Derek Foster and me might just be twins. Sure, he retired at 34 with a wife and four children, and I’m single and in my 20s, but we share such similar philosophies on money it’s hard to believe. I took out The Lazy Investor from the library the other day (anyone else find it ironic to buy books on personal finance?) and read it in an hour in the park (I skipped the entire second section on teaching kids about money).
His investing philosophy is simple, easy to understand and available to all Canadians:
I rejected the ‘nest egg’ approach in investing and instead focused on the ‘cash flow’ approach
His investing approach
•Buy blue-chip Canadians companies directly, through a Stock Purchase Plan (SPP) and fractionally reinvest dividends within them (DRIP)
•Slowly add to those positions over time, either through large deposits irregularly, or small, frequent automatic withdrawals from your chequings account
•Turn off the DRIP when you’re ready for retirement and collect the cash without selling your shares
Why this strategy rocks
•Low risk; a. blue-chip companies that pay dividends are some of the most stable companies out there, and b. dollar-cost averaging along with a buy and hold strategy ensures you don’t attempt to time the market which is good because you can’t actually time the market
•Automation makes you more likely to stick to investing and takes the hassle away (save the initial set-up)
•Tax-efficient; Canadian dividends are taxed far lower than interest income and capital gains.
•Stock crashes benefit you in the long-term because your dividends will be able to buy more shares, thus increasing your income (As long as the company doesn’t cut dividends, of course, but most of these blue-chip ones take great pride in never cutting a dividend)
•Pay your bills with the income, while still allowing the shares to appreciate. You may even be able to pass the shares on to your kids or a charity
All these points are likely to lead to higher returns
Why he avoids investing in brokerages
Discount brokerage’s DRIPs only invests in whole shares, not fractional ones.
This means if you earn a $20 dividend, and the price of a share is $26, you will simply get the cash dividend deposited in your brokerage account because you didn’t earn enough to buy a share. In an SPP, however, that dividend will buy a partial share, allowing it to immediately start paying a dividend itself. It speeds up compounding, and over time, can earn you significantly more money.
In addition, adding to your position is FREE within an SPP whereas it costs a fee within a brokerage.
However, there IS a brokerage in Canada that allows you to fractionally invest shares: ShareOwner. It’s a really unique brokerage and although the fees can’t compete with discount brokerages, it’s still worth checking out because a. it’s fees are comparable, if not cheaper, than buying a $75 share certificate, b. it offers free automated withdrawals and c. you can pursue this investing strategy within a TFSA, not possible with an SPP.
This brings me to my next point: TFSAs, which have changed the investing game completely were not around when Foster wrote this book.
Dividends are taxed well, but dividends within a TFSAs are tax-free. Until you’ve maxed out your TFSA it’s hard to make a case for investing with an SPP. Especially since it’s possible Canada could change the dividend tax rules within the next 40 years, which is millennial’s retirement horizon.
He pays no attention to diversity
Another super interesting point he made, and I’m not qualified enough to agree or disagree with him on this, is that diversity is overrated.
A primary reason people encourage investing in ETFs (also not a popular product when he wrote the book) is that they allow for diversity unavailable with stock picking.
I’m not the biggest fan of ETFs, just because I prefer to invest in individual companies. Something about investing in the “market” makes me uncomfortable, like WTF is the market? What does it really produce? How can I invest in something that produces nothing but other people’s opinions? Having said that, I do own some ETFs for the ease of it. But investing in ETFs becomes less attractive if diversity is overrated.
His stance on diversity extends to only investing in Canadian companies. Because US dividends don’t have the same tax benefits as Canadian dividends, this makes sense to a certain extent. He does includes a chapter on US stocks anyway though, since I guess he knows it’s so popular here.
I invest with US dividend stocks because I think they have far better consumer products than us, and Canadian dividend companies are mostly mining, oil, energy and banks which have some ethical implications I’m not fully comfortable with (but mostly ignore TBH).
He missed or could expand on
•TFSAs: he doesn’t mention it at all and it’s a game changer
•ETFs: he made his stance on mutual funds clear, i.e, they suck balls and stay far, far away from them, which people generally agree on in 2017, but no mention of ETFs. Since they’ve grown dramatically in popularity, it’s also a game changer
•Income Trusts: he touches on income trusts and REITs, but I want to know more
Basically, he needs to update his book to include the changes we’ve seen in both accounts and products. But his fundamental strategy is time-tested and remains applicable today, so is unlikely to change anyway.
What about his savings advice?
His saving philosophy is just as simple as his investing philosophy.
Spend money on what enhances your life, and try to avoid and minimize expenses around those things that do not enhance your life
Foster says your money can be spent in two categories:
1. Life enhancing
This differs per person, but for me, would be something like good coffee, bras and hair products.
2. Non-life enhancing.
This would be stuff like taxes, laundry detergent and cushy toilet paper.
Spend on what makes you happy. Drink those lattes like a boss. Simply try to minimize the expense as much as possible, so, for example, take in your own mug to save $0.10 and join the loyalty program to get free shit.
Spend money happily and guilt-free on fancy schmancy German cars if you honestly feel it improves your life to have a seat that gives you a massages while driving. That actually sounds pretty awesome. But first make sure you have saved up for it, and have shopped around and done your research to make sure you’re getting the best deal. Basically don’t blow your money anyway, but spend it consciously.
If you enjoy something, why would you want to give it up? Sure, if you want to live the miserly existence of Ebenezer Scrooge you can become quite wealthy, but so what! what kind of life would that be?
But if it doesn’t enhance your life, than cut-back on it or reduce it as much as possible. For example, you know what doesn’t enhance my life in any way? Bank fees! So I avoid them like the plague. I will walk 8 blocks to avoid an ATM charge. Windex also doesn’t enhance my life. That’s why I’ve been making my own household cleaner out of vinegar and water for years now and saying several dollars a year in the process (lololol)
Not spending money on things that don’t bring you any pleasure is painless — and in many cases quits possible.”
Conclusion: Buy, download or borrow this book!
Investing: His writing style is clear, jargon-free and the advice is practical and easy to follow. In fact, why do you even need more than this book? Truth is, you don’t. This book offers such solid, stable advice you could probably just read this one, set-up everything up and be good to go forever and be about 300949737% better than doing nothing, investing in a GIC or trying to stock pick based on what you think will go up (UGH UGH UGH).
He actually gives a list of the Canadian companies he thinks you should buy, along with exact directions on how to buy these stocks and start a DRIP. That’s extremely useful for those unsure of how to actually START investing in a practical
His strategy would suit everyone with a long time horizon to retirement. I can’t see how anyone following this strategy could be worse-off.
I will definitely be using this book in my continuing attempt to clarify and create my own investing strategy.
His spending strategy is rational and balanced. It doesn’t focus on deprivation and instead focuses on channeling your money into creating the life that you want. You really can’t go wrong here.
There are 5 comments
U.S. dividends have a 15% withholding tax (only RRSPs are exempt) and for Canadians are taxed the same as interest. TFSA’s are not exempt from the 15%!!
Instead of owning any bonds, GIC etc, I own REITs, two that I own in my TFSA are AX.UN with a 7.5% div. and BTB.UN with a 8.6% div, both offer DRIPs!
Yup, I know and unless you submit a W8-BEN form the witholding tax is usually way higher.
I also own a REIT, norther properties. Just bough it so we’ll see how it goes!
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