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.


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!

Facebook IPO: why I didn’t buy

There was a lot of hype about Facebook becoming a publicly traded company. The stock went public last week, and leading up to the big event there were endless speculations about its potential. Buying stocks is definitely on my top-10-favorite-things-to-do list, but I had no intention of every buying any shares of FB for one big reason:

I hate Facebook.

I didn’t use it for years because I hate it so much. The only reason I have it now is because I have to in order maintain our Facebook Page for work. Having a great affection for a company is not always one of my reasons-to-buy their stocks, but it certainly helps. Outright loathing a company is definitely a reason-NOT-to-buy for me though.

That said, I could have been persuaded to by Facebook if it was a better stock. After all, it fits my personal criteria of being a company I know and understand, which is my primary foundation for stock-picking. However, in addition to me hating it, Facebook is lacking a bit more in order to make it an appealing investment to me:

1) it’s too new, both as a company and a stock. Facebook has been a huge success and it has a great business model, but it’s only been up and running since 2004. Is Facebook going to withstand the ages the way brands like Coca-Cola, Proctor & Gamble, and Johnson & Johnson have? Maybe, but maybe not. At this point, Facebook still needs to prove its staying power to me.

2) it doesn’t pay dividends. I don’t buy dividend-paying stocks exclusively, but I like them when I find them. Healthy payments from a company with a history of continuously increasing dividends over a number of years will entice me to buy a stock. Because I’m young, I invest for the long-term so if I’m going to hold a stock for a number of years, I appreciate getting a small regular pay-out for it.

3) its first day disappointed. Facebook was kind of a bore on opening day, closing only $0.61 above its opening price (for comparison, Google rose $20 the day it opened), which suggests the stock was over-valued. While the first trading day doesn’t necessarily set the tone for a company’s trading lifetime, I would personally feel more motivated to get on the bandwagon if FB had been a runaway stock market success. Instead we’re all wondering where is it going to go from here? Which brings me to…

4) Where is it going to go from here? Facebook is the leader in social networking, but is this sustainable? Is it always going to hold its place as king of our online social web? Other social networking sites have risen to great heights and then burned out (ie. MySpace — who uses that anymore?) to be replaced with something else. I think Facebook could get old, and users might abandon it for something new — especially since they’re continually pissing everyone off with privacy policy adjustments, etc. Like any company, it will only succeed if it can  retain current customers and grow by finding new ones — does Facebook have that potential?

Do you use and like Facebook? Did you buy any FB shares? What is your expectation with the Facebook IPO?

PF Achievement Unlocked: monthly dividend income

Yesterday, I bought another dividend stock and succeeded at one of my baby-steps towards self-sustaining wealth: I have a passive monthly dividend income. 

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Albeit, a small one, but it’s there!

I know some people disagree with my decision to put money into savings & investments when I still have student loans, but acquiring income-generating assets is just as important to me as eliminating debt.

I used to read Early Retirement Extreme religiously (I still drop by occasionally but I’m not as diligent because I just don’t get the never-travel and take-cold-showers thing), and I was fascinated by the idea that you could accumulate enough wealth for it to be self-sustaining — and to do so on a middle-class income. I really never thought I would be destined to be wealthy because I expect to earn an average income for the entirety of my career, and assumed I would always need to work in order to pay my bills. Reading ERE really made me realize that not having to work (but still choosing to, because I love my job!) is a viable option, and even attainable relatively early in my adult lifetime.

Most stocks pay out quarterly, so when I pick which companies I want to buy shares in, I try to stagger their payout dates so I’m not getting all my dividends at the same time. This isn’t as easy as you might think: I’ve often found if I’m interested in say 5 different companies, 3 or 4 of them pay out on the same schedule. I might just be bad a stock-picking, but I think the financial year plays a big role in this too.

I’m pretty stoked about achieving this passive income goal, because now I feel ready to start building my portfolio in other ways, and I might even put dividend-payers on the back-burner for awhile.

Really I just love that there’s money being deposited into my account on a monthly basis and I don’t have to do anything except let it happen!

Stock investment wisdom from my grandpa

“You have to buy stocks the way you would a nice suit. Pick a high-quality, well-established brand — then wait for it to go on sale.” – my Opa.

Everyone knows investing in the stock market is about buying low & selling high, though intuition tends to make us act the opposite: if stock prices are down, we feel motivated to sell because we’re losing money and if they’re going up, we feel motivated to buy more because they seem to be money-makers.

I take my Opa’s advice. I actually wish I had more money to put more to use under his direction, but sadly I still don’t have a lot of cash to play with. Nevertheless I implement his strategy by watching big name companies, and waiting for a good price to buy. I watch the shares of many companies you might be familiar with:

Coca-cola, Pepsi, McDonald’s, Proctor & Gamble, Johnson & Johnson, Black & Decker, Kimberly Clark, Target, Mattel, Disney, Microsoft, Apple, Google, Telus, AT&T, Shaw, Netflix, and well, the list goes on. Some of these I already own, some of these I’ve bought & sold, some of these I’m waiting to go on “sale”, others I’m just watching and waiting for a collapse (or a revival) out of pure curiosity.

I keep some labor intensive spreadsheets when I’m bored, but generally I just check up on stock prices of these companies on my iPhone to see how they’re doing. After you watch a company for a few months and see the fluctuations in price, you start to recognize when is a good time to buy in. One of the main reasons I contribute to my brokerage account monthly is just so there’s ALWAYS some money in there so I can grab a good stock at a good price should the opportunity arise.

I haven’t been investing very long, but I’m amused to see my mock portfolio strategy has intensified rather than died off now that I’m using real money. For some reason I expected I would only watch the stocks I own, but I find I’m more interested in the market than ever.

Do you invest in the stock market? Do you have a strategy or follow any advice? Furthermore, is my Opa awesome or what?