Four Simple Rules to Improve your Life

We live in a world of opposites. For a millennia the world believed that the sun revolved around the earth.  What could be more obvious,  the sun rises in the East and sets in the West.   We know that this has been proven to be the exact opposite of reality, what appears to be real is an illusion.   Learning to accept what appears to be real as just an illusion is  not easy, however if you  want to have a happy healthy abundant life it is an essential trait to learn.

 We all are busy; work, family, community. We know  our need to rest and relax is essential  however when we are busy it is easy to ignore.  We will give up recreation or family time for work, or in some cases we will give up work for family time, either way the balance of our lives will get out of sync.   When that happens something is going to give and often the result is not pleasant.

The irony is that what we really should do is exactly opposite to what our human nature says we need to do, instead of working more, we should work less.  Instead of trying to find more time for ourselves we should devote more time to others, either family or community.   There are several key principles that are laws of nature that we tend to ignore, changing our approach to these and giving them more importance in our lives,  can make our lives more rewarding, filled with abundance and good health.

These four rules are the opposites that can change lives.  

1.  Giving gets- the more you give the more you receive.  Spend more time volunteering in your community , giving of your time and talent to the benefit of others with no consideration for what you will receive in return will result in you receiving more than you give.  J. Paul Getty, the great American industrialist, once said that his secret to success was helping others to be successful .  His company had more millionaires working there than any other company in the country.

When  you think you don't have enough time to devote to your job or business, go join a service club, give back to your community.  Volunteer, do something that is a contribution, you will be amazed at the impact this will have.  Learn to pay it forward, giving of yourself to the benefit of others is the key to the abundance of the universe, which is waiting for you to insert the key and unlock that outpouring of abundance.   This is opposite to what your instinct tells you to do.  Your initial reaction is to dismiss this as nonsense and to try to work harder to spend more time at your business.  

Watch this interview with Arianna Huffington which supports this concept., http://www.inc.com/arianna-huffington/founders-forum-how-huffington-learned-to-thrive.html

2.  Gratitude -  Be grateful everyday for all that you have received.  It could be as simple as saying thank you for the air your breath, just be grateful.  Write it down, start a daily journal and write down what you are grateful for everyday.  Don't question this one, just do it,  it will change your life. 

3.  Forgive - Whenever you feel you have been mistreated or maligned by someone, say I forgive you.  Put it on your calendar that you forgive.  Don't hold a grudge, get rid of it,  forgive and forget.   You will be amazed how your life will change when you forgive, it is the key to your happiness. 

4.  Love -  Nothing could be more important than to love.  Love is the answer, it is the elixir of life.  Love one another,  be kind to your fellow man.  Love all mankind.   Love destroys hate, it will heal a broken heart, it will lead to peace. 

There  you have it, four simple rules which if you practice them will make you a better time manager, improve your business and your health. 

Johnny Mercer , one of the great composers of the 20th century said that when a producer would call with a request for a new piece of music for a specific movie, he would sit down at the piano and if the inspiration did not come in the first fifteen or twenty minutes he would go out. His favourite pastime was to play golf,  on his return invariably the inspiration for the song would come and in no time the composition would be complete.  

Every day is exactly the same as it has been for millenniums.  Nothing changes except the seasons.  Life is not a rat race,  whatever appears to be  reality to you is not real. You can take control of your life, accomplish more and be happier and healthier and live longer,  just  do exactly the opposite from what you inner self suggests.  It's your time, you can think your way to success.

Twelve simple rules to follow to sound investing for the long term

INTRODUCTION

For many the major concern about investing for retirement is risk.  The risk of losing the capital is the number one concern, however there is another risk that is the risk of losing purchasing power to inflation.  With interest rates at an all time low the inflation risk is very real.  Investing in a non registered GIC  earning less than three percent, the actual rate of return is in the negative.

If the goal is to build wealth long term the only option is to include equities in the portfolio.  Learning how to do that effectively and to do it without loss of capital is the objective of this paper.  Here are the twelve  things   needed  to be a better investor, regardless of how what method of investing is chosen, buying  stocks on your own or use a quality mutual fund. 

1.       Define what wealth means to you

Take the time to think about what wealth means to you and define your goals.  A good way to do this is to begin with the end in mind. What would you like to achieve by the time  your retire?  It may be as simple as defining how much of your salary you want to continue without working.  If that goal is 80% you can now calculate what your savings goal should be every month, with that knowledge you can now begin to determine what type of investment strategy will work best for you.   Keep in mind that your goals should be long term, not only to retirement but to future generations.  Family wealth starts with one person making a conscious decision to create wealth and keep it for generations.

2.       Keep it a secret

Once you know what your definition of wealth is and what your goals are it is important to keep it to yourself.  Don’t allow others to pull down your dreams.  Keep in mind that achieving wealth success takes work,  you will have to apply yourself to succeed.  Measure the results, be patient and stay invested.

