Tag Archives: S&p 500

Financial Goals – What It’s All About

financial-goals

What am I saving money for?

For myself, this is the most important of all financial matters to get right. If I didn’t have a financial goal, I would simply lack the motivation to save. Having a goal constantly reminds me of what I’m working for, and gives me a light at the (far) end of the tunnel. To me, it is the most reassuring thing to think about after a rough day, knowing a plan is in place, and underway and that I’m not simply spinning my tires.

As I mentioned in my first post, my personal financial goal is to become financially independent as soon as possible. How will I be financially independent? I will be living off the the interest of my savings! The S&P 500 has a long term annual return of 12.65%. If you had $1,000,000, that would be $126,500 in interest a year! Of course, once you factor in inflation, fees and taxes, you would be looking at a more modest, but still ample, return.

My goal helps me in more ways than giving me a sense of purpose, it also helps me know where to put my money. The S&P 500 is a great long term (at least 5 years) investment, which is what I need for my personal financial goal.

But what if your reason to save money is more short term? What if you are saving up for a down payment on a house, or something that will require you to spend your money within 5 years?

The S&P 500 is pretty safe as far as stock investments go. But it still has its down years, like 2008, the year of the great recession. Had you invested at the end of 2007, it would have taken 5 years for the S&P 500 index to grow back to the price you bought it at.

If you are investing for the short term, that probably means you have something fairly specific in mind you want to buy (house, car, vacation, etc). If you say “I want to save up $100,000 for a down payment on a house in 5 years,” you may value the added certainty of knowing your money will be there in 5 years with a little bit of interest accrued, rather than be less sure your money will be there in 5 years, but with more interest accrued. The cost of safer investments is a lower return, and is a cost worth bearing if you are looking for a more short term place to invest your money.

For shorter term investments, I suggest looking at government bonds, GICs, or even a high interest savings account. There are also many safe mutual funds and Exchange Traded Funds (ETFs) that will also achieve the same effect. They will not grow your money much, but they are very safe. The small amount they grow is better than nothing. Having anything offset the constant encroachment of inflation is important. And if you need a place to stash your cash short term, these are great savings options.

 

 

Taking Action – Buying Stock

taking action - buying stock

Tired of savings accounts that lose you money? Want more growth and less fees than your bank’s mutual funds can offer? Thinking about giving the S&P 500 a whirl, but don’t know where to start? This post is for you!

Last week, we looked at stock markets and how their purpose is to let the public buy and sell shares in publicly traded companies. I mentioned that to invest in the S&P 500, you’ll need to buy an Exchange Traded Fund (ETF), like Vanguard’s S&P 500 index fund.

In order to buy and sell shares on a stock market, you need an stock broker, someone who has gone through various training programs and is regulated by the stock exchanged they work on. A stock broker is traditionally a person who takes buy/sell orders from individuals and fulfills those orders on the stock market floor by yelling and screaming at other stock brokers. Stock brokers usually charge a commission on every trade, that means if you want to buy some shares in company A and sell shares in companies B, that would be 2 separate trades, and your broker will charge you for each.

These days, the job of stock broker has been largely replaced by computers. So what we really need is a web broker. For you and I, a web broker is a website where we fill out a form specifying how many shares to buy or sell, at what price, etc. We then hit ‘Enter’ to buy and sell stocks. The web broker then trades your money with another web broker. The whole transaction could take seconds.

There are dozens of web brokers to chose from and every major bank in Canada has one, they are cheap and easy to use. How cheap are they? Well, that depends on what kind of investing you’re going to be doing and how often. As I mentioned, they will typically charge you per trade and web broker prices currently range from limited-time-free to $10 per trade.

The cost of a web broker is a fee, the third prong in the trident of costs (taxes and inflation being the other 2) and means that if you want to invest money every month, that could be $120 per year, which won’t be that big in the grand scheme of things, especially compared to some mutual fund fees. But I suggest planning on buying shares of TSE:VFV every 3 or 4 months to cut down on fees. Some web brokers can set up automated buying so all you need to worry about is having money in the bank.

Finding and opening a web broker account is easy. I would go to whoever your current bank is and tell them you’d like to open a web broker account. Here is a list of the 5 big banks and their web brokers:

If you aren’t with any of the above banks, you can still open a web broker account with them, or google around for another one. As long as the web broker allows you to trade on the Toronto Stock Exchange (TSE or TSX), you should be fine.

