Dollar Cost Averaging and Compound Interest.

   I've been thinking of doing some custom website coding for the blogger. I'd like to put this table at the side of the website, to show actual real-time money INPUT and OUTPUT (How much I've deposited, and my overall turnout.) (These are imaginary figures, for the time being.) An example would be such:

Index Mutual Fund Name	Amount Invested	Market Value
TDB900	$200.00	$400.00
TDB902	$100.00	$98.00
TDB909	$100.00	$150.00
TDB911	$100.00	$50.00
Time Elapsed:  6 Months
Total Invested: $500.00	Total Value: $698.00	Total Worth: + $198.00

   So, in other news.  I turned my first real profit today!  <3  I know it will most likely disappear tomorrow, and watching these index funds this closely is sort of redundant..  But, because it's my first investment, I'm pretty excited about it.  Payday is coming up, and I'm looking forward to investing my $152.00 so I can buy into index funds TDB902 and TDB909.  Anyways, this is just more personal garble and I'll move on to some actuality..  (By the way, it was my first $100.00 investment, and I checked today and it's worth $101.00.  Woo, a whole dollar!)

   So, remember how I was telling you that I didn't -really- understand the whole concept of an index fund, and I just kind of blindly fell into submission and started?  Well, that's all still true, but I've been reading a bit more about the definition of an Index fund.  While I can't find anything that doesn't refer "Index Funds Follow and Index and blah.." which to me just sounds like a reiterating statement that explains actually nothing...  But!  I did stumble across an article that explained it quite well, or so I'd like to believe.  Kerry, over at SquawkFox, did it quite well.  If you're not willing to go there (which you should) to read the article, I'll sum it into my own wording;

   "Index Mutual Funds are Mutual Funds that are not managed by a humanoid.  These funds are managed by a computer, and follow a, usually, major economic stock market index (ever heard of the Toronto Stock Exchange?)  If you're not following, remember those squiggly marks on that small Andex chart I posted?  Those.."

   She later goes on to explain a bit of the benefits associated with Index Funds, so that's a plus in my books.  Better overall long-run returns, lower management fees, no stupid humans involved in wrecking things up..  Anyways.

   I hope that helps make a little bit more sense.  On to today's topics;
-Dollar Cost Averaging.
-Compound Interest Rates.

   Dollar Cost Averaging.

   This may sound like some super complicated strategy in the professional world of lucrative stock trading and whatnot.  It is not.  This is a simple concept in which a lot of 'professional' persons are mislead around.  Pride and Greed are powerful things, but they can often get in the way of each other when they're side-by-side.  Let me explain..

   The concept of buying stocks is; Buy High, Sell Low.  This means you have to watch the markets, and pay a lot of attention as to when to do these two things.  This is what a professional is going to do with your money.  Unfortunately, nobody can really tell how the stock market is going to react, so..  People will buy a low priced stock, thinking it will rise, only to see its price plummet more.  To cut the losses, they'll sell at a lower price.  They've now bought low, and sold lower.  Many are afraid to commit to buying high because of fear entertained by the concept of stocks reaching a plateau and not rising much more.  This stereotype perpetuates itself within the stock market, and the only real loser is you, who are paying these people to literally play with your money.  You'd probably be better to take it to the Casino.  At least there, you'll get free drinks and food if you have enough money to blow...

  Anyways, getting carried away...

   Dollar Cost Marketing means you, and I cannot cannot cannot stress this enough, routinely purchase your portfolio's Index Funds.  This means that when the prices are normal, you get a normal price.  When the prices are high, you get a little less than average.  When prices are low, you get a little more than average.  Not only does this rule incite discipline within ourselves, but it also means that we're usually getting a better deal.  We're investing in these index funds for the long haul, so we'll be investing as the cost rises, anyways.  While it seems a little scary when the markets take a dip, we're actually just getting a much better deal on buying our funds.  We're getting cheaper units while the markets in a downturn, and when it rises again (stop it, the only time the market won't recover is if the U.S. petro dollar is obliterated...) we're actually looking much better because we now have a boatload of shares we got for a steal.  Dollar Cost Averaging.  Don't forget this term.  Just, always routinely purchase your index funds.  This is what it means, now, go put it in to action!

