Posts made in July, 2007
Can you Diversify too much?
This is a tricky topic to talk about. So please read the caveat at the bottom of this post! The wealthiest people in the world have, on average, made their fortunes on ONE stock… and that is usually the stock of the company they themselves founded and ran in the form of a small business that just kept expanding. But of course for every small business that becomes the next GOOGLE, there are countless more that fail and go under. This is the ultimate example of why you won’t get rich quickly by diversifying AND how you could lose everything quickly by NOT diversifying. Understanding this debate is understanding the trade off that you want to make...
Read MoreWhat is "Diversification"? There is more to it than you might think!
Diversification basically means not putting all your eggs in one basket. If you hold only one stock and that company went bankrupt, then you would have lost all your money. If you hold two stocks and one company goes bankrupt you have only lost half your money. And so on, and so on. But there is a BIT more to it than just that. If you held two stocks in companies like Sprint and Verizon and someone invents a device that makes phones obsolete, then both companies might go under. In this case you have diversified by holding two companies, but you picked two companies in the same industry! Further, if you held two mutual funds that both invested in large Canadian...
Read MoreInterest: Think of it as "rent"
I don’t think many people explain it this way, but it is probably the best analogy I’ve heard. Rent is paying for the “use” of something: like renting a movie, an apartment or house or a car. You never own the item, but you get to enjoy the use of it for a specified period of time. Interest in the financial world is exactly the same thing, except you are renting money! If you go back to the post that talks about how banks make money on your savings account, you’ll remember that they give you interest, but take your money and give it out in the form of a mortgage at a higher rate of interest. So they are “renting” the use...
Read MoreWhat is a "Line of Credit"?
A Line of Credit is basically like a credit card in that you apply to have the ability to borrow money whenever you want and have a set limit that you are authorized to use (let’s use $10,000 as an example). The Line of Credit remains open even when your balance is $0 – and you have no payments to make. If you were to use $5,000 then you would start to be charged interest. You could pay back the $5,000 right away or you could pay it back over time, the only thing you have to make certain is that you pay the interest monthly. So if your line of credit had a 10% interest rate you would owe a minimum of ($5,000 x 10% / 12) = $41.67 per month. You could...
Read MoreThe Magic of Compound Interest
Albert Einstein was a pretty smart guy – I think we can all agree on that. The man who gave us the Special Theory of Relativity and the General Theory of Relativity famously said that the most powerful force in the universe was….? Compound Interest! Would you agree then, that this is something we should take a closer look at since it relates to investing and not atomic theory? :) Okay, if you are still reading I’ll assume you are, in fact, in agreement. Now it is time to either excite you or depress you based on your age! First let’s define compound interest. Compound interest means that the interest you earn on an investment is based on both...
Read MoreCRA: The Canada Revenue Agency
The Canada Revenue Agency (CRA for short) can be thought of as Canada’s collector of taxes for the government… because that’s what it is. :) It is the equivalent of the IRS (The Internal Revenue Service) in the United States which is more famous. The CRA are the guys who send tax auditors to your door if they think you have made an error in your tax filing. Some of you may still hear others refer to it as the CCRA (Canada Customs and Revenue Agency) but that particular incarnation was split into two agencies back in 2003 - one for Customs and one for Tax Revenues. The CCRA no longer exists. ...
Read MoreWhat is an RRSP?
RRSP stands for ”Registered Retirement Savings Plan”. It is a type of savings or investment account which was designed for Canadians to facilitate retirement savings. It is “Registered” with the Canadian Revenue Agency. Many people think that they “buy” RRSP’s every year – that the RRSP is the investment. NO – think of an RRSP as an “account”. You can hold a wide variety of investments INSIDE this account so long as they meet the definition of a “qualifying investment” as listed by the CRA (The Canadian Revenue Agency). But don’t worry, almost everything is a qualified...
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