Stock Market is often disconnected from the real economy

For years, I have seen many stock market bubbles form and then burst. Stock market experts seem to sing the same old tune. They are looking beyond present conditions toward what they believe will happen in the future. Bubbles usually form when there is too much optimism and tend to burst when the economic reality sets in.

The basic human suffering from Covid-19 gets more and more insane by the day. The reality on the ground is that the spread of Covid 19 is getting worse in the U.S. and other parts of the world, not better.

Why then have money managers continued to push stock prices higher?

1. They believe that whatever is happening today doesn’t matter, but it is where we are going tomorrow that matters.  In this case, tomorrow is 2021.
2. Government stimulus measures seem to have lessened some investor fears. The CARES Act, the $2.2 trillion coronavirus relief package issued one-time stimulus payments to American households. It expanded unemployment benefits and created a forgivable loan program for small businesses.
3. The Federal Reserve has also used aggressive measures to make sure businesses and municipalities can access ready cash.
4. Investor optimism has been buoyed by phased state reopenings that have begun across the country and the expectation of a vaccine.
5. There has been a rebound in consumer spending and some companies are rehiring.
6. A survey of financial advisors suggests they’re taking a rosy view over the long term. A quarter of advisors expect to increase their stock recommendations to clients over the next year.

Here is a dose of reality

It turns out that much of the S&P 500 returns come from just 10 companies: Microsoft, Apple, Amazon, Google, Facebook, Visa, Mastercard, Nvidia, Netflix, and Adobe. As a group they are up 35% since the beginning of the year. As a group, the other 490 are down more than 10%.

Just three stocks make up more than a third of the Nasdaq 100 Index. I bet you can guess which three. Apple, Amazon and Microsoft together are now valued at nearly $5 trillion. That’s larger than the entire economy of Germany and nearly the size of the Japanese economy

In a true bull market, you see most stocks rising, often to new highs. A rising tide should lift nearly all boats. The percentage of NYSE stocks closing above their 200-day moving average is only 37% but it was near 70% in January.

The market has already assumed that current earnings will be bad. Analyst earnings projections tend to overestimate even in good times and analysts tend to have a herd mentality, usually tracking one another. I found a chart by Jim Bianco to illustrate a possible valuation bubble.

 

The problem with stock market bubbles is you can never predict when they will burst. The most notable one was the dot com bubble that formed from 1995 to 2000 and burst in 2001. There are a few stocks today that are valued similar to some of the past dot com stocks.

Tesla is a perfect example, it has a market value of 262 billion based on sales revenue of 25 billion. You can also add Shopify to the bubble list that has a market value at 110 billion with only 1.7 billion in sales revenue.

Some economic reality may set in next week with the release of second quarter GDP on Thursday July 30. (Analysts are expecting a decline of 33%), along with Friday’s release of consumer spending, Chicago’s purchasing managers index (PMI) and consumer sentiment index.

 

 

Wall Street ignoring the economic pain on Main Street

Are you mystified that the S&P 500 is only down 13% from its February high and the NASDAQ is slightly positive year to date? You would think that all the bad economic numbers would dampen investor’s confidence in owning stocks. However, publicly trading companies on Wall Street have a number of advantages over Main Street.

1. When it comes to government bailouts and subsidies, large public companies seem to be first in line. There are always claims that help is needed to save jobs or what they produce is an essential product or service. However, many of these companies used their cash to buy back stock and pay big executive bonuses instead of saving for a rainy day. (Airline industry)
2. The Federal Reserve’s zero interest rate policy helps large public companies to sell bonds at low rates to stay afloat, a huge advantage over small and medium sized privately owned companies.
3. The Federal Reserve has the bond and stock market’s back.  They are adding liquidity to the bond market by buying corporate debt and even buying high yield or junk bonds to keep interest rates low. This allows even the worst run companies to avoid bankruptcy.

