This Is What It Looks Like When You Put Everything Into One Stock… And Lose

Special thanks to Kapitalust for sharing the link that brought me to one of the craziest stock mess stories I’ve read in awhile. Maybe you heard about this incident in the news, but I promise, it looks different up close.

The following is not for the faint of heart.

I actually felt legitimately sick reading these posts and watching the story unfold. To summarize, a whole bunch of eager-investors dumped a ridiculous amount of money in a tech stock that went bad. Really, really bad.

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$GTAT hitting near zero October 6, 2014

In the beginning, this group was practically high-fiving each other through their screens thinking they’d all become instant millionaires. They spoke confidently about catching one of those rare opportunities that changes your whole life. It’s really easy to get carried away trying to decide what kind of yacht you’re going to buy.

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If you read the forum, some investors exited early and the ones staying in smugly waved them goodbye, chastising them for missing out on the money train that was headed their way.

I don’t really fault them for being overly optimistic, but it cost them dearly.

Many had dumped their entire life savings, and that of their family into the shares. Some even went above and beyond gambling their own money and purchased options in the stock. I’m going to let them tell you how that unfolded when GT Advanced Technologies unexpectedly filed for Chapter 11 bankruptcy. The posts below are merely excerpts from the thread as the group realizes their losses.

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A forum poster & GTAT investor laments going from expected millionaire to over six-figures in debt in a single morning

They are heart-wrenching.

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I hesitated a bit sharing this story because I’m generally a really big advocate of millennials investing in the stock market, and sharing such a terrifying story of loss isn’t going to inspire confidence in young investors who came of age during the crash of 2008.

But I’m hoping this grisly tale serves as a tale of what NOT to do.

For those of you that want to invest and want to make sure you do so wisely, heed the following:

  • Never invest more than 3% of your portfolio in a single stock.

  • Stick to index funds to diversify your portfolio and reduce your risk.

  • Always, always, always keep a percentage of your net worth in cash.

  • Never risk an asset you can’t afford to lose, like your retirement accounts or your house.

  • Make sure you understand the risks of options completely before you invest on a margin.

  • Do true due diligence in researching an investment before your buy.

  • If something seems too good to be true, it probably is.

One of the most cringeworthy moments of the the $GTAT debacle is when one poster asks if things would be different if they hadn’t been encouraging each other in the forum:

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It’s a poignant self-reflection, and one readers of personal finance blogs should take to heart. The personal finance community is a receptive one — so receptive you’re bound to find a blog that will support you in making really dumb financial decisions. Only yesterday I was linked to a blog written by a woman that cashed out retirement savings at a huge penalty to buy a car. Her 401K was irrevocably damaged, but her comment section was filled with words of encouragement and congratulations for following the Dave Ramsey way. I’ve expressed some criticism for the personal finance blogger community before, but I feel the need to reiterate that we also need to be careful not to continuously heap praise on each other for bad decisions just because we like each other.

That said, the $GTAT forum is not the time to be honest about someones financial idiocy. A lot of those people lost everything, so I’m going to second Joshua Kennon and urge you not to kick them while they’re down by commenting in the forum. Let it serve instead as an up close look at what it really feels like to make a huge money mistake — may you never know it first-hand.

The 4 Most Desirable Traits in a Market Analyst

The 4 Most Desirable Traits in a Market Analyst

The financial markets have changed considerably in recent times, thanks to a number of social, economic and technological advancements. Some aspects of financial market trading remain unchanged, however, such as the volatile nature of certain sectors and the impact that international data releases can have on company performance and prices. This is why financial experts such as Killik release daily market updates, so traders can remain up-to-date with the changing market landscape.

 

Considering a Career as a Market Analyst: The 4 Most Important Traits

 

This is creating a significant demand for market analysts, which represents a viable career option for those with an interest in finance. With this in mind, consider which attributes are the most desirable traits in potential candidates. These include: -

 

  1. Critical Thinking

 

Otherwise known as reflective reasoning, critical thinking enables individuals to have a clear focus when they interpret changeable market trends. This is crucial in terms of advising traders and empowering them to make concise decisions in real-time.

