Emergency Funds FTW

December 1st, 2016 by Potato

I don’t want to risk having my personal finance blogger license revoked, but I haven’t been paying attention to our budget as we deal with Wayfare’s recovery. I’m pretty sure we’re spending a bit more than average — we’re certainly eating more pre-made food, and spending more on drugs and parking and a walker, but much of that pre-made food is brought over by family and friends.

I actually haven’t been thinking or worrying much about money the past few weeks, which is as it should be. Early on my mind would wander to the topic and I’d try to crunch numbers as I rode the subway, without the benefit of a proper spreadsheet. But at some point I internalized the message that we’ve got an emergency fund and we’ll be ok. So I stopped worrying and focused my energies elsewhere.

And really, that’s what emergency funds are for, so you can make it through these completely random, crazy events without also having to worry about money in the short term.

TTP is a very rare disease, with an incidence of about 3 in a million. But that means that next year about 100 families in Canada will be hit by this. Another 200,000 or so will face a cancer diagnosis. Some others will be hit by a job loss, or a major repair bill.

As financial literacy month draws to a close I just wanted to quickly underscore how important it was to be savers when times were good, so that we could make it through a trying time like this. Yet many Canadians don’t have an emergency fund (here’s one survey that says a quarter have less than $1000). I mostly focus on investing stuff — it’s important too, and where I can actually make a difference — but emergencies can strike at any time. I don’t know what to say to all those people to get them to start, but having an emergency fund is important. I don’t know how we’d be handling this situation without it.

Robo-Advisor Comparison Calculator

November 23rd, 2016 by Potato

I’m very happy to finally be able to announce something I’ve been working on for months: a new Robo-Advisor Comparison Calculator at autoinvest.ca!!

I think the robo-advisor model looks like a great choice for a lot of Canadians. Many will save even more money with a do-it-yourself approach (and I have a book and course to help show them how to do that). But for those who don’t have the interest in DIY (or who will DIY all the parts that involve decisions, and use as service for the purchasing and rebalancing parts), having a low-cost option to handle your investments is wonderful.

Why a Calculator is Needed

Of course, there are a lot of robo-advisors out there these days, and trying to find the one that’s best for you can be a challenge. There certainly isn’t a clear winner across the board, and even comparing them at a glance with a table is quite the challenge. For starters, there are several pricing models in play. I love the flat-fee model that firms like NestWealth use, but for many people with smaller accounts paying a percentage of assets is still the cheaper way to go. However, even there each firm has their own rate and their own thresholds for where their percentages change — and some are marginal (like 0.5% on the first $X no matter how much you have) and some are thresholds (X% on the whole amount as soon as you cross a threshold).

On top of that, each firm has a different set of investments that they will put you in to, with their own underlying costs. Even finding what these costs are can be a challenge sometimes, and they’re going to be different depending on your risk profile. Sometimes even by how much you have to invest, as you may get access to cheaper underlying ETFs when your account gets larger (or conversely, there may be more slicing-and-dicing for larger accounts).

So Sandi Martin made a nifty tool a while ago to help with this comparison. It was popular, but that popularity led to some issues: people were colliding when too many tried to use it at once, and every now and then people would use cut & paste (instead of copy & paste) which broke the cell references. It was time for something better.

A Better Calculator

She had the idea of building a better, dedicated calculator on its own website, and I jumped on board to partner with her on making it happen. While we were at it we added some nifty new features, including the ability to filter the results according to whether they offered certain services, account types (like the RESP, or RESP with BC/Sask provincial grants), or investing styles.

A part I really like is how she broke down planning services – lots of them have planning or concierge or other advisory services, where you can speak with a person in some capacity about your particular situation. But whether the advice is limited to your portfolio, or savings, or your more general financial situation can vary. So Sandi has broken the advice up into several categories with representative questions.

It’s fast, doesn’t have the issues of the spreadsheet, and looks cool. I’m super proud of this.

Things to Remember as You Use It

This will help you compare the costs of different robo-advisor services for your situation. However, the cheapest one may not necessarily be the best one for you. Having the pricing information helps you better compare the other features, so you can see if you’re willing to pay $X more to get certain kinds of advice, portfolio options, or whatever feature it is that interests you.

We haven’t put in a DIY with ETFs option to compare to the robo-advisors. There are some good reasons for that: because it would always be cheaper, because I have DIY stuff to sell and we don’t want the perception of a conflict-of-interest, and because we don’t want people who may be looking for a robo-advisor because they’re uncomfortable with DIY to feel pressured to go down that road. But if you’re DIY inclined, then approx. 0.14% + some trading commissions (depending on your broker, but ~$10-100/yr is not far outside the ballpark, depending on how you arrange your investing) would be a decent comparison figure.

A preview of the calculator at autoinvest.ca

People Who May Like This

The obvious target audience is people who want to go with a robo-advisor and need a starting point for their comparison, and those who are stuck choosing between a few competitors and want a way to calculate the cost difference involved.

I think that other groups who may be interested in this include mortgage brokers and fee-only planners. The latter is fairly obvious: they can provide the planning but not the asset management services, so they can pull up the calculator and point their clients to a robo-advisor that suits their situation if needed, with no concern about a direct referral creating the perception of a conflict-of-interest.

