Later this year I'll turn 34. It's a weird idea for me that I'll be closer to my mid-30's than my early-30's. It's a really odd concept to me especially considering 9 out of 10 times I'd get ID'ed when purchasing alcohol from a liquor store or at a restaurant. I suppose that's the result of having youthful Asian genes. 😀
When I graduated from university back in 2006 and entered the work force at 23, I felt that I was starting a new chapter of my life. Looking back to this important time of my life today, there are many things I wish I could have done differently. If I had, I truly believe I would be much better off financially today. Having said that, there are also many things I've done quite well that set me up well financially to where I am today. If I could go back in time, here are 10 lessons I would give to my 23-year-old self.
1. Stop Buying DVDs
I watched a lot of movies in my 20's. Whenever I watched a great movie, I found myself having a huge desire to own the DVD so I could watch the movie again. It became a fascination to have a great DVD collection. I'd often to go Future Shop or other stores to buy the latest movie DVDs, or DVDs that were on sale. Due to this "addiction" I've spent quite a bit of money on DVDs.
Looking back, it was very silly to have spent all that money on DVDs, especially considering the only thing I can watch a DVD today is on an almost 9 year old MacBook Pro. We don't own a TV at home, let alone a DVD player. Furthermore, DVDs aren't even the "thing" anymore, as BlueRay and other technologies have taken over.
Today I have a box full of DVD's sitting in one of the closets at home. So much for my awesome DVD library...
2. Quit listening to hot tips
When I first started investing in stocks, I would listen to hot tips and try to make a quick buck or two. Boy did these hot tips burn me.
Thanks to these hot tips, I purchased my fair shares of penny stocks, I also did a number of day trades (and short term trades). More often than not, I would end up on the losing end of the spectrum.
For example, one time I decided to day-trade Ballard (BLP.TO) based on a hot tip. The stock had been going up for a couple of days straight. Based on momentum charts, things looked good. Everything indicated that the stock would continue to climb. The stock was riding on some new contracts that the company had just won and there were more contracts to be won. So I pulled the buy trigger for a couple thousand dollars in my RRSP account. As soon as I purchased the stock, the price started dropping. The stock price went from bright green (up) to bright red (down) in a matter of minutes. Frustrated and a bit nervous, I decided to set a stop limit to avoid the stock gaping down and ending up with a big loss. The stop limit was triggered about 10 minutes from my buy order being filled and I lost about 15%.
And that was not the first time I pulled a dumb move like that.
3. Invest in dividend stocks or index ETFs instead of mutual funds
Although I started investing early when I was 23 years old, I was buying mutual funds that financial advisers from banks were recommending. I knew that minimizing Management Expense Ratio (MER) was a good idea but I'd often get persuaded by these "financial advisers" to go with active managed funds. Simply because these funds had better historical returns. Unfortunately, the active managed funds also happened to have much higher MER's than mutual funds that tracked index.
For some odd reason, I kept repeating this mistake again and again, even after reading books like A Random Walk Down Wall Street. I was not willing to do my homework and taking charge of my own finance. Instead, I wanted someone to look after my money and manage it for me so I didn't have to. Simply put, I was lazy. Not taking any responsibility meant I was paying extra fees on these active managed funds.
I should have learned about dividend growth investing or pass index ETFs investing, or a hybrid of both investing strategies that we are currently deploying today. If I had purchased dividend stocks like Royal Bank, Disney, TD, Johnson & Johnson over 10 years ago, I'd be sitting at a very comfortable yield on cost for these stocks, collecting great dividend payouts every quarter. Likewise, index ETFs have much lower MER than most mutual funds. Even a small 0.5% difference in fee can make a HUGE difference in the long term.
4. Take advantage of the economic downturn
When I entered the work force after graduating from university in 2006, life was good. I was making more money than I ever had before. Since I had money left over each month, I decided to start investing money in the stock market by purchasing mutual funds.
Then the financial crisis hit. As a result of the financial crisis, the stock market stumbled too. Since I had some spare cash laying around, I thought I'd take advantage of the down market by buying some Canadian stocks. Two of the stocks I purchased were Royal Bank (RY.TO) and ING Direct (now called Intact Financial, IFC.TO).
I purchased both stocks at a much discounted price. My original thought was that I'd wait for the market to recover.
For Royal Bank, I bought 100 shares at $26.92 on Feb 26, 2009. I thought I purchased at an all time low.
The stock recovered a bit in early March but then the market started dropping again. Panicked, I decided to sell all 100 shares on March 3 at $29.05 to take in a small profit. I thought I was a genius.
Little did I know that the stock price would continue to climb after my sell.
Today the stock would worth around $76, plus I would have received $1,781 in dividend in total to date. My yield on cost would be a jaw dropping 11.74%!!! Oops, talk about losing a golden opportunity.
Similarly, I purchased 100 shares of ING Direct at $29.49 on Nov 21, 2008. This was the time when insurance companies were suffering big time. I liked the business model and thought the stock price would bounce back once the economy picked up. After the stock bounced around for a number of months, I ran out of patience and decided to sell all the shares at $32.25 on Feb 3, 2009, again taking a small profit.
ING Direct has since changed its name to Intact Financial so I don't have a chart to show this trade. But just knowing that IFC.TO worth around $89 today meant that I missed another great opportunity. If I had held on the position, I would have received $1,334 in dividend in total to date. The yield on cost would be 7.86%!!!
