Suggested Schedule For Lazy Investing

There are many blogs, news outlets, and advice channels providing the average Joe with a constant stream of financial news, opinions, and noise. What is a good way for a normal person to deal with all this information?

As horrible as it may sound, I would recommend that anyone who is serious about managing his own investments start by ignoring it all until he understands the subject matter. If you take the matter seriously, you can educate yourself quite thoroughly in 6 months to a year. Maybe that sounds like a long time, but it's a huge money-saver if your alternative is to pay someone 1% of your assets to manage your investments for the next 30+ years of your life.

How do you know that you've gotten to a point where you understand your investments? A test is to ask yourself whether you understand how a product is priced, what different parts make up the cost of owning that product, who issues the product and why, how liquid is it, what are the risk factors and how risky is it compared to other products, what is the expected return, what do you actually own, how can the product be taken away from you other than your selling it?

Understanding your investments is one part of freeing yourself from the constant barrage of questionable financial advice. Have a scan through some financial articles. You will find them peppered with non-committal words like "could", "maybe", and "looks like" with regards to current events. This is not really a knock against the articles themselves, since nobody knows for sure how things will pan out. However, once you understand your investments, you will be able to read these articles as opinion pieces instead of concrete tips.

Next, learn about investing history. Learn about the mass hysteria that has gripped investors in the past. Most people don't bother to learn about history and we find ourselves getting tripped up by similar problems later on. Our memories are so short that we even manage to crash the markets twice in the same lifetime.

[The above two points are very well covered and expanded upon in William Bernstein's book, "The Four Pillars of Investing". His four pillars are:

1. Theory of Investing
2. History of investing (how did people handle things before)
3. Behaviour of Investing (how your can emotions ruin your chance for success)
4. Business of Investing (how the mutual fund / brokerage / middleman industry bleeds you dry).]

Read books that are based on scientific research. "Educating" yourself by reading about hot investing methods that have no repeatable success is a waste of time.

So you understand investment products, you know how the markets can act, and you know how you should behave. Now is the time to form a plan. Spend some time to make it a good plan based on your researched knowledge, and then implement your plan. Just as it's not a good idea to invest without a plan that you understand, it's also not worth it to hold off executing a good plan because you are searching for the perfect one. Except in hindsight, there is no perfect plan.

You now have a plan, probably for your retirement that is many years away. If you've done a good job educating yourself, and you have confidence in your plan, you're free to let your plan run. If you want to continue learning more, by all means go ahead. If you like reading blogs and keeping up with the news, you now know enough to separate the good stuff from the noise. Tweak your plan every 6 or 12 months, and use the rest of your time to do something that will bring you better returns in some other area of your life.

Preparing To Invest: Read Some Books!

For many of us, the web has become an important learning tool. Search engines have made it wonderfully easy to find information on specific topics. But to me, the web, with no promise that content has been edited or is correct and complete, is not a great tool for getting comprehensive information on broad topics, which is exactly what you want as you prepare to invest.

There is also the question of how the site stays in business. For most, it means selling advertising, which raises issues of conflict of interest. For instance, can I trust a review of credit cards to be fair if the site also runs ads for certain credit card companies? How do I know that a comparison of brokerages is not biased when I see ads for banks running on the site?

The use of hyperlinks on web sites, while at the very core of what makes the web great, means that users can read about whatever pages they like on a site. But it also means that they will probably read only what they like. So structuring information on a broad topic is very difficult.

Newspapers and magazines have similar issues, and also need to constantly generate new content. It does not matter if there are not any new and useful ideas to write about--staying in business for them means writing new articles.

There are plenty of other learning methods, each with their own issues, like learning from chats with friends, or from TV.

To me, the best learning tools are books. Here's why I think so:

• Content is structured: Unless this book was written and edited carelessly, the content is presented in a logical progression. Focus is given to points that are important in the context of the broader topic. Articles on the web and in magazines and newspapers lose this context.
  
• Content is comprehensive: To many people, investing means buying stocks. I'm always surprised by how many people do not understand or consider bonds or other asset classes like real estate. A good investing book will teach you about the different asset classes and how they may (or may not) fit into your portfolio. Articles from other sources mainly focus on one point (usually stocks) and are not as able as books to present information in the context of the full spectrum of investing options.
  
• Once the book is in your hands, the sale is complete. Unless you've picked up a book that is trying to sell you another product, the content is not as influenced by advertisers.

To be sure, there are some books out there that are real stinkers--books written to evangelize the latest mania, to sell another product, short-sighted books, and just plain bad advice books. But all these problems also exist in the pages of non-books, without the positive points that books enjoy.

There is still a place for non-books, especially for doing quick research into specific topics or getting the beat of current trends. But while you are building a foundation of knowledge as you prepare to invest, go read some books!

Preparing to Invest: Practice

So you've got your finances in order, and after paying for living expenses, insurance, and funding your emergency fund, you find you have some money left over to invest. Great! Now you're itching to get your account opened so that you can place your first trades and make tons of cash! Well, before you do that, it's probably a good idea to do some practice trades. There are plenty of stock simulator sites out there for you to get your feet wet.

While you probably have an idea of what you want to buy, you may not be familiar with the types of orders you can enter, or how to enter the order at all. Having a trial run of this using play money will save you from the frustration and embarrassment of entering an incorrect trade with your real money. Market orders and Limit orders will probably be your most common order types, so try entering a few on a simulator. If you have enough time (a few months at least), try joining a game and see how you do.

If you're going to make mistakes while you learn how to enter orders, better to do it with fake cash!

