Friday, January 11, 2008

The great investing experiment

My sister, bless her heart, is not what you might call great with money. I've discussed this a few times on this site, but basically she's a textbook case of someone with a high income, but high expenses, who's always complaining that she never has any money left over at the end of the month. I've had a look at her cash flow and in truth, it's not as bad as it may seem. She's deep in debt, yes, but it's primarily "good debt" -- a mortgage and a $48,000 loan to put her through law school she's currently paying off. But still, that four-figure credit card balance she rolls over every month makes me wince -- as does her tendency to drive to work and pay $20 for the privilege (when the streetcar gets her there in 25 minutes, stress free).

I like to tease her about it, but truth be told, that's probably just my natural sibling tendency to play down how well she's turned out. She's a wickedly smart cookie, a success by any reasonable metric, albeit one with some shoddy financial habits she's been able to get away with because of a high income. Bottom line is, I'm really proud of her, which is why I'm particularly enthused by the plan she's concocted to help get her on the right financial path.

For Christmas, her partner's affluent father was amazingly generous and bought the two of them a brand new car, to replace the two clunkers they've each been driving since about the mid-1990s. She'd originally planned on driving her car under it literally died on her (as opposed to trading it in for a small head-start on an expensive new one) but this new development means she now has an unneeded asset she can sell. She's poked around and according to, each of their two cars has a resale value of a little under $3000. So selling both would net a windfall of at least $5,000 in "found" money.

Her idea is to give this cash to her "investing nerd" of a brother, so he can use his dizzying valuation skills to make them both overnight millionaires, or something like it. I can already hear the clamour of voices screaming "DON'T INVEST -- PAY DOWN THAT DEBT FIRST" and believe me, I agree. But unfortunately, it's a non-starter for her. She refuses to do anything as "boring" as paying down debt with this windfall -- no matter how many times I assure her it's extremely unlikely I, of all people, can better, on the stock market, the 19% after-tax return that bringing Mr. Visa down to 0 would do. But she's insistent. I'm cautiously willing to go along, on certain conditions. She's assured me she'll pay down that debt out of different funds, but she really wants to "have a little fun" with this mini-windfall. It's an emotional reaction, but it's one I can understand I suppose. I think she can do it all if I keep working on her.

So the obvious question is, what investments am I going to buy for her? Ordinarily, if anyone in their 20s or 30s comes to me and asks "what should I invest in?" I say as long as it's for the long-term, stick it in a broad-based ETF like XIC or VTI and forget about it for a few decades. But it's not that simple, in her case at least. She has a bunch of underperforming mutual funds that, strangely enough, seem to do nothing but bleed out fees and commissions without giving her any paper gains of late. (Editor's note: Sound familiar?) So, buying her $5000 worth of XIC, for example, wouldn't give her any more exposure than she already has in her anemic balanced funds, and would only sour her views on investing even more. And I can't bring myself to tell her to give the $5000 to her adviser because I don't think she needs to be paying this person like, 2.5% per year, when an ETF could do pretty much the same thing for her.

As such, my aims for her are a little bit different. I can roll the dice and stick my lot in with one or two companies, with the knowledge that her balanced funds will at least track the stock market as a whole. I'm going to be very strategic with my picks, as I'm trying to convey two broad notions to her:

1) Investing is about the long term. It's great if she can look at my picks in six months and see that she's "up" or "made money" on them, but ultimately, that's not important. I want to pick a company she can buy and hold for years, that'll increase in value slowly over time, so the magic of compounding, and stock splits, and dividends, can get to work for her. I want to rid her of the notion that you can get rich quick, and show her how getting rich slowly is not only easier, but also actually attainable.

2) Dividends are cool. Capital gains can be fleeting, but companies that pay out any excess cash in the form of dividends to shareholders are the best in my book. The day I realized that essentially, these firms are paying me to own them was an eye-opening one for me. I want her to get that, too. Plus, the dividends can be like little rewards for her. It's cash she can take out of the account and spend as she sees fit, without having to sell or reduce her stake to monetize. Surely that will turn her into a buy-and-hold investor -- quarterly cheques she can spend as a reward for her patience.