   Compound Interest Rates.

    Okay, so I'll say this again, I'm trying to keep complex mathematics out of this blog.  So, you'll just have to trust my math while I show it to you.

   Let's learn a little about the term "Interest" first.  Interest is the term used to tell you what to expect your dividends to be.  I mean, your interest means just how much money you're looking to earn for having your money in the bank, investment, etc.  If you have a yearly interest rate of 2%, it means that for every dollar you have in the bank, you'll earn 2 cents for every year it sits there.  So, you technically earn 2 cents for doing nothing.  That's all this means.  Interest is how much money your money is going to make you.  Got it?  Good.

   Compound Interest means when that interest is earned, it's not taken out of the account.  It's put back in the account to accumulate more interest on itself.  This is how your money really potently starts to duplicate itself.  Let's look at a 10 year period for a flat $100.00 in the bank at a 5% interest rate.

Year	Principle	5% Interest Rate	Interest Earned	Total
1	$100.00	5%	$5.00	$105.00
2	$105.00	5%	$5.25	$110.25
3	$110.25	5%	$5.51	$115.76
4	$115.76	5%	$5.79	$121.55
5	$121.55	5%	$6.08	$127.63
6	$127.63	5%	$6.38	$134.01
7	$134.01	5%	$6.70	$140.71
8	$140.71	5%	$7.04	$147.75
9	$147.75	5%	$7.39	$155.13
10	$155.13	5%	$7.76
Amount Reinvested:		$45.00
Actual Interest Earned:		$10.13

So, what this all really means is that instead of every year, pulling the $5.00 out of the bank that you'd have normally made, you just let that money sit in the bank.  In year 2, you earned 5% on $105.00 instead of $100.00.  Because it was such a low number (Only one hundred bucks) and for such a short period (10 years is nothing.) you only earned an extra $10.00.  But that money is only there because of the compounded interest.  You'd never have seen that if you didn't keep your five dollars in the bank. 

   This is how compound interest works, and why it's important.  You can see that it's definitely an upward spiral the longer this continues.  At first, you made...  If you weren't paying attention and are too lazy to do the math:  You earned; $0.25 / $0.26 / $0.28 / $0.29 / $0.30 / $0.32 / $0.34 / $0.35 / $0.36.  I suppose it looks pretty unimpressive with such small numbers, but in time the power to explode is within!

   I'm sure in a few years I'll be looking at other avenues of investing my money.  I'm still leery to the concept of the stock market, and I haven't learned a lot about ETF's just yet (Although I think they're very similar to Index Mutual Funds, except in the way that they're priced and what they cost to manage..)  I've read things about "Dividend Yielding Stocks, DRIP plans, etc."  This is something I will continue to read about, and it's something I'll definitely keep in the loop on the blog.

   Good luck saving your money!  I'm going to look into what hidden costs there are in the Index Mutual Funds in my portfolio, if there are any, and try and do some reading about Exchange Trade Funds.

My First Mutual Fund.

TO DATE:  I have put $148.00 in to my TFSA, and invested $100.00 in to the first Index Mutual Fund in my portfolio: TDB909.  My next investment will be approximately $152.00 (So I can purchase two units.  I'm willing to go above and beyond my 10% Net income mark to make 3 unit purchases in two paycheques.)

   Today, at the earliest point available, I invested in my first mutual fund.  The ticker name is TDB909.  As part of my Couch Potato Portfolio, I'll be investing:

40% of my investments into TDB909 (Canadian Bond Index.)
20% of my investments into TDB911 (Canadian Index.)
20% of my investments into TDB902 (United States Index.)
20% of my investments into TDB900 (International Index.)