Why I think that Wall Street shouldn’t be so optimistic regarding an economic recovery:

I agree with comments made by Fed Chair Jerome Powell who cautioned of a potential credit crunch as stimulus dollars start to dry up. The result would be the loss of thousands of small and medium sized businesses across the country. Owners of many bars, restaurants, gyms and clothing stores have stated that they are fearful of being able to cover their operating costs while limiting the number of customers allowed into their premises.

So far, 32 publicly traded companies have already filed for bankruptcy protection under chapter 11 which leaves many of their employees, suppliers and shareholders high and dry. The economic pain from Covid 19 could be long lasting as more companies file for bankruptcy protection. The recovery may take some time to gather momentum as some jobs will never come back.

It is hard to comprehend that Wall Street is dismissing the fact that all the jobs that were created over the past ten years have disappeared in just under three months. . The weekly jobless claims will continue to be momentous and don’t included workers who want a full time job but are working part time. It also doesn’t include many Americans who are out of work and don’t qualify for unemployment insurance.

I wonder, is it even possible to get people back to work without safely opening up schools and daycares? France reopened their schools last week and 70 new cases of Covid 19 were found in seven schools forcing them to close them again. A new concern for parents is an outbreak of a inflammatory syndrome in children that is linked to Covid 19. Cases of Inflammatory syndrome  have been diagnosed in 27 states in the United States.

Doctors have warned that many U.S. states have reopened without meeting CDC guidelines. The number of positive cases have spiked already in 14 states over the past few weeks. A rising death toll in the U.S. hasn’t stop many Americans from avoiding large social gatherings, ignoring social distancing guidelines and refusing to wearing a mask. There is a high probability that another spike in cases and deaths will dampen consumer spending.

Lastly baby boomers, (60 to 75 years old) have the most disposable income and also face the highest risk of dying from Covid 19. As a baby boomer, I will be avoiding the all travel and leisure activities.

• Air travel
• Cruising
• Resorts and hotels
• Movie theatres
• Sit down restaurants
• Casinos
• Theme parks
• Sporting events
• Concerts

I will avoid anywhere there is large gathering or requires close personal contact.  I am not going to risk my life to get a haircut or go to my local pub to watch a sporting event. It is just a matter of time when Wall Street profits will be affected by lack of consumer spending.

 

Some investing ideas to endure this recession

The latest economic numbers seem to confirm my view that this recession is going to be worse than the last great recession. The U.S. first-quarter gross domestic product report of -4.8% underscores the economic devastation of the Covid 19 virus.  The contraction in GDP was the largest drop since late 2008. Keep in mind that shelter in place and social distancing was only started in March in North America.

The drop of -7.6% in personal consumption was double the rate during the worst point of the global financial crisis. Other areas of the economy that resemble the last recession is a decline of 8.6% in business fix capital spending. The U.S. unemployment claims hit 30 million in just six weeks and an estimated 9 to 14 million more claims were not made because of online claim application systems were crashing.

The great recession of 2008-09, taught me that interest rates are likely to stay lower for longer. The Federal Reserve didn’t raise interest rates until Dec 2015 keeping zero interest rates for 7 years. The current yield of 10 year U.S. Treasuries has fallen to half a percent, a level not seen during the last recession.

Pension plans and retired seniors require monthly income however current yields on treasuries, gov’t and corporate bonds are not going to be enough to meet their needs. It may take another decade before interest rates get back to a more normal level. I believe that investors will have no choice but to switch from bonds and buy dividend paying stocks.

Unfortunately, many companies are preparing for a long and deep recession by cutting their dividends or temporary eliminating them all together. For example, Royal Dutch Shell cut its dividend for the first time since World War II by 66%, General Motors suspended their dividend and share buybacks.  I have found many companies in a variety of industries that have also cut or suspended their dividends.

Mutual funds and ETFs (exchange traded funds) that specialize in investing in dividend stocks will have to adjust their holdings as more companies could join the dividend cutting or suspension club.

Why has the month of April seen the best stock market returns in decades.