One thing I should mention is that I'm going to be conducting this little experiment in an unregistered account (i.e. not in an RRSP) I'll set up for her with a low-fee online brokerage like Qtrade, Questrade or Etrade. My sister has a large income and puts relatively little into an RRSP at the moment, so she's got a lot of unused contribution room. One day, when she's figures all this stuff out, that contribution room is going to be worth a lot to her as a tax shelter, so I don't want something I screwed around with today to impact that. I'll keep it unregistered, and we'll worry about capital gains if and when they're up and we sell. If that happens, it'll have been a worthwhile lesson for her, so it's not a bad problem to have. And I should also add that I'm going to be including her, as much as she's willing, in the selection process. Because this is supposed to be a learning experience for her. I want her to understand the how and why of what I'm doing, as opposed to her just shooing me away and saying "you deal with this stuff," the way she does at the moment with anything regarding money.

As far as companies go, I've got a few contenders I'm currently researching based on my above-stated criteria, and I'll keep you updated on how this progresses. But I'm eager for feedback and suggestions on this. Feel free to try to convince me why she's better off paying off the Visa bill -- like I said, I agree with you. But it's a non-starter for her, so this seems like the next best thing.


FourPillars said...


Clearly the visa bill is the best investment but that is her decision.

I'm definitely in favour of buying ETFs for her - some XIC, VTI, VEA will do the trick. Or just some XIC to remove the currency out of the equation.

I don't have much advice about companies (buy the good ones?). Don't worry too much about transaction costs - at Questrade you can buy 10 companies for a one time 1% fee (ie $50) or even 20 companies for 2% so don't reduce the number of companies because of trading costs. Diversification is important.


mariam said...

Hmm, tough choice. I agree with you that buying more ETFs would just duplicate her high MER MFs. Why not just help her do a portfolio makeover to reduce fees? That's "found" money right there as well (said from someone that has to do the same).

I'd be inclined to put the $5000 in a money market fund but I understand that it's not sexy.

I just read MCD dropped 6.62% today on news of lower consumer discretionary spending... I wonder if it's oversold? That name is plenty sexy for anybody.

nancy (aka money coach) said...

Re: visa versus investing - I'm with your sister on this one. Investing is what ultimately led me out of debt and into being all over my money. As long as I paid everything to my seeming-never-bloody-ending student loan etc debt, money management felt depressing and hopeless.

Once I started saving and investing (although I did at least get a low-interest visa etc), suddenly, turning down the impulse shopping became a lot easier - it wasn't a choice between gratifying shopping and sinking the money into the Dark Pit, but declining the great jeans in favour of new stocks.

Eventually the debt went away and meanwhile my assets column had become quite attractive. My wardrobe, on the other hand, became and remains a bit sparse...

In short, in the long term, investing instead of throwing every dime at the debt got me further ahead. Technically, the other way would be smarter and better for the $. Pragmatically, I'm with your sister.

Thicken My Wallet said...

Your sister sounds like a lot of other lawyers I know! Its a total myth that lawyers are well off- we burn if faster than we make it.

What about this suggestion- fix her existing issues and then put away $1000 in fun money- have her chose a penny stock for "fun".

I would do as you do (go with a dividend stock) but if your sister thinks investing is boring, give her a little excitement (make her pick though). If the stock tanks, it may be a good learning lesson for her about investing in fundamentals and, perhaps, that paying down debt is better than taking chances. yes, it sound like wacky advice but it may be a good lesson in investing without breaking the bank.

Krupo said...

Everyone wants to save money on their taxes, right? They want free tax advice?

Re-phrase the suggestion to pay off the stupid credit card debt with this advice, the smartest free investment advice you'll get from an experienced CA: pay down your non-tax deductible debt first.

People like to hear these things from outsiders rather than those they're closest too. Perhaps a different messenger would help?

Or, have her view this video - the video itself isn't the message, the title on the site for the vid is.

At the very least, have her get a low-interest credit card. $5k balance at 20% is $1000. Get a card with a quarter of that, save $750 a year. Yay.

Back to the stock option, note that a bunch of big American stocks got hammered hard recently. See if you can't loot the survivors.