Past Performance is no Guarantee of Future Results

Learning how to invest is one of those exercises where it seems that the more you read, the more questions arise when reviewing stocks to purchase. When looking at “Value Investing”, there are many theories or systems that people use to identify stocks to put money into. I came across the site Old School Value which keeps track of the performance of around 15 different value investing stock screeners and tracks the performance of the method over the past 16 years.

I’m both a semi- uninformed investor, as well as a lazy optimist, it would be great if I could rely on achieving the long-term returns calculated for a system like “Magic Formula Investing”. An average of 11% return would allow me to follow the relatively easy system of selecting a couple of pre-defined stocks per month, hold them for a year and sell them. I could turn an initial investment of $20,000 into an average cashflow of around $15,000 with no further investment after 20 years, with minimal effort and minimal capital risk.

Of the 15 different “value” stock screeners outlined by the site, there were 11 in total that were able to beat the S&P 500 over the 17 year test period outlined. The volatility on the investments was fairly significant, which is what I would expect for this type of marginally high risk investment, but some are much more significant with others, with the majority of the long-term gains coming from a year or two of 200-300% returns, and the rest of the years ending up at or below (or significantly below) what could be arrived at investing in a large-sized index fund.

This is what causes me to pause before hitting the “buy” button on almost everything. No matter how strong I feel my hypothesis is when going to purchase a security, I understand there’s a moderate level of risk that I’ll never see the money I’m investing again, or at least a chunk of it before I chicken out and sell the investment, no matter how “safe” it seems at the beginning (see the three year drop in the S & P 500 in the early 2000’s and 2008 as a seemingly “safe” investment).

I think that the main characteristic that I need to acquire to be a better investor is to have even a bit of long-term faith in the stock market (or any market). I am by nature a pessimist, which makes going long on stocks a significant challenge – betting that things are going to get better. I need to have faith that the pile of research I’ve done, the ratios I’ve reviewed, the news and opinions I’ve collected regarding the investment I’m making is at least kind of on the right path, and that at the time of purchase I had some sort of reason to by shares in a company.

I have to have faith that the long-term past performance will at some point be reflected in the future, and that’s what I’m working on now, as I’m slowly being enveloped by my investing “career”. Whether it’s an individual stock or something more basic like a bond ETF, I’m always going to wonder if there’s a better place I could have put my money, or there was a different (and possibly better way) of examining the potential investment.

Invest Only in Canada?

As I write this, one Canadian dollar is worth about seventy four cents American. A few years ago, Canadian consumers were up in arms that our strong dollar was not being respected by Canadian stores selling goods from the US, which were still 20 or 30% higher than the readily available comparison prices that Canadians could see with a quick Internet search. There were so many articles written or shown on television about how much Canadians were feeling ripped off at the time.

Now, things are back to about what Canadians would have seen in about 2009. My wife and I are looking for places to travel to in April, and Mexico has gotten significantly more expensive for us than it was a year ago when we went. Our main huge “splurge” every year for the past four or five years has been an all-inclusive trip away, where we bring stacks of books and try to read them all between trips to buffets and bars. Going away someplace warm is something that we both really enjoy, so we’ll have to be a little more discerning with our destination this year and maybe go somewhere a little less fancy than we have been heading to the last few years.

Besides vacations, US securities have become much more expensive to buy. Being a frugal individual, buying stocks at a premium is something that I don’t really want to do, to watch my investments reduce in value over the next few years if the Canadian dollar recovers to previous levels.

The problem with any investment, is that it’s a bit of a gamble. When you put your money into a company, whether it’s in your own domestic currency or in foreign dollars, nobody has any idea of what the investment is going to do. If everything works as planned (this is my basic plan), the value of your investment over the long-term will hopefully increase. I would much rather know before I dropped a few thousand dollars on an investment that it was going to make me rich, but (as far as I know) nobody is privy to that sort of information.

While I would have preferred to have invested a bunch of money in US dollars a year ago when the Canadian dollar was much more valuable, I don’t think it’s a good idea to disregard the rest of the world’s market because nobody wants to buy Canadian securities. Even though the Canadian dollar is beaten up right now, staying diversified by investing outside of Canada seems like a better idea than depending solely on the Canadian economy in the long-term.