• Some money managers are betting that the economy will rebound in third quarter of this year.
• Pension funds are rebalancing their portfolios by reducing their bond holding and buying stocks.
• The earlier than expected reopening of the economy is making investors more confident to buy stocks.
• Preliminary results that the drug Remdesivir reduces the recovery time for patients with the coronavirus and a hopeful development of a vaccine increased investors enthusiasm for stocks.

In my opinion, this looks like a sucker rally. The average recession lasts for about 11 months and the great recession that started in 2008 lasted for 18 months. Plus, medical experts predict that a second wave of this virus will hit in the fall.  Japan and Hong Kong have already seen a small second wave of the virus after reopening parts of their economies. I am in no rush to jump into this uncertain market. 

Looking back at the last recession, there are two sectors that I would avoid: energy (XLE) and financials (XLF), both underperformed the overall S&P 500 illustrated by the chart below which shows the performance of these two sectors from Jan 2008 until May 2020.

Two sectors that outperformed the S&P 500 during the same period were technology (XLK) and healthcare (XLV) illustrated in the chart below. Please note however, Amazon is not considered a tech stock but is included in consumer discretionary (XLY).

Stock pickers may have an edge during this recession. Over the past 10 years, the technology sector has outperformed the overall market thanks to the FAANG stocks. Individual investors who over weighted their portfolios with Facebook, Apple, Amazon, Netflix and Google had higher returns than most index and exchange traded funds.

I use a combination of owning some individual stocks and sector ETFs in my portfolio. Here are some telecommunication and pharmaceuticals stocks that are on my watch list which offer some safety and high dividend yields.

• AT&T (Ticker: T) yields 6.9%,
• Bell Canada (Ticker: BCE) yields 6%
• Orange (Ticker: ORAN) yields 6.5%
• Glaxosmithkline (GSK) yields 6%
• AbbVie (ABBV) yields 5.6%.

Common sense tells me that consumers will not be traveling, going to sporting events, movie theaters, theme parks, restaurants or concerts anytime soon. Many business can’t make a profit with current social distancing guidelines. It means that airlines will have to increase prices, many of your favorite restaurants will disappear and shopping online with curbside pick up will be the norm.

Warren Buffett has said “Never bet against America” and yet he is  holding on to mountains of cash waiting to buy. Sound advice during these turbulent markets. 

 

 

 

Signs that this recession will be more severe than 2008-09

 

The last time we had zero interest rates was during the great recession of 2008-09. If you are a movie buff, that was one scary horror movie. Unfortunately, the sequel maybe even scarier. The plot, so far, is similar in many ways. The world faces a major crisis with high unemployment, massive government spending (bailouts), zero interest rates and central banks printing money.

How do you make a horror movie scarier than the original? The writer has to intensify the plot line and add some terrifying developments not seen in the original movie.

• This crisis affects the whole world with every economy feeling the pain.
• The percentage of people unemployed could be worse than the great depression of the 1930’s (25% or more)
• The government stimulus package was in the billions last time and now in the trillions with more to come.
• Central banks are buying huge amounts of government debt and now are buying low grade corporate debt. (Even some junk bonds)

More terrifying developments

• Although tragic that many consumers lost their homes in the last recession, small business failures will have a more negative effect on the economy. Small businesses are responsible for employing 48% of the U.S. workforce and have generated 65% of net new jobs over the past 17 years. The unemployment rate will be higher for longer.
• Consumer spending accounts for 70% of economy growth. Unemployed consumers will have less money to spend. Plus, images of body bags and continuing daily death counts will inhibit consumers from risking their lives to go out and even spend money.  The last recession had little impact on travel, movie theaters, theme parks, sporting events, restaurants and bars. These businesses will continue to suffer until consumer confidence returns
• The last recession didn’t produce long lines at grocery stores. Disruption of food production was unheard of and has become a real concern as some meat packaging plants have been forced to temporarily shut down. A shortage of fruit and vegetables could be next as migrate workers could face high rates of infection.
• Normally a drop in oil prices has a positive effect on consumer spending but a total collapse does more harm than good. Oil companies have started to suspend capital expenditures, cut dividend payouts and reduced their workforce. Countries which depend on revenues from oil production will face large budget deficits making it harder for them to stimulate their economies.
• Food banks are experiencing a surge from a high number of people who have never needed their help before. Images of long line ups are popping up all over the United States.

