5 Investing Mistakes to Avoid

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Take a good look at the above picture! Notice the date, Sept 24/80 and the price of silver was $24.20 per ounce. Look at the exchange rate between the Canadian and U.S. dollar (1.1685). That was the first investment that I made excluding the purchasing of my first home. The current price of silver is around $16.50 an ounce. Yes, I didn’t avoid the following mistakes:

Mistake #1 – Herd mentality, investing in something just because everyone else is going it, not a good way to invest. The price of silver went sky high only to come crashing down.

Mistake #2 – I knew nothing about the silver market, had no idea why prices were moving up or down. I learned a valuable lesson, never invest in things that you don’t understand.

Mistake #3 – The price that you pay for something at a particular point in time has little to do with its future value. The price of silver didn’t bounce back to the $24.00 level until 2010! (30 YEARS LATER)

Mistake # 4 – Admit that you made a mistake and take the investment loss. Investors have a hard time taking a loss, holding on too long will only increase the amount you lose.

Mistake # 5 – I didn’t take into consideration that investing in another currency not only adds costs but additional risks. ($485.21 U.S. cost me $566.97 Canadian)

Silver_price_in_USD

I still own the bar of silver as a reminder that I can make investment mistakes. Yes, I was young, in my late twenties  at the time. However, I still see people make those same mistakes today.  I take it out and show young people that my wisdom comes from making mistakes. Avoid them if you can but also learn from them. Most important, try not to make the same mistakes over and over again.

I plan to share other investment mistakes that I made in future blog posts and some that I managed to avoid.

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8 Yearend Tax Planning Tips

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With only _______ shopping days before Christmas and you want me to read a blog post about tax planning?   Sounds crazy, but not everyone celebrates Christmas, almost everyone pays taxes. You could be glad in April because tax planning now could generate a tax refund. (You could  even pay for next year’s Christmas presents.)

Tip 1

Get out your lasts year’s tax return and see if this year’s income will be higher than last year. Will you be in a higher tax bracket? If yes, an extra contribution to your tax deductible retirement account could generate a bigger tax saving.

Tip 2

Add up your medical bills from this year and compare them to last year. If you have spent less, you may want to reschedule your dentist appointment from early January to December. Why wait until next year if you need new eyeglasses, buy them now. Planning a winter vacation that requires medical shots, get them now.

Tip 3

Add up your charitable donations and compare them to last year. If you have donated less or nothing at all, now would be a good time to be generous. Wealthy people donate stocks, ETFs and mutual funds that have a capital gain instead of money. They don’t have to pay any tax on the gain and they get a bigger tax deduction.

Tip 4

Have you sold any investments in 2014 that will generate a capital gain? Consider doing some tax loss selling of investments that are underwater to offset the capital gains. A capital gain loss can be carried back 3 taxation years to offset capital gains incurred in that year. You can always buy them back later. (You will have to wait 31 days to re-buy to avoid “superficial loss rules”)

Tip 5

Postpone selling your investment winners in non-registered accounts until Jan to avoid paying tax in April.

Tip 6

Look for ways to legally split income by transferring income producing assets to family members that are in a lower tax bracket.

Tip 7

Getting a big year-end bonus? It may be better to postpone getting it to January or have your employer deposit the bonus directly into your retirement account!

Tip 8

Check to see if there are any changes to tax laws that could affect your tax return for 2014 & 2015. There could be some new tax deductions or some loss deductions.( in Canada, a safe deposit box is no longer tax-deductible)

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The tax man is happy to pick your pockets for more money. It is up to you to legally avoid paying them too much. Remember, rich people stay wealthy because they can afford the best tax specialist to reduce the amount of tax that they pay.

Teaching Kids the Joy of Giving & Save Money

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It is the season for spending. American Thanksgiving is only is only a week away. Black Friday in the U.S. is the biggest and busiest Christmas shopping day of the year. Retailers are going to entice you to spend more than you had planned. Some of them even plan on staying open on Thanksgiving! It is sad but many families will go into debt this year by over spending. I find it depressing that exchanging gifts has become the focal point of Christmas.