Looking back, I definitely wish that I had held onto these stocks and used all the cash I had available to buy all the big 5 Canadian bank stocks during the financial crisis, instead of holding cash in GIC and fearing what was happening in the stock market. What I failed to realize is that the likes of Royal Bank, The Bank of Montreal, CIBC, The Bank of Nova Scotia and TD Canada Trust all have been paying dividends since the 1800's. I should have known better. This is why I'd tell my 23-year-old self to take advantage of the economic downturn and load up on solid stocks for the long term.
5. Be patient
As I showed above with my Royal Bank, and Intac Financial trades, if I had been patient, I would be doing very well today. But I was young and impatient. I was looking for the quick buck and the excitement of big stock gains in very short period of time. Thanks to my impatience, I had gotten out of many trades way too early, losing either huge gains, or huge amount of dividends.
Here's another example. A long time ago, I used to watch Business News Network (BNN) regularly. I'd base my purchase on picks of the day (see lesson #2 above). One of the stocks that caught my attention was WI-LAN Inc (WIN.TO). The stock picker suggested that the stock was undervalue. After some quick analysis, I decided to purchase some shares of at $1.70. After less than a month, the stock price was bouncing all over the place. My patient ran short so I sold all my shares at $1.98. Yes I made some money but if I had waited for a year, the price would have doubled. If I had simply waited for 2 years before selling the stock, I would have made a 6 bagger on this stock.
Be patient, my 23-year-old self.
6. Listening to my intuition
I recalled using Google in the 90's and thought the search engine was a million time better than Yahoo and other search engines around. I thought to myself, if Google were to go public one day, I should purchase some shares and hold forever. I thought Google had great potentials.
Similarly, when Apple first announced the original iPhone, I thought the phone was very cool but didn't think too much about it. About a month after the launch, a co-worker showed me the phone. After playing around for a little bit, I thought the phone was revolutionary. I even talked to my co-worker about purchasing some Apple stocks because the iPhone would totally take over the smartphone market.
But instead of listening to my intuition and purchasing shares of Google and Apple, I didn't go through with it. Yes I eventually purchased Google and Apple stocks but it wasn't until many years later. Talk about missed opportunity.
Just for fun, let's look at the historical chart for Google from when it first went public to today.
And here's what the Apple stock chart looked like from 2007 to today.
7. Say yes to free money
If work has RRSP (or 401(k)) matching, take advantage of it. It's essentially free money from your employer. It amazes me how many people don't take advantage of this great benefit.
Likewise, if work has an employee stock purchasing plan and is matching cash contribution to a certain percentage, get on top of it!
Always say yes to free money!
8. Maximize RRSP/401(k) and TFSA/Roth IRA
One thing that I'm very glad that I've done since started working is to always maximize my RRSP and TFSA contribution room every single year. Tax sheltered & tax free accounts are efficient ways to reduce your income tax. Furthermore, investment in RRSP/401(k) and TFSA/Roth IRA can really take advantage of the power of compound interest.
Whatever you do, do not "invest" in GIC's or term deposits in your RRSP/401(k) or TFSA/Roth IRA. First of all, the interest rates nowadays are terrible. Second, you're essentially losing purchasing power by putting money in GIC's/term deposits because inflation starts eating into the interests earned. This of course does not apply if you plan to use the money in the short term. But that would defeat the purpose of these registered accounts.
9. Maximize savings rate
When you're single and young, it's a lot easier to save money every month. So when you're 23 years old and just started working, aim to maximize your savings rate each month. Aiming for 50% savings rate is good but 80% or higher is even better. It sure is a lot more challenging to have savings rate in the above 80% range when you have a family and have dependents.
When I started working, I kept an excel sheet to track my income and expenses. Although I wasn't specifically tracking my savings rate, I was trying to keep an eye on my expenses.
I recently went through this excel sheet and calculated my savings rate. Below is a 3 year snap shot of my savings rate after started working. A bit of explaining first, for about 1.5 years I moved back with my parents paying no rent. When I finally moved out again to live with a flatmate, my expenses increased.
As mentioned, back then all I was doing was to track my income vs. expenses. I didn't know anything about maximizing my savings rate. I was still living like a poor student, so I was living below my means. As you can see, my savings rate was pretty decent without me even trying.
I definitely wish I could have paid more attention to maximize my savings rate in my 20's. This could be done by going out for drinks less often, eating out less, partying less, and also generating more income through side hustles.
10. Stop caring about what others think of you - just be yourself
This is probably the most important lesson. Stop caring about what other think of you. Stop feeling that you need to impress people by wearing brand name clothes, having expensive jewelries, driving an expensive car, or having the latest electronic gadgets. If people are friends with you because you have these expensive, latest toys, they shouldn't really be considered friends. You're better off being friends with people that don't care about what you own. Stop second guessing what people think about you behind your back. You can't control how others feel about you, so the only thing you can do, is to do things that will result in happiness for yourself and yourself alone.
Be yourself and be comfortable about the decisions you make in life. You'll make some good decisions, you'll make some bad decisions. That is life. Don't base your important life decisions on what other people might think or say about you. This is your life after all. Take charge.
Dear readers, do you have any lessons you'd give to your 23-year-old self?