Fabulously Broke’s Retirement + Investment Primer – Pt. 3: Find your inner investing Evel Knievel

DISCLAIMER: This is totally from my own personal experience and point of view. I am not a professional financial advisor, nor do I claim to be one. I’m just a girl trying to make it through the world and pass on what I’ve learned so far from reading, talking to others, and by trial and error. I’m also purposely keeping it simple.


Determine what kind of risk you’re willing to take

If you’re in your 20s – early 40s, you can afford to be a moderate to high risk investor. This means that you can afford to weather the ups and downs in the stock market with your investments. So if your investments drop to nil overnight, you know you still have a good 40 to 20 years ahead of you to wait for the stock market to go up and recoup itself (which it normally does). The stock market has historically returned an average of about 7% – 10% over the past 50 years. Some years are bad, some years are good.

And if you get a company match and can allocate the cash of the company match however you want, go for broke! Invest it in the RISKIEST fund possible. Why? Because while you may lose the money, it isn’t yours yet, because you haven’t vested into it (some vesting plans take from 2-5 years of working for the same company before you get to keep their money). So if it loses cash, oh well. It isn’t yours. If it gains big because of your risky nature, all the better when you finally get vested in the company and get to keep it, but if it loses money AND you stay with the company, it’s still a win-win albeit a smaller victory because it’s still free money you didn’t have 2-5 years ago.

If you are in your 40s or older, and you are basically looking towards retirement, your portfolio (collection of stocks/mutual funds etc in your RRSP savings account), should have more stable investments, or “low risk” investments. This includes bonds, GICs (government issued credits), or basically anything that guarantees you a certain rate of return over whatever period you choose. But I don’t advocate putting your money in bonds (you will read why below), because you can get better-than-bonds-interest in a high interest savings account or a money market fund that guarantees returns/income just like a bond or GIC would. But for now, I will refer to any fixed-income asset as “savings bonds” or “bonds”, just for the sake of simplicity, but just keep in mind that I really mean a stable/guaranteed return and income on your money.

So for example, you may have $1000 worth of stocks in your portfolio, but if you want to retire in the next year or so, and can’t afford to have the stock market plummet over night and lose the entire $1000 and leave you with $0.01, then you switch the $1000 into savings bonds, and buy $1000 worth of 1-year, 5-year or 10-year bonds, depending on when you think you may need the money, and watch it grow at a prescribed interest rate of let’s say 5% or 6% every year. Then at the end of the length of your bonds that you purchase for $1000, you get your $1000 back (guaranteed), plus the 5% or 6% interest on top of it. The only caveat is that these bonds are not liquid. If you need to pull the money out before the bonds mature (or when they reach the end of their date, either 1 year later, 5 years later or 10 years later), then you WILL pay a penalty. If you need your cash to be more readily at hand (not under your mattress I hope!), you can put it into a savings account instead, and earn at least 4% back every year on it. It won’t earn you more, but at least it’s there in case anything happens and you need the money right away.

The general rule of thumb for investment/wealth allocation is 1/3 of it in bonds, 1/3 of it in real estate and 1/3 of it in stocks/mutual funds

Now, I don’t follow that myself because at my age, I’m able to weather heavy risks at this point in my life, and I don’t own any real estate. So in actuality, 100% of my investments are in stocks right now.

Once I get a home, it may go down to 90% of my investments in stocks, 10% in real estate, until I keep paying down the mortgage and little by little, earning each square footage in my home (or otherwise called “building home equity”) to make it equal to 33% of my investments/savings.

Personally, my portfolio looks like this: 50% in an index fund, 30% in an international stocks (super risky), and the rest in domestic stocks (Go Canada! Even though you’ve JUST jacked up my interest rates because we’re doing too well and its hurting our imports).

You may be asking: why no bonds in your future, FB?

Warning: FB personal opinion up ahead… 😛

Well I don’t really like/believe in bonds because what I do have to point out as ironic is that the PC Financial and ING Direct Savings high interest-accruing accounts at 4% and 4.25% respectively are still higher than what the Canadian “Premium” Savings Bonds are offering, at 3.15% for the first year you have your money in the bonds, 3.25% for the second year and 3.35%. And in fine print in case you missed it on the page: *Annual compound rate of 3.24% if held for 3 years. See the rates here from the horse’s mouth.

So I said: Gee Canada, I thought we were buying SECURITY and STABILITY when we buy Canadian bonds, while getting a guaranteed return (that barely clears inflation at 3%), but hmm, it looks like PC and ING offer HIGHER interest that grows with every year we keep our money in the bank (only if you keep a balance of $1000.01 or higher), AND you can see it in your bank account on a daily basis, with no locked-in period unlike what you offer. Even the Canada Savings Bonds are only offering 3.10%.

Boy, they sure fleeced my mother-in-law when they got her to lock in her money for 5 years at these ridiculously low rates. She would’ve been better off throwing it into a high interest savings account, but after she found out how low the interest rates are and how silly it was, she vowed never to buy bonds again. Goes to show, don’t just trust conventional wisdom and invest 1/3 of your wealth in bonds because others “said so”. Sure, the security and stability are there, but it’s also there if you hide it under your mattress, or in a higher-yielding savings account.

So for right now, since the Canada Bond interest rates are awful (and have been awful since the 1960s when the government once offered up to 19%+ interest rates on bonds, and then dropped it down considerably) and compared to PC and ING’s “high”-interest savings accounts, it bear repeating again:

Don’t give our Canadian government your money.

They not only tax the hell out of us and seem to want MORE money (have you seen that housing transfer fees may go up?), but what they really need to do is take some SERIOUS government financial planning courses, and first sort out the mess that is Old Age Slush (OAS) Fund, Canadian Pension Plan (CPP) and figure out how to pay BACK all the money they conveniently borrowed from the retirement fund to pay for their own little pet projects.

Also, I’d like to know their plan for how they’re going to feasibly pay OAS and CPP retirement pensions for all the baby boomers that are going to be retiring soon, without raising taxes on the younger generations and starting an all out revolt – because you know I’mma be leading that.

Those taxes we pay right now were supposed to be TEMPORARY long long ago, but like a person addicted to a luxurious high income lifestyle, they spent and spent that extra cash flow and never learned how to cut back and give us a break.

If the government gave us DECENT interest rates at 6% or even 7% (net 3% and net 4% after inflation), I’d completely be in favour of signing up to buy bonds for the security factor. But unfortunately, tis not the case.

Ok that’s the end of my mini rant against the Canadian government and their fiscal (ir)responsibility…. now on to the fun stuff. Next part #4 of 6 parts will be: What to look for in a mutual fund. You can read all of my previous parts under “TIMELESS FABULOUSITY” on the right-hand sidebar of my blog.

Update (Jul 17 2007): I eat some of my words. 🙂 Not all, but some. ScotiaBank is issuing GICs at 4.85%, minimum $1000, locked in for 2 years at that rate.

Quick preface before Part 4: Your total options for investing are: individual stocks, mutual funds, bonds/other similar fixed income with a low interest rate returns, or real estate. That’s it. Nothing fancy to it.

I don’t like individual stocks because putting all your eggs into one stock is quite risky; I’ve already said why I don’t like bonds/similar fixed income assets, and you already know what to do with real estate. 🙂 So I’m going to concentrate on mutual funds as my preferred form of investing. Not to worry, I’ll explain how they work and what it really means, in simple terminology.

About the Author

Just a girl trying to find a balance between being a Shopaholic and a Saver. I cleared $60,000 in 18 months earning $65,000 gross/year. Now I am self-employed, and you can read more about my story here, or visit my other blog: The Everyday Minimalist.