For me, the magic of Christmas is spending time with family and friends. It is a time to be thankful for what we have and help those who are less fortunate. Don’t get me wrong, I love to watch children opening presents on Christmas morning, getting down on the floor and playing with them. But let’s put some focus on the act of giving and not receiving.

Some Gift Ideas for Kids to Give

  • Letter writing – If they are old enough to write a letter to Santa then get them to write a letter to grandma & grandpa telling them why they love them so much. (Expect some tears of joy)
  • Homemade gifts- there are many cheap crafts ideas available for kids of all ages that can be make into gifts. If you like to bake, get your kids to help make cookies to give as presents.
  • Donate toys– go through their toy box and encourage them to give away a toy to your local charity.
  • IOU coupons – to make dinner, take out the garbage, clean the house, wash the car….etc
  • Use part of their allowance– take your children to the grocery store to buy a small food item to give to your local food bank or buy a new toy to donate to charity
  • Donate Time – get your children to donate time to a charity like helping out at your local food bank, better yet, go together
  • Be a role model– show them how you give to those who are less fortunate
  • Christmas movies – watch them as a family to reinforce the concept of giving

There are many Christmas movies that are ideal to reinforce the concept of giving. My two favorites for young children are Dr. Seuss “How the Grinch Stole Christmas” and “the Muppet Christmas Carol”! Make sure that you watch as a family and make it an annual tradition.

Save Money

  1.  Homemade gifts are not only a great way to save money but could be appreciated much more than a store bought gift.
  2.  IOU coupons for; a home cook meal, a Sunday afternoon to watch a sporting event on T.V., instead of a gift card for the movies, go with them, time spent with family & friends is a great gift, use your imagination.
  3.  Donate to Charity, pick the person’s favourite charity, not only does it help the less fortunate but you get a tax deduction.
  4.  Secret Santa, for large families, reduce the number of gifts, put family names in a hat and pick one to buy a Christmas gift.
  5.  Steal a gift, everyone buys or makes a gift, set a dollar limit, a number is put into a hat for each family member, each person draws a number out of a hat and #1 picks a gift, #2 can steal #1’s gift or pick another one, the stealing is over when the last number picks the last gift. Great fun for young & old.

Some of my fondest Christmas memories was  playing rummoli on Christmas Eve and  watching “It is a Wonderful Life” and “Scrooge” with my teenage daughter. (Scrooge with Alastair Sim 1951 is our favourite)

If your children don’t learn the joy of giving when they are young, don’t expect them to be generous as adults.

 

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Understanding Investing Risks

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Would you be surprised to know that the cash, in your wallet, under your mattress or in a savings account at your bank is not safe? The purchasing power of your cash is subject to inflation risk. Over time the cost of goods and services go up in price. The consumer price index that measures inflation does not even include the cost of food or energy.    (Where is the logic in that?)

Inflation can also be imported from trading partners due to the changes in value of your currency. If you are Canadian, your trip to Florida this winter is going to cost you more because of the drop in value of the Canadian dollar against the U.S dollar. If you are American, coming to Canada for a summer vacation just became cheaper.

Risks in Owning Bonds

  1. Inflation Risk: if the yield on the bond is less than the inflation rate than you will still be losing money.
  2. Currency Risk:  foreign bonds are subject to fluctuations in currencies. Americans who bought Canadian, Euro or Japanese bonds have lost money because of the increasing value of the U.S dollar compared to other currencies.
  3. Interest Rate Risk: people have a hard time understanding that raising interest rates are bad for bonds. For example, a $100 U.S. ten year bond is paying 2.3% interest, if rates go up to 3% than that same bond would drop in price to $99.32! Why would an investor pay $100 for a bond that is paying 2.3% in interest when they can buy a $100 bond paying 3%?
  4. Credit Risk: corporations, local governments and even countries can default on paying back interest and principal. The City of Detroit and Greece are just two examples of where bond holders didn’t get their principal back but were forced to take a small percentage of their original loans.
  5. Liquidity Risk: most investors purchase bonds using ETFs or  mutual funds, you should be aware that a mutual fund manager may be force to sell bonds at a discount due to large redemption requests. Even bond ETFs could be difficult to sell if there isn’t enough units sold to investors.
  6. Market Risk: excess fear can cause investors to sell their bonds at any price during a financial crises like in 2008!                                                                                                                                                                                             Risks in Owning Stocks

