Saturday, November 8, 2008

Thinking Long-Term: Secular Bear Markets

Fear has gripped world markets, world governments, and pretty much everybody around the world. This economic disaster is the result of the excesses that the world enjoyed throughout the 80s and 90s. We are now paying for the leverage and lending bubble that developed, as people tried to keep the party going. Now, everyone's scared that the world will end up in a long-drawn recession, or much, much worse (I'm just as worried as everyone else). If you've been reading this blog, you can see that I hedged myself against a market meltdown, which we experienced over the last 6 weeks. Contrary to most, I'm feeling much better now than I did then.

I have been a proponent of the "Dow Theory". Essentially what this stipulates is that the market goes through cyclical ups and downs over the short-term, and secular ups and downs over the long-term. These cyclical movements can result in 3 month to 6 year trend movements in the markets, whereas longer term secular movements can result in 7 to 25 year longer term trends. In a secular bear market, the markets can move in cyclical bear or bull markets, but ultimately the market cannot break its former highs. Make no mistake of it, we are in a secular bear market, and have been in one since the dot-com crash in 2001. The S&P 500, the 500 companies deemed to represent the U.S. economy best, has not been able to break the 1,580 to 1,600 mark for the last 8 years. Over this time, the world economies have been growing dramatically, but as a result of huge P/E ratios and expectations in the late 90s, early 2000 period, we are going through a period of consolidation in the marketplace. Ultimately, in general, historical P/E ratios reach the single digits before the market can once again proceed forward into a new secular bull market.

In essence, the businesses are catching up to the lofty expectations in the 90s. It's as though the market was the driver in a very serious car accident. While the accident only takes a moment, it takes years to resusitate, rehabilitate, restrengthen and renew the driver and his/her health and confidence before we can move forward. However, ultimately, before the renewal of the driver's confidence, we know that their health is no longer in question. The market will get project this health much sooner than we as individuals get the confidence to fully invest again. We must be willing to step in front of the train with the hopes that it will stop before it hits us smack in the face (figuratively-speaking of course).

I'm not calling a bottom, nor am I saying I have closed all my hedged positions (buying ETF's that move inverse to the markets). What I am saying is this: even in the 1930s, the bottom happened within 3 years of the start of the Depression. If you have a longer-term outlook, you have to be compelled into investing somewhat into the markets. I have been slowly closing hedges, and buying equities. Mostly, this equity is in low debt stocks or large-capital stocks that will continue to sell goods the world needs.

Within the rubble of any disaster lies the tools, lessons and catalysts for the next great growth period. In this market, there are companies that will become the next great stocks to hold as the market starts to move upwards again.

Thursday, October 9, 2008

When the crisis will end?

I have been seeing the markets crumble around us, and I am of course concerned like everyone else. The central banks around the world have been trying to stave off the abyss, and have thrown everything at the markets. Nothing has worked. There are several problems in the markets these days.

There is over $360 trillion (yes, trillion with a T) in financial contracts in the marketplace that is subject to LIBOR (the London interbank offered rate - the rate that banks lend to each other). According to, that's over $53,500 per person on earth. When you look at it, ultimately debts are held by people, even if it is artificially held in corporations. This debt becomes the debt for the world, and each and everyone of us is burdened by this. As the amounts are absolutely unsustainable, these financial contracts must be reduced. The market cannot afford this. These debt amounts are absolutely unsustainable. It was absolutely necessary for the banks to deleverage. It just happened that the financial industries appetite for risk (hedge funds, derivatives and mortgage-backed securities) had to doom us. Even though the government has been pumping trillions of dollars into the marketplace, this will not result in reduction of the credit rates. We have seen cuts to bank rates, it has not resulted in lower LIBOR. LIBOR must, must, must decline to more manageable levels before we can return to financial normalcy. Therefore, even if the governments around the world continue to pump money into the markets, we will see the money supply continue to decline as that $53,500/person drops to more normal levels, and LIBOR finally drops to levels closer to the US Fed funds rate.

I will add one thing: I personally feel that we will need Keynesian economics to recover from the long-term problems that we will see from this crisis. Without concerted and worldwide coordinated government projects, the world industrial output will come to a standstill.