3.       Understand your money beliefs

We all carry this baggage about money, the root of all evil etc.  You need to change that belief.  Understand that there are only two things that work people and money. Money invested will eventually give you enough wealth that you don’t need to work.  Learn the principle of the rule of 72 and apply it to you  goals.  (Rule of 72 – whatever the interest rate divided into 72 determines how long it takes to double the original investment)

4.       Wealth is a consequence not a reward

Wealth is a consequence of concerted effort to achieve an objective.  Understand that ten percent of everything you earn is yours to keep.  A good objective is to save 1% of your gross annual income monthly, i.e. if you earn $100,000 a year your goal should be to save $1,000 per month.  Invest first in a savings account, then diversify the investment to stocks, bonds, mutual funds, real estate etc.   Money begets money, that is the magic of compound interest.  It takes patience and it takes courage, especially when the market takes a reverse but over the long term it is always going to rise. 

5.       Diversify to reduce risk.

Diversifying the portfolio is one of the best ways to reduce risk.  It stands to reason, when one sector of the economy is down another will be up.  Diversification may be owning equities, i.e. quality companies,  bonds and guaranteed investment certificates in the portfolio at the same time.  How they are mixed will determine overall rates of return.  

Wealth managers will recommend  a mix of equities and fixed income based on risk tolerance,  a conservative income  portfolio might be 80% fixed income and 20% equities, a moderate growth portfolio would be 60% equities and 40% fixed income and an aggressive growth portfolio would be 80% equities and 20% fixed income.

Having two or three advisors with investments with each is not diversification. In fact it is stupidity, invariably the investments in each portfolio are similar or the same, which defeats the purpose, pick one advisor put everything with him or her and stick with it.  A good analogy is put all your eggs in one basket and then pay close attention to the basket.

Determining risk tolerance is not easy, the problem is that it involves more than just logical objectives, there is a lot of emotion involved, it is just as important to pay attention to your gut feelings as to what seems logical.  A good place to start is to complete a risk tolerance  questionnaire.  The questionnaire is made up of a  series of questions, which when answered honestly will generally provide a fairly accurate risk tolerance equation.  This is a guideline it should be the basis of the discussion with your financial advisor not the conclusion. 

Risk tolerance is not a static condition, you will change your opinions when the forces impacting your decisions change.  Risk tolerance that is focused on a long term time horizon may not be your risk tolerance for the next five years.  Being aware that you will change and being prepared to react to that will make you a better investor.

Armed with a better understanding of this process will allow you to formulate your investment policy statement, which is a statement that reflects what you wish to achieve and how you would like to achieve it.  There are good examples of investment policy statements and most are templates that can be tailored to each individual.  We have included an example as Appendix B.

Risk is also reduced by the length of time the portfolio is invested.  Time does heal all wounds and when there is lots of time the risks will fade.  Investing in equities should not be considered if the time horizon is less than 10 years.

6.       Understanding how the stock market works

My long time associate and business partner Larry Johnson who passed away in 2008  described the stock market as walking up a hill with a yoyo, the yoyo is always going up and down as the hill is climbed.  That is a very good description for over time history has proven that the stock market is always on the rise overall.

The key is to realize that a stock market is like a farmers markets, hundreds of independent vendors vying for the same investors.  If there are lots of buyers the price rises if there are few buyers the prices will go down.  It is a free market and will  fluctuate daily.

There are hundreds of companies listed on two or three dozen exchanges around the world,  that a specific company is publicly traded does not mean it is worthy of investment.  Choosing the right company to invest in requires some research,  and due diligence.  A good investment manager will begin with the financial statement, this is a wealth of information on the companies business model, the principle managers and what the potential for profit and growth is. 

For most people it is like walking into a Wallmart that has thousands of items and trying to determine which coffee maker to buy.  You can buy on price, quality, efficiency of purpose or you can close your eyes and pick whichever one your hand touches.  Probably not the best way to buy a coffee maker it will work however you will probably be back to buy another one in the near future. The alternative is to buy one of each, not a practical solution from a cost perspective and it will lead to some interesting conversations when  you get them all home.

Similarly choosing what stock to purchase from the thousands listed on the stock exchange can be as daunting a task.  Buying everyone is normally not an option and making the wrong choice can be expensive. 