    Stocks are considered risker than bonds because they share some of the same risks as bonds plus a few more. Here are some brief explanations:

  • Inflation Risk – Companies’ costs raise but can’t increase prices due to strong competition
  • Currency Risk – Foreign sales lose value because of currency fluctuations
  • Interest Rates Risk – Companies borrow money to expand, higher lending costs reduces profits
  • Credit Risks – Companies do go bankrupt for a number a reasons
  • Liquidly Risks– Penny & small cap stocks don’t have very many shares in the market to trade
  • Market Risks – Investor’s fear & greed make stocks go up and down in valuation
  • Economic Risks – periods of slow growth and recessions cause stock prices to come down
  • Government tax policies – increases in corporate tax, personal income taxes, payroll taxes and foreign tax policies can effect profits
  • Criminal Actions & Lawsuits – bribes to get contracts, insider trading, executive fraud and class act lawsuits like GM had to face over the deaths caused by faulty car parts
  • Wars, political upheaval, weather

    Risk is a part of life, do you stop driving your car to work because there is the risk of getting into an accident? Of course not, you drive defensibly, obey the rules of the road and drive according to the road conditions. Unfortunately, that doesn’t prevent some idiot driver from hitting your car.

    Markets are made off any kinds of investors, the smartest and most experience investors can still lose money but they do know the risks. Sometimes even idiots can make money but over the long run it is the smart and experienced ones that come out ahead.

    Educate yourself, know the risks, gauge the market conditions, learn from your mistakes and don’t worry about losing money. Remember, even Warren Buffet has made some bad investments. He bought Dexter Shoes in 1993 and lost 3.5 billion dollars!!! 

     

 

Talk to your Elderly Parents about Money

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I believe in planning for the worse and hoping for the best. Money conversations between parents and adult children can be difficult. Don’t wait for tragedy to strike before talking about issues such as your parents’ estate planning wishes and elder care issues.

Initiate the conversation early while both of them are healthy. Don’t be shy about bringing up detailed questions. Like “have you updated your wills lately’? How about power of attorneys for financial and medical matters?

Before going on a vacation, my wife and I would tell our kids “The will is in the safe” It was not intended to scare the kids but to let them know that we have planned ahead. We inform them that in the safe was a contact list for our insurance agent, lawyer, accountant and investment advisors. We also included an inventory of all  assets and liabilities.

Assets and liabilities to inventory could be:

  • real estate (residence, vacation home)
  • investments
  • retirement accounts
  • insurance policies
  • annuities
  • interest in a business
  • checking and savings accounts
  • safety deposit box number and location of the  keys
  • art and collectibles
  • cars
  • credit card debt
  • mortgages
  • other loans outstanding

Don’t be surprise if your parents refuse to discuss exact figures, in their minds you are still children. However, it is important that they compile the information so that the surviving spouse or children can deal with financial and medical matters.

These issues can be really difficult

  • Where will the money come from in the event of a long-term care situation?
  • Who will take over your parents’ financial affairs in the event they become unable to do so?
  • What are your parents’ wishes, including disposition of their assets upon their death, burial, staying in their home, etc.?
  • How to transfer your parents’ wealth to the next generation to avoid taxes?

If you are like me and have already lost one parent, you can not delay in having “the talk”! There are no issues with my siblings as to who does what because I am an only child. No doubt, this will be a difficult situation with siblings.  Getting everyone to agree on a course of action will take time and be prepared for some conflict.  Check your emotions at the door and do what is best for Mom and Dad.

At the end of the day, what is really at stake is the opportunity for parents to communicate their wishes to their adult children and for children to help their parents make those wishes come true.