The Transparent RRSP: Post #2

Actions Taken This Week of January 9th

  • Deposited $150 into the RRSP account which increases my principal to $1150

After buying 50 shares of ZPR at $10.86 per share, I have $456.50 left in the RRSP (I paid 0.50 cents in commission). With another $150, I give myself a better chance to buy enough shares of something else when the opportunity arrives. Having more money gives me the ability to diversify my portfolio.

For most of my working life, I mainly saved any extra money that my expected budget permitted. While this allowed me to contribute more than I normally would from time to time, it still fostered sporadic saving rather than regular savings that could’ve compounded nicely in my investments. There is power in consistency. 

When you’re consistent, you’re better able to determine where you’ll be headed in the future. If you can figure out your rate of return from year to year and factor in your regular contributions, you can see the actual potential of your financial growth. This where a goal is more likely to become a reality, rather than just exist in the back of your mind as a half-baked wish.

The first fundamental concept of investing refers to the compounding effect of your invested money + its previously earned interest = more interest on top of your growing money. I, too, wrote about it in my book because it’s the most basic concept of growth. Interest on growing money is going to be more than interest on a static amount money.

It gets complicated when you try to calculate the rate of return on your portfolio of investments. Ultimately, you want your portfolio at the end of the year to be worth more than it was at the beginning of the year and not just because you’ve been putting money into it. 

So if you put $3000 in three stocks. The best-case scenario would be for them to be worth more year after year so that should you have to sell them at any point, you will make money. You buy stocks to make more money on the sale of them. Never forget this.

Another reason to buy stocks is to make dividend income. For some people, this is their primary reason to buy stocks. It’s a very good reason because if you buy enough dividend-paying shares, you can live off that money. Or it can be reinvested in a DRIP to buy more shares or you can use the cash to buy other stocks.

HOWEVER, you must keep in mind that dividends aren’t a company’s obligation and not all companies pay one. If a company does, it can increase, reduce, or stop its dividend payments to investors if it makes financial sense for them. So, if a company is in trouble and over the years you bought many dividend-paying shares, you’re not only out of income, you face a big capital loss once you sell your shares.

A lot of people can’t get over the varying outcomes that stock investing offers. I mean, you might not make a profit and you might not get your dividends! The reason why I feel it’s important to regularly pump money into your investment account is so that you have capital to buy more than the three stocks in my example. You need to diversify. 

Not all stocks go up and down at the same time. Just because a stock price is less than the price you got it at doesn’t mean it’s in trouble – it’s normal for this to happen and sometimes it’s even healthy. It could take a while before it shines and becomes the star of your portfolio.The nice thing about a well-diversified portfolio is that as performances may be cyclical, over time they should all be going up in value. Having different stocks can smooth out the negative effects of underperformance, capital loss, or a stop on dividend payments.

Having said that, if you diversify too much and have too many stocks from all the sectors, it could start to look like the market. It’s a lot of trouble (and commissions) to diversify only to look like the market (or worse) when you could’ve just bought shares of an index ETF. Don’t over-diversify or else you can dilute the overall performance of your portfolio.

My takeaway point is that you invest your savings regularly so that you can afford to diversify.

I believe investing regularly, reinvesting your gains, plus diversifying your holdings lead to a growth effect that transcends the old compound interest model. With lower interest rates and the negative impact of inflation on your money and investments, you must start thinking about stocks and their ability to do more for you than anything else.