Gather Little by Little

A couple of weeks ago, I started the different investing strategies for beginners with the most secure asset allocations. Especially when you start investing, you don’t know exactly where you are heading and you do not want to take too much risk. However, even among beginner investors, there are some who are willing and able to invest in a more aggressive manner. This is why I am talking about the next 3 asset allocations:

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According to your investor profile, you might want to take a different route for investing. Forget what your neighbour or your brother-in-law told you about “the next big thing”. If they were that good, they would be calling you from their yacht in the Bahamas to give your stock tips”¦ not over the fence while pushing their lawnmower  ;-)

In my last post about investing baby steps, I was talking about finding your investor profile. I think this step is omniimportant if you want to succeed as an investor. And succeeding doesn’t mean making millions, it does mean building a solid investment strategy that you will be able to follow that allows you to sleep well at night ;-).

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When we were just babies, we started to crawl in order to explore the “new world”. After a while, we noticed that there was more “out there” and we started to think about a way to go faster and further during our exploration. Then one magical day we decided to stand up on our 2 feet and look out at the horizon. In order to reach this point, we learned, step by step, how to walk. We fell a few times, we got hurt but our mommy was always there to take us in her arms and comfort us. Wouldn’t life be easier if our mom was still there to show us how to manage our personal finances as she was there to teach us how to walk?

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We are approaching Christmas and most of us are now  shopping in “light speed mode”. Unfortunately, Santa won’t give us many gifts with regards to fixed income. Rates are currently at their lowest since the legend of Saint-Nicolas was first told and things probably are not going to be better in a few months. Can rates go lower? That is not the problem. In fact, I would be more worried if interest rates start rising. If you were bitten hard enough by the stock market in 2008 and decided to switch your investments towards bonds, you will see that your portfolio can suffer negative results as well. Why? Because bond values drop as interest rates goes up.

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Last week, I discussed why I really like index mutual funds. Some readers might prefer to trade ETFs (Exchange Traded Fund) directly, in order to replicate stock market indices with lower fees. However, there are 2 major inconveniences with ETFs when you are investing smaller amounts (i.e. less than $10,000):

#1 You are limited in your trades due to your small amount (you shouldn’t buy 5 or 6 ETFs with 10K)

#2 Transaction fees will eat up a lot of your yield (if you buy an ETF with $3,000 and you buying cost is $10 and your selling cost is $10, this represents close to 1% already).

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Last Tuesday, we looked at how to create a bond ladder with less than $10,000. While certificates of deposit are good to balance out your portfolio and provide peace of mind with security like a comfy blanket while sitting in front of a warm glowing fireplace, they will definitely not provide the growth to make your retirement savings account jump.

Some people won’t be able to endure the cruel market fluctuations and that is fine. This is why they should (even at an early age) setup their bond ladder and minimize their risk. However, if you understand that although your investments drop at times, over the long haul they have always gone back up (if you have a sane asset allocation”¦which will be explained in another post).

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Insider trading is one of those things that we all hear about. Yet few know what it is and tend to think (incorrectly I might add) that only the big hedge fund managers should worry about trading on “inside information”. It always seems like investors think that they are above the law.

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For decades, many of us have been putting more and more of our money into real estate. Strange enough, it is an asset class that many owners do not even consider when they answer questions about their stock portfolio or investments even though it is by far the most significant in many cases.

Are you among those who complained about the major banks’ excessive leverage?

Chances are that you or your neighbour is leveraged at least as much if not more. Think about it”¦ If you own a house that is worth 400,000$ and you have a 360,000$ mortgage, you are leveraged 10 to 1! Many banks used that kind of leverage.

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Last week, after reading Stew’s article about why he does not expect to buy gold, I started thinking. Over the past few months, I’ve been hearing an increasing amount of interest in preparing for “worst case scenarios”. It seems as though last year’s major crisis left some very important consequences. So what are these dark scenarios? Here are a few that are often discussed:

–Collapse of the entire financial system: This one can no longer be dismissed easily since it was a distinct possibility during last year’s collapse of several US and foreign banks.

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Just by writing this title, I already know that people won’t agree with this strategy. How can you tell people to get rid of their emergency fund while we are in one of the most important recessions ever? So please, keep reading until the end of the post, I promise to make sense ;-)

First things first, I am a big fan of the “pay yourself first“ technique when it comes to personal finance. If you consider yourself as a priority creditor, you will put money aside for your personal finance and then, live off the rest. Many of my clients are asking the same question with regards to extra money: Should I pay down my debt or invest the difference?

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