# Almost Debt Free! Need Investment Advice



## Simon Says (Jan 5, 2013)

I`m 35 years old and my wife is 34, we`ve worked hard to pay off our debt and in the next couple months will be mortgage and debt free, we don`t have any investments and our pensions are defined benefit. I estimate we`ll have approximately $50,000 per year to invest based on our past history of saving and assuming we are going to spend a little more and have more fun. We have two young children. My investment knowledge is very limited but I`m working hard to fix that. I know I need a RRSP to reduce my taxable income, I should also maximize my TFSA and I know I need an RESP. I know I need to contribute approx $500 per month to the RESP to ensure the money is there for my children when it`s time for university. My problem is that even though I know which investment vehicles I need I have no idea what I should invest in, mutual funds, GIC`s, bonds etc. behind the rrsp, resp and tfsa, I truly have no idea. Some of the books I`ve been reading point out how the banks are there to make money for themselves and how the financial advisors at the banks really have no financial training, only sales training. How the MER at banks will drain your returns and how your options are limited. I want to do the right thing with this money but I`m worried I`ll make a mistake and it will take me 20 years to figure it out. I don`t expect double digit returns and I know my investor profile is moderate to conservative. I`m learning what I can but I think I need an advisor but I don`t know how to find a trustworthy one that actually has real investment skills with proven returns that won`t eat up my returns in fees. I`ve also read how mutual funds are a horrible investment in general and how the banks always push them on you.

I appreciate any advice you can offer! I'm also willing to read anything necessary, I've been going through the forum to determine some good books to read but there seems to be some strong varying opinions.

Thanks so much,

Simon


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## the-royal-mail (Dec 11, 2009)

All these questions about investing, yet no emergency fund?


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## Simon Says (Jan 5, 2013)

*Yes*



the-royal-mail said:


> All these questions about investing, yet no emergency fund?


Sorry, forgot to mention that, yes we do have an emergency fund, we will grow it further before investing. We have a couple months socked away.


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## Rusty O'Toole (Feb 1, 2012)

I question the need for an emergency fund as such. If you invest in stocks, bonds, or other liquid investments you can get your cash within a few days. If you need cash RIGHT NOW there are always credit cards or a HELOC.

In my case, I know I have never had an emergency that I couldn't cover with a credit card. For the big losses, there is insurance.

By the way, it was Morton Shulman who pointed this out in his investing book back in 1966.

So, if you have a credit card and insurance you shouldn't need an emergency fund. If you get in a real bad jam you may have to sell some investments but why have cash sitting around doing nothing? Might as well invest it, there is no down side.


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## HaroldCrump (Jun 10, 2009)

Rust, what you are thinking of is a "float" - relatively small amounts of money that you can cover with a credit card, from month to month.
Emergency funds are for more substantial, unplanned, expenses.
I agree that the need for emergency fund varies from individual to individual - $2,000 may be enough for you, but someone else might need more (a lot more).
But it's different than monthly float, and a credit card cannot be an emergency fund.


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## andrewf (Mar 1, 2010)

HaroldCrump said:


> Rust, what you are thinking of is a "float" - relatively small amounts of money that you can cover with a credit card, from month to month.
> Emergency funds are for more substantial, unplanned, expenses.
> I agree that the need for emergency fund varies from individual to individual - $2,000 may be enough for you, but someone else might need more (a lot more).
> But it's different than monthly float, and a credit card cannot be an emergency fund.


Why not?

Ie, why not a personal LOC?


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## jnorman5 (Aug 21, 2011)

I feel the need to chime in here and also agree with andrewf and rusty... I was long considering the need for an emergency fund but feel the need for saving in TFSAs and paying down debt is just as important, if not more. 

I have access to mid to high 5 figures through HELOCs, CCs, and whatnot, and will simply cash out TFSA investments to repay these facilities within a few days if needed. Having cash that is not producing income or reducing interest paid simply seems like a waste to me.

