Posts Tagged ‘financial planning’

Dollar cost averaging

Dollar cost averaging is a technique designed to reduce market risk through the systematic purchase of securities at predetermined intervals and set amounts. Many successful investors already practice without realizing it. If you participate in a regular savings plan, you are already using this tool. Many others could save themselves alot of time, effort and money by beginning such a plan.

 Dollar cost averaging can lower an investor’s cost of investment and reduce his risk of investing at the top of a market cycle.

The beauty of dollar cost averaging is that you buy more shares when prices are low and fewer shares when prices are higher. The result is an average cost that is better than trying to time the market with your investments.

What is Dollar Cost Averaging

Instead of investing all his money at one go, the investor gradually builds up a position by purchasing smaller amounts over a period of time. This spreads the average cost over the period, therefore providing a buffer against market volatility.

In order to begin a dollar cost averaging plan, you must do three things:

  1. Decide exactly how much money you can invest each month. To be effective, you should have sufficient funds to continue investing through the market cycle.
  2. Select an investment (index funds are particularly appropriate) that you want to hold for the long term, preferably five to ten years or longer.
  3. At regular intervals, weekly, monthly or quarterly, invest that money into the security chosen.

An example of a Dollar Cost Averaging Plan

Here’s how it works. The principle is simple: Invest a fixed amount of money in the market at regular intervals, such as every month, regardless of whether the market is up or down.

Let’s assume you have $12,000 and you want to invest in a stock. You have two options: you can invest the money as a lump sum now, walk away and forget about it, or you can set up a dollar cost averaging plan and ease your way into the stock.

You opt for the latter and decide to invest $1,000 each month for one year. Assume further that the stock started at $10 per unit and reaches $16 per unit a year later.

Had you invested your $12,000 at the beginning, you would have purchased 1,200 shares at $10 each. When the stock closed for the year in December at $16, your holdings would only be worth $19,200!

Had you dollar cost averaged into the stock over the year, however, you would own 1,643 shares as shown in Table 1; at the closing price, this gives your holdings a market value of $26,228.

 

Why Dollar Cost Averaging Works

The system works because it takes the emotion and temptation to time the market out of the process. You establish an amount that is comfortable for you to invest and let the market work for you. The system takes the decision-making elements of how much to invest and when to invest out of your hands. Dollar cost averaging solves this problem by eliminating the need to predict an entry point.

Chart 1 shows what happens when you invest $1,000 per month for twelve months in an investment that fluctuates in price. The average market price per unit is $8.08. Look at Table 1, your average cost per unit = $12,000/1,643 which is approximately $7.30. Thus, the example shows that you don’t have to guess when to purchase shares to get a better price.

Will dollar cost averaging guarantee you a profit? No system can do that. However, if you buy quality investments and continue dollar cost averaging over a long period, you will have a much better chance of success than trying to get in and out of the market at the right times.

Buy Low, Sell High

For long-term investors, dollar cost averaging is a powerful tool that takes much of the emotion out of investing and lets the market work for you. One of the major problems facing individual and professional investors alike is determining when to buy a particular stock or, in other words, how to find the bottom of a price swing. The problem is that no one is consistently correct in calling this point on individual stocks and certainly not on the whole market. If you miss this point and the stock begins to move up, you have lost some of the potential gain by not buying at the right point. Very few people buy at the bottom. Those who do, typically happen to have been averaging all the way down.

Market timing is a dangerous game, especially when practiced by beginners, who typically tend to over expose themselves to the market. Market timing is an attempt to predict future price movements through use of various fundamental and technical analysis tools. The real benefit of knowing what is going to happen is that your return from buying a stock before it takes off is better than if you had bought the stock on its way up.

Market timers are the ultimate “buy low and sell high” traders. Day traders, who move in and out of positions in minutes or hours, are the extreme market timers. They look for small profits by the dozens each day by capitalizing on swings in a stock’s price.Most market timers operate on a longer time-line, but may move in and out of a stock quickly if they perceive an opportunity.

