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The Art of Low Finance

Registered retirement savings plans (RRSPs) area way to save money and defer income taxes until you are retired and pulling in less money. Ideally you put money into investments like mutual funds, and let them grow with compound interest into a nest egg to allow you to enjoy your retirement. With compound interest, it’s best if you start early as your returns have potential to grow geometrically.

How do you go about investing? When old Harold started, unless you had guidance from your parents or friends adept in the art of investing, you consulted the ‘professionals’ at your bank and purchased mutual funds or laddered GICs when interest rates were favorable. Then you sat back and checked your progress every couple years hoping your investments would grow. After about 10 years of investing, old Harold had the same amount invested as originally put in.

I then made the bold move to open a trading account and invest on my own. How hard could it be? With a decided lack of due diligence over another 15 years, I parlayed my investments to equal what I put in. I had a few winners and losers, and learned a few things along the way. You’ll likely get a better return investing in banks themselves instead of their mutual funds. Management expenses for mutual funds can end up costing you a lot in the long run. You are typically a day or two behind if you’re trying to day trade based on ‘good news’. Buying and holding good companies is a proven strategy for blue-chip stocks, but doing the same for flash in the pans often sees your investment fade until the company folds. Holding shares in small companies is also perilous, as when these dip with market declines, they can be taken over and pay out less than what you put in.

These days, hot investments are exchange traded funds (ETFs), which you can buy like shares on the stock market. These can be structured very similar to mutual funds, but their management expense ratios are typically lower. There are also ETFs that track the market known as index ETFs. These hold parts of the total market, market sector or the top performers, for example the TSX60 (top 60 companies on the Toronto Stock Exchange) or the S&P500 (Standard and Poors 500, which includes the top 500 companies traded in the USA).

If you’ve been investing for a while, and would like to see how you are doing (i.e. if you’re beating the market), an easy way to see is to check out one of the many S&P500 index funds out there, for example the Horizons S&P 500 Index ETF (HXS.TO) If old Harold had only invested in an S&P500 index, I’d be a lot better off than I am today as $1000 10 years ago would have turned into about $5000 today. Simple investing like this is the subject of many practical guides to investing (ex. The Wealthy Barber). Trading on your own, however, has the allure of a big Vegas casino. It can be tough to sit at a $0.25 slot machine that is an odds-on favourite to net long term returns, while flashier prospects are available that have made a few people wildly wealthy.

Year over year, we hear about how new ways old things are being taught in schools. New math, revised history etc. etc., but why is it that the basics of nutrition and finance are not being taught? How much would this save on health care costs and help the average Jane/Joe save for their golden years and not have to take it up the rump on interest payments and need to work until they’re dead?

Peace out

Harold Splatt, a long time resident of Lacombe Alberta, provides us with his colourful commentary on life as he sees it.

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