Category Archives: Investing

Dumb Luck Is Also Required

Larry MacDonald recently had a post on his blog about Derek Foster which was questioning weather the math of Derek’s strategy would let other people follow in his foot steps.  The short answer I believe is no.

Each early retirement story I’ve read of very young retirements (ie: under 50) all seem to have a common thread.  Each person will tell you how it is possible for you to do the same as them.  Yet the reality of it all is a bit of dumb luck is also required.

Granted most of the very early retirees do have plans to make some money with real estate or stocks and they do have a strategy.  Yet in every plan there is that wild card of luck.  Where the results of your plan far exceed what you expected to happen.  For example, when I bought my first house I knew it had a good potential for fixing it up and reselling.  Yet the renovations were more expensive than I would have guessed.   About $10,000 more expensive due to a leaking roof.  So I was hoping to just break even and not lose my shirt.  The reality was the local real estate market was hot and I made about $55,000 in profit in two years.  You could try to call it good planning or anything else, but in reality it is just dumb luck.

So you see each early retirement path is unique.  I don’t expect anyone to take the exact same path as me, because they will have different values and different opportunities.  Yet learning from each of these very early retirees teaches you something different such as controlling your spending, dividends are good, or avoid tax is important.  Yet each one echoes a similar lesson: luck favours the bold.  If you want a retirement under 50 you are going to have to take a few risks.

Interview with Derek Foster

In case you haven’t heard Derek Foster, author of Stop Working, has come out with a second book called The Lazy Investor. So out of curiosity I sent Derek an email requesting an interview and he was kind enough to give me a call (I should point out I did the interview before I had read the book, I’ll post a book review tomorrow complete with a contest to win a copy of the book).

Tim: So what can we expect in the new book?

Derek: This book is basically the strategy that I would have done if I could do it all over again. People often think I came up with my investment strategy all in one go. I didn’t. The strategy evolved over time. I started in mutual funds which isn’t something I would do now.

Tim: Ok, how would you start now?

Derek: I would start with as little as $50 and use DRIP’s and SPP’s. Are you familiar with those?

Tim: I know the DRIP is a Dividend Reinvestment Plan, but I’m not familiar with SPP.

Derek: A SPP is a stock purchase plan with isn’t offered by a lot of companies in Canada. You can buy shares directly from the company without having to pay any fees. [Editor’s Note: Also sometimes referred to as DSPP –Direct Stock Purchase Plan]

Tim: Ok, how do you start.

Derek: You have two options on how to can get your first share of a company that offers both a DRIP and SPP. The first is through a discount broker, which is more expensive. First you buy the share and then request the stock certificate. The total cost will run you about $80. The other option is to go to a share exchange board like the Investing Resource Center. There you can request that someone will sell you a single share. The cost of this is a $10 courtesy fee.

Tim: Sound’s great. So where did the idea for this all come from?

Derek: The idea started from my own kids [Editor’s Note: Derek is now up to four kids ages 7, 5, 4, and 1], which is why the second section of the book deals with investing just for kids. I don’t like RESP’s and I wanted to provide something for their future, but still leave them with responsibility for paying for their own education.

Tim: I can totally agree with that. I don’t intend to pay for everything for my own kid either. So you started a similar strategy for each kid?

Derek: Yes, I started with $8500 for each kid and invested in four companies in their names. I believe financial education is sorely lacking in our schools and this will provide some incentive for the kids to learn. After all some of the dividends they earn pays for their allowances when they get older.

Tim: Now that is a great idea. So do you also provide an update on your own situtation from the last book?

Derek: Yes in the appendix I address some of the most common questions I’ve been asked.

Tim: Derek, thank you so much for your time. It’s been great talking with you.

I should point out that this interview actually went on for a lot longer, but I had to paraphrase it down to a reasonable length.

How to Kill A Mortgage

Yesterday I had a comment by Telly asking if I intend to be mortgage free by 45 (my retirement date). Yes I do want to have that gone by then. I was actually playing with a few calculators earlier this week so I will outline a few different ideas.

1) Do Nothing

This first plan is the easiest. I don’t pay down a extra cent until I turn 45 and then I pay out the remaining balance with some of my retirement savings.

2) Mild Acceleration

My current time line to be mortgage free is 19 years which isn’t too far from my plan to retire at 45 (16 years). So another option is to save myself a lot of interest costs and prepay just enough of the mortgage to ensure it is gone by the time I’m 45. I estimate I would need to pay off approximately $9000 in the next two years which is completely doable.

3) Completely flatten the mortgage

Of course this option was a bit fun to figure out. If I put every spare cent I have against the mortgage I can be complete debt free in just over 8 years. Which also has some appeal since then my cost of living drops off the deep end and I could look at doing semi-early retirement perhaps by age 40.

Conclusion:

Right now I’m thinking about doing option 2, since I’m very close to trigging my mortgage equity plan with my bank. So if I drop the mortgage fast and decide I need some money to invest I can pull it out and if I use it to invest in a taxable account we can right off the interest against our taxes (Basically I could do a small version of the Smith maneuver).

I must admit option 3 also has some appeal. Yet for now I think I’ll try for option 2 for now. Any one else been in a similar situation, if so what did you do?