There is some controversy about market timing. Many investors believe that over time you cannot successfully predict market movements. Market timing becomes more of a gamble in their opinion than a legitimate investing strategy.
Market Timers and the Next Big Thing

Some investors argue that it is possible to spot situations where the market has over or under valued a stock. They use a variety of tools to help them predict when a stock is ready to break out of a trading range. Usually, the market proves them wrong. Stock prices do not always move for the most logical or easily predictable of reasons.

An unexpected event can send a stock’s price up or down and you cannot predict those movements with charts. The Internet stock bull market of the late 1990s was a good example of what happens when investors in the excitement of the moment, consciously or not, overpay for their investments. Those who bought then are not likely to have made much money.

Everyone has a hot tip about the next “big thing” and investors are always jumping on stocks as they shoot up. Unfortunately, most of these collapse just as quickly as many investors typically hold on way too long. The disastrous result is usually the exact opposite of what they were hoping for. In the end, it is usually a case of “buying high and selling low”. For most investors, the safer path is sticking to investing in solid, well-researched companies that fit their requirements for growth, earnings, income, and so on.

In conclusion, dollar cost averaging takes the emotion out of decision-making and is a useful tool for the individual investor who wants to buy and hold a stock for the long term. Over time, it will usually result in a better entry price than timing when to buy.

If you look for undervalued stocks, you may find one that is poised for moving up sharply given the right circumstances. This is as close to market timing as most investors should get.

Buy a Car Based on the Monthly Payment Cost

Owak / Kulla / Corbis

“It’s dangerous to think about a big purchase, like a house or a car, in monthly terms,” says Jim Wang, a blogger at Bargaineering.com. “It doesn’t illustrate how much of your total wealth has to be surrendered in order to own that house or car.”

“It’s also easier to swallow $200 a month instead of a five-figure number, so salespeople are trained to go after the monthly number,” he says. Whenever a salesperson is giving you financial advice, he says, step back and evaluate whose best interest they have at heart, yours or theirs. Always do the math on what the purchase will cost you in the long run.

“I’d say focusing on the monthly price of anything, and ignoring all else, is terrible advice,” Wang says. “While it’s important to look at that number for the purposes of budgeting, you always want to know how much you’d be paying in total.”

MORE: Drivers Upgrading to New Cars at Slowest Pace in Years

Read more: http://moneyland.time.com/2012/08/23/terrible-financial-advice-top-10-tips-you-shouldnt-follow/#ixzz27bESknpt

A lot of people think that paying any amount owed on a debt acts as a good-faith effort and that creditors are obligated to work with you if you pay a nominal sum of, say, $5. This isn’t true. There’s no such thing as getting an A for effort when it comes to delinquent debt.

“The rationalization behind this theory is that some payment is better than no payment,” says Kimberly Cole, an education outreach coordinator at Novadebt. If you’ve worked out an agreement with a creditor to pay $5 a month, you’re in the clear, but there’s no automatic agreement that kicks in if you just send in whatever you want, she warns. “My clients are often shocked when I advise them that the collection activity will continue without an arrangement.”

Cole says borrowers who get in over their heads need to reach out to the creditor and work out a payment plan both parties agree to — and get it in writing.

Read more: http://moneyland.time.com/2012/08/23/terrible-financial-advice-top-10-tips-you-shouldnt-follow/#ixzz27VPpRUOn

Learn how this strategy can help a cause and save tax for your heirs

Philip Porado, Jul 9, 2012

Most people don’t know how they can use annuities and insurance to boost their charitable giving.

“People are saying, ‘Don’t buy annuities now because interest rates are low,’ ” says John Jordan, CFP, an insurance and estate planning specialist. The other common argument is that life insurance is expensive, but Jordan asks, “Expensive compared to what?”

Insurance may be pricey at the front end, but it hedges against a person’s longevity and inflation by obtaining a policy for a larger sum than you would be able to amass in cash.

via Gift Insurance to Charity | Canadian Capital.

Neil Macdonald: Why a U.S.-style housing nightmare could hit Canada – World – CBC News.

An expatriate always thinks about going home. The longer the time abroad, the stranger the prospect of re-entry feels.

But if you’re a Canadian living abroad these days, the idea of returning home has become downright frightening. Stories are now routinely surfacing in the Canadian media suggesting collective madness when it comes to affordable living.