Besides being diversified, the Canadian economy could continue to significantly lag behind the US, given our reliance on natural resources for exports, which would make the current value of the Canadian dollar compared to US or other world currencies seem like a good deal.

The Gamble of Value Investing

      My eventual plan with my investing portfolio is to have five to ten percent of my investments in what will hopefully end up being “value” purchases, with the hope that these investments result in significant capital gains in our household’s available funds. So far, I have not made any of these types of investments, but have been doing a substantial amount of reading, hoping to accumulate as much knowledge from smarter investors than I probably ever will be.

My goal (investing-wise) is to have the following makeup:

10% – Bonds (ETF)
~80% Dividend-producing stocks
~10% in “value” stocks.

My current “obsession” with value investing partially has to do with diversification – moving away from the larger dividend-producing companies that I am currently focused on in order balance the portfolio with smaller and varied companies. The second reason for looking at value stocks as an alternative is the hope for the odd “home-run” on a minimal level of investment to increase the overall investment returns on the way to retirement.

At this point, I would say that I am in the range of “knows just enough to get my self into trouble” when looking at investing opportunities. I will not be fully investing my “Value” money immediately, while I take the time to learn all that I can about this way of looking at the market. Up until now, I was (at a basic level) looking at yield-producing companies and examining whether or not these entities would be able to continue to provide dividends to investors in the future.

Based on my limited knowledge of value investing, there seems to be the following steps involved:

  1. Identify stocks selling at a bargain.
  2. Research the stock extensively.
  3. Buy the stock at your target price.
  4. Wait for the market to figure out what you saw in the company, and buy the shares up to a profitable level.


Step one to three makes a lot of sense to me, and the stocks I pick and targets I set are mainly dependent on the research I do and the skill that I select stocks. It’s step four that depends on other investors either believing the same thing I did, or something happening with the company that is the concern with this type of investing. There are going to be times that I’m either wrong, or may enter a position too early that would result in initial losses on the purchase of a stock.

The gamble of investing in stocks that are currently undervalued, based on whatever metrics used to select the stocks is that nobody else will agree with the hypothesis that I’ve come up with, kind of like inviting everyone to a party and then nobody showing up – likely resulting in a similar feeling of dejection on my side.

For me, the potential gains from this portion of my retirement portfolio outweigh the risks associated with this type of investment, allowing for potential capital gains not available from the rest of the securities I have planned to purchase.

Playing the Game

The first job I ever had was horrible. I worked at a chicken farm gathering eggs on weekends. The job was very manual, and entailed me pushing a heavy-duty metal cart up and down very dusty and smelly rows of tightly caged hens picking up 4 eggs per hand and throwing them down into 30-egg flats over and over again for 3 to 5 hours (depending on what stage the chickens were at). At the end of the day, I would have averaged around 10,000 eggs gathered and needed to take a twenty minute shower to get the smell of the barn off of me. I was paid piecemeal, at (if I remember correctly) around four or five cents per dozen – it didn’t work out to a lot of money, but for an eleven year-old, it was quite a bit more than I had been making prior to that.

My parents instilled the habit of saving to me early, and would not let me just spend the money how I wanted to. I was “forced” to save money, and given very little access to the majority of funds. Through my parent’s investment advisor, a mutual funds investment, which I still remember (over 20 years later) being a Templeton emerging markets fund. Every weekend, I would check the finance section of the local newspaper and watch my “fortune” shrink and grow.*

One thing that I was allowed to buy was a Sega Genesis. My mom ordered this for me from the Sears catalog (I lived in a small town that had no electronics store, and this was pre-Internet 1991), and I had to impatiently wait the 3 to 5 business days for this awesome new toy to show up. My first ever game was “Sports Talk Baseball” and I probably played that for hundreds of hours – whenever nobody was watching our family’s one television that had 4 channels, I was on my Genesis, probably killing brain cells.

Since my Sega Genesis, I moved on to a Playstation 1, 2, and 3, as well as owning a Wii and X-Box 360. These days, I don’t play as many video games – It’s not due to anything other than I have other stuff I’d rather do – read more books or watch more sports, or spend more time with my wife. For 15 or 20 years of my life though, I probably averaged around two hours of video games per day. I liked the challenge of starting off in a game, being TERRIBLE at it, and slowly but surely getting better and better, gaining skills (useless skills in real life, but skills nonetheless) until I hopefully beat the game.

Personal finance is similar to video games. My personal finance life started with that terrible job, and having a savings plan strictly imposed on me by my parents, and continued on until today. Along the way, I have learned quite a bit from both experiences as well as following people’s lessons who are much smarter than I am. I somehow single-handedly paid for a University education, as well as the loans associated with those. I bought my first car, got a place to live, and paid off the entire mortgage of my house.

Similar to the video games that I probably spent too many hours playing, the whole process of personal finance is basically a grind. You save relatively small amounts of money, and slowly but surely through experience, luck or skill build up confidence and assets until you’re hopefully in a position that you can win. In my case, winning will be having a large enough portfolio that my wife and I will be financially independent by the time I’m 45.

Right now, I’m kind of at the beginning of the game – my portfolio is fairly small, the investments held are creating very little overall wealth on their own, and it’s kind of a frustrating process. I read as much as I can about investment planning and investment vehicles, but I am still pretty much a rookie at the whole “put money here and it will hopefully be worth more than it is now in a few years” strategy. Hopefully as time goes by, my odds of winning “The Personal Finance Game” will increase significantly.

*While I was writing this, I looked up the historical performance of this fund, and it has remained at essentially the same price point over the past 20 years.

The Savings “Addiction”

I’ve read personal finance blogs for over a decade, since blogging started to be a thing. My tastes in what I read have shifted from when I first started out my financial journey. Initially, I was very interested in authors who wrote predominantly about frugality and major money-saving techniques. This phase was probably the one that drove my wife completely nuts, as I was perhaps a little intense in implementing major money-saving techniques (something that she had never thought about doing). I never went as far as forcing the household onto single-ply toilet paper, re-using ziploc bags, or drying out paper towels for re-use, although if you asked my wife, I did go a little nutty for a while in an attempt to reduce the waste I saw in my house.

One blog that I still read on a semi-regular basis (although probably not as much as I should because there is a lot of goof information and analysis there) is Dividend Growth Stocks. One part of his blog that I really enjoyed reading about when it first came out was his pocket change portfolio.  I think the premise of this portfolio initially was to take the small amounts of money that was being made from writing posts, and turn that into dividend cash flows for a “fun” portfolio. After 7 years, his “pocket” change portfolio is making almost as much money as my wife and I would need to live on in retirement. I really like this idea, and have thought about doing it for a while. As a way of saving my change, I fill up an empty 100-ounce whiskey bottle (Canadian Club, from my younger and much more foolish days) and every year or two I’ve counted it out and spent it. With the abolishment of the penny, it’s taking me a lot longer to fill the bottle up this year, but it expect there to be significantly more money in there than the last few times.

The last time I emptied out the jar, my wife, who enjoys the tedious task of counting and rolling change, came up with a final count of about $450 – I’d think there would be at least $600 in there, which would be a good start to any sort of “mini-investment” project that I would take on. I could put $600 into an investment account and earn dividends off of it forever, much like the writer from Dividend Growth Stocks. This decision would be probably the most responsible thing to do – create more cash-flow for myself from “free” money forever.

My problem with any savings plan I implement, is that I have a hard time spending any money on anything. I allocate so much of the money I earn at my job to retirement savings right now that it doesn’t really leave a ton of money for some “fun” things – I’m more addicted to saving money than I am to spending it on anything – fun or not. While the savings addiction is beneficial to my current goal of amassing enough money, it is not beneficial when all I end up doing is having separate savings account for various future goals that I haven’t even thought of yet.

I haven’t really decided if it’s a good thing or a bad thing – I could use the $600 to buy a new cell phone next year, but my own “pocket change portfolio” funded with free money is probably a better idea – the decision I have to make is when to stop saving.

Better to Start Now

I meant to post this yesterday, but had to re-work some of my calculations in the examples below that didn’t make sense.  I’m definitely not advocating this type of investment for anyone, but wrote this post as part of my own investigation into possibly doing it for myself.

I am far from an innovative investor. I lean heavily on stealing other people’s ideas as my own, picking and choosing the best stuff that seems to fit into my own risk profile and investing strategy, as well as for the time I’m able to use to research the investments going into my portfolio. I continue to read books and blogs of people who are smarter (and probably more interested) at investing than I am.