 

 

• There was a coordinated world response to the financial crisis which is sorely lacking in dealing with this pandemic. Too many leaders are more concern with keeping their jobs than going their job.

 

 

The spread of misinformation by some world leaders and some media outlets could cause a second wave of this virus. The image below is an example of irresponsible leadership. Some of these people will get sick and some may even die. However, they will also spread the virus to their families, their friends and critical medical personal at hospitals. Being a Canadian, I hope that a change in leadership in the United States will help the North American economies recover sooner rather than later.

How will this horror movie end? My best guess is when a scientist shows up holding a treatment in one hand and a vaccine in the other!

 

Stay tune for some investment ideas during these turbulent times.

 

 

 

Op-Ed: I am less optimistic of a V shape recovery

It is difficult to write a financial blog when the death count from Corvid -19 keeps going up every day. However, the big question is when we will get back to normal? I think you have to look back in history at the Spanish flu of 1918 for some clues.

Policies used to reduce the spread of Corvid -19 are similar to what was done to reduce the spread of the Spanish flu. Unfortunately, isolation, quarantine of infected people, use of disinfectants and limitations of public gatherings were applied unevenly. (Sounds familiar?) Back then, the Spanish flu came in waves and infected 500 million people, about a third of the world’s population. It lasted from Jan 2018 until Dec 1920 and somewhere around 50 million people died.

I fear that world leaders are more worried about keeping their jobs then doing their jobs. Their slow reaction of issuing stay at home orders for non-essential workers will prolong the spread of the Corvid-19. In my humble opinion, a V-shape recovery is overly optimistic.

 

The roll out of government programs to get money into the hands of individuals, small business and bailouts of large corporation will take a long time to be effective.

• Many government websites are crashing from the number of requests for aid.
• Many small businesses will go bankrupt before the relief funds arrive.
• The aid to  businesses are in the form of loans which add extra operating costs, this will hider rehiring employees.
• The United States had 16.5 million unemployment applications over the past three weeks which is just a small sampling of what is to come.
• This is a world recession so leisure and travel will be impacted for a long time. Plus business travel, conventions and hotel stays will be limited.

The best case scenario would be a slow and cautious U shape economic recovery. What is needed is accurate testing of people who would be allowed to go back to work.  Also, a quick development of a vaccine and an effective treatment for people who are infected with the virus.

The worse case scenario would be an L or W shape economic recovery. Rushing to reopen the whole economy could cause a second wave of the Covid-19 outbreak, killing thousands of more people and shutting down businesses all over again.

I am not investing based on stock market experts who tend to be overly optimistic. I am listening to the doctors who specialize on disease control. Their timeline of a vaccine is 12 to 18 months away. Therefore this recession will probably last around 18 to 24 months. The chart below illustrates that happen to the S&P 500 during the last recession of 2008-09:

This chart illustrates the past two years of the S&P:

I am not an expert on charts but I think that there is a good chance that what we are seeing is a bear market rally. There is more bad news coming that hasn’t been priced into stock prices. I would suggest that you play it safe and sell into stock market rallies and hold on to your cash.

Save lives and stay at home. The life you save may be your own!

 

 

 

 

 

Should Trump should be charged with involuntary manslaughter?

If I was a U.S. prosecutor, I would charge Trump with involuntary manslaughter. In case you don’t know what that is; charges of involuntary manslaughter is defined as an unintentional killing that results either from negligence or recklessness. An example is a motorist driving under the influence of alcohol or drugs resulting in a deadly car crash killing another individual.

Trump realized that if the body count from COVID-19 in the U.S. reached pandemic levels during 2020, his re-election bid could be in serious jeopardy. On Jan 21, the first American was diagnosed with the virus. A day later in Davos, Trump was asked if he was worried about a global pandemic.

“No, not at all” he stated. “And we have it totally under control. It’s one person coming in from China, and we have it under control.

