Feeds:
Posts
Comments

Archive for the ‘Financial Planning’ Category

In January 2011 I wrote about a little experiment on stock market.  Well it has been one year and so here’s the result of the experiment.  In Dec 2010, I selected 5 stocks on the Toronto Stock Exchange (S&P/TSX) using nothing but darts to see how the performance of the stocks would stack up against the index in one year’s time. I made no changes to the stocks during the year even as the stock market experienced a “correction.”  So here’s the data from Dec 21, 2011.

Security Shares Opening Price Opening Cost Ending Price Ending Value Return
Encana Corp 35 28.7800 1007.3000 18.8900 661.1500 -34.36%
Fairfax Fiancial Holdings Ltd Subordinate Voting Shares 2 407.9400 815.8800 437.0100 874.0200 7.13%
Minefinders Corp Ltd 95 10.6900 1015.5500 10.8300 1028.8500 1.31%
Royal Bank of Canada 19 51.6900 982.1100 51.9800 987.6200 0.56%
Silver Standard Resources Inc 46 24.7400 1138.0400 14.1000 648.6000 -43.01%
Dividend 87.1500
Total 4958.8800 4287.3900 -13.54%
total before Dividend 4958.8800 4200.2400 -15.30%
TSX Index 13443 11955 -11.07%
TD Dividend Growth -0.30%

So the dart test did not beat the index in my test.  Including dividends, my annual return is -13.54% while the TSX returned  -11.07%.  Considering I didn’t include the trading costs of $99.95 to buy the shares my overall return on the investment is more like -15.30% , 4.23% less than the index.

The main contributor of my negative return were my heavy weighting in Encana during a year where oversupply for natural gas depressed all stocks related to the industry and the fact that Silver Standard lost 23% of its share price in one day after announcing reduction in reserve (how much silver is available to mine) and increases in production costs.

I have also included one of my favorite Canadian mutual funds in the table to illustrate how a different weighting (heavy in financials) would have impacted your returns. In 2011, while still negative this fund did significantly better than both my darts or the index.

So what conclusion can you draw from this experiment?  As anyone knows one year’s data isn’t worth much in the grand scheme of things.  Had the darts outperformed the index in 2011, I would have to reach the same conclusion.  I think what’s illustrative in this little demonstration is that by overweighing in specific stocks, you can skew the results significantly.  However, as you add stocks in your drive to diversify you will also drive your returns to match the index which means that if you are aiming to beat the index you won’t succeed (remember that there are always fees  even with ETFs).

So what to do?

“Don’t play the stock market” has always been my conclusion.  You don’t have enough time to be looking at the stocks, doing the research that’s required to “beat the market.”  If something like that exists then why are there so many advisors and analysts around?

Go back to your financial plan and see what return you need to grant you the goals you have set for yourself.  Create a portfolio that matches your risk profile and monitor it.  If need be, add more money into the pot, because savings are the best way to reach your goals.

Now if there is only a mutual fund out there that can give me 12% return….

Advertisements

Read Full Post »

It is March, when many of us realize once again that we have failed in our new years resolution made in the heady, early days of Jan 2012. For many, that would be sticking to a budget.  As a financial planner I often hear “I can’t (save, pay off debt insert as appropriate).  I never have any money left over.”  Next I get the inevitable question “what’s the secret?” Of course there isn’t any secret.  You just have to spend less than you make.

If you can’t do that naturally, then you have to trick yourself.  For budgeting the trick is to make yourself feel poorer than you really are and track how much you spend.

Now how do you make yourself feel poorer you ask?

You are not richer than you think  – How much do you make?  It is not the number on your job contract.   It is actually the amount you take home, the amount that shows up in your bank account every paycheck.

Now take it a step further,  subtract from the net paycheck the costs in your life that are non-negotiable such as rent/mortgage, utilities, insurance (health, home and car), debt payments.  Now how much do you have left?  That is all that you can spend each month- your living allowance.  Your 50K a year job has now just become a 25k a year job.  You are not as rich as you thought.

Now go around shopping with that number in your head and you’ll find that you make choices differently. It sounds obvious but try it, the difference it will have on your choices will be profound.

Track, Track, Track – Now that you know how much your are actually worth (feel poorer yet?) you need to track your spending. Just like any good diet program you need to enter your daily calories.  There are lots of budget tools out there that will help you such as mint. com.

However, I prefer something much simpler … an old fashioned spreadsheet.  On a weekly basis subtract how much money you spent from your living allowance. You don’t have to keep receipts; you don’t even have to track daily, because that would be a chore and you won’t do it.  Spend 15 minutes weekly (Mondays?) and update your totals from your credit and bank accounts and subtract them from your living allowance.  For credit cards you should use your new balances.  For your bank account use your total cash out flows (called debit), usually your bank have a handy summary at the top or bottom of your account details page.  This way you will always know how much you have left to spend for the remainder of the month.

Now before someone says “what about setting your budget and the different pots of money…. ” I say it doesn’t matter.  While detailed categorization of your spending will help you understand your spending patterns, this level of detail doesn’t help if your goal is to avoid overspending.  All that matters is that your spending never exceed your living allowance.  Whether you spent $400 on groceries or on a pair of shoes is irrelevant if you don’t have $400 to spend.

If you do these two things and make them a habit, you’ll find that you will be able to keep your spending under control.  I have been doing this for years and have managed to do well on this system.  However, once in a while I stop tracking for a month to see what happens.  What happens is that I spend way too much.  Last time I experimented, I spent twice my living allowance.  So back I go to tracking.

And that leads to my third trick.

Don’t give up – we all know it takes multiple attempts to quite a bad habit before succeeding and living within a buget is the same. You need to keep trying. Just because you overspent one month doesn’t mean you can’t stay on track the next month.  Just think of each month as a fresh new start.

So now that it’s March and you haven’t been sticking to your budget … it doesn’t mean you have failed for 2012, it just means you get to try again for March.

Good Luck.

Read Full Post »

« Newer Posts

%d bloggers like this: