Financial Literacy Is For Everyone

financial literacy

Financial Literacy is for everyone!

 

I remember when I was 23 years old, binge-watched the entire Sopranos series in under a month.  One point in a later season there is a scene where Tony and Carmela are at a BBQ with their neighbors.   These neighbors are clearly wealthy via more legit means than Mr & Mrs. Soprano.  One of the neighbors gloats how they aren’t just playing the stock market, but that they are winning.  The show was set in the late 90’s, around that time the market was riding the height of a bull market.  A few years later I wonder if those same neighbors would still be gloating.

 

Nonetheless, that moment struck an interest Financial Literacy for me.  My parents had been nagging on me to start investing money into RRSP’s, Mutual Funds and whatever else adults put their money into, for the previous few years.   It had been in the back of my mind for awhile.  

 

The next day I contacted our family financial advisor to set up a meeting.

 

A few day later I met the advisor in his big fancy office in the nice part of town.  He was younger than I expected (turns out he was my parent’s guy’s son).  We shot the shit about my future plans, traveling around Southeast Asia, financial literacy, and other such things.  I think he even laid out a rough path to becoming a financial advisor at one point before getting down to business of how much I could invest and my risk tolerance.

I ended up with Fidelity mutual funds in Canada and the US, medium risk. and some US funds for my RRSPs.

 

The Beginning..

 

Right on, I was officially an investor with a big shot advisor.  I had money coming out every month to contribute on top of a foundation I signed over immediately.  Sit back and let those dollars compound, right?

 

Well over the next year and a half I began looking into financial advising further and began studying the financial industry.

 

I learned Mutual Funds were a safer, long term bet.  But I started thinking back to that Sopranos episode, I wanted that fast cash; that big money right away.  I wanted to get in on the highs of the stock market.  

I contacted my Advisor about investing in stocks, he suggested I didn’t quite have the funds for it to make sense but if I insisted, that I should open an online brokerage account and buy a few stocks with a small chunk of capital to get a feel for how things work.  He also suggested a few.

 

I am officially an investor..

The next week I had my Qtrade Investor account opened and bought into the stocks he suggested, plus a popular-hipster tea company and some marijuana stocks suggested by a friend.

 

In retrospect – save the marijuana stock, but that was just luck – these companies are now the worst performing assets in my portfolio, and only 1 out of the 4 pays dividends.  It wasn’t a ton of money I put into them so I chalk it up to a lesson learned.  You can’t expect to succeed in the market without doing your homework on a company.  A process I am just beginning to work out.

 

I sat back and watched as things went up and down in my account.  In the meantime, I read.  I read as much as I could about finances, investing, savings, and growing your wealth.  Blogs, introductory guides, books and more.  Everything I could get my hands on.

 

My next revelation was unless you have a large stockpile of cash, deep understandings of and access to analytical tools and systems, the time, resilience and – honestly – inside information you’re better off buying into indexes for the long term, reinvesting dividends and letting compound interest take its toll.  Trying to compete, beat the pro’s at their own game, and the market, doesn’t have a historically good record for most people.

 

But I also didn’t have enough money to buy into indexes like the S&P 500 or Dow Jones Industrial Average.  I certainly didn’t have anywhere near enough money to invest in the Berkshire-Hathaway fund (Warren Buffett’s financial company).

 

I discovered ETFs…

 

These changed the game.  ETF’s – Exchange Traded Funds – mimic large indexes to the best of their ability, for a fraction of the price.  You can now own a chunk of all the same companies as the S&P 500 without having to shell out $2,000 per share.  Also, the dividends are generally just as good and the management fee’s are nearly nonexistent as compared to a Mutual Fund (MF).  

 

ETFs are actually quite similar to MFs.  They both hold chunks of multiple companies – sometimes in the hundreds – they also hold various companies in a set industry.  The benefit to buying either MFs or ETFs is that you diversify yourself and shield yourself.  And your principal – from the volatility of the stock market.  Rogers Communications may take a hit for a period of time, but generally the whole communications industry won’t.

 

Protecting your principal while growing it modestly and consistently is the key to success.

 

Now, where MFs fall short of ETFs; MFs are illiquid – ETFs can be traded anytime the market is open just like a stock, and ETFs have tax advantages over MF (generally).  Last but not least and why I’ve moved myself almost completely out of MFs and into ETFs is management fees.  When I discovered the average management fee of ETFs is something like 0.40% I had to contact my advisor to clarify what their management fee was.

 

Well that fee was around 2.5%..         About 5X as much..

 

And for what?  In both cases, at this time in my life all the shares are only sitting there, hopefully growing and reinvesting the dividends.  Why would I be paying someone way more than necessary to do essentially what I am able to?

 

Long term, those management fees can have a DETRIMENTAL effect on your total net worth.

 

Here is some financial literacy for you..

 

Mutual FundETF

 
Initial investment $100,000 $100,000 Gross return over 20 years @ 6% $320,713 $320,713 Management fee 2.50% 0.40% Total fees paid $95,972 $15,186 Net return $224,741 $305,527

 

And now you know why Financial Advisors drive Porsche’s.

 

NOTE: Financial advisors are not evil.  I would argue most of them could and will help improve your financial situation.  Any advisor worth his weight should be doing much more than just buying stocks or funds for you.  Estate planning, budgeting, retirement, helping you realize goals in your life via financial means should also be in their bag of tricks.  

 

Plus that $100,000 would be worth only $132,050 if you had left it in the bank for 20 years collecting the average and measly – not even beating inflation, so actually losing money! – return of 1.4%.  GROSS!

 

If you choose not to educate yourself on finances then going to a financial advisor is essential.  But you’re going to pay for it.  Look for an advisor that’s transparent about his fees.  And isn’t charging you more than 1% of your total net worth.

 

Bottom line on financial literacy…

 

You can easily save yourself a lot of money.   All you have to do is invest a bit of your time in reading up on how money works.

You don’t need to be a millionaire to invest, and financial literacy isn’t reserved for the 1%.  It only appears that way to make other people money.

 

In my opinion financial literacy is simply a part of being an adult.  Money is a huge aspect of our lives.  You learn to cook, do your own laundry and set regular doctor’s appointments.   So should you be keeping a working understanding of YOUR money and finances.

 

If you don’t care to get around to it, maybe one day you can invest with me.   For a more-than-reasonable fee, of course.  Who knows!

 

All the best,

Colby

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Author: Charles

Good ol’ Canadian boy currently situated in Gwangju, South Korea. Spreading the word of the English language. I’m about living well, focusing on the essentials and enjoying my life’s journey.
And that’s what I write about.

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