April 12, 2019
At dinner the other night, my 21-year-old grandson asked me for some financial advice.
He has a job and is trying to save some money. He'd like to start investing, but he doesn't know where to begin. Some of his friends had made money in marijuana stocks and he wondered if that might be worth considering.
I said no. Even though pot is now legal, and the initial demand has outstripped supply, there is no way of knowing the size of the potential market or which companies will be the most successful.
I told him about the early days of the Internet (he was only a toddler at the time) when investors poured millions of dollars into any company with a good story. Some, like Apple and Microsoft, ended up being hugely successful. But many others, ranging from Pets.com to Global Crossing, went down in flames, taking all the invested money with them. The mania ended with the tech crash of 2000, which took the whole market down with it.
This is not to suggest the marijuana bubble will end the same way. But investing now, with the stocks having run up so much, is risky. With such a crowded field, some companies are not going to survive.
Anyway, I told my grandson, there's a lot that should happen before you start investing in the stock market, or anything else.
Here's what I suggested:
Educate yourself: The financial literacy level of most kids when they leave high school is abysmal. They know little about the banking system, debt management, investing, mortgages, or any of the other basics. So, my advice to him was to start by educating himself. Spend 15 minutes a day scanning the business pages of the newspapers (or in his case, the online version). Go to websites like GetSmarterAboutMoney.ca, which is packed with valuable information for people just starting out. Read a couple of books like The Wealthy Barber or Personal Finance for Canadians for Dummies. The more knowledge you accumulate, the greater your chances of success.
Save: Start a disciplined savings program. It doesn't have to be a lot at the start - even putting aside 5 per cent of each pay cheque can get you going and establish a lifelong savings habit. Have the bank set up an automatic savings plan that will deduct a specific percentage from each pay and put the money into a designated account.
Use tax sheltering: Most people who are just entering the workforce don't even think about tax shelters. Unless they're software engineers or animators, they're probably not making enough money to be worried about it. But as the years pass and income grows, shielding as much as possible from governments becomes more of a priority. So, why not start early? Begin by opening a Tax-Free Savings Account (TFSA). Most Canadians 18 and over are eligible (in a few provinces and the territories the age is 19). You're allowed to contribute $5,500 per year.
As your income increases, consider adding an RRSP. Unlike a TFSA, money contributed to RRSPs is tax-deductible. That won't mean much if you have a minimal tax rate, but if you're being hit for 40 per cent on each dollar earned the deduction will be worth a lot of money.
Avoid bad debt: This is the advice that young people most frequently ignore. They want what they want, and they want it now. But instant gratification comes with a price, typically in the form of a credit card bill with a high, almost usurious, interest rate. I know people who have taken years to pay off these debts and I have seen them deplete their savings and even cash in their RRSPs to get out from under the debt load.
That doesn't mean you should never borrow, I said. Using other people's money to advance your education or to buy a home can repay the cost many times over in future years. But don't get in over your head - to do so means years of financial misery.
Understand fear/greed: Investors are driven by these two emotions. That often means they buy when markets are high (everyone else is getting rich, I want my share) and sell when stocks crash (I have to cut my losses now before it gets worse). This is the exact opposite of successful investing. Instead of buy low, sell high, this is buy high, sell low. It's a path to the poorhouse.
In the 18th century, Baron Rothschild advised investors to "buy when there is blood in the streets." In those days, that advice was true in a literal sense; today it can be simplified to "buy when everyone else is selling" - in other words, in a market panic.
I told my grandson that these will probably occur four or five times during his lifetime. That's when he can make his fortune, I suggested. He doesn't have to buy at the precise bottom - no one can ever make that call, except in hindsight. Just focus on buying good companies at a point in time when they look absurdly cheap and then be patient. You'll eventually be rewarded many times over.
Don't chase dreams: There are some people in the financial community that trade in dreams, not reality. They'll try to persuade you to part with your money by investing in what is sure to be the next great diamond mine or an app that everyone will want to buy. I've heard many such stories and in my youth even invested in a few of them. Not one ever paid off. I lost money every time. The experience almost put me off the stock market forever, until I wised up and started to pay more attention to revenue and profits.
Buy a home - eventually: Anyone who bought a house or condo in Toronto 20 years ago (about the time my grandson was born) has done very well. In many cases, the property has more than doubled in value. Right now, home prices in this city are far too high for my grandson to even contemplate a purchase. But despite what has happened in recent years, prices won't go up forever.
There will be another recession, which will knock prices down. The last big real estate crash in this city was in the early 1990s when the average home price fell about 35 per cent. That will be the time to make a move.
Above all, I told him, be patient. Don't try to go for the big score - even Steve Jobs and Bill Gates took years to build their businesses, and their wealth.
Save your money, buy a home at the right time, and focus your investing on good-quality securities when they are on sale. Follow those rules and you'll never have to worry about where the next dollar is coming from.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.