On Jan 30 during a campaign rally in Michigan, Trump provided an update on the spread of the virus in the U.S. to a rowdy crowd of supporters.

“We have it very well under control. We have very little problem in this country at this moment with 5 and those people are all recuperating successfully.”

On Feb 2, Trump bragged about his China travel ban on Fox News. He told Sean Hannity and a national audience that:

“We pretty much shut it down coming from China.”

Trump wasn’t quite ready to give up on his number strategy throughout February as he continued to claim the situation was improving. There are plenty examples of Trump being irresponsible. Here are just a few:

• On Feb 26, he said “We are going down, not up. We’re going very substantially down, not up.”
• On Feb 27, he bragged: It’s going to disappear one day, it’s like a miracle, it will disappear.”
•  On Feb 29, he said a vaccine would be available “very quickly and very rapidly” He praised his administration’s actions as “the most aggressive taken by any county.”

The case for Trump’s negligence is the mishandling of the test kits that were sent to laboratories around the country that had a technical flaw and didn’t work. Trump and his team weren’t worried and ordered the CDC to find a work around. The Trump administration also didn’t turn to the World Health Organization for its perfectly functioning test, nor did it remove regulations that prevented hospitals and labs from developing their own tests. Why? Trump remained intent on keeping the U.S. body count low.

Despite mishandling the production of test kits, Trump continues to make dangerous false statements.

On Mar 6 Trump said “Anybody that wants a test can get a test.” 

I could go on and on but this sums things up:

The mishandling of this crisis is reflected in the raising death count that was in the hundreds and now over a thousand. Why hasn’t he used the Defense Production Act to force companies to produce masks, protective equipment and ventilators which are in short supplies? Does Trump even care how many Americans are going to die?  He just wants businesses to re-open in time for Easter hoping that a strong economy and raising stock prices will get him re-elected. He should resign!!!

All state and local governments should ignore Trump’s call to re-open businesses! If not, then what is happening in Italy is only a few weeks away from happening in America.

 

 

Why interest rate cuts won’t save the economy or the stock market

This week, after an emergency call with central bank leaders around the world, the Federal Reserve cut interest rates. A somewhat surprising move coming about two weeks before its next scheduled meeting. It was the first emergency rate cut by the Fed since the financial crisis in 2008 and a strong signal that the central bank is taking the threat of the virus seriously.

The problem is that cutting interest rates, which were already very low, isn’t likely to do much to solve the kinds of economic problems posed by a pandemic.

Think of it like this: if more people get sick, more people can’t work. Businesses become less productive and ailing workers without paid sick leave don’t earn money. (They might also go to work sick.) Meanwhile, others who are either sick or afraid of catching the virus stop going out and spending money.

Restaurants, movie theaters, hotels and airlines have already experienced less revenue. More workers will lose their jobs temporary, so fewer people will have money to spend. Its classic cause of an economic downturn since the U.S. economy depends on consumers’ spending money.

Crucially, all the people out of work will still need money for food and housing costs. The new record-low mortgage rates aren’t going to solve that immediate problem, especially not for renters. Nearly 4 in 10 adults would have trouble handling a $400 emergency expense, according to a recent study from the Federal Reserve.

An economic downturn is coming, the problem is no one knows how severe it will be and how long will it last. China’s economy took a big hit and government took some draconian measures that can’t be done here in North America.

Some precautionary financial steps

1. Top up your emergency fund
2. Living pay check to paycheck: then get a line of credit or increase the limits on your credit cards
3. Start looking for day care services in case of school closures
4. Don’t put any new money into the stock market until the coronavirus is contained. (Too early to buy the dips, however make an investment shopping list)
5. Get ready to refinance your debt, but keep in mind that there could be more rate cuts.

Why you shouldn’t panic over a decline in stock market prices

The chart below illustrate what happen to stock market values during the financial crisis. (Jan 2008 until Mar 2011) The left side of the graph shows the market hit bottom in Mar of 2009 and recovered most of it losses by Mar of 2011. I not suggesting that this current market downturn will get that bad.