Tuesday, October 7, 2008

Europe vs. the World - Can the E.U. survive this debacle?

As we have been facing this complete freefall in the market (can someone say capitulation?), I think we need to evaluate where to put our hard-earned dollars when it comes to the equities market. As I've stated before, I believe that we are facing deflation, in spite of all the unsuccessful US actions to increase the money supply, and try and shore up the lending system. With lending at a standstill, and deleveraging already underway with the banks, I often wonder where to put my money. But a more pressing issue to the world should be, how will the E.U. deal with this?

The reason why this question is so pertinent is that the European Union has one central bank for those countries that use the Euro (so U.K. is excluded among a group of the E.U. countries). That assists the Euro-zone in creating a central interest rate, and a central monetary policy. The big problem within the E.U. is that each country has its own Treasury function, and each country still has its own government with its own budgetary system. Because of this, countries in the Eurozone will decide to take different actions to shore their economies, thereby affecting all countries in Europe. This can create a worse problem than in the rest of the countries around the world. When a country doesn't control its own monetary policy, but controls the treasury function, it can only hinder coordinated attempts to stabilize an economy. I will be interested to see how Europe copes with the current meltdown, and I even feel there is a remote possiblity that the Euro could be rejected in some countries and even the total rejection of the European Economic Community by others.

Monday, September 29, 2008

What was Congress thinking? Markets collapse in the wake of "No" Vote.

I'm not going to mince words. The U.S. Congress showed its true lack of leadership, and its total ineptitude in the face of the worst economic crisis in the last 80 years. Congress is holding the world hostage, in the face of an election. This may be the first time in a few years that I have felt that George W. Bush, who has nothing to gain from pushing the $700B package, appeared to be acting in the best interests of the United States (and the world for that matter), while the U.S. Congress was doing just the opposite. In order to get re-elected, these people are willing to vote down an economic plan to unfreeze the credit markets (not "bailout" the financial system, as everyone is stating) by purchasing already discounted debt-backed securities, providing much-needed liquidity to the banking system, so that they can lend to each other, and more importantly open credit markets up for businesses and people. I'm surpised the markets didn't fall further. You only have to look at the terrible deal Caterpillar had late last week to see how bad it has gotten.

A company of the caliber and creditworthiness of CAT having to pay huge premiums in the credit market makes me question whether many companies will even be able to borrow to finance short term cash requirements, like employee salaries and working capital requirements. This means obvious things to me: companies are going to hoard cash, reduce their payrolls by cutting staff, and reducing capital spending over the next year. This ultimately will result in pushing us further into a deflationary market, worldwide. A credit crisis as intertwined as this means no country is immune to its issues. Deflation is the worst disease to strike an economy. It results in a downward spiral - this toilet will flush like it's broken, and we don't have a plumber to fix it. As deflation occurs and Wall Street suffers, people on Main Street will lose their jobs, lose their homes, lose everything - I'm not trying to be an alarmist, but the market needs intervention, because it won't resolve itself until most banks in the U.S. fails (the small regionals - remember, over 1,000 failed in the 1980s and 1990s in a less serious crisis). We only have to look at the Japanese markets to see that this can be a long drawn issue. Eighty years of inflationary growth presents a potentially long-term deflationary issue for the markets.

So what does one do in this market? The only thing I can see myself doing (and I'm not an expert nor am I recommending you follow my advice) is reducing risk and buying the companies that I feel are best of breed. I will not be selling in this market: as much as I hate the actions of the US government, I still feel that things can change in an instant, and I know that I am not smarter than the market. Not only will I maintain my asset allocation while facing this uncertain and tough market, I will actually add to my portfolio in stocks with little or no debt, but only in cases where their competitors have moderate to vast amounts of debt. Stalk these companies - they are being punished in the down market, and they may earn less money in the future. However, these companies will have pricing power, and they will have long term competitive advantages. As their competitors fail or downsize, they will be able gain market share for many years to come. And if they haven't raised money in the equity markets (as a substitute to the credit markets) over the last 3-5 years, even better. These companies are growing organically, and won't need capital while others suffer looking for it, and getting punished in a risk-averse market. In my retirement accounts, where I hold no individual stocks, I will simply continue my pre-authorized purchases, and re-allocate at the end of October.