Our biggest real estate markets — Toronto and Vancouver — seem to have decided they’re really London and Manhattan. Several of our smaller cities are wildly optimistic, too, with year after year after year of six-, seven-, even 10-per-cent increases in property values.

Friends and colleagues who own homes in Canada are the very pictures of smug. They seem convinced the markets in which they happily reside will keep rising forever. Or at the very least, never drop.

And any discussion of the subject usually involves condescending lectures about how Americans, who are only beginning to recover from a six-year nightmare of foreclosures, could have used a dose of Canadian common sense and prudence.

CONDO CITYToronto’s booming condo market a high-rise panorama

Well, I watched America’s nightmare unfold, and it appears pretty evident to me that a sequel of some sort is coming to Canada.

So I ran that thesis past Robert Shiller, of Yale University, probably the foremost authority on real estate in America. He co-founded the Case-Shiller Home Price Index and predicted the American collapse in 2005, a year before it happened.

“I worry,” he told me, “that what is happening in Canada is kind of a slow-motion version of what happened in the U.S.”

 

Continue reading the remainder of the article… Neil Macdonald: Why a U.S.-style housing nightmare could hit Canada – World – CBC News.

Gas Cubby FREE – Fuel Economy & Service Log

Gas Cubby by AppCubbyI discovered this app and I have been entering my fuel ever since. Very cool to see the cost per mile, see the gas mileage for each fill-up, and even interesting to see the graph of gas prices over time. This does everything my old mileage book did and more.

 

Features:

Tracks gas mileage and vehicle maintenance

Charts: MPG, stats, gas price, gas expenses, service expenses

Online Sync

Customizable service reminders

Supports multiple vehicles

Store vehicle data: VIN, License Plate, etc.

Excel compatible email reports (CSV attachment)

International Units: MPG (US), MPG (Canada), MPG (UK), MPG (Imperial), L/100km, gal/100mi (US), gal/100mi (Imperial), km/L, km/gal (US), km/gal (Imperial), and mi/L

 

via App Cubby • Hand Crafted iPhone Apps – Gas Cubby • Sensible Car Care.

Estate planning: 10 things you need to know – Moneyville.ca.

Talking to your family about estate planning now can save trouble later after you're gone.

Many Canadians haven’t taken the most basic estate planning step which is writing a Will. They should.

Without a Will, your estate doesn’t automatically go to your spouse and children, but ends up being distributed according to the rules of your province For example,Ontario’s rules differ from those in Quebec and Manitoba. In addition, without proper planning, almost half the value of your assets could disappear to cover capital gains taxes and probate fees.

Here are 10 steps that can help ensure your final wishes are carried out simply and smoothly.

#1: List your assets

The first thing is to figure out what you have. So prepare an inventory of your assets. A net worth calculator can help you through the process.  The list should include your home, vacation properties and investments such as RRSPs or RRIFs. It should also include bank accounts, pensions, personal property like cars, boats or jewellery and the value of any insurance policies.

You should also list any debts that relate to these assets – such as loans or mortgages – and record the account numbers and institutions where the debts are held.

#2: Who gets your stuff?

Once you have a picture of what you have, you can figure out how to distribute it. In addition to family members, you may also wish to recognize other people and charitable causes as part of your legacy. In the case of charitable donations, a professional advisor can help you structure these to maximize their value for the recipient and for your estate.

Read the rest of the list…. Estate planning: 10 things you need to know – Moneyville.ca.

Five Risks to Future Income

Longer life spans mean cash flow assumptions need to change

Filed by Staff, editor@Advisor.ca , Aug 7, 2012

In a recent speech at the Canadian Institute of Financial Planners annual conference in Ottawa, Peter Drake, vice president, Retirement and Economic Research, Fidelity Investments Canada ULC called attention to the new retirement realities facing Canada’s baby boomer generation and highlighted the importance of taking account of the five key risks to retirement income as part of the retirement planning process.

Drake emphasized that the conventional wisdom about retirement planning needs to be adapted to suit the new environment faced by today’s Canadians who are retired or about to retire. He pointed out that financial advisors can play a crucial role in helping Canadians understand that their retirement planning choices must not only reflect the longer lives we are now living and the volatility of capital markets, but also changes to Canada’s retirement income system.

via Five Risks to Future Income | Canadian Capital.