   As you can see, I'll be investing a total of 60% of my money in my own home country, because I love it!  Anyways...  That being said, I'll explain what I understand about mutual funds and why I chose index mutual funds over the GIC route I explained earlier.

   Well, an Index Mutual Fund is a type of mutual fund that covers an 'index' of stocks.  To be really honest, I just googled a quick answer and it sort of makes sense to me.  The difference between regular mutual funds and Index mutual funds, is that;

   Mutual Fund is when a professional is in charge of your money, who pick specific stocks to try and beat the market.
   Index Mutual Fund is when you are buying into a mutual fund that follows a stock market's performance and tries to grow to that standard.

   It only kind of makes sense to me, so I wouldn't take it as gospel.  A professional banker may be able to elaborate more on this, but as far as I really care is that an Index Mutual Fund is handled by you, and you alone.  No, this doesn't mean you have to pick stocks, and buy high and sell low.  It just means that you have to find an index that sounds good to you, and you buy units.  For my plan, I'm following the Canadian Couch Potato's 'Global Couch Potato' (Option 2) strategy.  I'm going to talk a little about TD Waterhouse' online Discount Brokerage system and what I've learned about it from using it in the last 24 hours.  Before I touch on that, back to Index Mutual Funds.

   If you're trying the Wealthy Barber thing, this might be a little disheartening.  When you buy, you buy in 'units' and not 'stocks.'  This is fine and all, but Index Mutual Funds have a 'minimum' purchase price.  For the four I've listed above, it's actually $100.00 each.  In order to complete a full portfolio, it's $500.00 CAD.  (5 Units in total.)  So, while I'm only saving about $150.00 a paycheque, I'm looking at buying 3 units every four weeks.  You see, I originally thought that I'd be able to buy partial units, but this is not the case with Index Mutual Funds.  This will change as I save 10% of my Net income, and in the summer I work a lot of overtime (and such will bring my 10% earnings to varying numbers.)  Either way, to fill a round of my portfolio, I'll be looking at up to 2 months...  There may be other ways to manage this, I see on the TD Assessment website, there's a table row stated as "Minimum PPP Amount".  I'm going to call TD Waterhouse and inquire about this, but for now I'm just hoping that PPP means "Pre-Paid Payment..."  /Wishful-thinking.

   So, as was discussed in my last post, GIC's host a guaranteed investment but with a low yield for interest.  It's my understanding that as your risk factors rise (higher risks) the higher potential for your investment returns (higher interest) but at the cost of a higher chance at devaluing your money (losing cash!)  Index Mutual Funds are considered "Moderate Risk" because of market fluctuations.  This is why I chose Index Mutual Funds as my main investment method -- Moderate Risk translates into a higher return than a Low Risk investment.  These are considered long time investments, and with Index Mutual Funds, the longer you invest WITH REGULAR, SCHEDULED, PURCHASES, you can make an almost guaranteed return (or so I'm lead to believe.  This is also not to be taken as gospel, this is just an opinion generated from my personal reading.)

   I'm going to throw a set of bogus numbers into an engine and reveal the difference between a low interest earning, and a moderate interest earning.  (Savings Account type of interest Vs. Prospective Index Mutual Fund interest.)

   Assuming we use the same numbers of principle (Initial Starting Dollars.)
   Assuming we use the same numbers of annual contributions ( $2,600.00/year ( $100.00/2 weeks. ) ).
   Assuming we GENERALIZE interest rates as ballpark rates which are entirely hypothetical.
   Assuming we invest for 40 years (That's investing until I'm 65.)
   Assuming we reinvest our dividends*.

   Let's crunch the numbers!  (I used this calculator.  You can use it to calculate your own earnings.)

Figure 1.