Saturday, September 20, 2008

U.S. Actions on the Markets

This was an unprecedented week in the markets (but isn't every week unprecedented?), with the US financial landscape forever changed with the bankruptcy of Lehman Brothers, the acquisition of Merrill Lynch by Bank of America and the US taxpayers' bailout of AIG, the world's largest insurer by assets. Only one word can be used to describe this: wow!

With the markets in turmoil, and financials falling precipitously Thursday morning, word spread of a government-sponsored plan to thaw the frozen credit markets with an RTC like entity (RTC was formed and funded by the government in the 1980s to buy assets of banks and sell them in the markets. It ultimately made the US taxpayer a tidy little profit). This was an incredibly bullish move for the markets, and investors were right to cheer this move as it will only benefit the world credit markets, and prevent the world from falling into a severe depression, and destroying tremendous value in the markets. This plan was announced later Thursday evening in a bipartisan news conference.

While I cheer the moves of the Treasury Secretary Paulson, along with Bernanke and US Congressional leaders, I think that the SEC has overstepped their bounds. The SEC thought it would be wise to ban all short selling on 799 financial stocks (including many that I own). By banning short-selling, essentially we have prevented one of the most efficient corrective measures in the marketplace - we as investors can sell shares of stocks we believe are overvalued to bring them down to fair value. The SEC has blatantly allowed short selling on all stocks at all times, even as they fall (selling on "downticks" - when a stock's price is falling on the exchange), and now, instead of reimplementing the "uptick" rule (that was first implemented after the Crash of '29), they eliminate the practice altogether? This socialistic move will not prevent the declines in the marketplace for financial stocks, and really is a targetted move against hedge funds - it's funny how politics gets in the way of free market capitalism. The US (and UK, I may add) took a giant leap backwards with the full ban of short-selling on financial stocks, and this will not ultimately stop the declines in the marketplace.

A final note: what was happening to financial stocks was not unhealthy. It is important to note that banks were lending callously and without regard to risk when they sold mortgages to unworthy customers. The investors in these banks should be punished for reckless abandonment of risk-reward modelling. While the world governments need to protect everyone from complete collapse of the financial system (by saving those "too big to fail" like AIG), they should not stop the markets from running effectively. There is always collateral damage in the marketplace - let the system cleanse itself, even if it involves a little hemorrhaging. We will see in the weeks following October 2nd whether the short selling ban really "saved the death spiral".

Wednesday, September 17, 2008

The Financial Market Turmoil - a Thesis

I've been a short-term bear of the market for some time, but I will never EVER get out of the market because of this. I may invest in ETF's that short the market (as I have since Bear Stearns collapsed) with SDS, HXD (on the TSX) and FXP (shorting China), but I always want to maintain my positions in the market, as you never know when the market will return to the good old bull days (of course, as a value investor, I'm a long-term bull). That said, I believe we are in the late innings of the financial crisis, but we are only in the first few in the US and global recession.

This credit crunch has been a lot deeper than most people really thought. The subprime mortgage mess was perpetuated by 1% interest rates in 2002-2003, and resulted in millions of US households investing into an already heated real estate market. Because housing prices were flying high, banks were giving away mortgages like they were candy: with little income and little downpayments, people were buying houses way over their budget. The banks packaged these loans and sold them to other banks (mortgage backed securities - or MBS). Banks also buy insurance against borrowings amongst each other when they either swap securities or lend cash (credit default securities). All of these securities are under pressure these days. Liquidity is drying up, as individuals shift monies out of financials and into the safety of treasury bills (taking the money out of the banking system, and banks are now trying to deleverage themselves. This is problematic for the world market.