To open a web broker account, I would suggest physically walking into your bank and telling them that you want to open a web broker account, and someone will meet you to go over whatever steps are needed to setup an account. The banks do all the work for you, but there are quite a few forms they have to fill out, the process can easily take 30 minutes.

I would open up a web broker account for your TFSA, and a second web broker account for your RRSP. This will allow you to transfer money into your tax sheltered accounts, and buy and sell as much as you want without incurring any taxes. You would only pay taxes when you withdraw money from your RRSP web broker account. You will never pay any taxes on money withdrawn from any TFSA account, and you are able to withdraw money from your TFSA whenever you want.

Once your account is open, and you have a trading password, you are ready to buy a stock! The stock we want to buy is Vanguard’s S&P 500 ETF I mentioned earlier. It trades under the symbol: TSE:VFV.

This means <stock exchange>:<company stock symbol>, so TSE is the stock exchange, VFV is the symbol of the fund or company we want to invest in.

Things you’ll need to know to buy stock on any exchange:

  • The account the funds to make the purchase are coming from.
  • The action you wish to take (buy, sell, other stuff we don’t care about).
  • The company symbol.
  • How many shares you want to buy.

When deciding how many shares to buy, remember to factor in any web broker fees. If you have $1000, you can only buy 9 shares that cost $100 (9 x $100 = $900, + $6 (web broker fee) = $906)

You can buy VFV from your web broker’s website, or you can phone up the web broker directly and have a human to actually make the trade for you. Note that web brokers are neutral parties when buying/selling shares. They will not give you investment advice, so don’t bother asking them if buying particular shares is a good idea.

Don’t bother trying to time when you buy the S&P 500, in the long run, that won’t matter. Once you’ve bought your shares, hold them. Literally do nothing for decades and watch the value of your investment grow.

Stock Exchanges – The First Sharing Economy Market

exchange

A stock exchange is really a large auction, like ebay, but for company shares. Stock exchanges allow anyone with a bank account to buy shares in companies and Exchange Traded Funds (ETFs). Companies sell small amounts of themselves to the public in exchange for ownership shares in an Initial Public Offering (IPO).

For example, Acme Inc might try and sell 1,000,000 shares of itself for $50 per share in order to raise $50,000,000, or more if investors think Acme Inc is going places. If things go well for Acme Inc, they will have traded tiny slices of ownership for at least $50,000,000. This would be called Acme Inc’s IPO, they can then use the new money to invest in their business (maybe acquire a rival, update their factories, etc).

IPOs also allow founding shareholders the chance to sell some of their shares to the public for what can be a small fortune.

For Acme Inc, raising money on a stock exchange might be better than borrowing money from a bank, or raising $50,000,000 from one person or small group of people who would then be able to exert control over the inner workings of a company.

Companies that have shares on a public exchange, like the TSE or the New York Stock Exchange (NYSE), are called ‘public companies‘ because any member of the public can own a part of these companies by buying shares on a stock exchange. Companies on exchanges are subject to various rules and restrictions though. For example, they have to publicly announce the status of their operations and finances every 3 months (quarterly reports), they have to publicly declare who is on their board of directors, which typically represents the biggest share holders of a company. Also, their finances have to be in good shape, or they will kicked off the exchange.

Most of the time, when you buy shares on a stock exchange, you are not buying them from the company you wish to invest in, but from another investor. You are only buying shares from a company directly if it has an IPO, or secondary public offering, or third, etc. Otherwise, you are buying from another investor. It is important to know that people will sell shares for many reasons, but will generally only buy shares in a company if they feel that the worth of the company will go up.

And the worth of the company is often described as its market capitalization: the number of available shares it has, multiplied by the value of each share. So Apple, the largest company in the world currently, has a market capitalization of $740 billion, and a current share price of $127.09, making the number of Apple shares available at 5.8 billion. Market capitalization is generally considered how much it would cost to buy a publicly traded company, if you wanted to completely buy Apple, the company, that would cost you $740 billion today.

But we’re not looking to buy a company, only the S&P 500. Our next step is setting up a self directed investment account.

In order to invest your money with the S&P 500 you need to open a special kind of bank account, a self directed investment account. Because the specific S&P 500 investment we want to make takes the form of an ETF, we need access to the Toronto Stock Exchange (TSE).

The S&P 500 itself is an index, an index that can be easily duplicated with a basic formula. Other financial companies have created funds using this simple formula, and made these funds available on the TSE, Canada’s main stock exchange.