High Interest Savings Account / GIC.
Current Principal:	$	0.00
Annual Addition:	$	2,600.00
Years to grow:		40
Interest Rate:		2 %
Compound interest time(s) annually
Make additions at start end of each compounding period
Results
Future Value:	$	160,186.06

   We see in Figure 1 we've earned 2% interest a year (which I grabbed from various High Interest Savings Accounts figures.)  This means, out of the $160,000 we have in the bank, a measly 2% return rate has yielded ... ... ... $56,186.06.  That's pretty damn impressive for only 2%.

   I've been told that proper investing with only minimal attention paid, can yield up to 10~11%, and many investors who have been doing this sort of thing for longer periods of time strive for a 15% return.  On average, I've heard about 8% is pretty normal, but I decided to take the lowball in Figure 2 and estimate an interest rate of 5%.  Again, these numbers are only speculative, and in no way factual to a point of literal translation.

Figure 2.

Index Mutual Funds yielding an estimated 5% return.
Current Principal:	$	0.00
Annual Addition:	$	2,600.00
Years to grow:		40
Interest Rate:		5 %
Compound interest time(s) annually
Make additions at start end of each compounding period
Results
Future Value:	$	329,783.38

   This number is much more respectable. I mean, for a relatively low risk factor (in my opinion) you've yielded soooo much more money.  In both situations, we've saved $2,600/year.  That number, over 40 years, is $104,000.  That means this scenario has given over $225,000.00 in interest.  Free Money!  Money that has self replicated, and made money of itself.  Like alchemy!  I'm not saying, I'm just saying...  I'd personally rather see a return similar to Figure 2.  The second thing I'll introduce in a subsequent blog post is the concept of "Dollar Cost Averaging."  I think that's what it's called...  Anyways.

   So, now you see where I made my decision to place my money in a "Moderately Risky" place.  These Index Mutual Funds are generally reflected by the life of the stock market.  Historically speaking (I'll show a pretty picture of an Andex chart) the value of the stock market has risen overall, even vs. heavy fallbacks such as the economic downturn in our recent 'Recession' years, and the "Depression" periods, and even before.


   I left the picture nice and small so that you don't even have to bother trying to read any of the garbage on it.  All you have to know is that all those squiggly lines starting from the left that jaggedly proceed up and down towards the right, those are the stock market values.  There is 0 technical information on here that you need to know, not right now, anyways...  The financial adviser mentioned some more technical terminology about this Andex chart, but really it didn't mean squat, so I'm not relaying it.  All you need is to comprehend that those squiggly lines have generally proceeded upwards, even during some pretty heavy falls (like the dive in the middle of the chart.)  The way I look at it, from my average Joe type of appeal; the economy is always going to exist--even if it takes a little dip here and there.  It's always going to grow, and from the trend of growth from the start of the chart (in 1950) to the end (2007) the value has undeniably risen without loss.  Well, I have a long time to invest my money, 40+ years, so this seems like a very safe move to me, even in a 'Moderate Risk' environment.  (If you're -really- interested in looking for one of these charts, google: "Canadian Andex Chart."  Don't say I didn't warn you--the amount of detail on these sort of things can be absolutely discouraging, and that's definitely not the aim of this blog...)

   Long Term investors, such as myself, will also make a very good use out of the concept of "Dollar Cost Averaging."  I've decided I'll talk about that in my next post..  I need to cover TD's e-Service Discount Brokerage, just because I felt like I had to make some sense of it.

   Well, as I said at the start, I bought my first TDB909 Index Fund today.  In order to do this, I had to do some things.

• I had to Open a Tax Free Savings Account for a TD Waterhouse Account.
• I had to make a minimum deposit of $100.00, manually, because I don't normally bank with TD.
• I had to create an online account for the discount brokerage.
• I had to call and get a 'Connect ID', Temporary Password, and Trading Password. 

   This was all relatively easy, but the outline of the steps were a little misconstrued.

