Historical article note: This article was originally published on 2018-05-14. Rates, policies, home prices, statistics, product names and qualification standards reflect the environment at that time and may have changed. This archive is for historical record and general education only. It is not mortgage approval, investment, legal or tax advice.
Investment means converting current resources into resources that can be used in the future. As the balance of each of our families' income minus expenses continues to increase, after working tirelessly for a better future, we must eventually break into the investment field. Only by breaking through the cost line of income-expense = 0 and continuously accumulating knowledge and funds can capital and assets eventually grow with compound interest. This is a future-oriented activity that requires us to be able to live in the future, not just in the present. Investment requires capital, and capital is the cornerstone of capital, which is the balance of income minus expenditure. Funds alone are not enough. Funds are just the bricks in the capital building. There are three conditions for converting funds into capital: the size of the funds, the time of use of the funds, and the wisdom behind the funds. Financial intelligence is the wisdom behind funds. Many wealthy people are not worthy of standing behind capital and are just prey for other investors. The main reason is due to lack of financial intelligence. Knowledge + time + money + practice = successful investment.
Knowledge, in the investment field, is the basic common sense used to identify opportunities and filter out useful information. That is, identifying knowledge is the thread that weaves the filter. The difference in financial quotient is determined by the quality of the filter. Financial intelligence knowledge is acquired. No one has an innate advantage. Parents will not pass financial intelligence on to their children, so everyone must learn and accumulate it on their own. Do people who major in economics have high financial intelligence? not necessarily. Traditional economics is based on the assumption that people think rationally, but are people rational? An important branch of the development of modern economics is behavioral economics, because economic society and investment markets are composed of people. Take the stock market in the investment market as an example. This is a zero-sum game arena. A makes money while B loses. It’s not enough for you to only know yourself, you also need to know other players, otherwise you will always do B. The same goes for the real estate market. There is a concept in behavioral economics, the endowment effect, which means that if a buyer buys an asset for his or her own use, he or she will have feelings about it. When selling, the expectation will be too high, and it may even be emotional. If the buyer is buying for the purpose of selling, he will sell when it is time to sell. There will be nothing to miss, and this is a normal business behavior. When house prices fall, the endowment effect explodes. Most homeowners are reluctant to sell, and transaction volume plummets. Once the market reverses, the greedy nature of sellers returns, and no one is willing to sell at a lower price than their neighbors. The real estate market fell slowly but rebounded very quickly. This phenomenon was clearly demonstrated in the Canadian real estate market from the second half of 2008 to the first half of 2009. Another widely discussed branch of modern economics is the life cycle investing approach. That is, looking for the intersection between the economic cycle and the investor’s life cycle to develop personalized investment plans. To give a simple example: a 34-year-old investor can allocate 66% of stock assets and 34% of bond assets in the investment portfolio; the 64-year-old investor, in turn, allocates 34% of stock assets and 66% of bond assets; the 34-year-old investor chooses to use the equal-amount periodic investment method to spread the investment costs equally over the next 30 years; the 64-year-old investor seeks professional advice to put assets into a safe investment portfolio as soon as possible. Learning has the highest return on investment. Whether it is the endowment effect or the life cycle investment method, it can be identified and mastered through learning. If you refuse to learn, you will not have the opportunity to know what you will gain after learning. If you don’t know what the harvest is, you don’t know how big and good the harvest is. If you don’t know the benefits of learning, you will naturally have no motivation to learn. In the moment of acquisition, the whole world changes. Every time I master a skill, I feel like I am reborn. The acquisition of any knowledge is irreversible. The moment it is known, it changes everything. Life changes because of it, but it cannot be restored.
Time plays a vital role in investing, and many results change due to time. Some people want to lose weight through running, but they don’t know that sugar is consumed in the first 20 minutes of aerobic exercise, and the proportion of fat consumed will increase significantly after 30 minutes. Running vigorously for 20 minutes will not have the effect of burning fat and losing weight. Therefore, running 1500 meters in 20 minutes will not have the effect of losing weight, but jogging for 30 minutes will have a better effect. What you do and how long you take vary from person to person and from thing to matter. Many people ask, how long does long-term investment mean? Just remember a simple formula: when the amount of assets invested reaches 4 times the initial investment amount, it is a long-term investment. A down payment of 70,000 yuan is made to buy an investment house worth 350,000 yuan. During the holding period, the tenant pays the mortgage and other expenses, and the investor does not make additional investment or supplement cash flow. It will be 10 years when the house is sold and the house is sold for 280,000 yuan. So 10 years is a long-term investment. Buy stocks for 70,000 yuan and leave them to Buffett to manage. The annual return on investment is 21%. If you get back 280,000 yuan after 6.90 years, then 6.9 years is a long-term investment. It can be seen that improving financial intelligence can extend people's life span. There is only one way to make efficient use of time: parallel tasks. Connect the tasks that were originally connected in series in parallel. For example, if you buy assets with compound interest or borrow other people's money to invest, the capital can work while you sleep. It's not you working, but your money working. The essence of investing is to give your money a job. Some people set their life goal as wealth and freedom. In the end, this kind of freedom means that you don’t have to sell your time for livelihood. After wealth freedom, there is wealth management and wealth inheritance. Time is free, but people are not yet free. Time is fair to everyone. If you relax for too long in the early stage, you suddenly find that there is not enough time. You can only hope for a quick fix, and most scams are related to quick fixes. There are two animals that can reach the top of the pyramid: eagles and snails. Everyone can have the spirit of a snail and treat time as a friend. You don’t have to do things quickly. Horses can run faster than camels, and camels travel twice as long as horses in their lifetime. No one has ever seen a camel galloping in the desert, unless one of them went crazy. People who want to see immediate results in everything they do are too impetuous. The more impetuous they are, the more dissatisfied they are with the status quo. The more dissatisfied they are, the more impetuous they are. There is only one thing that will produce results quickly. If you pull the slot machine, the result will be there in 5 seconds.
