Generic advice

This is a guest post by Robert, who lives in Calgary and worked as a financial adviser before retiring at age 35. He is married, has three kids and has returned to school with the goal of eventually living and working overseas.

A woman wrote me to ask how she could make money in the stock market. She explained that she’d like to have extra money for Christmas gifts or a vacation, beyond the small pension she currently has. She offered that she’d be able to commit the money that she otherwise saves up for a couple months at a time, before needing it for a lump sum expense. I wrote the following, which I consider to be good generic advice.

My initial thoughts are that your expectations may not be realistic. The stock market can make money for you, but it can also lose your money. It’s dangerous, unless you can invest your money for at least five years. Even then, it will only earn 5% to 10% per year. That means that if you start with $100, after five years you might earn $50 if you’re lucky. Also, stock commissions are expensive. It costs at least $25 (or more) to buy stock, whether you buy $100 or $100,000.

Step one: save money. Everyone is different, so it’s hard for me to tell you how to save money. Can you save $3 per day by not buy coffee? Can you save $50 per month by not subscribing to cable TV? Or are you already spending the minimum possible to still be healthy?

Step two: open an investment account. You can start at your bank. Tell them you want to invest in mutual funds. That way, there should be no $25 fee (no commission) to invest. You probably want a TFSA account or “open” or “taxable” account.

Step three: invest each month. Choose a Canadian Dividend Fund. Each month, deposit only the money that you’ve saved and that you won’t need to take out soon.

The idea is that once you invest the money, you’ll never take it out. Instead, you’ll just take out the dividends that you’ve earned. It’s a very slow, long-term plan. But it does work.

In the end, she decided that she would try to find some flexible, part-time work to earn extra income, since that would be the quickest, most dependable way to generate some extra income. That seemed like a very good decision, given her circumstances.
Do you find anything surprising in this advice? Is there anything that you would add?

9 thoughts on “Generic advice”

  1. Surprise #1: $25 to buy stock? A number of discount brokerages let you buy stock for a commission as low as $5.

    Surprise #2: Invest in mutual funds? That’s troubling advice to read on a reputable personal finance blog.

  2. Andrew, your profile picture made me laugh. Well done.

    If you do some research, you’ll see that in order to qualify for $5 trades, you must have a certain amount of capital or frequency of transactions. Many beginning investors will be charged $25 or $30, even at discount brokerages. If you find I’m mistaken, I invite you to point out the correct information here.

    Also, buying mutual funds (which includes index mutual funds) can be cheaper for beginning investors. It is the responsibility of “reputable” personal finance writers to do the math, which I’ve done elsewhere. As an example, the TD e-series of index mutual funds might be cheaper than index ETFs after accounting for both MER and trading cost, depending on account size, transaction size and turnover rate. Again, if you do the math (which I’ve shown elsewhere) and find I’m wrong, feel free to post it here.

  3. I like the response. What I’m personally more curious about, though, is what you say to people expecting 20% (or more) annual returns without fail either via “superstar management” or personal active trading. My suggestion that doing that without fail would land a great Wall St. job, but that doesn’t tend to stick …

  4. @Andrew; It takes money and experience to play in the stock market. Mutuals are good for novices, always. Most people who try stocks first off lose their shirt.

    @Greg; tell them their nuts!! lol 20%!! I get a kick out of people who try to tell me that they are making 15% from their investments through a mutual fund company. ha ha ha ha….. Although, more lately those same people have started complaining that they are losing money.

    @Robert; you forgot to tell the lady about the 649 investment/retirement plan! That’s the only way to make money quick. I told my parents,(avid gamblers), that if I had invested all the money they every spent gambling that I’D BE A MILLIONAIRE. However, that was probably being conservative.

  5. Crawl before you walk, walk before you run. You can’t invest before you save.

    What this woman got the part that investing wasn’t appropriate for her short term goal, I’m afraid she totally missed the concept of increasing her future income by saving now.

