Category Archives: Investing

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.


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?

The Spectre of Inflation – Part I

For the last week or so I’ve been a bit of dog with a bone about inflation. It comes up in every retirement calculator and I started wondering how much of a concern this really is in retirement spending. Is inflation a real concern or just a spectre of fear that the investment industry uses to get you to save more?

Since this topic ended up growing a bit more than I had first planed on I’ve had to break it up into a couple of posts. Today we will start off with a little education session for those not familiar with inflation. Inflation is the measured with the Consumer Price Index (CPI) which consists of a basket of good which the government tracks on a monthly basis to track the tendency of prices to increase over a long period of time. In Canada, the data comes from Statistics Canada, but the Bank of Canada is the one using the data to determine if inflation is being controlled within their set target range which is currently 1 to 3% over an entire year.

Since the CPI consists of several volatile components (like fruit, veggies, gas and heating oil) the Bank of Canada likes to strip those out to get a better idea of the core inflation. The core CPI consists of 84% of those items in the total CPI. This core rate is used as a operational guide to ensure the bank is keeping inflation with in their target. For example the core rate of inflation was measured at 2.0% in December 2006, while the total CPI was 1.6% (see here for more data).

Now in general the CPI is useful since Canada Pension Plan (CPP) and Old Age Security (OAS) benefits are adjusted to reflect changes in the CPI rate. Yet despite it’s almost universal acceptance of the measure of inflation in Canada, it does have some problems when using it for personal calculations such as retirement estimates.

The CPI’s basket of good goods is based on the national average of a an urban Canadian’s spending habits. The spending habit data is only updated every four years, which means the CPI’s basket of goods lags the current average Canadian’s spending habits by up to five years (four year between gather data and 1 extra year to process it). Another problem of using the average Canadian is it tends to skew the spending to those in the upper middle class, since their larger incomes tend to shift the average spending up. Another problem with the CPI’s basket is it only uses urban data, which means it doesn’t reflect any rural spending habits. Also using a national number doesn’t reflect your regions inflation particular issues. For example, Alberta’s inflation is significantly higher than Nova Scotia’s due to current regional economic conditions.

All of these issue contribute to the bias of the CPI and on average it is estimated it is 0.5% higher than real inflation. Which means if your using a calculator with a 3.0% inflation rate, your overshooting the average by at least 0.5% a year. Tomorrow we will look at some more data to try and come up with a better inflation number.