Practice is the only means to test learning results. Practice means using the right method and doing the right thing. "Doing the right thing" is far more important than "doing things right." There are three things you must not do: "join in the fun for no reason"; "follow the crowd eagerly"; "worry about others." I still don’t know which word the president of Peking University mispronounced. Does this matter have anything to do with you? Why are you joining in the fun? People who join in the fun don't take their attention seriously and waste too much time on boring things. When others buy off-the-plan properties, you also buy one. Others can get a loan and successfully settle the transaction, but what about you? Some people are so eager to become someone else's prey or dinner that they can't stop them. Why is it that there are many professionals in the Chinese community in Canada, but the basic concepts are very confusing? According to my observation, it is because some professionals cross boundaries too much and worry about other people and things in other fields. To invest, you must first concentrate, secondly, devote time to practice repeatedly, and finally have enough funds. Attention>Time>Funds is the inequality for successful investment. There are two types of people you must stay away from. Stay away from people with "money personality disorder". These people are characterized by lack of money, paranoia, acrimony, laziness, empty talk about feelings, and pouring cold water on others. In layman's terms, they are poor and poor people. There are no people in this world who regard money as garbage. If a person really regards money as garbage, he will also despise other precious things, such as friendship, love, and even life. Stay away from people who value money above all else. What some people lack in life should be other things, such as being noticed, being loved, etc. The money they pursue is just a substitute for these actual missing items. Blindly pursuing substitutes is a kind of mental paranoia. Who you approach depends on his attitude towards money. There is no better way to examine a person's abilities and personality than to see how he makes and spends his money. How you make money directly reflects a person's ability, insight and courage. There is no such thing as underappreciating talent in Canada. Your ability is directly written on the tax return. How you spend money can even more accurately reflect the depth of your personality than how you make money. If you are looking for a wealth coach, find someone you know who is willing to help you and whose family net worth is 20 times greater than yours. You can also be physically close to a group of like-minded friends in investment and financial management. This is very important, because you know that there are other people like you who are not willing to only accept government support after retirement, and are willing to postpone gratification, assume their own responsibilities, and strive for a better life. Making progress together is essential in the learning and practice of investment. There will be a two-day financial and business forum in Niagara this June, where you will find like-minded friends.
Financial intelligence, including 5 basic abilities. Make more money, hold on to your money, develop a financial plan, use financial leverage, and improve your financial information. These abilities can be learned, and with repeated use, they can be integrated into the blood and become a part of the body. Financial intelligence has two basic tools, compound interest and leverage, which can also be learned and mastered. On June 23rd and 24th, we held a financial and business forum at the Great Falls. We did not seek to make everyone get rich quickly, but only wanted to allow participating friends to get started quickly and find like-minded partners.
"Developing a financial plan", many people think that it means living within one's means, scrimping on food and clothing, and doing everything possible to save money, but for investors, the most important thing is to set investment goals. If the balance between income and expenses is too small, just stop frugal and work hard to increase your income. For Canadians, the investment goals are a series of simple and rough numbers: at least 500,000 life insurance for the couple when they retire, a home with no mortgage, and 2 million financial assets. In the event of a personal accident, leaving 500,000 in cash for your loved ones is the minimum. If your ability allows, it is best to purchase 1 million life insurance. If you still pay the mortgage for your home after retirement, I'm afraid you won't be able to retire, and you will still need to work part-time at Wal-Mart. If the principal of 2 million financial assets remains unchanged, the return rate is 5%, the annual income is 100,000, and there is 60,000 left after tax to live on. This is the result of a questionnaire survey of wealthy families in Ontario in 2014 by a bank. Anchoring a goal is of great significance. It is a goal that lets us know how far we are; it is a psychological account that records every step of the journey toward wealth and freedom. Speaking of mental accounting, think about it, what is the price of your own house in your mind? Or how much is this house worth in the eyes of the insurance company? If the house burns down, how much will the insurance company pay? Is the price paid in your mind? We invited a Chinese appraiser to write an article on house prices in the eyes of appraisers for readers in the journal of the first Financial Business Forum. Another case of mental accounting is the issue of investment housing. If you set the rental income of the investment house as the goal, you will have an account in your mind; if you set the future price growth of the investment house as the goal, you will have a completely different account in your mind. Different mental accounts, different attitudes towards tenants. The forum’s keynote speaker will talk to the audience about what a good landlord looks like in the eyes of legal professionals.