Ever since I initially read “Rich Dad Poor Dad”, I had a dream of being a real estate mogul – of building a business that was outlined in his book from a couple of small houses to eventually a full portfolio of buildings that would make me a multimillionaire. I read that book over 10 years ago, during my initial rush of inhaling every personal finance book that I could. While I think that in general, most of what was talked about in the book doesn’t really apply to me, the picture of being a real estate “player” as a means to wealth never really left my mind.

One thing that has kept me out of the physical real estate market is that I really don’t like people. I know what I was like as a fairly responsible tenant during my renting days, and I wasn’t ideal – I can only imagine the problems that I could come across with some of the “horror story” tenants that I read and hear about from landlords. My wife and I can barely manage our own house, let alone look after several properties at a time. While I know I could hire a property management company to look after the houses I’ve bought, that would mean I’d have to hire and fire those “employees”, something I wouldn’t look forward to doing.

A couple of weeks ago, Nelson from Financial Uproar wrote about an alternative method of having a leveraged real estate portfolio.  Most of my adult life, I have been against most forms of debt, I don’t like to have it hanging over my head and have avoided most forms of borrowing as much as I can. I am generally a risk averse individual when it comes to investments, but this kind of leveraged investment has me intrigued. I am currently invested in a couple of REITs in my RRSP portfolio (RioCan and Dream Office), but these items make up a fairly small portion of my current overall investments. A much larger exposure to real estate wouldn’t really shift the diversification of my portfolio.


As an example of how this investment would work, let’s say my wife and I were to start a “mini” real estate portfolio. Like most real estate starts, our intention is to use 20% of our own money (similar to how we would have started with buying a small house to rent to a small family or students) and borrow 80% of the amount from our bank using a home equity loan. I have made the following assumptions (taken from Nelson’s blog post, as well as September 15, 2015’s return for the REIT TSE:ZRE) :

Interest Rate Charge – 2.70%
Annual Charge = $2,160
Monthly Charge = $180

Return on the REIT investment – 5.71%
Annual Return = $5,710
Monthly Return = $476

I’m going to assume there is no change in distributions or interest rates for the period of testing.

Basic calculation:
On a monthly basis, we could, on a 20,000 investment earn $295.83 (distributions less interest charges) as long as interest rates never increase, or cash distributions aren’t adjusted in the for the index fund. Annualized, this investment would provide an additional $3,550 in income for our household – not a huge amount of money, but a pretty good return of 17.75%. If our goal at retirement is to have passive income of $25,000, we would be 14% of the way there, with minimal effort.

Paying down the debt:
If, over the next 9 and a half years (114 months) if we didn’t spend any of the income received from the investment and use the total net amount to pay down the principle on the loan, we would be making $382.22 per month ($4,586 per year). At the end of this period, we would owe $21,604 on the loan we took out

“Letting it Ride”
A more aggressive method of utilizing this kind of investment, would be to pay interest only, and utilize the money earned to purchase more shares. This kind of strategy would be similar to a “small-time” real estate investor starting with a single house, and using the equity created by the investment, to extend the investment to the maximum. At our projected retirement date, we would be generating annual income of $6,100 with our investment, an increase of $2,550 over the year 1 investment returns, or about an 8% increase on return (hopefully greater than inflation).

A Mix
The investment could be paid down like a mortgage, increasing the investment and paying down the debt at the same time. In month 1, the net return of the investment is the calculated $295.83. The $295.83 could be split in two, with half of the distribution used to pay down the debt and the rest used to purchase more of the security, more of a “blended” payment. This method of debt payment would reduce the debt outstanding, which might insulate any future impact of an increase in interest rates, while increasing income associated with the investment.

Tax Implications:
If I were to utilize this kind of investment, I would do it through a taxable account. With a taxable account, there are implications that need to be taken into consideration over holding a REIT in a tax-sheltered account.

On the taxable income side, REITs are much more complex than normal securities, due to the methods used to create income. The Globe and Mail wrote an article about tax filing for RioCan in previous years, which included the following items in income:

31.24% – Other income – taxable at the marginal rate.
1.72% – Capital Gains – 50% taxable at marginal rate
4.57% – Foreign non-business income – taxable at the marginal rate
62.47% – Reduction in adjusted cost base (return on capital or ROC) – A bit of a complex calculation – the Globe and Mail writer explained it as:

When you receive ROC, you are not taxed immediately on the amount. Rather, you subtract the ROC from the adjusted cost base of your units. This gives rise to a larger capital gain, or smaller capital loss, when you ultimately sell your units. Because of the tax deferral, ROC is considered tax-efficient income.