Keep in mind that the stock market has gone straight up since the market hit bottom back in march of 2009 with a few little blips. The chart below illustrates that the current downturn could be just another blip. This virus will only have a temporary effect on the economy and consumer spending will recover. People will travel again, visit theme parks, eat out and business will be profitable again.

Back in September, I wrote a post to reduce some of your risk and move some money into dividend paying stocks. I hope that you followed my advice.  Dividend income should help to offset some of the fall in value of your portfolio.

 

 

 

Is your emergency fund ready for the next recession?

Around this time last year, a U.S. government shutdown forced many  government workers to go into debt to pay bills and some even had to go to food banks to make ends meet. They eventually got back pay but it is a good example of why you need an emergency fund. According to a recent survey from Charles Schwab, 59% of Americans say that they are living paycheck to paycheck, despite the fact that the U.S. economy has experienced the longest expansion period in its history.

I have no idea when the good times will end. However, financial experts recommend having an emergency fund in case you lose your job. The financial rule of thumb is to cover 3 months of living expenses if you qualify for unemployment insurance and 6 months if you are self-employed. I am a bit surprised that they also recommend  the need to have funds available for unexpected car or appliance repairs. People who own homes or cars should include such repairs in their annual budgets.

I would recommend making two budgets, one for when you have a job and an emergency budget for when you lose your job. Divide your budget into needs, wants and savings. Needs are expenses you can’t avoid, like mortgage, rent, car loans, food etc. Wants are things you could do without if necessary, like clothes and entertainment. Saving for retirement, college or extra debt payments should also be excluded from your emergency budget.

Once you calculate your absolute bare bones budget, you can start to put money aside every month into an emergency saving account. With tax season just around the corner, you could jump start your savings but including any expected tax refund.

Tips for people living paycheck to paycheck or for those that can’t save fast enough

• Apply for a secured line of credit if you own your own home
• Don’t own a home, then apply for an unsecured line of credit
• Use a line of credit to pay off your credit card balances and put the interest savings into an emergency savings account.
• Worse case scenario: ask your credit card company to increase your credit limit.

Going into debt is not a great option but it is better than losing your home or having to sell your car.

 

Do you know the fable of the ant and the grasshopper? In essence, the ant spends all summer gathering food for the winter while the grasshopper sings and fiddles the summer away. When winter comes the Grasshopper has no food and found itself dying of hunger, while it saw the ants distributing corn and grain from the stores they had collected during the summer.

A recession will come, so be the ant and not the grasshopper!

How to keep your New Year’s financial resolutions for 2020

 

Nearly 70% of Americans are making a money-related New Year’s resolutions and more than half of those making one are prioritizing saving more, according to Fidelity Investments’ 2020 New Year Financial Resolutions study.

As well-meaning as we may be, around half of us failed to keep the financial resolutions we made this year. Change doesn’t come about because people want change so badly. It comes about because they plan it.

Here’s how to make a plan so you can actually accomplish three of the most popular financial resolutions for 2020.

“Save more money”

This goal won’t work for many people, because it needs to be more clearly defined.

• Make the goal as specific as possible: “Save $3,000 over 12 months,” not just “save more money.”
• The goal needs to make sense and be attainable with your skills and abilities.
• The goal should be important to you.
• You need to set a time frame for accomplishing your goal.
• The progress of your goal has to be tractable

Pay down debt

One method is call the snow ball strategy. You make at least the minimum payments on each of your debts, credit card, student loans, etc. and then put any extra money you have toward the debt with the smallest balance, regardless of interest rate or other considerations, so that you pay it off more quickly and have one fewer bill to worry about.

This method has a psychological benefit: Paying off one debt will keep you motivated to then aggressively pay off your next-highest balance and so on.

I prefer the avalanche method, where you focus on paying off the debt with the highest interest rate first. Mathematically, this method is more financially beneficial than the snowball method, because you’ll save more on interest payments. But you might lose steam if you’re not seeing quick results.