Using financial leverage is to use other people's money to leverage larger assets, that is, you pay 2 yuan yourself and borrow 8 yuan to buy a 10 yuan asset. The income is the income generated by the 10 yuan asset, and you need to pay 8 yuan in interest. Leverage means using small to make big gains. Using leverage will not increase the rate of return, but can only double the gains or losses. The biggest leverage is borrowing even 2 yuan. I will comprehensively introduce the PHRESE investment method on the financial and business forum: buy/Purchase, hold/Hold, increase/Refinance, continue to hold, continue to increase exposure, and finally sell/Sell. TD Bank colleagues will also contribute an article on the latest mortgage policies in the journal.
Is improving financial information also a basic ability of financial intelligence? Of course, if everyone looks at the same stock market conditions, reads the same financial reports, and under the same interest rate environment, how can their investment returns be different? The difference between high and low financial IQ lies in the ability to collect, organize, and screen useful financial information. There is no need to overexaggerate the difficulty of analyzing financial information. By referring to a scientific investment portfolio and insisting on fixed investments, you can invest in the stock market like a sloth. This forum invited the former CPP (Canada Pension Plan) fund manager to explain the investment portfolio structure announced in the 2017 CPP annual report to see how Canada's top institutional investors allocate assets and how individual consumers can learn from it and use it as a template to build their own investment portfolios. The fund manager will also provide the journal with an article on his thoughts on the 2018 Buffett Shareholders Meeting in Omaha, which is very exciting. Canada is a country of immigrants, and changes in immigration policy determine the direction of the economy. The immigration consultant will write a special article on immigration policy information for this issue of the journal. BDC Bank, a Canadian state-owned enterprise, is a bank that the government supports small and medium-sized enterprises. The forum journal has a special article introducing the government's specific policies to support credit for small and medium-sized enterprises.
Finally, let’s talk about two basic investment tools: compound interest and leverage. There are two ways to gain wealth: creating wealth and buying wealth. Innovation and entrepreneurship are actually all about creating wealth. If starting a business is just opening a restaurant, it is to make a living. Opening a series of chain restaurants, like McDonald's, is starting a business. The difference between doing business and starting a business is whether the business you create has a growth rate and whether its operating income can increase by a percentage every year. The same goes for investment. If the assets you buy do not bring continuous income, then it is gambling. You are trying your luck. You buy it today and see if you can sell it at a higher price tomorrow. Assets that can generate passive income, and adding the income back to the principal to continue investing, will have a compound interest effect, that is, the rule of 72, 72 divided by the annual rate of return equals doubling the principal after N years. For example, if the return on investment is 7.2%, 72 divided by 7.2 = the principal doubles in 10 years. If you invest 10,000 yuan, the annual return rate is 7.2%. If the income is added back to the principal, the return on the new principal investment in the second year will still be 7.2%. After 10 years, the principal of 10,000 yuan will become 20,000 yuan. The annual growth rate of the fund managed by Buffett is 21%, that is, 72 divided by 21 = 3.43 years. If your investment is managed by Buffett, your principal will double in less than 4 years. The compound interest effect, that is, compound interest, is called the 8th wonder of the world. If you want your investment to witness miracles, invest in assets that generate compound interest. Stock and fund investments have a compound interest effect, but real estate investments do not because income cannot be added back to the principal for reinvestment. Leverage is the second tool of investment, that is, it is an accelerator of using small things to make big things happen. The risk is: double the income, double the loss. In investment, leverage can only be used to purchase controllable assets, and cannot be used to purchase uncontrollable assets. Using margin to buy stocks means using leverage to buy uncontrollable assets. If a listed company is not doing well, you can't replace the CEO, so just wait for margin call. By using leverage to purchase an investment property, investors can adjust the down payment ratio based on expected cash flow, or they can repair the property themselves to improve the rent, or renovate and upgrade it, or even knock it down and rebuild to force appreciation of the property. If the leverage is high and there is no cash flow, you can accelerate the repayment of the mortgage in advance to reduce the monthly payment and improve the cash flow; if the leverage is low and there is no leverage, you can increase the mortgage and increase the leverage to reduce the net rental income, thereby reducing the tax burden. Of the two tools, the latter is more risky and requires higher financial intelligence and the ability to manage assets.
Finally, I would like to tell you about the concept of "mirror neurons", which is the phenomenon of painful firing when you see someone else getting an acupuncture. If all your friends are going to the bar to watch the NBA on the weekend, you want to go too; if all your friends are going to attend Buffett's Omaha Financial Business Conference, you will also want to go with them. Financial Forum, we are serious. If you haven’t started learning about financial intelligence, believe me, you are not alone, all of us are still on the road.