  6. Tell her that she can invest the money for 10 years and in 10 years she can have some money for that Christmas. For this one find a way to reduce your expenses and pick up some extra hours or an extra part time job.
    I laughed a little when I heard extra cash for Christmas and Vacation separate from her pension. Those are almost mutually exclusive things. Your pension is for your retirement or when you have no working income. Christmas and vacation is a yearly expense. Save for it up front.
    Now for the advice. For simplicity sake, I am assuming she is in a lower income situation. Stick everything in a TFSA not an RRSP. What is held within the TFSA would definitely be LOW expense index funds of any sort, ING moneywise or streetwise (can’t remember which it is off hand) fund might work well for her. Then I would suggest that this is simplified and automatic. Once that is in place plan for next years Christmas and vacation now so she can put away money separate for that. Maybe a high interest savings account. Set a budget based on what you can save realistically and stick to it. Might not be the most expensive Christmas this year, but Christmas isn’t about the money. The vacation might need to be postponed until next year to when she has enough saved.
    Now for the big picture advice. Plan. Spit out everything you think that might cost you money in the next 10 years and make a plan for it. Otherwise this will happen year after year. Get a cash cushion for those things that come up that might break your budget. Water heater, major car repair, furnace, health related cost. Once this is in place then start to read about who and where you should be investing with. This might be alot of work, but boy will it simplify her life going forward because she will have a plan. Otherwise she will be asking these types of questions over and over and over again. How do I know? Let’s just say I have a few family members that think like this.

  7. Yikes Robert,

    I’m sure you meant well, but almost everything you told her was incorrect.
    1. You wrote “It’s dangerous, unless you can invest your money for at least five years.” It doesn’t matter how long you invest for, the risks don’t change, i.e. the risks are the same whether you plan to invest for one year or 5 years – you can make money or lose money just the same.
    2. “Even then, it will only earn 5% to 10% per year”. Absolutely incorrect. Some years you can make 50, 60, 70% or more and some years you might lose 5 or 10%. Read my website for more on that.
    3. Nothing wrong with Step 1
    4. “Tell them you want to invest in mutual funds. That way, there should be no $25 fee (no commission) to invest.” There’s so much wrong here it would take a couple pages to cover it.
    5. Step 3 falls in line with the above.
    6. In the reply to Andrew (a different Rob?) “mutual funds (which includes index mutual funds) can be cheaper for beginning investors.” NOT if they lose money or don’t outperform their comparative index, which is the case 80% of the time.
    7. You wrote “@Andrew; It takes money and experience to play in the stock market.” OH my gosh, please don’t ever call it “playing”. This is not a game, and it’s very dangerous to use those kinds of words.
    8. You wrote “@Greg; tell them their nuts!! lol 20%” Why insult people who are seeking your advice (while using the wrong “their”, I think you meant “they’re nuts”. They might not appreciate you speaking to their nuts!)? Send them my way and re-read my point #2 above.

    The Baker’s Son

  8. Baker’s Son, I think we can respectfully disagree. That doesn’t make me wrong, or you wrong; it’s simply a difference of opinion. I appreciate that you made the effort to comment on the blog. However, you’ve mixed up my comments with someone else.

    All the best with your blog.


  9. Hey Robert,

    Thanks for your reply. Yeah, I think there was a different Rob in there.

    All I can say is that I have been predicting (“they” call it timing) short and long-term market moves since the mid-1990’s with a better than 90% success rate. I have been doing, with incredible accuracy, what “THEY” say is impossible, but I’ve been doing it for so long and with such accuracy that it is impossible to say that it is luck or just opinion. I have come to the point where I am fed up with the “industry” participants getting rich at the expense of hard-working and trusting individuals and that is why I have set up The Baker’s Son course. People need to know that they only really have to work 10 or 20 years tops, to be able to retire comfortably and enjoy life.

    If you ever want to “talk shop” drop me a line.
    The Baker’s Son

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