Interest on investments is an allowable expense, provided the investment is used to try to earn investment income (can’t be used for capital gains investments). This allowable expense will reduce the taxable liability on the interest earned, provided I would fill out a schedule 4 tax form.


The two main risks with this type of investment would be a decrease in the distribution paid out, or an interest rate increase. Both of these risks are a little scary when it comes to the investment as a whole, but there is (currently) a 3% spread currently between the interest charge and investment return to “play” with.


I’m still not sure if I’ll do this or not. If I do make a leveraged investment, the earlier it’s made the better, as it would give more time to get either interest paid down or to increase the investment earnings by reinvesting into the security.

Continuing Education

I received an accounting designation 2 years ago, after around seven years of tedious distance education. For three of the seven years, when the courses I was taking became too difficult to allow for the amount of procrastination I was accustomed to, I had to give up a good portion of my hobbies and interests in order to give myself a chance to pass the courses I had decided to take. As in most schooling I’ve been part of, there were many things that were not applicable to either real life or any accounting work that I’ve come into contact with, but it seemed very important at the time.

As part of my accounting designation, I have to fulfill 40 hours of professional development per year. This year, I took a two day course on auditing standards (was actually better than it sounds) and will probably scrape together enough free webinars offered by financial companies and accounting bodies to fulfill the necessary requirements to keep my license. I don’t mind the learning part, it’s the cost of learning that makes me a little angry – the Chartered Professional Accountants of Canada / Ontario essentially have a monopoly on the courses offered now, and price accordingly.

Besides continuing my education for my chosen career, I am also trying to continue to teach myself to be a better investor. I would be the first to admit that I read fewer personal finance and investing books than I did five or six years ago, when I was deep in the middle of creating a personal finance plan for my wife and I. At the time, I read most of the personal finance and investing books that my library had available, trying to sponge up all of the information out there. These days, my intention is to learn more nuance – instead of the previous strategy of “learn everything at a time, and hope that some of it’s right”.

I’m much more comfortable with my financial situation. My wife and I have gotten our monthly expenses to a reasonably low level that allows us to save enough to hopefully achieve our end goal of being financially independent in about nine and a half years. What I need to learn right now and into the future, are ways to limit (as much as possible) investing mistakes that could put my finances in peril. In addition to risk avoidance, my goal is to reduce the opportunity costs of my investment decisions – if there is a more profitable place to put my money, I’d like to at least be aware of it.

So, for now, I have a pretty big list of books that I’m planning on reading, taking notes on and applying (if what has been written makes sense) to my investment decisions. I’m hoping that sometime in the future, I will have less doubt when I make a purchase or sale of a security, but I have a feeling that as I get older and my investment portfolio gets larger, the wariness and worry will probably always be there.

Having Any Investing Plan is Better Than None

I try not to be a money snob. I don’t discriminate between short-term “Early Retirement” planners, the longer-run value investors, or the more average index investor. I think that each method has both benefits and pitfalls, depending on risk tolerance, market conditions, and capital availability. Over the long-term, I think there is probably a “winner” in all of these investing strategies – there have been many studies showing how each will turn out over time, including risks of each method of investing.

One thing I know, is that given the choice between any method of investing for retirement and not investing at all, I’d take something over nothing. I have many people in my life who seem to take a long-term “hope it all works out” approach to retirement planning, and not really do anything (save and/or invest) that may help them when they can no longer work.

I don’t think everyone needs to retire at 35 or 45, or even 60. I think that there should be some recognition however that at some point in a person’s life, they may either not want to get up in the morning to work for money, or they might no longer physically be able to work anymore. It’s so easy to put off that inevitable day in return for vacations, a new car, a bigger house, or any number of purchases that could be made by an “average” middle class household.

For me, working towards financial independence is a long-term goal that I try to keep in mind anytime I start thinking about doing something foolish with lots of money. It’s the kind of goal that stops me from what I would deem frivolous spending. I would rather work towards an end goal with my available funds.

