CANADA

Personal Finance

A few people have asked me how to invest in Canada. A seemingly easy question. But the answer is much less simple, because investment is just one aspect of personal finance. Below is a summary of my thoughts.

  • Savings = Income - Expenses. Unless you can borrow money at low costs - it is possible especially for real estate investments - most of your investments will have to be funded by savings. Forget about investment unless you can make some good savings every month.

  • Maximize your income by creating side income.

    • Do you have a spare bedroom? If so, you can make it available on Airbnb.

    • Is your guest interested in making easy money? Refer him/her to Tangerine, Transferwise, Questrade, Turo, Airbnb. (See footnotes).)

    • In fact, instead of looking for the cheapest apartment, you may consider renting a whole house with multiple bedrooms, occupying one bedroom yourself, and rent out all the rest through Airbnb. In a city as expensive as Toronto, you can easily find a 5-bedroom-and-3-restroom house for about 3,000 CAD a month in North York, close enough to the subway. Now instead of spending money on housing, you are making money on it. (If you have a job but not a stay-at-home partner, consider find a business partner sharing the profit/work/cost/risk.)

    • Are many of your guests interested in renting a car? If so, how about buying a used car for 5,000 CAD and rent it through Turo for 50 CAD per night? Good synergy with Turo referrals! (Do it through Turo, which takes care of the insurance.)

  • Minimize your expenses by focusing on recurring costs.

    • Telecom: Instead of Rogers or Bell, consider Freedom or Chatr for your mobile plan and eBox for Internet. Cable TV? Do not waste your time or money on it! (Feel free to use GP265 as referral code for eBox.)

    • Banking: You may want to open an account first with one of the Big Five, just to get a credit card and build your credit score. They usually offer free checking/savings/credit card for free for newcomers for a limited period of time. Meanwhile, open checking and savings accounts with Tangerine, which are 100% free, and once you already have a reasonable credit score, also apply for a credit card with Tangerine for free. Now you can close all your accounts with the Big Five. (Please feel free to use my Orange Key 51017779S1.)

    • Public Transport: Ideally you want to be able to walk to work. Walking also saves you gym cost.

    • Food: Do your grocery at FoodBasics instead of Loblaws.

    • Finally, always negotiate. I negotiated off various costs with my Internet provider and CIBC. Of course you need to make them think you are a valuable customer. I first transferred a significant amount of money to CIBC and told them I was interested in getting a mortgage with them, before asking them to waive me a 50-CAD fee.

  • Investment. This is actually the easiest part, at least until you have enough capital to buy real estates. Everyone should start with stocks. The most important is to know the difference between investment and speculation.

    • Stocks. I worked in investment management for four years, and the best advice that I can give is Do not try to beat the market. More concretely, it means.

    • Invest in the broad world economy through ETFs instead of speculating with individual stocks. When you buy Apple or Google, you are speculating and statistically speaking you will under-perform the market, on a risk-adjusted basis.

    • Be disciplined: Invest all your savings that you won’t need soon at fixed periods. For example, buy XAW.TO every month as soon as you have got your salary. The daily, monthly, or even yearly, price fluctuations do NOT matter in the long run.

    • 100% equity: If you buy well-diversified ETFs (e.g. XAW.TO), the only scenario in which you will lose money in the long run (meaning longer than 10 years) is the world economy collapses and never recovers. And if that’s the case, money is probably the least that you should worry about. Historically, it does not matter whether you take a 10-year, 20-year, or 50-year period, whether you include financial crises in your period or not, the average annual return of well-diversified stock portfolios (e.g. S&P 500) was about 8% per annum in USD terms, much higher than bonds or savings. 8% per annum means every ten years, your money doubles.

    • If you want more theories, there’s a lot of information here.

    • Model portfolios for Canadian residents can be found here. Personally, I have 97% in XAW.TO and 3% in VCN.TO.

    • Questrade is probably the best option for those with less than 100k USD. (Feel free to use my QPass 786424980408390.) For those with more than 100k USD, consider Interactive Brokers. (I have both.)

  • Real estates.

    • If you buy a house in Toronto and hope its price will keep going up, you are speculating, not investing. My bet is that you will lose money.

    • A good investment is a property that can bring you a lot of rental income, relative to its purchase price. There are places in Canada where you can achieve a net rental yield of 10%. (Google rental yield if you don’t know what it means. In Toronto, the rental yield is typically less than 2%.)

    • Improve your return by financing your purchase with a mortgage. When your rental yield is higher than the mortgage interest rate, taking a mortgage improves your return. Tax minimization. This can be very complicated. But honestly, you will do just fine if you get the other things right. Leave it for now to those perverts like me who do not have better things to think about.

Foot Notes

  • Tangerine offers checking and savings accounts at zero costs without any minimum balance requirement. When you refer someone, both of you get 50 CAD. Without a referral a new customer will get only 25 CAD. (Please feel free to use my Orange Key 51017779S1.)

  • Transferwise is probably the best way to transfer money from/to overseas for people without a lot of money. (If you are rich enough, Interactive Brokers is much cheaper.) When you refer someone, you get 25 USD and your referral will be able to transfer 500 USD free of charge. After that it costs about 1% of the total value, still much less than what a typical bank makes by using unfair exchange rates (usually about 3%).

  • Turo is a p2p car rental website. When you refer someone, both of you get 25 CAD credit for free.

  • Airbnb. When you refer someone and he/she becomes a host, you get 125 CAD.

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