Since banks are deleveraging themselves, they are essentially trying to sell assets (or even denying mortgages/loan renewals) and thereby getting liabilities off their books - by repossessing assets, or by allowing other companies to lend the funds to the companies that they have denied. Banks are also failing to lend new projects, including formerly lucrative gold or oil projects. As banks reduce their liabilities, investors have less money to invest with, and consumers have less money to borrow so that they can consume. Essentially this lowers demand for everything, including commodities. Therefore, we see commodities falling, companies lowering earnings and revenue estimates, as everyone tries to pay down their debts.

The cycle then brings down world markets as demand dries up for foreign products by US consumers. As the biggest consumer of foreign goods, this will destroy growth stories for the BRIC countries further than they already are, and Europe will continue to weaken. The world markets will continue to decline, until the US banks lend again, and the US consumer spends again. Disinflationary or deflationary pressures will bring prices down as the price of consumer goods decline (since unemployment will increase, and commodities will continue to fall), and no consumer wants to buy something today, when it will be cheaper tomorrow. Therefore, prices will continue to fall, similar to what is happening in Japan for years.

Once again, this is just a theory. Your comments are welcome.

I have long positions in FXP, SDS and HXD.

Saturday, September 13, 2008

Potash Share Buyback - Best use of Money?

On Thursday, Potash Corporation announced that it will increase its stock repurchase program to up to 10% of the shares outstanding at this time. First, let's note that a planned stock repurchase program does not necessarily mean a single share will be repurchased. The company can repurchase the shares at whatever target price they may have decided. The question is, if I were a shareholder (which I'm not, and I have no position in this company), is this the best plan for the company?

I certainly don't believe this makes the most sense for the company. First of all, the company would need $5b cash based on current market capitalization to buy back 10% of the company. the company only has about $250m cash according to its last quarterly report (as per Google finance). This shows that, in order for the company to complete this repurchase program, at current prices, they would need to borrow the funds to buy the shares off the market. Therefore, current shareholders would basically be mortgaged to buy the selling shareholders. The cost of such a move could be tremendous. The company would essentially be buying shares and leveraging the company in the process - what shareholder or bondholder would want such a move to take place?

Finally, I take an issue, as a value investor, to this type of transaction for any company - if the company is a growth company, and the belief in the market is that Potash is, then shouldn't the company use its cash proceeds to continue to build or purchase the capital infrastructure necessary to mine more potash out of the ground, and increase revenues? If not, why should the stock price be maintained at this level, and why shouldn't all shareholders benefit immediately from the company's apparent success? In my opinion, the best use of funds in a growth company, if it has no better use of funds (when it has excess cash - which Potash doesn't even have) would be to pay a special cash dividend for all current shareholders, rather than mortgaging the current shareholders for the ones exiting from the company. Only time will tell if this move by Potash bears the fruit that the board and CEO intend for it to do.

Whirlwind Weekend for the Stock Market

On Friday, the stock market settled relatively flat ahead of one of the most crucial 48 hour periods of the last 30 years for the financial markets.

First, a hurricane, half the size of the Gulf of Mexico is making landfall over Galveston, Texas, with reports of levee breaches in New Orleans, and causing 25% of North American refining capacity to be shut down. This has already been felt at the pump, as gasoline around Toronto (where I live) increasing $0.12 to $0.13/litre, and increases of over $1.00/gallon in many states across the U.S. It will be interesting to see whether this impact will be long-lasting, or another short term spike to oil and gasoline prices as it continues to plummet.

Second, and probably more impactful to the financial world, it appears that Lehman Brothers is up for sale, and will probably not make it past the weekend unless someone buys the company out. The real significance is not the fact that this is a Bear Stearns re-dux. The real significance is that this may represent a watershed moment for the U.S., as the Federal Reserve and Treasury allow Lehman Brothers to fail, or at least avoid assisting any party in the buyout process. With Bear, Fannie and Freddie, the Treasury and Fed backstopped the bailouts, allowing the assets to be taken over in a more logical and streamlined way. Should the Fed and Treasury allow Lehman to simply fail, this will at least cause asset prices across the markets (equities, bonds and others) to fluctuate dramatically, and, worse case scenario, could cause a catastrophic domino effect across the financial sector.

