Monday, June 16, 2008

Book Review: Stop Working, Here's How You Can! Part 2

Here’s the 2nd part of my review of Derek Foster’s book “Stop Working, Here’s How You Can!”. Does he give enough detail to allow the average person to follow in his footsteps? Will his strategy still work today? Can you really do this for $200 per month?
Let’s check out Chapters 8 to 14.

8. Put Your Money Where Your Mouth Is!
This chapter shows the thought process Derek goes through before buying a stock, using the example of Colgate Palmolive, a stock he actually purchased. He goes through the various items he listed back in Chapter 5 Let’s Pray for a Stock Market Crash and methodically ticks them off to see if this company qualifies. It did, and he bought it.

9. Location. Location. Location.
Now Derek comes back to real estate investing. His solution for obtaining the benefit of real estate ownership without the burden is a Real Estate Investment Trust (REIT). Basically the investment trust owns a lot of properties and the unit holders (like shareholders in a company) own a piece of the business, effectively owning a tiny portion of each building.

He spells out a list of advantages ranging from spreading out risk and being hands off to the tax advantages. [Don’t get too excited; the government made changes in 2006 that will take effect in 2011 and make it less advantageous.]

Then he talks about the various kinds of REITs and dismisses most of them (residential, office, warehouse and hotel REITs all get panned). Basically he likes 2 kinds, a retirement residence REIT and Riocan, which owns shopping malls and big box stores. [In his subsequent book, “The Lazy Investor”, Derek reveals that he sold the retirement REIT after it lowered its distributions.]

10. Electrify Your Portfolio!
Derek recommends 2 Pipeline Trusts (Pembina Pipeline Income Trust and Enbridge Income Fund) and 2 Power Generation Trusts (Algonquin Power Income Fund and Trans Canada Power). [See my comment above regarding changes to income trusts.]

11. Black Gold, Eh?
Derek talks about oil and natural gas both in the world and in Canada specifically. He’s a big fan of investing in the energy sector; stating flatly, “Everyone thinking of retiring should have some exposure to energy because each and every one of us is an energy consumer”.

He goes on to recommend 2 Royalty Trusts (Pengrowth Energy Trust and Canadian Oil Sands Trust) along with Encana as a recommended hedge for Canadian oil sands. [Right. Trusts again.]

12. How Do You Start?
Derek opens this chapter with a warning that trusts might not always enjoy the tax-deferred distributions that were the norm when he wrote the book (in 2005). A very valid warning, considering that government changes were made in Fall 2006 that will take effect in 2011.

Then he says that the previous chapters show anyone with a nest egg where to invest, but asks what someone with a low income can do to get started investing. He sets up the rest of the chapters, describing them as focusing on simplifying spending, saving money on housing, reducing debt, saving tax and discussing RRSPs.

13. Financially Free by 35! My Financial Journey Retraced
This is the chapter that discusses what Derek did. He says he started in 1992 (at age 22) by putting $200 per month into mutual funds. He graduated in 1993 with no student loan debt, having paid for his tuition with earnings from summer jobs. He alternated between working and taking off to travel to Europe, Australia and Korea (where he met his wife, Hyeeun) but kept contributing (although he sometimes deferred the contributions). While he started with mutual funds, he later added (dividend producing) stocks.

14. Simplify Your Spending
Derek feels this is crucial and lists some spending ideas that he then expands on.
1. Simplifying spending should not be a form of self-deprivation.
2. Budgeting does NOT work for most people.
3. Try to save as much as possible from non life-enhancing expenses.
4. Saving money is twice as powerful as earning more money.

The final chapters will cover taxes, housing, debt, RRSPs, how much you really need to retire, a sample portfolio, and putting the ball into your court. We’ll look at those tomorrow and then I’ll put in my .02 the following day. Did I like the book? Did I have problems with it? Stay tuned.

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