Most of us will start with what we are familiar with, if we recognize the coffee maker brand and have had past experience with that brand that is probably what will influence our decision if the price is right.  Investing in the stock market is exactly the same, if there are 50 financial services companies to choose from and they all look the same we are probably going to choose the one we know because they have a branch on the corner downtown or that is where we bank.  To get out of our comfort zone and invest in something we don’t know that much about is not the objective.  The objective is to  bring that specific company into our comfort zone by learning as much about it as we can before we make the final decision.  If you are very familiar with Black and Decker but want a bit better quality coffee maker that will last five or ten years instead of three or four you will need to learn more about the alternatives.  That is doing your due diligence, you do that every day when making purchase decisions large and small. The same principle applies to purchasing or investing in a stock.  However the good news it you don’t have to do all that, you can hire a reputable fund manger to do that for you, someone who does it every day and who loves his job and is good at it.

I am pretty sure you don’t fix your own car or do your own dentistry.  Most of us have the good sense to recognize our limitations and hire professionals to look after these things for us. We also don’t even give the cost of these professionals a second thought it is the cost of having it done right the first time.  The same thing applies to investing, if you don’t fully understand the stock market or have the skills and time to develop the skills to be a successful investor why would you even consider it, doesn’t it just make sense to hire a professional to do it for you?

7.       What is a stock market index and how to understand it.

Probably the least understood and the biggest threat to long term investing is the stock market index.  The index,  of which the Dow Jones Industrial Average is the oldest and most famous is something that was created by two newspapermen, Dow and Jones in order to publish in their newspaper, the New York Times a measurable index of how the market was doing on a daily basis.  They chose 30 stocks, those 30 stocks have changed over the last 125 years or so but it still remains the average daily value of 30 stocks.  Similarly the TSX index measures the average daily price of a basket of stocks on the Toronto stock exchange.

No other free market in the world has an index.  When you walk into Safeway to buy groceries you don’t stop and check the poultry index or the dairy index.  But lets consider for a moment what impact a grocery index would have on your purchasing decisions.  Lets assume that this grocery index contains,  bread, milk, eggs, beef, potatoes, tomatoes , coffee and sugar.  For the purposes of this illustration we will assume the average index price of the seven items is  4.55 today.  Tomorrow however a huge supply of coffee arrived and the coffee price was halved, the effect on the index was that it dropped 45 cents to 4.10.  You have noted the drop however you don’t need coffee and  only three of the other six items on the index, all the rest of your grocery shopping will be for items not including in the index.

Did the index influence your buying decisions?  Did it make a difference in what you spent, or was it just an interesting number that had no meaning whatsoever in how you purchased  your groceries. If you decided to stock up on coffee then perhaps it would have made a difference in your buying decision but that is about the only benefit it could provide.

You would ignore the grocery index, similarly the stock index has no value to an intelligent investor and should be ignored at all costs.  Every market panic in history has been caused by the index not be intelligent investment decisions.  If someone refutes what I have just said I personally would run in the opposite direction as fast as I can with my capital safely in the bank.  More investments have been lost because of paying attention to the index instead of paying to attention to good sound investment principles and investing in quality companies for the long term.

If you invest in a specific company or a value mutual fund which has companies that pay consistent dividends year over year regardless of the stock price and you reinvest those dividends in that company year over year with no regard to the day to day price of the stock, then   you have benefited from the index.  When the market price is depressed your dividend bought more shares and when the market price is higher you had a capital gain.  Herd mentality does have an effect the key is to stay out of the herd, which starts by investing in companies the herd has no interest in.

8.       Choosing value companies to own.

If you do decide to invest in the stock market and manage your own portfolio you must have a plan on how  you are going to choose the companies to invest in.  On the other hand if you plan to hire a professional manager through a mutual fund you still need to understand the key principles for choosing value investments. 

Value investing is picking quality companies that pay consistent dividends and that have potential for capital growth. Value investors, professionals and individuals alike choose companies that meet specific criteria.  These four steps are excellent simple rules that lead to success.

a)      The companies have to be hard to duplicate, a good example is CP or CN Rail, there is very little chance that Canada will ever have another national railroad, it would be just too expensive to purchase the land necessary to build a railroad across the country.  That is one of the reasons that Warren Buffet owns Burlington Northern Santa Fe.

b)      They should have a good track record of paying dividends and consistently increasing their dividend distributions annually and hopefully will have a dividend reinvestment program in place.

c)       They have potential for growth which will increase the capital value of the company over time.

d)      Be in areas that the investor is familiar with.  It is worthy to note that Buffet does not own a lot of companies outside of the US, with the exception of Canada.  He tends to invest in companies he is familiar with and that meet the first three criteria, following his example is not a mistake.

A good example of how Buffet has applied these criteria is his decision to invest in American Express in his early years.  Standing at the cash register at his favorite steakhouse in Omaha and noting that regardless of the state of the economy customers still ate out and paid with their Amex.  That isn’t a scientific analysis of American Express.  It is applying common sense, which of course has paid off for Berkshire Hathaway very handsomely  in the years since.