The S&P 500 – The Best Way To Save Your Money

s500

Last week, I talked about mutual funds and how they are able to grow your money much better than savings accounts. One of the problems with mutual funds is that there are so many to choose from. Personally, I just don’t have the time or desire to really hunker down and maul over financial details of funds, what they are invested in, and how much.

And that’s a real problem. When I didn’t know any better, simply being shown an impressive graph of a fund with a name like ‘Mackenzie Ivy Foreign Equity-A’ by a financial adviser with a reassuring smile was all I needed to invest.

It could well be that Mackenzie Ivy Foreign Equity-A is a great place to invest your money, but I personally don’t know. And I don’t really care either because I don’t have the time to research mutual funds, and quite frankly, I find it really boring.

As I mentioned in my first blog post, I have things I want to do with my one life. I have ambitions and passions to pursue, and the sooner I can stop having to work for the Man, the sooner I can really focus on doing the things I want to do. This means that my free time now is also valuable, too valuable to waste researching boring things.

Like many before me, I thought to myself, “Surely, someone has figured out the best place to put money, this must be a solved problem.”

After a short search, it was revealed to me that the Standard & Poor’s (S&P) 500 was such a place and that it was actually a well known solution amoungst investor types. Indeed, Even Warren Buffett, the most successful investor of the 20th century, where he amassed most of his staggering 72 billion dollar fortune, has very publicly endorsed the S&P 500 as the best place for the average person to put their money.

The S&P 500 itself isn’t a fund, it is an index: a list of 500 large companies publicly traded in America that basically make the world work. Companies are put on or taken off the list based on specific criteria by a committee.

In its current form, the S&P 500 has been around since 1957. The way the index is calculated is pretty simple: Add up the capitalization (number of company shares multiplied by the share price) of all 500 companies in the index, and divide by ‘the Divisor’. The Divisor is technically proprietary info owned by the people who manage the S&P 500, but it is approximately 8.9 billion.

The math behind the S&P 500 is basic: the sum of the capitalization of the companies in the S&P 500 index is something close to $18.8 trillion, divide that by 8.9 billion and you get 2108.10, the S&P 500 index as of March 20, 2015.

Because the index is based on the stock market share price of each of the 500 companies, the better individual companies do, the higher the S&P 500 index goes. Over the last 5 years, the S&P 500 index has gone up an average of nearly 16% per year. Over the last 20 years, 11% per year. Over the last 100 years, 12% per year. At 12%, you are doubling your money every 6 years, $100 with the S&P 500 could become $200 in 6 years.

Of course, it’s not quite that straight forward. The S&P 500 is not a fund, but and index. There are several funds, however, whose sole purpose is to emulate the index for as cheaply as possible. But there are still three largely unavoidable costs that will effect all investments: taxes, inflation, and fees. These costs will chip away at what you actually end up taking home on any investment.

But as far as investments that require the least amount of energy go, it’s hard to beat the S&P 500. There are all kinds of companies in that index that you use every day: Disney, Visa, Apple, Starbucks, Black & Decker. Other well known companies like Boeing, P&G, Gap, Staples, Ford, Whirlpool and Google are also included.

The S&P 500 is a very diverse investment. The individual companies that make up the index make your world go round: they mine natural resources, build all the stuff you use, move goods, grow food, make the internet useful, provide electricity, entertain you, cloth you, etc. It is a single investment in 500 companies that gives you a little part of every industry. And it is good to be diversified, because unseen things always happen. I sure wouldn’t want all my life savings tied up in only Starbucks if a mold that killed the worlds coffee crop broke out (god help us…).

Fees are another strength of the S&P 500. Because the index is easily calculated and publicly available, software can easily do the job of fund managers, significantly reducing fund fees. My preferred S&P 500 ETF (Exchange Traded Fund) is Vanguard’s, its management fee is only 0.08%.

So how does one put their money in the S&P 500? To answer that, we must first consider some new realities, namely, the incredible amounts of money one can make. Consider having $100k in the S&P 500, it is possible to double that in 6 years. That’s an average of more than $15k per year of investment income. Imagine having $10 million in the S&P 500?

The government is fully aware of the massive potential for income on investments, and has taxes in place to rain on a good investors parade.

Taxes are a problem well known by Canada’s wealthy, where solving the problem of having to amass a fortune becomes the problem of finding the best way to avoid taxes when withdrawing from said fortune. But for anyone who plans to someday live off interest from investments, knowing how to avoid taxes from the start is key.