 

  1. An Understanding of Determinism

 

Determinism plays a key role in financial trading, as it helps investors to understand cause and effect in the financial market. Analysts need to have a comprehension of its principles, and apply these when presenting a clear view of the marketplace for the benefits of individual traders throughout the world.

 

  1. Methodical

 

Essentially, financial market trading is a task that requires good attention to detail and a methodical approach to work. Market analysts must therefore operate in a similar manner, and strive to create sound structure and reasoning to support their assertions. You will need to develop a certain level of trust with your subjects, and being methodical in your week is the best way of achieving this.

 

  1. A Keen Imagination

 

While it may not seem like it, market analysts require a keen imagination and an ability to visualise how economic trends will unfold. Taking initial data and information, they must evaluate this to determine the short and long term course that a specific trend will take. This must always be presented in a visual manner through charts and concise graphs.

 

With these things in mind, it is possible to distinguish yourself from rival candidates and achieve a successful career in financial market analysis. While you will always need to operate from an established foundation of academic qualifications and experience, an ability to demonstrate the above traits will afford you a critical edge when applying and interviewing for work.

 

 

Investing in stocks to hedge against your lifestyle costs

A few years ago, before I had a personal finance blog of my own and was just an anonymous reader, I was a huge fan of Jacob of Early Retirement Extreme. His progress and achievements are admirable, but his methods are not for the faint of heart (including taking cold showers in order to save on utility costs). One of his tactics for accumulating so much wealth so fast on such a modest income was that, if he couldn’t afford an activity with his passive income from investments, he simply would not partake in it. Instead, he would forego indulging in that spend and put the money into his investment accounts until they paid out enough in dividends to let him go back to it again.

This requires a lot of discipline I don’t possess, but it doesn’t mean my goal isn’t to ultimately replace my salary or full-time income with passive income from investments — I’m just ok with taking more than a few years to do so.

One of the most interesting ways to generate passive income for your spending in one category, is to own stock in the company providing you the product or service

– effectively making them pay you for your use of their business. 

This isn’t a new idea. There’s hundreds of articles and posts out there telling you that purchasing $2,000 of Apple stock is better than spending the same amount on a new Mac, or putting a years worth of soft-drink spending into Coca-Cola stock is better than buying a can from a vending machine every day. But that doesn’t make it any less of a fun way to look at how you’re spending your money and find any opportunities where you might be able to profit from a company you purchase from.

Stocks to buy to hedge against your lifestyle costs

REITPaying rent/mortgage and owning REITs

This was #2 on my list of 5 Stocks Every Millennial Needs To Have In Their Portfolio. With home prices what they are in Canada, plenty of young people feel either like they’ll never be able to afford a house, or that they need to over-extend themselves immediately to get in before the prices go up even more. Both of these scenarios are stressful, and I feel like most 20-somethings don’t realize there’s quick and easy way to get into the property game without saving up tens of thousands of dollars for a down-payment. Owning a REIT (Real Estate Investment Trust) is a short-order way to invest a small amount of money (I’d suggest starting with at least $1,000) and be a part of the ups & downs of the real estate market, while collecting a monthly dividend. It will take a long time and a big investment for the payout to resemble your rent or mortgage payment, but wouldn’t it be nice to get even a little bit of cash back back from property ownership every time your housing costs go out of your own bank accounts? I lean more towards commercial REITs than residential, but there are plenty of options to choose from.

AsktheEditors_cellphones2012_610x426Paying for cable/internet/cellphone and owning stock in your provider

I don’t own any shares of Rogers Communications, my cellphone provider, but I do own some stock in Shaw, who supplies my internet. Shaw’s monthly dividend means negates more than a quarter of my monthly bill, which makes my internet service feel very affordable. At present I have no plans to quadruple my holdings in Shaw, but at least in the meantime I’m effectively getting their services at a discount: I pay them my balance each month, and then they immediately pay me a little bit back in a dividend. Communications tech stocks are usually some of the best dividend payers out there, though the volatility of their stock might make you a bit ill. Best to buy and then look away, only checking in every quarter or two.