1. First, you have to call TD Waterhouse and open an account with them.  This is easy, as they just ask for some personal information over the phone.  
2. You then go in person to a branch and open a Tax Free Savings Account for the TD Waterhouse Account (If you don't bank with TD, you'll need to provide proof of an already existing Canadian Bank Account.  This is your Account Number and I believe Transfer Number..)  
3. Afterwards, you will have your account number on a piece of paper, and you need to call TD Waterhouse and give them your account number in exchange for a "Connect ID" and password (Which is temporary and requires to be changed.)  
4. You'll proceed to http://www.tdwaterhouse.ca/ and log in using your Connect ID and Temporary Password.  From here, you can change your account preferences and create a "Nickname", which is just a fancy term for a personal username that you can use to log in, rather than memorizing that Connect ID.  
5. Change your password, and your trading password, and you can finally go ahead and buy your stocks, options, or mutual funds.  
6. ...It's a bit of a process, but I was able to do it in the course of a day with minimal effort.  Also, you can use the mobile application for your smart phone to manage all of this, too! 

   Anyways.  Next topic I promise that I'll talk a little bit more about Compound Interest rates, Dollar Cost Averaging, and why this sort of saving is important.  The power of a percentage sign, and whatnot.  I also am going to start advertising myself at this point.  I think this sort of information in laymen is important to us Canadians, so we can make some smarter choices for our future.  If you're reading, thanks for the time.

The Learning Curve

   As promised, an immediate follow up to catch up with my last months worth of progress.  This post may be a little exaggerated in size, but it's going to start from a few years back (where I started) to some recent discoveries (Don't worry, a lot of my years are skipped because when I started, I stopped thinking about it for a few years...)

--------------------------------------

   So this is where I began.  For a long time, I've wondered about ways to make extra cash without having to pick up a second job.  I had this grand financial plan figured out when I was 21.  To be honest, it sounded great to me!  I'll explain it here, in words, and then draw a pretty picture, and cover once more.

   So, I decided that if I was able to save $10,000.00 a year, and invest this money into a GIC* (Guaranteed Investment Certificate) for 10 year terms, for 10 consecutive years, I'd have a buttload of cash.  I didn't do any math on it, and I've abandoned this plan, so I won't really do a whole lot of math on it.  This concept still takes on the idea of Compound Interest but at an incredibly slow rate.  Let's draw a pretty pictures, now..

   Years listed at the bottom, you can see here;
-Year 1 is invested for 10 years, and matures at Year 10.
-Year 2 is invested for 10 years, and matures at Year 11.
Etc. Etc.
-Subsequent years following year 10 are re-invested with all inclusive dividends* and the initial principle value (In laymen:  The original $10,000 is re-invested, including all of the currently earned interested.) so that they'll all mature at my major cash-in date in Year 20.  So;
-Year 11 is reinvested for 9 years, and matures at Year 20.
-Year 12 is reinvested for 8 years, and matures at Year 20.
-Year 13 is reinvested for 7 years, and matures at Year 20.
Etc. Etc.

   Now, why this is a good idea;

• GIC's are a forced savings method, meaning that once you sign that contract, you're not getting that cash back until the date of maturity.  
•  Also, a GIC is considered an insured investment up until $100,000 (Don't quote me on this, but it's a pretty ridiculous number.)  So, it's also a very safe investment.

   With all good ideas, come negative points in reality;

• The interest rates (your dividend calculation) is usually lower on items like GIC's, because there is zero risk factor.  I think currently GIC's are offering interest rates at, like, %1, or something similar.  Again, don't quote, but GIC's usually yield a very low interest rate.
• Being a forced savings plan, you can't get that money in the case of an emergency.  So if you follow the path of a GIC, it's best to make sure you have some spare cash floating around..

    So, I left this idea alone for a while, since I planned on doing this after I paid off all of my outstanding debt.  I owed around $8,000.00 in Student Loans (which I was severely behind on...) and about $7,000.00 in Credit Card debt.  I figured after I paid off these debts, I'd be able to start in on this 20 year plan.

