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.
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| 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 | |||
|
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| 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.
| |||
| 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 | |||
| |||
| 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.
- 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.
- 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..)
- 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.)
- 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.
- Change your password, and your trading password, and you can finally go ahead and buy your stocks, options, or mutual funds.
- ...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!
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