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source // Kraft stock took a tumble last week so it might be a good time to buy — after all, can you imagine a world without Oreos?

Buying groceries and owning General Mills, Pepsi, Kraft, etc.

As a healthful shopper when it comes to food, my grocery bill is often terrifyingly high. I’m not willing to eat less nutritiously just to be more frugal, so one of the ways to make high food costs easier to swallow is to own shares in some of the major food processors and providers. You’ll never have to make the “Pepsi or Coca-cola?” choice again because you can buy and hold both long term in your portfolio. Many of these companies have decades of dividend raises behind them and make excellent holdings for the long term, particularly in things like your retirement portfolio. After all, people will always need food.

 

where-to-buy-common-household-items-in-nyc-for-the-lowest-priceBuying household and personal care items and owning Proctor & Gamble, Unilever, General Electric, etc. 

If you’re a good budgeter and well versed in tracking your spending, you already know how much you spend or dish soap or laundry detergent every year, and aybe a new washer was needed after your old one went kaput. In any case, you’re spending a lot of money to keep your home going, and owning stocks in the companies that make the products you use every day might make these bills easier to manage.

Of course, the potential for lifestyle hedging doesn’t stop there. You can buy stocks in publishing companies that make your favorite books and magazines, fast food companies where you get your lunch every week, airlines you use to fly around the globe etc — and yes, of course Starbucks where you get your daily coffee. You will still need to invest in more than consumer goods and services to build a well-diversified portfolio, but sometimes owning shares in companies you interact with every day can make managing your money a little more interesting.

What are your thoughts on owning stocks in businesses you buy from? Any others that are your favorites?

The 5 Stocks Every Millennial Needs To Have In Their Portfolio

I’m a big advocate of investing in your 20’s. It is not nearly as scary or challenging as people make it out to be. Signing up for an online brokerage account (I use Questrade) takes only a few minutes and requires just $1,000 to get started. When it comes to building your portfolio, there are 3 main goals:

Income: investments that produce money for you in the form of interest or a dividend on a monthly, quarterly, semi-annual or annual basis.

Growth: investments that will grow in value over time, so that you can reap capital gains when you sell.

Security: investments that are safe and won’t lose your money in the long run.

See? Very simple stuff! As for how to select stocks, the best resource I’ve ever found on investing is The Intelligent Investor: The Definitive Book on Value Investing (even Warren Buffet, a student of Graham, credits him for his investment success! Don’t you want to learn from the investor that taught Buffet everything he knows?)
I STRONGLY RECOMMEND that if you want to get into the stock market, you purchase a copy. It’s available for only $13 on Amazon — and it will be the best investment you ever make. Nothing will net you more money than knowing what you’re doing when it comes to investing in the stock market! Once you’ve picked up your copy, you’re ready to start building your portfolio. For that, I’ve assembled a list of 5 investments every 20-something needs to have in their portfolio. I usually suggest when you purchase a stock or investment, you buy at least $1,000 (preferably $2,000). If you’re about to tell me you don’t have $10,000+ laying around to get into the stock market, no worries! You can start with any point 1 through 4 on this list, and then buy the next one when you have more cash. Leave #5 until the very last — you’ll see why!