If I were you Simon, I'd get a nice fat HELOC on your mortgage free house in case of an emergency and start setting up the RESPs, TFSAs, and RRSPs. (I work at a bank, the chances of a bank calling your HELOC in case of a job loss is slim to none, just transfer out 20 or 30K from the HELOC if you lose your job prior to them being able to close it). It's really hard for me to comment on what asset mix will work for you, but from all my research over the years, I am using TD eSeries for my RESP (just set up, planning for 90% equities), same thing for my TFSAs (except 60% equities, 40% fixed income), and RRSPs are covered by extra contributions to my company DC pension. Once my child gets over 10 years, I will change my asset mix in my RESP to be more conservative with some GICs, more fixed income, etc.

Just my two cents... hope this helps


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## Simon Says (Jan 5, 2013)

jnorman5 said:


> I feel the need to chime in here and also agree with andrewf and rusty... I was long considering the need for an emergency fund but feel the need for saving in TFSAs and paying down debt is just as important, if not more.
> 
> I have access to mid to high 5 figures through HELOCs, CCs, and whatnot, and will simply cash out TFSA investments to repay these facilities within a few days if needed. Having cash that is not producing income or reducing interest paid simply seems like a waste to me.
> 
> ...


Thank you for the advice, I do have a PLOC and some CC's if needed, I just feel more comfortable having a little cash in the bank, not loads just maybe $5k or so. I have an upcoming appointment with CIBC to hear their pitch, I just have this sinking feeling the person who will be handing me pamphlets and doling out advice is more of a salesperson then an adviser. I guess I need to sort out why my asset mix should be based on my risk tolerance. I've heard a lot about the couch potato method but I don't know enough to decide. Thank you for telling me what you're doing, that helps a lot. I often ask people what they are currently doing or what would they do if it was their money and if they're honest you're getting the best advice they can give.

Thanks again and I look forward to any further advice.

Simon


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> Why not?
> Ie, why not a personal LOC?


In the case of a credit card, the limits are usually low and the interest rates are very high (double digits).
A credit card is ok for monthly float (a couple K or so), but surely it can't be used as "emergency funds" in case of job loss, medical expenses, major unplanned home repair, car repairs, etc.

Personal LOC is better because limits are higher and rates lower.
In this case, it would depend on the duration of the emergency, and the risk tolerance of the individual.
A major home repair or car repair is ok on a LOC, as long as all other aspects of the finances are secure (job, savings, etc.)

One issue with using LOC is that interest starts to become due right from 1st month.
During periods of financial stress, having to pay LOC interest is an additional burden.
Those that rely exclusively on credit based products for emergency funds often find themselves shuffling money from account to account (i.e. paying one credit account from another).

Higher emergency funds are a good idea for those that can't tolerate longer periods of unemployment, can't reloacte easily, or have external liabilities, such as supporting elderly parents/grandparents.


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## Just a Guy (Mar 27, 2012)

I remember living debt free for years, biggest mistake I ever made. 

Had I been smarter back then I would have gotten a heloc and bought good investments and real estate, deducted the interest against the cash flow they generated and been much further ahead than I am today. 

I did eventually wake up to the power of OPM and leverage and was amazed at how quickly your net worth could increase. The trick was to learn to spot good investments. 

For picking stocks, understanding the market and the companies you invest in are key. When I buy companies I use and understand, I make money. When I bought "hot sectors" that were "highly touted", I usually lost. Books like a random walk down Wall Street, and millionaire mind come top of mind to me. 

For real estate, I've recommended a site many times, as it gives, in my opinion, the best advice out there.


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## Mall Guy (Sep 14, 2011)

Simon Says said:


> I`m 35 years old and my wife is 34. . . how the banks are there to make money for themselves and how the financial advisors at the banks really have no financial training, only sales training. How the MER at banks will drain your returns and how your options are limited. I want to do the right thing with this money but I`m worried I`ll make a mistake and it will take me 20 years to figure it out. I don`t expect double digit returns and I know my investor profile is moderate to conservative . . .


You have time . . . So buy CND banks for their 4% dividends . . . and profit off of their clients playing those fees . . . add on pull backs, and add really big solid names over time . . . go self directed, and stop worrying about the trading fee . . . you will quickly get it down to $9.95/trade . . . do you really think the CDN Gov will let any of the big 5 fail !!!