In these times, it takes alot of courage to stand in the face of such turbulence in the markets, and like the calm before Ike struck Texas, the markets (overall) showed very little signs of any impending implosion. This market has become a forced test on all investors of their conviction and their ability to stay the course. All I can advise is that these are the best times to learn about yourself, and whether you truly have the right asset allocation to stomach the most volatile of times.

Sunday, September 7, 2008

Fallout from Freddie Mac and Fannie Mae Bailout

The historic bailout of Freddie and Fannie will have immense implications for the financial world, and will probably cause tremendous anxiety in the markets over the coming weeks. The mere fact that the U.S. government is now on the hook for $6 TRILLION of U.S. mortgages does not bode well for U.S. treasuries or the U.S. dollar. But, the market may see otherwise. The dynamics of such an event are so complex - the real importance of such a bailout is this: short-term, dramatic government intervention can buoy or destroy market confidence, but, in the long-run market and financial fundamentals prevail.

Always stay the course during hectic times in the market, even if your head or heart tell you otherwise. Market psychology plays an important role in making you money, and not losing your shirt.

Friday, September 5, 2008

Getting your financial health check-up

One of the most important things to do to move towards your financial dreams, no matter whether you obsess about money (like me) or just want to get your priorities in order, is to develop a financial plan and an investing/saving strategy. The biggest thing problem I have witnessed is that many are in denial or even downright ignore their financial future.

Many are overwhelmed with just simply starting their financial plan. I have often heard people say that they are "scared" to prepare a networth statement, or a monthly income statement. I often tell these people (friends and co-workers) that, justlike getting your car "checked up", or just like you get an annual "check up" with the doctor, it is definitely important to get your financial check up. The key is just to act!

For many, simply adding their bank accounts, their investments, their home and investment properties and deducting all liabilities is as simple as logging into one or two bank accounts online, and throwing a few numbers on an Excel spreadsheet. Yet, why do people not actually do this? FEAR! They fear knowing that they are not financially secure, or that they have more debts than they can afford.

The fact of the matter is this: no matter whether you review your financial health or not, your financial condition is what it is. The real fear should be ignorance itself - you can only develop a plan when you know your starting point. Without a roadmap, you can't get to your destination. The same holds true with your financial health.

To conclude, make sure you check your financial health every quarter to see how you stand, and what you need to do to keep yourself on track. If you are more obsessive, maybe check monthly. A little work will go a long way to achieving your financial goals!

Wednesday, August 27, 2008

The Thirties - The Sandwich Years, Part I

This is a continuation of my decade-by-decade plan toward financial freedom and the pursuit of prosperity.

I anticipate the thirties will present exciting moments in my lifetime, but they will also present some of the most difficult financial decisions I will ever have to make. I know that during these years my parents will both retire full-time, and live off one pension, and their RRSP investments. I also anticipate that my wife and I will start a family during this time as well. I well then officially become the "Sandwich Generation" - potentially having to take care of my parents above me and my children below me. This means conflicting financial decisions, and potentially less room to contribute to savings and investments. My plan, and suggestion for anyone in this stage of life: don't sacrifice your retirement funds for any other costs, no matter how difficult that appears.

I know, I know. I won't "get it" until I become a parent, but I am a firm believer that you must, must, MUST fully contribute to your retirement plans prior to any education funds. The power of compounding is a very powerful thing, and many people miss its value. $10,000 invested in a tax-deferred retirement account compounding at a rate of 8% will become $46,610 in 20 years, about the same time as a child enters their junior year of college/university. While that sounds great for a child's education fund, it's more critical that this money is invested into a retirement fund first: by allowing this investment to compound in a tax deferred (or tax-free) retirement fund, it would grow to $100,626 10 years after initial contribution, and $217,245 10 years beyond that. By deferring your retirement funding by the 20 years, in favour of contributing to your child's education, you are actually burdening your child with your retirement: you will have missed over $170,000 of funds in this example. Imagine the loss of 20 years of contributions!

Remember: you can't mortgage your retirement - nobody is going to lend you money so you can not pay them back. You can always help your children fund their education in other ways, including loans while you have the chance to work to pay them off.

To conclude, my plan is to continue to put maximum contributions into my retirement funds (RRSPs and the new TFSA), and beyond that contribute whatever I possibly can into my children's RESP. After all, I don't want to burden my children with my retirement expenses.