The Five Stocks Every Millennial Needs To Have In Their Portfolio

1. Blue chip dividend payers. These are some of my favourite stocks because they are reliable, well-established companies that have been paying dividends for decades — some over a century! What’s more, they regularly increase their dividend, which means you make an initial investment and ever year you will be paid more for holding that stock. When you look at these companies, it’s more likely than not you’ll recognize the names: Johnson & Johnson, Proctor & Gamble, and AT&T. In Canada, your blue-chip stocks are ones like Trans Canada, BMO, TD, and Sunlife. While holding individual common stocks are still a riskier investment than holding an index fund, blue-chips are about as safe as you can get. That said, one of the reasons I’m an advocate of grabbing individual stocks is because you do stand to gain more than holding a fund. If you invest in an index mutual fund, your return will be that of the index, but if you hold an individual stock, you stand to gain a lot more (you can also lose more, but with these companies that have stood the test of time, it’s less likely).

2. REITs. While Real Estate Investment Trusts rarely pass the Benjamin Graham litmus test, I still feel they’re an integral part of a Millennial portfolio. As a generation that seems obsessed with home ownership, a REIT is a great way to own property before you can afford a down payment on a home. Furthermore, REITs are great for protecting your portfolio against inflation. Lastly, REITs frequently pay out a monthly dividend, which means they’re a great income generator. You can buy REITs individually or buy a REIT ETF or mutual fund depending on your interest and risk tolerance. As a Calgarian, I’m partial to the H&R Real Estate Investment Trust (HR-UN.TO) which includes Calgary’s beautiful Bow building:

3. ETFs. I’ve blogged about how to buy Exchange Traded Funds before, and they’re still one of my favourites, especially since Questrade doesn’t charge to purchase them, which let’s me buy a handful (or even as little as one) unit at a time without paying a trading fee. ETFs are a great way to diversify your portfolio while minimizing risk and generating income. You can choose ETFs by industry — like utilities, banking, etc — to keep your portfolio balanced and profitable. I try not to replicate my common stock holdings within ETFs because then you’re not diversifying. For example, if you already own a few bank stocks individually, do not buy an ETF of bank stocks!

4. A bond fund. It’s always good to be boring and buy some tried & true government and corporate bonds. I suggest a bond fund (either as a mutual fund or ETF) rather than buying individual bonds. Bonds typically move in the direction opposite of current interest rates. That means you want to buy when interest rates are high and refrain from buying when interest rates are low. I rebalance my portfolio only once per year, moving cash from stocks to bonds or vice versa, but for the most part I’m committed to dollar-cost-averaging. This is the practice of buying a little bit on a regular basis. In terms of my bond buying, I buy a handful of units of a bond ETF once a month in my RRSP. I haven’t accumulated much in way of bonds (because interest rates are so low! I’m favouring stocks) but I like having just a little bit for a balanced approach.

5. A few wildcards. One of the most fun aspects of investing is taking a chance on an investment and making a killing. It can hurt when you lose, but that’s why I suggested points 1 through 4 to set up a robust, safe portfolio leaving you a little bit of wiggle room to take a gamble. As a rule of thumb, I never risk more than 3% of my total portfolio — I do this because then if I were to lose all my money, 97% of my portfolio would remain in tact. One of my favourite gambles was on Netflix (bought at $220, sold at $350 per share) but I’ve had some losers as well. I like to play the stock market a bit, but if you’re a more conservative investor you can skip adding wildcards to your portfolio and stick to the tried & true suggestions 1 through 4 above.

Happy investing!

Why You Shouldn’t Borrow To Invest In Your TFSA & RRSP

*Note: I’ve updated some of the wording in this post since it went live to replace the places where I said “borrowing on a margin” to say “borrowing to invest”. I was using the terms interchangeably when they’re not for these types of accounts: “Government regulations prevent you from trading with margin in registered accounts like RRSPs, TFSAs and LIRAs.” (because it’s dumb, as you will see in the post below). Sorry for the confusion! I had also typed ‘ever’ as ‘every’ so this definitely needed a proofread ;)

You can and should open brokerage accounts within both your TFSA and RRSP. I suggest the TFSA first, because if you’re a new grad just starting out, it’s unlikely your income is high enough to justify aggressively contributing to an RRSP — particularly if you paid for your education yourself and have tuition credits you can claim. For an understanding of how an RRSP and TFSA differ, here’s a quick cheat sheet:

The TFSA vs. RRSP

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 The main difference between a TFSA and RRSP is how the funds in each account are taxed, particularly in a brokerage account. In a TFSA brokerage account, all dividends, interest and capital gains you earn on your investments is tax free. This is a huge advantage in this account because if you continue to reinvest dividends and interest, the compounding income will also be tax-free. In your RRSP, you’ll also benefit from compounding, however you will be taxed on all these gains when you withdraw the funds with the exception of borrowing under the first-time Home Buyer’s Plan or the Lifelong Learning Plan. To learn more about withdrawing from your RRSP, check out this post: Ways To Use Your RRSP For Things Other Than Retirement.

A seasoned investor might understand that using leverage like cash borrowed on a margin for trading is a quick way to grow you money. After all, if your investments increase in value, the more you’ve put in, the more you’ll get out. However, if your investments lose money,  twice because you still have to pay back what you borrowed. Taking this risk on accounts that have contribution limits is idiotic. If you lose even part of your investment, you never get that contribution room in your TFSA or RRSP back. Which is why I suggest…

Don’t borrow to invest in your registered accounts!

Borrowing to invest can turn very expensive, very fast. Depending on where you get the funds to invest, the total borrowing cost could vary from 3% on a line of credit to 18%+ if your funding it with a credit card (I don’t even want to go into how stupid that is).

This means that when you borrow to invest, you need the stock to earn at least 3% to 18% just to break even, and even more if you want to make a profit!

I don’t think it’s unreasonable to earn 3%+ on a stock, but shooting for 18%+ is a little more challenging.

and what if you lose?

This is where it gets nasty. For example, someone borrows $5,000 to invest in a hot stock in their TFSA. They borrow this at 6% so in a year’s time they will have to pay back $5,300. They dump all $5,000 plus an additional $5,000 of their own money for a total of $10,000 into one stock and watch it for 12 months. It falls, and then falls agin, finally plummeting down 20% to $8,000 by year end. Finally ready to call it quits, the investor withdraws their money and pays off the $5,300 they owe the brokerage, leaving only $2,700 for themselves. This means of the $5,000 of their own money they initially invested, they lost nearly 50%. Ouch!

They also lost the contribution room in their TFSA.

That’s $2,300 that could be safely earning interest in a savings account. If you’re thinking buying stocks in your TFSA at all is risky because a loss will always translate into a loss of contribution room, you’re right. And that’s why investing in stocks is riskier than keeping your money in a simple savings account. But what’s most important to note is this:

borrowing to invest unnecessarily magnifies risk. 

If the person had invested only $5,000 of their own money, they would have suffered a loss of only $1,000 instead of $2,300. If they had saved up the extra $5,000 they needed and gone all in for $10,000 just like in the example, they’d only be down $2,000 instead of $2,300. It’d still be a loss, but at least they’d have an extra few hundred dollars. They’d only realize a loss of 20% instead of 46%. That’s a HUGE difference!

The scenario plays out the same way in your RRSP. If you borrow and lose, the RRSP contribution room is gone forever. If you’re serious about building wealth, you know that investing in stocks in a registered account is risky enough and you don’t want to magnify that risk with borrowed money.

Is it ever ok to trade on a margin in your TFSA and RRSP?

Honestly, it’s up to you! I’m too risk-averse to gamble with fire in my registered accounts but some investors might really feel confident borrowing to invest in their TFSA or RRSP. As a seasoned investor with maxed out registered accounts that have already returned some extra money for you, you might feel comfortable taking the plunge and buying on a margin. Ultimately, it comes down to what kind of investor you are. But if you’re like me and still managing small investments (less than $50,000) and still learning the ropes of the stock market, buying on a margin is simply too much risk for too little reward.

What are your thoughts? Is borrowing on a margin in your registered accounts a great way to build up your long term savings or too scary to play with contribution room you can’t recover?