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## Simon Says (Jan 5, 2013)

*Thank you all*

Thank you all for the great advice! I'm a little hesitant about using HELOC money to invest but I just may not fully understand it yet. I also agree that the government would never let any of the big 5 fail. I'm going to look for some of the books that have been recommended and see what I can figure out. I have a couple months left before it's time to open the accounts and get started so I have a bit of time to get the reading done.

Thanks,

Simon


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## Oldroe (Sep 18, 2009)

Contributing enough to drop you down 1 tax bracket is a good strategy.

Build a solid base of div. stocks then 5% for more risk more reward, if you get comfortable with the markets.


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## doctrine (Sep 30, 2011)

Definitely read some books. I personally like Jeremy Siegel's "Stocks for the Long Run", which will make you a believer in the long term returns that can be provided by owning part of a successful company. I also liked "Four Pillars of Investing" by William Bernstein, and of course the classic "The Intelligent Investor" by Benjamin Graham. I have been very successful managing my own capital; the bottom line is that no one will care as much about your money as you.


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## the-royal-mail (Dec 11, 2009)

A couple months is far below what is recommended for emergency funds. The general advice is between 6-12 months of living expenses, kept in cash in a savings account (NOT invested!), ready to deploy on a moment's notice.

Be very careful about investing money you don't have or cannot afford to lose. I personally recommend spending some time to save up some more emergency fund cash for both you and your spouse, then save some capital afterwards to do your investing thing. Just don't expect to get rich overnight. For every 250 threads we see in CMF about investing, we see 1 about saving and managing money. A lot of people out there are missing the point on how to manage your financial house. It's not just about investing and RE like some would have you believe.

I also recommend reading some of the other threads here in CMF. Good luck.


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## 44545 (Feb 14, 2012)

For advice on self-directed investing, I'd suggest picking up The MoneySense Guide to the Perfect Portfolio."

If you want to get into some serious reading on investing, I'd suggest either "The Four Pillars of Investing" (long, detailed, somewhat math heavy), or "The Investor's Manifesto" (shorter, same content, less math heavy but skips a lot of detail) - both by Dr.William Bernstein. Both of those are US-centric so a decoder wheel of sorts is helpful...available here: http://www.finiki.org/wiki/Canadian-US_Investing_Differences
...or just skip the parts that deal with specific investment advice using US-based investment products.

You might have a look around the entire Finiki site, starting here: http://www.finiki.org/wiki/Getting_Started



the-royal-mail said:


> A couple months is far below what is recommended for emergency funds. The general advice is between 6-12 months of living expenses, kept in cash in a savings account (NOT invested!), ready to deploy on a moment's notice.
> 
> Be very careful about investing money you don't have or cannot afford to lose. I personally recommend spending some time to save up some more emergency fund cash for both you and your spouse, then save some capital afterwards to do your investing thing. Just don't expect to get rich overnight. For every 250 threads we see in CMF about investing, we see 1 about saving and managing money. A lot of people out there are missing the point on how to manage your financial house. It's not just about investing and RE like some would have you believe.
> 
> I also recommend reading some of the other threads here in CMF. Good luck.


I second what The-Royal-Mail has written above.

The point of the emergency fund is to carry you during times when everything falls apart. 

Let's say there's an economic collapse and all of your investments lose value. Not a problem if you leave them invested as they'll likely recover on their own.

During economic downturns, you're more likely to lose your job. If you get hit with that double whammy, would you want to sell your investments at a loss to cover living expenses? What if you'd been leveraged to buy those investments? Now you've got debt, investments you've had to sell at a loss, with no income.

They emergency fund is designed to carry you through those events without having to incur or service debt or sell investments at a loss.


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## Simon Says (Jan 5, 2013)

*Thanks again*



CJOttawa said:


> For advice on self-directed investing, I'd suggest picking up The MoneySense Guide to the Perfect Portfolio."
> 
> If you want to get into some serious reading on investing, I'd suggest either "The Four Pillars of Investing" (long, detailed, somewhat math heavy), or "The Investor's Manifesto" (shorter, same content, less math heavy but skips a lot of detail) - both by Dr.William Bernstein. Both of those are US-centric so a decoder wheel of sorts is helpful...available here: http://www.finiki.org/wiki/Canadian-US_Investing_Differences
> ...or just skip the parts that deal with specific investment advice using US-based investment products.
> ...


