McGill Personal Finance Essentials - RBC Future Launch PDF

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Download McGill Personal Finance Essentials - RBC Future Launch PDF

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MODULE 5 & 6: INVESTING  Investment options ● stocks - own shares of a company ○ more risky, depends on the company performance ○ stocks offer higher returns - 8% per year on average ○ bear markets are yikes ● bonds - IOU ○ lending to a company which will pay you back with interest ○ short and long term ■ short-term: money market securities (< 1 year, eg. Guaranteed Investment Certificates issued by banks) ■ long term are more risky ○ government or corporate ■ corporate are more risky ○ bond returns depend on interest (usually 0.5-3% range) ● how to invest ○ open a brokerage account ○ give money to mutual funds - professionals ■ they charge fees ■ passive ● cheaper than active! charge 0.1% or less per year ● they do not change the stocks? ■ active ● pick best stocks to invest in, changes portfolio over time ● charge 2% per year  Common mistakes and rules to avoid them ● diversify your portfolio ○ not uncommon to lose 30% of value over a couple of days ○ S&P 500 ■ portfolio of the largest 500 stocks in the US stock market ■ some stocks do better, som do worse ■ the index is far less volatile ○ diversification is not for increasing returns ■ for reducing stress and risk ○ how to diversify ■ 10-20 stocks is enough ■ include every industry ○ index funds does the work for you ■ inexpensive - do not trade a lot, not generate large expenses ■ give up looking for great deals ○ diversify internationally

diversification does not protect you from market crashes ■ but markets will fix itself ○ diversification protects small bubbles ■ eg. 45% loss from 2000-2003 (dot com bubble) ○ NASDAQ index: common stocks and similar securities (e.g. ADRs, tracking stocks, limited partnership interests) listed on the Nasdaq stock market ○ Dow Jones index: 30 large companies listed on stock exchanges in the US buy low, sell high ○ 2008 financial crisis lost 55% of its value ○ investment bank Lehman Brothers goes bankrupt, so ppl started selling late October 2008 ○ should expect to face two financial crises in your lifetime ■ 2000-2003 and 2008-2009 bear markets ○ buy when stocks are low, market almost always goes back minimize investment expenses ○ inactivity strikes us as intelligent behaviour ○ compounded expenses! can lose like half of your money over 30 years? ■ active mutual funds = 2% ■ index mutual funds < 0.1% ○ past performance does not guarantee future returns ■ not a good reason to invest in smt ○

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 Progressive Income Tax in Canada / Considering Income Tax when Investing ● taxes are on a progressive basis ● a basic amount does not have tax, but increased amounts will be taxed in their own bracket (progressively higher) ○ above 200k might be taxed at 50%+ ● all income earned is taxable ○ investment income is added to salary income  Paying Down Debt ● interest earned on investments are taxed ● interest saved on paying down debts are not taxed ● debt (eg. credit cards) has really high interest rates ○ this is NOT taxable income, so ALWAYS PAY PERSONAL DEBT  Government incentives ● to encourage savings for retirement ● TFSA - tax-free savings account ○ government-registered account ○ eligible maximum amounts into the account ○ contributions that exceed the amount are penalized (monthly penalty until you remove the excess)

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can be invested in: GICs, stocks and bonds, mutual funds, other after-tax return stays the same as the actual interest can be beneficial, since income is exempt from tax contribute eligible salary delay/defer taxes tax-exempt investments: GICs, stocks and bonds, mutual funds, other once money is withdrawn, will be taxed at the marginal tax rate in year of withdrawal income is tax-exempt until withdrawn (aka you should keep the investment until you retire bc you’ll have no income and lower marginal tax rate)

 MODULE 9: THE REALITIES OF REAL ESTATE  Why Real Estate? ● do not have to pay rent ● can generate stable income as landlord ● capital appreciation (Toronto, Vancouver, Montreal) ● sense of security, leverage ● tax benefits ● diversification benefits ● hedge of inflation (your money will not depreciate)  Factors to Consider ● location: population growing, rental income, growing cities, financial center and money, quality of life (low crime, education, etc.) ○ Detroit - kind of dangerous so not good investment ● macro factors: time (mortgage rates and house prices are opposite trends), house price dynamics ○ Honolulu - limited land area so super expensive ○ Chicago - lots of availability so reasonable prices ● micro factors: ○ which neighbourhood? ■ up-and-coming neighbourhoods - capital appreciation ■ established neighbourhood - stable income ○ property type? ■ apartment/house/etc.  Rent vs Buy ● how to calculate affordability ○ housing is over 28% to 36%? you’re spending too much ● price-to-rent (annual rent) ratio ~ 20 ○ if over 20, then just rent

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BUT depends also on: ■ other housing expenditures ■ down payment ■ time horizon of investment

 Alternative investments ● invest in REITS ○ real estate investment trusts ○ buy and hold real estate properties for rental income ○ buy like a stock, different property types  MODULE 9: BEHAVOURIAL FINANCE  Psychological Mistakes ● safe vs risky investments - depends on YOU ● behavourial biases ● conservatism bias: underreact to new information ○ last information is the first, don’t prioritize histoyr ● representativeness: stereotyping ○ don’t over-extrapolate a trend ● the disposition effect: sell stocks that perform well, hold onto bad stocks?? ○ state of denial, anger, bargaining (stages of grief lol) ● bias self-attribution: attribute success to themselves ○ leads to overconfidence and excessive risk ○ fear also makes you confused ● should plan ahead and not let emotion guide you  Investment Strategies ● trading strategies / quantitative strategies historically ● momentum trading: invest in a basket of winner stocks (successful in past couple of year) ○ related to conservatism bias ○ maybe good news is undervalued? hopefully stock will amount to its true fair value ● post-earnings announcement drift ○ trend going in same direction after earnings announced ○ also conservatism bias...