Tuesday, August 26, 2008

Should corporate bonds be part of a basic portfolio?

(Please note that I have read several books on the subject of asset allocation and fixed income securities before arriving at my opinion, including "The Art of Asset Allocation" by David Darst, "The Aggressive Conservative Investor" by Martin Whitman, and "Unconventional Success" by David Swensen. I would advise any novice or serious investor read books authored by investment giants such as these before arriving at their own conclusions.)

It's often overwhelming thinking about investing, let alone getting involved in the actual process. Researching stocks, purchasing investments, and hanging on through the emotional and financial highs and lows can certainly take a toll on even the strongest of investors. Perhaps the most nerve-racking issue for many novice and seasoned investors alike is asset allocation, and asset class selection. Many portfolios fail before they are even created simply through misallocation, chasing returns, and misunderstanding various asset classes and their correlations.

One of the most difficult asset classes in which to invest is the corporate bonds asset class. The novelty associated with them is simple: corporate bonds provide a premium over government bonds and government treasuries, with "less risk" as compared to corporate equity (preferred or common shares). As with equity, there are many types of debt securities that an individual can invest - regular corporate debt, convertible debentures, junk bonds, etc. The variety of private debt available to public investors alone should caution the average investor.

While corporate bonds can provide much higher returns than Treasury or government bonds in shorter timeframes, it is simply a matter of risk vs. reward. Corporate bonds attract higher yields the more doubtful their interest payments become. If an investor is fortunate to find a high-yield bond that performs well, great! You can outperform Treasuries, at least in the short run. I argue there are several problems with investing in corporate bonds that are both deep and resoundingly negative.

1. Callability: One of the biggest issues with corporate debt is the result of callability. Many investors buy into higher yield debt, expecting to be the next Michael Milken. Unfortunately, usually, investors of debt junk debt, or even lower grade investment debt face the unenviable and helpless callability of debt. You see, as debt becomes more attractive to investors, providing higher yields, the greater the chance that the debt will be called in the future. If a company starts with a lower debt rating, such as a CCC, it will garner a higher coupon rate than a similar bond holding a higher debt rating, such as BBB or AAA (a rare debt rating to achieve). If an investor were able to successfully decipher that the CCC company had attractive future prospects, or was "turning the corner", they may believe that they can achieve greater returns with less risk - a perfectly acceptable conclusion. The issue, however is that, as bondholders, the investors are unable to stop the corporation from calling their debt (literally buying them out - or more generously termed refinancing), in order to reissue debt at more favourable terms. Although investors may be astute in finding a great investment opportunity, they will fail to reap the rewards as a debt rating improves. In the meantime, the shareholders reap maximum rewards of the turnaround company, as the interest load decreases, and cash flow increases.

2. Risk: Most investors have been educated to believe that debt is less risky than equity, and therefore any debt security investment is valuable to individuals. In my opinion this is simply untrue. Consider the situation: a corporation continues to show deterioration in its operations, and this begins to hinder its debt ratings. As debt ratings decline, interest yields need to increase, and the market value will continue to fall to meet investors demands for risk premiums. An investor in these debts would hardly conclude that they are experiencing less risk. In fact, one could argue that the risk of such debt is similar to equity itself. In the quest to decrease risk and reduce portfolio correlation, corporate debt hardly provides assistance to either of these goals.

3. Risk premium: Currently, corporate bonds carrying a triple A rating (AAA) carry a forecasted yield of 5.53% (source Moody's Corporate Bonds Yield Forecast, July 2008, At the same time, the 30 year U.S. Treasury Debt (also carrying a AAA rating) carried an arguably risk-free projected rate of 4.52% ( The 1% premium is hardly conducive of adequate risk-reward payoff, when considering many companies have lost their coveted ratings in the last ten years, including the likes of Coca-Cola and 3M. At last count (April 2008), there were only six companies in the United States to hold AAA ratings, and only two, Exxon Mobil and General Electric have held these ratings since 1980. Considering the risks associated with holding bonds, even of the most highly regarded debt-worthy companies, the risk premium is just not there to justify purchasing these bonds either.