I am personally comfortable with having money in the bank. My wife and I carried a significant amount for a while but after a few years we used it to buy a vehicle, now it has dwindled somewhat but it's still a fair amount, we plan to build it up again. I'm definitely not looking to get rich quick or play the markets. I just need a good stable investment that I can sink all my extra cash into. My risk tolerance is not high but I do have 30 years until I retire.

Thank you for the advice, hearing so many opinions gives a person much to consider from different perspectives which is what I'm looking for.

SI~


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## Cal (Jun 17, 2009)

My 2c worth (and yes I read your other thread as well)....stay away from mutual funds (unless it is TDefunds, they have low fees). MF's may or may not make you $, but guaranteed they will make the company selling them money.

I would look into the Canadian couch potato portfolio to get you started. Use the search feature, you will find a few threads on it here. It is a good start.

And when you feel comfortable, take some $ and buy equities directly through your bank brokerage yourself. First figure out what investment style is best for you and your life situation. I would start with some of the largest holdings within the MF's or etfs that you already hold and would like to add to in your portfolio.


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## Rusty O'Toole (Feb 1, 2012)

I can understand why you would like to have an Emergency Fund in case of job loss or other major emergency. But why does it have to be in cash, earning little or no interest, in a separate account? Why can't you invest it like any other money you have?

Normal investments like stocks, bonds, GICs, mutual funds and ETFs can be liquidated in a few days, maybe sooner. So why do you have to keep a separate emergency fund?

What do you do, keep $15,000 or $20,000 stuffed under the mattress? What for?

I keep $100 to $200 in cash in my wallet, plus a few credit cards. This covers day to day expenses. I keep $500 to $2000 in my chequing account for paying bills.

In case of an emergency I can pay out up to $5000 on the spot using a credit card. I can have up to $50,000 instantly with an LOC. If my house burns down, or my car gets wrecked, I have insurance.

So why do I need a special emergency fund? Of what possible use is a separate bank account, drawing little or no interest, called "Emergency Fund"?


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## Rusty O'Toole (Feb 1, 2012)

"During economic downturns, you're more likely to lose your job. If you get hit with that double whammy, would you want to sell your investments at a loss to cover living expenses? What if you'd been leveraged to buy those investments? Now you've got debt, investments you've had to sell at a loss, with no income.

They emergency fund is designed to carry you through those events without having to incur or service debt or sell investments at a loss. "

No I wouldn't want to sell them but I would sell them. Of course I would sell them, if I need the money. I just can't see the sense in taking a large, certain loss on investment income on a substantial amount of money, to avoid a theoretical possible loss in case of some emergency that might never happen.

Incidentally I have gotten in trouble, and did have to liquidate a substantial investment at a loss, and it didn't bother me a bit. I still regard my decision NOT to keep an emergency fund as correct, for the same reason I regard the decision to buy insurance on my house as correct even though I have never needed it.

As for keeping an emergency fund stuffed under the mattress earning no return, and at the same time borrowing money to invest, I regard that idea as out and out insanity.

Don't keep an emergency fund and don't mortgage your house to speculate. Use the emergency fund to pay off those bad debts. Keep a credit card or HELOC of the same value just in case and it won't cost you anything until you use it. This makes better sense than paying interest every month and keeping money sitting idle just in case you need it.


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## jnorman5 (Aug 21, 2011)

Rusty O'Toole said:


> ...Don't keep an emergency fund and don't mortgage your house to speculate. Use the emergency fund to pay off those bad debts. Keep a credit card or HELOC of the same value just in case and it won't cost you anything until you use it. This makes better sense than paying interest every month and keeping money sitting idle just in case you need it.


+1. Excellent posts Rusty. Opportunity cost is too high for me as well. Also, since you have at least 20+ days to pay off the CC without getting charged interest, there is lots of time to cash out the investments or draw on your HELOC.