A different, probably less aggressive goal could be anything that would ensure that both my wife and I have enough money when we’re done working. Instead of a 40 – 60% savings rate, a more reasonable 10 or 15% rate would ensure a small fortune in savings over a 35 or 40 year period at even a very conservative rate of return, because the way I see it, any savings and investing plan is better than none.

The Hope for More Free Time

I follow a few local fitness people on Facebook, they sometimes post good deals on classes or have interesting articles. This week, one overly ambitious business, which focuses on mobility and flexibility had the following question posted: “Are Pelvic Control Drills Part of Your Exercise Routine?”. My answer to this question, is that first of all, I don’t even know what a pelvic control muscle is, or why I’d need it, and secondly, why would I work on this pelvic muscle instead of just going for a walk.

In an ideal world, I wouldn’t have to go to work, and would have a solid 2 or 3 hours per day to lift some weights, go for a walk, and then work on things like flexibility or other physical things that will allow my body to stay together in the next (hopefully) 50 years. With work, I really don’t have the time to do much more than make sure that I don’t spend all of my time sitting around and doing nothing.

Besides not having time to work on pelvic control drills, and other things that I should be doing to get in better shape, there are other things that slide due to a lack of time. One example is the fact that I should be much better versed in investing. In order to reach the goal my wife and I have set out, we have nine and a half years to save and invest enough money to allow us to be financially independent of our jobs. This kind of “responsibility” should take up a good chunk of my available time, but seems to slide to the back burner some weeks to make room for the latest library book, round of golf or Netflix show.

I’m hoping that I’ve gained enough knowledge over time that I won’t look back in horror at the investing decisions I’m currently making in the future when I will be hopefully much more confident and savvy. Once my wife and I are out of the workforce, I will hopefully be able to leverage some of the free time I gained into better returns for our portfolio. Until that time, I battle procrastination, and trying to get everything done all at once, rather than having to rush to get things done in my free time.

My Planned Portfolio

The last few weeks, I have written about a few of my holdings in my retirement portfolio – something which I hope will support my wife and I from the time we decide to stop working until we don’t need money anymore. Today, I’m going to lay out my current “end game” for when I am fully invested.

Over the course of reading many investing and personal finance books to come up with a plan that meets both my risk profile as well as providing the necessary cashflow that my wife and I require. There are so many points of view on what “proper” securities are, and what you should stay away from that making up a financial plan gets very confusing. Because retirement investment plans cover such a huge expanse of time (I’m hoping for another 60 years, which would get me to 95), the stuff I’m investing in today at age 35 may not make any sense to me by the time I turn 45.

The following represents the 3 main categories that will make up my portfolio.

80% – Income Producing Securities

These investments will made up of dividend producing stocks and Real Estate Investment Trusts. The purpose of this group of investments is to hopefully replace the income that my wife and I are each currently spending 40 hours every week working.

There are risks with having an equity allocation this high, it is contrary to at least 40% of investing and personal finance books I’ve read. I’m not sure who wrote it, but I prefer to follow the tenant that I’d rather have 20 or 30 sources of income (separate stocks I’ve invested in) than depending on one salary now. As long as I’m correct on the vast majority of my investments in this category, I think my wife and I will be okay being dependent on these investments.

15% – Bond Funds

The purpose of the bond funds are to stabilize the retirement portfolio. The stable bond yields will decrease the overall portfolio yield, they are “safer” investments due to the more stable and predictable nature of bond yields.

One thing that I hadn’t thought about, but Nelson from Financial Uproar wrote about was the benefit of having bonds available to sell in down markets in order to buy more stocks. He writes that because in a down market, bonds generally increase in value, they are a good source of cash when there are buying opportunities.

5% – Value Stocks / Speculation

This percentage of my portfolio may increase as I get more comfortable with investing. I am mostly too impatient with investing in stocks that would be deemed “value” stocks, mainly because the return on these types of investments requires the rest of the stock-buying public to be involved with the stock. I think there is merit in having these kind of investments, and that they could result in significant capital gains if done correctly, but I’m not willing to invest huge amounts of money in this category at this time.

So, that’s a proposes bird’s eye view of how I’m currently investing in securities. What does your plan look like, and how did you decide on it?