Preparing to Invest: Have a Plan

Before you deploy your investment dollars, have an investment plan. Get it down on paper along with your reasons so that when things get scary, you will stick to your plan. For asset allocators using index funds, this might look something like:

What	Why
Stock/bond split	Risk control
Asset allocation	Diversification, opportunities for capturing benefits during re-balancing
Re-balancing strategy	Systematic method of capturing diversification benefit (buying low, selling high), Risk control

Reasons to revisit your plan include changes in the following:

• marital status or family
• job
• tax laws
• life changes affecting your income/expenses
• life goals (eg. you no longer want to sail around the world--helping to raise the grand kids is what you really want)
• periodic adjustment for age/investment horizon (this is a risk adjustment done maybe every 5 years)
• financial system (should be pretty rare--these are not economic or political events)

Poor reasons to revise your plan are usually predictive and short term issues such as:

• hot tips forecasting the next growth opportunity
• trying to predict the effect of an economic or political event
• predictions of interest rates and monetary policy

If you have a reasonable plan, it's important to stick to it. Getting spooked during a downturn (are you investing within your risk comfort zone?) or jealous when others appear to be doing better than you (don't chase past performance!) will lead you down the road of buying high and selling low.

Preparing to Invest: Get To Know The Available Account Types

RRSP, RDSP, RESP, TFSA, RRIF, DPSP! There are many types of accounts/plans available to help you grow your money faster. Get to know how they work, so you can make the best use of them and allocate your investments to the proper accounts from the get go.

Let's look at the RRSP and TFSA since they are probably the most common. The main benefit for both of the accounts is that growth in the accounts are not taxed while they stay in the plan. How about some of the differences?

• Contributions to an RRSP are tax deductible while TFSA contributions are not.
• Withdrawals from an RRSP are taxed as income while TFSA withdrawals are not taxed at all.

These two points mean that if you expect your tax rate to be lower after retirement, you will pay less tax using the RRSP. If the opposite is true and you expect your tax rate to be higher after retirement (not as likely), then the TFSA is more advantageous in this respect.

But that's not all! RRSP withdrawals before retirement incur an early withdrawal penalty while TFSAs do not. Check out the withholding tax chart for early RRSP withdrawals. (Note these are not exactly your final tax rates on these withdrawals. You might think that if you make 3 withdrawals of $5000 that you will be taxed only 10% instead of 30% on a lump sum withdrawal of $15,000, but since these withholding taxes are estimates, you will end up with a huge tax liability at tax filing time when your final tax rates are calculated.)

As you can tell, there are many rules and eligibility requirements. Get to know the different account types so that you can make good use of the benefits available!

In the general case (and remember, none of us is average, so adjust for your own situation!), for someone saving for retirement, I would recommend filling up an RRSP first. Of course, top up both accounts every year if you can!

Preparing to Invest: Be a Saver

You can't build real wealth and financial security if you are not regularly saving money. Yes, you can "own" a really nice car and a big house by the water by borrowing, but that debt is a liability that you'll never pay off if you are not saving.

Borrowing money to invest is a risky prospect too. Suppose your lender is going to charge you around 5% in interest. This is payable no matter how your investment does. Lose money, and you still have to pay interest on your loan (and eventually pay back the principle as well). And when you make money, considering that stocks average 8 to 10% annual gains in the long run, a 5% bite for interest payments is substantial.

Controlling your costs and spending is key to saving. Contrary to what advertisers imply, you do not automatically deserve to have the latest and greatest just because people around you are getting one. It does not serve you to envy them. If you can afford it, by all means, go ahead. But recognize when you cannot afford it (hint: if you can't pay for it with cash, you probably can't afford it. If you have to dip into your emergency fund, you probably can't afford it.) You don't need to keep up with the Joneses when chances are, under the nice shiny exterior, the Joneses are broke.

So how can you save? If you have the will, you can set a percentage (I suggest at least 10%, but the more the better) of your income to try and set aside as savings. Then look at your spending patterns and separate your needs and wants. Cut down on your wants to achieve your savings goal. Adjust what you spend on your needs (are there lower cost alternatives?) If you need a bit of help, try a "forced" savings plan by automatically depositing your savings goal into a savings account (like a high interest savings account). Places like ING Direct offer such a service (ING calls theirs the Automatic Savings Program).

Preparing to Invest: Protect Yourself, Your Dependents, and Your Belongings

Personal finance is about more than just your stock picks or your carefully selected asset allocation. A holistic view of your finances also includes your ability to handle financial surprises, and protection against financial catastrophe. These come in the form of your emergency fund and various types of insurance.

Emergency Fund: It is usually recommended to have 3 to 6 months worth of living expenses (not salary) in your emergency fund. Tally up your rent/mortgage, food, bills, fuel costs, monthly insurance premiums, etc. and set aside 3 to 6 times that value in your emergency fund. Keep this money liquid, so that you can access it relatively quickly. For example, put it in a savings account, money market mutual fund, or cashable GIC.

Why do you want to have this set up before you invest? Since the markets are volatile and emergencies and financial surprises can happen at any time, you really don't want to be forced to cash your investments when the markets have taken a nosedive, as they do from time to time.

Insurance: Protect yourself from financial ruin. The types of insurance you need will vary based on your situation, and in some cases your employer may provide some coverage for you. Some of the more common types of insurance you need are:

• Disability Insurance (protect your ability to earn)
• Health Insurance (protect from possibly huge medical bills)
• Life Insurance (protect your family's income)
• Home Insurance (protect your property and possessions)
• Vehicle Insurance (protect your vehicle and get coverage for liability)

I would strongly urge you to adjust your policies to get the best coverage for those cases that would truly bring financial hardship. Paying a couple hundred deductible for a broken windshield is annoying, but won't wipe you out like a court order for $1 million will. All insurance brokers have a default policy. It will work for the average situation, but nobody is average, so take the time to examine it and make adjustments that fit your situation.