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## Eclectic12 (Oct 20, 2010)

Rusty O'Toole said:


> ...As for keeping an emergency fund stuffed under the mattress earning no return, and at the same time borrowing money to invest, I regard that idea as out and out insanity.
> 
> Don't keep an emergency fund and don't mortgage your house to speculate. Use the emergency fund to pay off those bad debts.
> 
> Keep a credit card or HELOC of the same value just in case and it won't cost you anything until you use it. This makes better sense than paying interest every month and keeping money sitting idle just in case you need it.


I don't know ... paying 3.0% interest that is tax deductible on a bank stock bought in 2009 that was paying a 6.5% dividend and has increased it's dividend since then doesn't seem like a bad idea or speculation to me. 

Then too, if I have an emergency - selling at today's prices means paying off the loan _and_ additional cash to put against the emergency to the tune of 95% of the paid off loan amount.



As for the CC and/or HELoC being free ... YMMV, so make sure to pick a good one.


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## Eclectic12 (Oct 20, 2010)

jnorman5 said:


> +1. Excellent posts Rusty. Opportunity cost is too high for me as well. Also, since you have at least 20+ days to pay off the CC without getting charged interest, there is lots of time to cash out the investments or draw on your HELOC.


It likely depends on the emergency - if the company owed will take a CC, all is well. If the company owed demands cash - what CC gives a cash advance without charging interest?


Cheers


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## jnorman5 (Aug 21, 2011)

Eclectic12 said:


> It likely depends on the emergency - if the company owed will take a CC, all is well. If the company owed demands cash - what CC gives a cash advance without charging interest?


Completely agree with you... and in that case I would use the HELOC at P+0.5%... much cheaper than the CC for cash requirements. Also, I would pay off the CC monthly with the HELOC to ensure the lowest interest is paid.


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## Zoombie (Jan 10, 2012)

It is rather unfortunate that any question posed on this website ultimately (and usually immediately) turns into a discussion of what type of emergency fund is appropriate... Where are the responses relating to investment advice for OP?


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## the-royal-mail (Dec 11, 2009)

^Zoombie, I assume your comment was directed at me. The reason I wrote my original comment should be fairly clear. As you did not seem to (or chose not to) understand my overall point, I will repeat it for you. In this thread, and many others around CMF, we see countless people who still do not understand the importance of a cash emergency fund. There seems to be an overabundance of investing threads in CMF, with only a small percentage of those posters showing any concern or interest in protecting themselves with emergency funds. This is putting the cart before the horse. I do not feel we would be doing the OP any favours if we taught them all about "investing" while they do not have enough saved for the unknown. 

Also, this thread was posted in the general finance section of CMF, not the investing section.


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## Eclectic12 (Oct 20, 2010)

Zoombie said:


> It is rather unfortunate that any question posed on this website ultimately (and usually immediately) turns into a discussion of what type of emergency fund is appropriate... Where are the responses relating to investment advice for OP?


Agreed ... so returning to our regularly scheduled program ....

Part of the issue listed by Simon Says was learning about the different investments possible such as MFs, stocks, bonds. 

So if I were starting from scratch like this, I'd find cheap index based funds that allow buying automatically in small amounts such as the TD e-series. Use those to implement one of the smaller portfolios (ex. option 2) at the link below.
http://canadiancouchpotato.com/model-portfolios/

This will allow money to be invested at a cheap rate while the investment learning is being done, will not require a ton of work selecting investments and will keep costs low until the total is enough to qualify for cheaper trades at a brokerage.


After one is comfortable - a switch over to stock picking can be done or continue on as-is, with maybe some adjustments to one of the more complicated portfolios.


IMO, the key is to learn to walk before you run.


I'm not keen on the advisor as they may setup a more complicated situation that is more difficult to change once the investment learning is far enough advanced to take more direct control.




the-royal-mail said:


> Zoombie, I assume your comment was directed at me...


Zoombie knows for sure but the way I read the comment - it is more about the two plus pages of debate for one particular suggestion versus the half page that adds other suggestions.


Cheers


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