Wednesday, April 15, 2009

Insider Information

The truth is that stocks are part of wealth management. When you have a High-Net Worth, you often earn at least $100000 a year in interest if you simply put your money in a canada savings bond or left it in a variety of no-fee savings accounts. even if all you bought were conservative GIC's and you were earning the most conservative yield on your savings, you would likely be in the highest tax bracket. 40% of all your interest income would be taxed.

This is not good. What is good, is investing a large portion in investments that put your money into something that the government considers as putting your capital to work in the economy (and hence won't tax you nearly as heavily).

But that is not enough of an argument when it comes to investing the wealth of an individual. What about preserving the captial that you put to work in the economy? The argument is made, since the dawn of the investment advisor, you need an experienced professional investment guru who spends all day studying businesses, the economic trends, cycles, blah blah blah. You pay someone a fee to pick companies that will not lose all your capital and they offer you the chance, based on other peoples experience, to 'grow' your captial. Your capital is preserved when the share price does not lower from your buying price and rises over time above inflation.

Is that logic enough, to justify a millionaire putting half of his money (regardless of age) into the stock market? This is the general recommendation spread throughout our society. He will pay relatively little taxes. He will pay a fee to an advisor or portfolio manager who will claim to have the experience and ability necessary to pick investments that will preserve his capital.

If you believe in your advisor, if you believe in your portfolio manager or mutual fund(s), than you will likely follow their advice and immediately put half your money "to work" in the marketplace and probably put the rest in a long-term canada savings bond.

If the economy is stable and growing, the stock market does well and the stocks do well. If inflation skyrockets, the stock market usually skyrockets. Does that mean the overall return to the millionaire will skyrocket?

while it is likely that a managed or mutual fund portfolio will often report annual returns of 10%, 15% even up to 25%, this number skyrockets lower when talking strictly realized returns in cash in the hands of the investor. consider that mutual funds have low, if any, distributions. The management fee is anywhere from 1-3%, there may be hidden fees when returns exceed expectations and there are almost always penalties and hidden fees when you try to take your money out of the mutual fund.

consider also, that longer-term savings bonds are subject to much greater price, interest rate, and inflation risks. If you or your advisor doesn't understand how to properly construct a laddered portfolio (even if just in canada savings bonds) than you risk either having all your money invested in a bond when interest rates for new issues rise (if you want to cash in and buy the higher yielding bond, you are forced to sell your bond at a loss) or risk having all your principal come due when interest rates are crashing (like now).

BUY AN INDEX FUND! it does all the same work of a mutual fund, tracking the various sectors of the equities (and fixed income) markets with only a fraction of the fees. the shares of an index fund do fluctuate, so your captial is still no more protected than if you chose the companies inside the index fund yourself. Index fund, Mutual Fund, it doesn't matter. Any type of equity always carries the risk of reducing your invested capital to zero.

This should be old news. I know for some people they simply never think about these things. Reality is that at some point in your life you will have to make at least one decision about investing money. If you don't have someone knowledgeable acting on your behalf you need to be informed. better to be smart when you don't have to be stupid. Saving money is instrinsically about preserving captial and the idea of earning a return on your capital is what prospective investments are offering you in return for your capital. Invesment advisors and financial institutions, the powers that be, they have used marketing and sales to convince an entire generation that the stock market is the ideal retirement income generation and capital preservation vehicle.
How is that working out for everyone who bought into it? This strategy placed the primary goal of captial preservation into a secondary status behind income generation. Due to the favourable tax status of equities, invesment advisors were able to claim the ability to out perform a bond portfolio. After the market crash, this just simply is no longer the reality. The average investor is down anywhere from 25%-50%. With the crash in resource prices, distributions have been slashed or suspended across the marketplace (not everywhere, but about half of the typical portfolios distribution have been suspended).

Investing your capital with an individual or business or government is saying something. It's saying that you trust or value that person, business or government. In economics, our dollar is our vote. And your investment is your vote for the brightest future for your money and you.
Personally, when i let someone know that i trust them, I do so knowing that they will reciprocate that trust. that's what real trust in life and relationships is built on. trust is a mutual obligation and care for the point of view of the other in that relationship.

When i say that i trust a company and i want to vote for that trust with my money to the tune of $100 000, I like to know that the company will be grateful and will return the favour of my trust. they will not only agree to pay me back all of my money by a certain date, they will pay me a competitive rate of interest for as long as they have my money. Wow... but wait, there's more. if business goes bad, and they start earning less money, the business will promise to cut the money it pays to all the other investors BEFORE they ask me to stop recieving my payment. In fact, My payment is the very last (behind pensioners) they will ever cut and if they go out of business (god forbid) they'll sell off whatever assets they have to at least give me back some of my original investment (again, only behind pension plans in priority).

wow, what company issues stock like that? it must be GOOGLE or APPLE or some amazing new eco-energy company based in the rainforest, that has a fair-investor holisitic spiritual corporate culture.

It's a bond, it's the biggest, oldest and safest form of investment and you better educate yourself on the intrinsic advantages of investment grade corporate and provincial bonds or you will be like one of the many in this economic downturn who has lost 50% of their retirement savings. i will continue in my modest, informed and trustworthy habit.

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