Investment concepts as a senior
Many people won't touch the stock market with a 10 foot pole, as they've heard of people who have lost their shirt, etc. (or did themselves).
You spent many years in school learning about a variety of issues about living, and you've taken training throughout your life in the school of hard knocks, so you've learned a lot since school days.
You wouldn't go on vacation to a strange place without checking it out ahead of time - but many people spend more time planning their vacation than they do how to manage their money.
Many haven't learned a lot about effective money management, however. How come - that's certainly an important part of one's life experience? I think that many people find it rather intimidating.
Several years ago, about the time that I stopped part-time employment, at age 70, they had a personal financial advisor as a guest on a province-wide phone-in radio show on our national broadcaster that operates five days a week.
I told him that, though many financial advisors recommend that as people become seniors it is wise for them to invest a substantial, and often increasing percentage, of their assets into investment where the value of the asset is very safe, usually stuff earning interest, where the principal is guaranteed, there were other legitimate viewpoints. The argument for it being that, should some of the principal be lost, it's almost impossible to replace it. That one should not invest in equities where one expects to need the money in the short term, etc.
But that I disagreed.
I figure that, at age 70, I want to fund my advancing years to age 100, as I prefer to be still able to eat, in a warm shelter, should I achieve that age.
I consider that fund in terms of 6 blocks of five years each.
As I don't expect to need 4 of those blocks during the first ten years, I feel that it would be wise to invest a substantial portion of that part of the asset into equities.
Especially since, in Canada, if I buy stock in quality companies, which is the ones that I, as a senior, feel that I should use for most of my core asset, the dividends that they pay, though usually at a rate slightly below the rate of interest that I earn on guaranteed certificates, bonds, etc. (which is taxed at top rate) is taxed at a much lower rate - so I must earn about 4% on bonds in order to equal about 3% in Canadian dividends.
Though the value of my stocks has fluctuated substantially over the past 40 years or so (I didn't have a mortgage, as I lived in a home provided by my employer in the early years), the general trend over a number of years has been upward.
When I choose to accept the investment covered by the bank's highly-touted guarantee that they'll give me back every dollar that I lend them at the end of the contracted period, many don't pay any attention to the other guarantee that they never mention: apart from the rent on the money (interest) ... they won't pay me one dollar more at the end of the term, either. But the value of each of the dollars that I lent them has been eroded each year that they held it, due to inflation. If I gave them $10,000. on a 5 year contract, 15 years ago, and renewed it twice since, that $10,000. would have bought a decent car, 15 years ago. Not now. Prices have gone up - but the number of dollars of my principal didn't.
I say that there are two rats that eat my cheese: the Canada Revenue Agency wants to talk to me about each dollar of my income, each year - and they want part of it.
If I earn employment income, or the pension that may result, or interest on invested principal ... they tax those types of income at top rate (except for a deduction on part of my pension income). Those are the types of income that the large majority of the population earns.
But if I earn dividends on Canadian stocks, the tax rate on such income is much, much lower.
As the value of your principal, since it can't shrink, can't grow, either ... the only income that your principal is going to produce with regard to this year's business is produced now. And is taxed now.
The other rat?
If you have $1,000. and stick it under your mattress, then leave it there for 5 years ... it'll buy a lot less when you pull it out that it would have, now.
Inflation erodes part of the value of each dollar of your asset, every year - since the Great Depression of the early 1930s.
So - you must take part of your interest earnings each year to add to your principal in order to keep the purchasing power of the dollars in that asset intact, not eroded.
In recent years of low interest rates, after one deducts the income tax from one's interest earnings, and deducts again an amount to add to principal in order to maintain purchasing power ... there was little or none left.
And - do you know what?
The rats eat first!
You get what's left - if there is any.
I don't like having others use my money, but it making nothing for me.
Not only that - while you know what interest rate is available on your asset now ... you have no guarantee as to the rate that may be offered at the end of the term that you choose to lend it. But it usually isn't a lot higher than current rates.
But dividend rates tend to rise with the price of the underlying stock, so that the percentage remains more or less constant.
A stock of a major Canadian bank that I bought 39 years ago for (I think) about $4.25 can be sold now for slightly above $80.00 per share. I have not been required to aqnswer to the Canada Revenue Agency with regard to that increased value up until now (but I was able to earn that capital gain tax-free until 1994, and locked in the gain in value prior to that at that time). I will not be required to report such increased values until I either sell the stocks ... or die (in which case it is deemed that I sold them the day prior to my death, for tax purposes) ... and I don't plan to do either, this week or next.
At the time that I purchased the stock, the annual dividend rate was about 6 cents or a dime, a few years ago it was 80 cents, then a dollar. As of recent months, it's been $2.80, and the dividend rate usually increases every year, or two, or three.
Interest rates haven't done anything like that in the last 40 years, have they?
The financial advisor on the radio phone-in agreed with my ideas about the situation.
That was 7 years ago (and the prices and dividend rate that I quoted here on that stock are current, not the ones that I gave him 7 years ago)- but I still feel the same.
And - you realize, of course, that the banks know a lot more about the management of money than you do.
There's more - but that's (more than) enough for now.
Have a great week - managing your assets effectively (for you, rather than mainly the guys that you let use it). It is rather a shame if the guys using yur money make more on it than you do, don't you think?