To conclude, in my humble opinion, any purchase of corporate bonds, even the most trust worthy of such bonds, fails to provide ample reward for individual investors. In my eyes the results are clear: (1) corporate bonds fail to reward investors for their intuitive research and insight, as bonds are called before they provide the great returns; (2) the risks of corporate bonds, especially in tougher economic times (like the times we are experiencing now) hardly provide any portfolio protection or diversification from equity risk that is expected (too highly correlated to equities) to warrant introduction of a large investment in them; and (3) even the most highly rated corporations fail to provide ample risk premium versus the risk free Treasury rate available in the marketplace. In light of these results, I have maintained minimal exposure to such assets (under 2% of my portfolio), and believe that all but the most sophisticated investors should keep minimal allocation in these securities. Most of my fixed income securities are held in e-Series TD CDN Bond Index funds to reduce my fees, allow for multiple monthly purchases, and avoid risks associated with more "profitable" endeavors in the fixed income space.

Monday, August 25, 2008

The Roaring Twenties

Although I'm nearing the end of this decade of my life, I have learned quite a bit about finances, investing, taxation and myself during these years.

My twenties did not go exactly as planned when it came to my finances. In retrospect, I realize that I spent more of my money on frivalous things than I should have, and this has probably deferred my ultimate goal several years. Only in the last two years, with the coaxing of my wife, did I really arrange my finances in a more effective way. Sure, I enjoyed the care-free and worry-free lifestyle, but only now do I realize that I could have balanced this with some sound financial decisions. The last couple of years have been most beneficial: I have begun the process of catching up on past years' RRSP (IRA) contribution limits, have realized the value of asset allocation, and have emphasized paying down my mortgage as quickly as possible.

For those of you starting your own path to riches, if you are in your twenties, I only have two major suggestions for you. First, enjoy yourself! While money is an important aspect in life, so are the memories of life. Go out there and search the world, your city, and your neighborhood. Learn as much as you can about the things around you. Life is too short to worry all the time, but always keep mind of my second suggestion: start saving inside and outside your RRSP (IRA) accounts.

It's important to save for your long-term future, but it is also important to build your nest egg for important decisions in your future, like homes, marriage and children. Savings and liquidity are the key to an financially free future.

The best way to start your savings program is to simply "pay" your savings and retirement accounts on a weekly, biweekly or monthly basis, as though it were any other bill. More importantly, you need to avoid cashing out your savings at all costs, as they are not there for day-to-day spending. By socking away at these two plans, you will save for both intermediate and long-term goals. The funds in your non-retirement accounts should only be used for life-changing events, like the purchase of a home, preparation for your marriage or covering the initial costs of bringing a child to this world. If you already have a home, are already married, or have children, these additional savings can provide the seed monies to an emergency fund, or can be used to build your retirement egg even faster.

The key to this type of savings is also to constantly save in this way during your lifetime. In future decades, you will expand on this savings program. By saving up front, you will be forced to reduce your spending, in favour of your automatic savings. I suggest that you commence with saving of 5% inside your RRSP and 5% outside your RRSP. This level of savings will allow you to still enjoy the early years of adulthood. As you grow accustomed to this savings rate, you can consider giving yourself a raise, and increasing your savings rate. In future posts I will discuss asset allocation, tax issues, etc., as I have encountered issues, etc.

The Basics

Over the next few days, I will describe my plan for financial freedom over the next few decades. In addition, I will also set guidelines for an individual starting their own journey in their twenties, thirties, forties, and so on. Today, I present my accomplishments in my twenties, and what I suggest other individuals in their first few years in the workforce do to build a solid foundation to a more sound financial outlook in the years to come.

Saturday, August 23, 2008


Hi all,

Welcome to my blog, where I'll be talking about everything and anything on my mind about money. As is the case with most people, I am looking forward to being financially free. Join me on my lifelong journey to achieve this goal. Along the way, I will try and share my experiences to help readers meet their goals, and not make the same mistakes as I've made in my past.

Feel free to let me know if you have questions or have anything on your mind.