Starting to Save...

[Tickner]

So I've decided to start saving my money. I don't make a whole lot but I do make some. Most of it is poker winnings in smaller stakes ($50nl - $200nl usually).

I am a Canadian citizen and I've been one my entire life. I've called Revenue Canada and they told me that poker winnings do not need to be taxed at all.

I've been reading a lot online about investing, etc. My long term goal is to actively trade stock options or some similar vehicle. Im studying business in University and absolutely love finance and economics, so I have some of the basic principals down, just small access to capital. I've opened an account at www.optionsxpress.ca to "paper trade". (Thoughts on this site?)

My plan is to invest $400/month. I will be starting with $0 in my "savings". So I don't have a whole lot of money to start off. Would I be best off to simply start at an online intrest savings account until I saved up a few thousand and then perhaps move into some index funds? Are there any Canadian online banks that would take CAD? OR should I invest in USD? If so, what's the deals on the taxation?

Basically any guidance at all would be useful since I haven't done this before.

[mwgr5]

Your idea to start an online money market account to accumulate money and then invest in index funds is a fine idea. If you can invest in some sort of tax sheltered account (not sure how that works in Canada) similar to an IRA or Roth IRA in the US that would be good. You could invest in a target retirement fund in one of these tax sheltered accounts. These funds are composed of multiple mutual funds so you would have complete diversification without having to invest a large amount. Vanguard has good target retirement funds composed of index funds.

Also, I'm not sure how old you are, but if you are living on your own it is always a good idea to have an emergency fund. The emergency fund would cover living expenses incase you lost your job or had an emergency. Maybe about 3 months living expenses, but the size of the emergency fund is up too you.

Also, what you do with this money is up to you. However, I don't think it is a good idea to invest a large amount of your savings in options right away. Best to start small with the options to make sure you can be profitable before you move a large % of your savings. I'm don't think you suggested that you were going to invest a large amount in options but I just thought I would make that additional suggestion.

[squiffy]

I agree. Don't rush into anything fancy.

First save up cash, perhaps in a online account or money market that pays 5% interest. Then, once you have enough saved up to meet the minimum for a CD, put them into 3-6 month CD's and keep rolling them over, in case you need to access the money.

Then try to wait a few years for a major market correction or a recession. Then when you think things are near a bottom, buy a mutual fund or index fund.

All the while, do faux paper trades with options, so see how your individual stock picking works out or your options play work out.

Buying low is important. And not rushing into a money losing play is important. That comes with experience.

[MatthewRyan]

listen to mwgr5

[mwgr5]

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listen to mwgr5

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Very good point [img]/images/graemlins/smile.gif[/img]

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First save up cash, perhaps in a online account or money market that pays 5% interest. Then, once you have enough saved up to meet the minimum for a CD, put them into 3-6 month CD's and keep rolling them over, in case you need to access the money.

Then try to wait a few years for a major market correction or a recession. Then when you think things are near a bottom, buy a mutual fund or index fund.

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How is OP, who is just starting to invest, supposed to be able to forcast a recession and when the market reaches a bottom? Many professionals can't even do that. I really don't think trying to time the market is a good idea for OP and conflicts with the indexing approach.

There have been long bull and bear markets. If OP sits on the sidelines to wait for a recession he may miss out on big gains in the market.

What I do know is that the market has returned about 10-12% historically. I also know that the longer money is invested the better chance your portfolio will experience these returns. My advice is too jump into the market as soon as possible and enjoy the ride for as long as possible.

[squiffy]

Often a recession will last a year to a year and a half, so you can often tell when you are in the middle of one by looking at stock prices, economic reports.

You cannot necessarily predict the absolute bottom of a market, but you can often tell when the market is overpriced.

Compare 1999-2000 with 2003.

He doesn't have a lot of money. $400 a month is not a lot.

And being able to save it in CD's at 5% for a year or two is pretty safe. Meantime he can study more about investing and the market.

I don't like his idea of getting involved with options until he is ready.

If you put your money into an index funds at a market top and run into a recession, it can be pretty discouraging. But it's his money.

[squiffy]

By the way, did you know that back in 1969 or so, Warren Buffett closed his investment fund and gave the money back to investors because he believed the entire market was way overvalued.

You can look at historical PE's and start to realize you are in a bubble, even though you cannot predict to the precise day or month that the bubble is going to burst.

[gull]

That's funny, because the S&P 500 went up the next three years.

[squiffy]

That is funny. Because 1973-1974 was a huge stock market crash. So Buffett was early, but correct. See Vick, How to Pick Stocks Like Warren Buffett at pages 200-201.

And see Shiller, Irrational Exuberance at pp. 7 & 111 (1972 was eve of crash.

Also see S&P graph at page 6.

Greenspan gave his famous irrational exuberance speech on Dec. 5, 1996, and market took a huge downturn in 2000-2001.

So you cannot predict precisely when the market bubble will burst. But you can know stock prices are way overpriced and wait for a major correction or downturn to get in, if it is at an excessive level.

[mwgr5]

I'm not saying that it's impossible to time the market. I am saying that OP who is an inexperienced investor would be better of investing his money as soon as possible and staying the corse. The probablility that he would make a mistake when trying to time the market is high. He is not Warren Buffet.