Spend Less

This resolution is probably the hardest to actually achieve because it involves making a budget so that you know how much you typically spend each month in major categories: housing, food, transportation, clothing, entertainment, etc.

Changing your spending habits can be difficult because you are pressured to spend from many different social media platforms. Seeing your family and friends post pictures of their vacations, drinking at their favorite pub or dining out with a group of friends are difficult to ignore.

I believe that in order to succeed you need to reduce but not completely eliminate your spending on things you enjoy. Step one is to breakdown areas that you spend too much money on, then make up some spending rules.

For example:

1. One common area of over spending may be going out for lunch every day. New Rule: Bring a lunch to work three days a week and only go out twice a week.
2. Another common area of over spending maybe ordering takeout meals. New Rule: Assign every other Friday for ordering a takeout meal.

Another concrete tactic for spending less: Institute “no spend” rules for yourself. If there are certain things you spend too much money on like books, clothes or entertainment, then set strict rules for yourself for a manageable amount of time, say a month or season. (i.e. no new purchases of summer clothes)

It takes a lot of will power and discipline to be successful in keeping any of these three financial resolutions. However, paying down debt and spending less will automatically lead to saving more.  To be really successful, you want to make sure your goals are attainable, but also that they make sense with the life you want to lead.

Some recommendations for new investors with not allot of capital

 

 

One Size Doesn’t Fit All

 

It has been a long time since one of my readers posed a question that could be answered in a blog post.

Do you have any recommendations for new investors with not allot of capital to start with? $5000 – $10000. Just wondering if there are any things you wish you knew when you started or good resources you would recommend for learning some important basics. Maybe even specific to Canada, allot of the books I have been reading are by American authors.

Before choosing what to invest in, you have to think about your time frame. Is this money going to be tied up short term (1 to 5 years) or long term?  Next you have to decide on a savings goal. For example; are you saving to get married, buying a home or saving for retirement. Finally, you have measure your risk tolerance.

Some short term investment ideas

Low risk investments are usually recommend for a short term saving goals. You don’t want to risk having less money then what you started with. Unfortunately, low risk means low returns. I personally like Exchange Traded Funds (ETFs) because the management fees are lower than mutual funds and they still offer the safely of diversification. Since this blog request came from a Canadian, I will use examples from a list of BMO’s Exchange Traded Funds

• Low risk – BMO (ZGB) Government bond ETFs – offers 2.5 return
• Medium risk – BMO (ZLC) Long Corporate bond – offers 4% return
• Medium risk – BMO (ZWC) Canadian Dividend covered call – offers 6.9% return
• High risk – BMO (ZJK) Corporate high yield bond ETFs – 7.25 % return

Some Long term investment ideas

• Low risk – BMO (ZBAL) Balance ETF – 61% equities, 39% bonds
• Medium risk – BMO (ZGRO) Growth – 81% equities, 19% bonds
• High Risk – BMO (ZNQ) Nasdaq 100 – 100% U.S. equities

When it comes to investing, Canadians have some flexible options. One of the best options is opening a Tax Free Savings Account (TFSA) with a discount broker; very low trading commissions and no tax payable on income or capital gains. It can be used for both short term and long term savings goals.

Another option for people who are in a high tax bracket is a retirement account as long as you take the tax refund and reinvest it. For example: Someone in the 35% tax bracket would get a refund of $3,500 with a $10,000 contribution into a retirement account. (RRSP- Registered Retirement Savings Plan for Canadians)

For small investors, I highly recommend using a Dividend Reinvesting Plan (DRIP). Most EFTs offer the ability to reinvest the income into additional shares with no trading costs. DRIPs use a technique called dollar cost averaging which allows the investor to buy stock as it moves up and down. A great way to compound your returns.

Finally some reading resources for learning some important basics:

1. The Wealthy Barber Returns
2. The Good, Bad and the Downright Awful in Canadian Investments
3. Canadian Securities Text Book ( buy it used on Kijiji )

Please do your own research, examples in this post are not recommendations.  

Merry Christmas!!!