   It's been several years, and I'd left the concept of investing alone in the back of my head.  Until last month.  I happened to be watching a television show with my wife, and in the program they mentioned a "401(k)."  I've heard the term before, but I never knew what it was.  To save the suspense, a "401(k)" is the United States equivalent to an RRSP in Canada.  After I'd looked this up, my Google searches wandered a little, and I ended up searching along the lines of "Canadian Investment Methods" or "Canadian Investment Tips" and stumbled across the Couch Potato.

   I'm not intentionally advertising, but 'The Canadian Couch Potato' has an entire website introducing the concept of investing in Index Mutual Funds, and Exchange Trade Funds.  I'm not really going to delve in to a lot of detail about this at this very moment, but this was the crux of my decision in longer term investing.

   I'd gotten curious about a lot of the stuff on the Couch Potato's website, because... well, a lot of it's very overwhelming, with a lot of acronyms, percent signs, and decimal points.  The kind of thing I'm going to try and avoid, en masse, on this blog.  Because of all of this overwhelming material I figured that I'd call my grandmother, because she does some investing here, and there, and I thought it'd be a good resource.  It was a short phone call, because my grandmother doesn't know anything about ETF's and Index Mutual Funds, but she did refer me to a book.

   I immediately found a copy and started reading, "The Wealthy Barber" by Dave Chilton.  It's a cute Self-Help type book that takes a different approach to instructing on personal savings.  In stead of a book of detailed financial information, it takes place as a story/novel, including 3 main characters, 1 rich old Barber, and his 2 cohorts.  It really was a great read, and the first book I've read since "The Hobbit." back in highschool.

   Quickly it starts to define a savings plan, and then covers a vast array of other types of savings and investment information.  While the main character is Canadian, it's unfortunate that most of the book contains American based information.  The book talks about retirement options, but it only refers to American retirement options: 401(k), 401(b), IRA (Individual Retirement Account), etc.  It also refers to mortgages, but again it's based on American mortgages as the book describes the pros and cons of paying a mortgage early or not, but in America, interest on mortgage payments are tax deductible..  Not in Canada.  These points aside, the book is still a good read for a Canadian, and covers a broad spectrum of topics that are still worthwhile for Canadians to look into; insurances, wills, retirement concepts, investment concepts, etc.

   This pretty much brings me to modern day.  I met with a financial officer from Toronto Dominion Bank to ask about the TD e-Series Index Mutual Funds.  After some reassuring affirmations, I decided to open a TD Waterhouse account, and give the Global Couch Potato strategy a go.  Because I'm buying through TD, I'm using Option 2.

   Good luck to me!  I'll continue some other topics in a following post.

New Terminology used in this Post:

GIC: A Guaranteed Investment Certificate or GIC is a Canadian investment that offers a guaranteed rate of return over a fixed period of time, most commonly issued by trust companies or banks.  Due to its low risk profile, the return is generally less than other investments such as stocks, bonds, or mutual funds. It is similar to a time or term deposit as known in other countries.

Damned Money!

Hello!

   My name is Jordan, and I love money!  Well, who doesn't, though..?  What we all don't know about our money, is that its an asexual creature that can self replicate all on its own after only a little attention and direction from you!  Cast aside the Ouroboros Dollar Bill vision, and let's get in to what this blog will be all about~.

   Like I said; my name is Jordan.  I'm just a regular Joe-Schmo.  For as much as I love money, I really don't know anything about it.  And that's exactly what the Blog is about--people who don't have a clue about money.

   I'm starting from Day 1, and I'll catalogue my adventures in learning about money, investing money, and help it do exactly what I said it'd do--self replicate and all.  This is blog is dedicated and will solely talk about Canadian Investment methods.  I will do my best, for you and I, to give real portrayals of real dollars, fund names, and my own understandings.  This is also my first blog, so...  bare with me...

   So, this is the introductory post.  My next post will be immediately following this, and will discuss some of the things I've learned since starting from 0 knowledge, last month.