9.       Reinvest dividends

Dividend reinvestment compounds the rate of return.  It is the magic of compound interest what Einstein once described as the eighth wonder of the world.  Understanding  how compound interest works is essential to long term investing results. 

It is important to know the rule of 72 and how it works.  The rule is that whatever the rate of return divided into 72 will indicate how long it will take for the initial investment to double.   If the rate of return is 2% it will take 36 years to double, if the return is 12% it will take six years and if the return is 6% it will take 12 years.

To illustrate $1.00 invested at six percent takes 12 years to double,  that is go from $1.00 to $2.00 but it only takes six years to add one more dollar from $2.00 to $3.00 and only three more years to add one more from $3.00 to $4.00 .  The problem is that first 12 years are boring, getting through them requires patience.  Unfortunately if  boredom prevails   the starting point is where the investment is today it’s at square one again.

Helping avoid boredom is the task of the financial advisor, and one of the best ways to avoid it is to invest consistently every month; month after month for the long term. 

10.   Invest regularly

Consistent monthly investment is the best defense again the risk of loss, it multiplies the effect of compound returns,  and increases the long term capital gain.  A good rule is to save 1% of gross annual income monthly, that is a bit more than the 10%  that is the rule of thumb which will make up for lost time.  For example  a $100,000 annual income sets a savings goal to $1,000.00 per month.  That figure can be reduced by CPP premiums, pension contributions and other savings.  It is a goal and it can take time to achieve.

11.   Patience

The society we live in today is one where instant gratification is the biggest demand.  We don’t want to wait, we will borrow to purchase what we want right now.  That is why so many will purchase lotto tickets or go to the casino and shove dollar and dollar in the slot machine, always looking for a fast buc.

Unfortunately building wealth requires infinite patience, there is no easy way to get where you want to go and consistently eliminate the risk.  Staying invested for the long term is the only solution.  So what defines long term?   Think lifetime and then some,  rather than just your lifetime what about the lifetimes of your children and their children. 

12.   Get good Advice

If the objective is to invest personally, purchase a few quality companies and stay invested long term then the best solution is a discount brokerage firm through your bank.

However this does required time, if that is a problem then getting a good advisor to assist with the decisions and using a quality mutual fund will make sense.  Advice does cost  however it can be kept to a minimum.  Quality funds should not cost more than 2.05% per year.  The advisor will receive 1%  of the fee which is a reasonable amount to be paid for advice.   Many advisors will reduce the fees if the portfolio is more than $250,000 and often an additional discount for portfolios over $500,000.

You! The One Driving the Car

We just spent the day volunteering as traffic control for the Kootenay Rockies Gran Fondo.  The KRGF is an annual event that gives bike riders a chance to ride around the East Kootenay, there are three events, the Gran Fondo 196 K, the Medio  105k and the Piccolo 60K.  It is a fund raiser organized and conducted by the Cranbrook Sunrise Rotary Club. This year there were 375 riders ranging from age 6 to 80.  There were in addition 125 volunteers who looked after the aid stations, traffic control and a host of other services.

You would think for the most part that the majority of people on the road would take the inconvenience of having to stop and let a group of bike riders make there way through an intersection as nothing too serious and a minor interruption to the day.

 It was Saturday and there were no real emergencies so why would someone come unglued swear at the traffic control individual and ignore the stop sign and actually drive through the intersection endangering the lives or a rider?  Do other lives mean that little?

What are the consequences of ones actions if in fact they did injure a bike rider by failing to obey the traffic control person?  1. Driving privileges are lost immediately. 2. A traffic offense chargewould be laid  and if  the person on the bicycle died the charge would be Vehicular Homicide (manslaughter) and could that could lead to a jail sentence. 3. But the problems would only have just begun, the rider or the family of the rider would sue for damages, the insurance company may or may not defend the case depending on negligence.  Whatever the insurance company decides the end result is probably bankruptcy within six months. 4. How does all this effect the rest of the family? It could lead to  job loss, loss of the family home and savings.  How will the family react? Will the spouse and children be sympathetic if they no longer have a house to live in? 

You have probably have never given any of this a lot of thought. That's fine, that is your prerogative, but the next time you decide that you can drive at 110k instead of 100k or pass without thinking, or disobey a traffic control person, maybe you will think about these things and decide to slow down take a pause and ask yourself if it is really important that you get there in five minutes or ten.

Sadly this summer there have been fatalities in accidents between bikes and cars here in the Kootenay's and the criminal trails and law suits have begun. What a horrifying way to have your vacation come to an abrupt halt because you never paid attention to the bike rider in the on coming lane as you decided to pass. I fell sorry for the family of the biker and I feel sorry for the family of the car driver who will suffer imeasurably for an action that could be avoided just by slowing down.

I truly hope that everyone will take a moment to just think before they act.