myself a better person, I needed to investigate this approach with open curiosity.  I reluctantly dipped my toe into the unfamiliar waters of the Exchange Traded Funds ocean.  

One small step for a woman, one microscopically insignificant hop for investors everywhere.
I mean that only in the broadest terms, of course. What I actually did was Google "dividend exchange traded fund Canada".

Results popped up, and I read the headings.

I selected a webpage and...

To be continued.