Monday, June 27, 2011

Index Mutual Funds

What is an investor to do to combat all these hidden/high fees that effect your bottom line? Well maybe look into Index Mutual Funds....its an investment vehicle to match/track the components of a market index ( such as Standard & Poor 500 Index)  So you get the wider range of exposure ( in this case 500 companies) low operating costs and smaller turnover ( certain criteria to enter this funds). The drawback with this strategy is you cannot control the amount of one company that you buy into as your purchasing the whole fund, so if ABC Company is a dominant player within the fund you are exposed to its swings in the market place. So to finish up with my opinion on this subject, i look for Equity Mutual Funds that have at least 1 Billion in total assets and pays out a dividend that i roll back into the fund ( as stated in the last blog to reduce your "real cost")  Again there are thousands of mutual funds out there, but i believe that only 10% are worth having and remember what i have stated in this past 2 blogs, look for a good fund manager that has a proving track record......this is paramount!

Friday, June 24, 2011

Dollar Cost Averaging & Dividends

A savvy way to invest/reduce risk of market swings, plus pay yourself back!!...... i thought that would get your ears up (lol) The joint power of constant Dollar Cost Averaging and Reinvesting Dividends will result in your "real cost" ( what you paid in) to be lower, that in time with any uptick in equities creates a nice profit. To explain; Dollar Cost Averaging is buying a set amount of investment each month and thus provides insulation against changes in market price. Say we put in $100 per month and the unit cost $10 in January and so we get 10 shares, same $100 in February and the unit price drops to $5.00, so we pick up 20 shares, March, $100 goes in and the unit price has bounced back to $7.50 per unit and we get 13.34 shares. Now looking at this from afar, you say i started out at $10 per share, fell to $5 and rebounded to $7.50, I've lost money, but wait....... that's the magic of Dollar Cost Averaging as you picked up more shares when the price was down during those months. So you ended up with 43.34 shares x $7.50 ( March Unit Price) = $325.00 and your "real cost" was $300.00  Next we buy units that pay a dividend (which is when a company earns a profit and it distributes up to 4x per year) Say Company xyz paid you a $50 dividend for its 1st Quarter in February, so you would of received 10 shares ($5 Feb unit price into $50) again this will bring down your "real cost" as you have more total units. Now if investing larger amounts per month, the entry point into the market is key, this is where a good investment company comes into play. Also ask/watch the management expense ratios (MERs) or sales commissions ( front end loads and deferred sales charges) as these fees can put a huge dent in profits. In Canada, we have some of the highest mutual fees in the world
and most are hidden or never seen on your statements!!

Thursday, June 9, 2011

Understanding Compounding Interest & Rule72

Hey bloggers, simple words in that heading but really how many of you keen investors understand the "magic" of compounding?  Not to worry, the K-Man has the goods!!  Basically compounding is interest earned on your Principal (start up money/ plus what you continue to invest) and the interest you've already have earned.....pretty sweet deal. So for an example, you had invested $100.00 and it earned 10% at the end of the year that would be $110.00, simple math. Next year that original investment would be $121.00....the $10.00 interest on your start up of $100.00 + the $10.00 but also $1.00 on the first $10.00 of interest from the year one. So to put some glamor in these numbers lets look what it would take to be a millionaire as that word still sounds sexy when thinking of reaching your financial goals. If starting from age 20 with $150 per month you would be in that exclusive club by age 60, just $5.00 per day ( just think, a coffee lol) wow the power of compounding and time!  Now waiting to start at age 30 you would need to increase your monthly to over $400.00 and at 40yrs old the monthly would be $1300.00, so without saying the earlier you start the better. Another method to calculate your earnings is called the 72 Rule...simply you divide your interest rate of return into 72 to find out approx. how long to double your investment. Example, you have an investment vehicle that pays 8% so divide 8 into 72 and your original investment doubles in 9yrs. To finish up, a wise man once told wont run out of money, but you WILL run out of time!!