For mortgage brokers, the notion of investing doesn’t come up often. However, a big challenge is helping their clients move away from the gravitational well of the big banks. If they can help their clients find a better home for their investments, that makes them less resistant to going with a non-bank lender for their mortgage, while potentially also saving the clients a bunch on their MERs.

Behind-the-Scenes

How did you make it?

The data-gathering was perhaps the hardest part, as a lot of the information that goes into the calculator is not readily available. Sandi had to hustle to get all the information out of all the firms, and then verify its accuracy.

The tool itself is not a spreadsheet any more, it’s a custom bit of programming using PHP, SQL and some Google APIs. We did have to outsource some of the programming, which cost actual money.

Any amusing stories to share?

Actually, not really, though there is a bit of minor frustration involved.

Part of my job was to help come up with the math and logic for the developer to then implement. So I had a fairly general structure that would accommodate several fee tiers and pricing models: flat fees, marginal fees, threshold percentages, and even mixed models (as one firm did until recently). We could also account for different fees on the underlying portfolio, which can change based on the amount invested. We got it all set up at the same time that data collection was going on, and had to decide on how many tiers to build in. “Four or five should do it, who would possibly have more than that” I said.

Well, you’ll see a slightly awkward work-around with one firm that did have more tiers in their pricing structure than we built the back-end database to handle (and I’ll note the end result is still correct).

How do I get my ad on this?

Please contact Sandi at sandi[at]autoinvest.ca.

Welcome New Readers

November 19th, 2016 by Potato

I’m down at the Canadian Personal Finance Conference this weekend, which means there will likely be a few first-time readers stopping by, so let me say “Welcome!” and give you a few places to start here, as there’s a lot of stuff in the archives here and it is not all gold.

I’m the author of The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing, a book that walks you through how to become a do-it-yourself investor using a simple, easy-to-follow index investing strategy. It’s focused on just solving that problem, specifically for Canadians, so it can focus down and get into a lot of detail, including step-by-step instructions with screenshots. I’m very proud of the book, and I’m happy (and secretly validated by the fact) that it has a lot of positive feedback and reviews — lots of people have been looking for a guide like this (even if they didn’t know it yet).

After writing the book, I was still getting questions from readers looking for even more detail, so I created syllabus here — note that I had originally intended to complete the course roughly now (late November), but due to a family emergency am a few weeks behind full completion.

Investing Resources:

I’ve made a number of spreadsheet tools and infographics over the years, these are some of the best and most popular:

Personal Finance Reading Guide
TFSA vs RRSP Decision Guide
A Capital Gains Tracking Sheet for Non-Registered Accounts
Guide to Canadian Taxes for Freelancers
The Rebalancing Spreadsheet
Rent vs. Buy: the Investment Spreadsheet — note that in hindsight I want to re-write some of the text around this tool to make it easier to jump in cold, but the spreadsheet itself is still a powerful tool.

Coming soon: a CPP calculator for the new CPP rules.

And a big thing that I’m very happy to be a part of is a tool spearheaded by Sandi Martin to compare the costs of robo-advisors in Canada.

I also created a free directory of fee-only planners after MoneySense decided to ditch their popular directory.

About Me and the Blog:

I trained as a scientist (PhD in Medical Biophysics), and have a day job as a science writer/editor in Toronto. For personal finance, I’ve written a lot, I give talks at the Toronto Public Library from time to time (including this Monday at the Eatonville Branch), and I just recently joined the Because Money team as the on-air producer for season 3.

The blog covers a lot of ground. It is very old — the silly title dates back to an in-joke in high school. Sometimes I’m all serious and professional, spending a lot of time to craft a guide, infographic, or tool; sometimes I just whip out a rant or get totally silly. I hope you enjoy it.

Insurance Woes

November 17th, 2016 by Potato

This post was drafted a while ago, when Wayfare was trying to get insurance in the spring. I was sitting on it partly because I was waiting for her to try another avenue (or just again with another year of stable post-mat-leave income) to get disability insurance and have a happier outcome. With recent events, it seems like just an extra kick in the pants.

“Insure all the things!” Wayfare was exclaiming after her two-hour meeting with the insurance saleslady. Considering she had gone in on a surgical strike mission to acquire some disability insurance, and came back loaded with pamphlets on all manner of insurance products yet lacking a quote on disability insurance, I have to commend the saleslady’s skill.

I have a very stoic view of insurance: if there’s a chance that some event will ruin us, we need to try to insure against it (and take reasonable precautions to prevent it from happening in the first place — note that in reconciling my philosophy and my actions, diet and exercise are not classified as reasonable precautions). Insurance is not something to buy to get a windfall in case of tragedy, and so we aim to self-insure wherever we can.

It’s also important to understand that we are in no way normal parents of a young child. Financially speaking, losing one parent or the other will not ruin us. We both have advanced degrees, we both work, and we have financial resources sufficient to cover over a year of cash burn if we had to take a prolonged leave of absence — plus as renters, we have the flexibility to reduce that cash burn with just a few months’ notice1. We are, as Miss Sunlife put it, “like a family of happy little squirrels, burying [our] nuts all over the yard in anticipation of winter.”

So my main fear is prolonged disability — because living our current extravagant lifestyle of having grass on both sides of our house (a detached house!) in Toronto requires two incomes, and one of us becoming disabled doesn’t free up the other to move on and move out in the tidy (if morbid) way that death would. Thus, disability was the one kind of insurance I did want to pay for, and we finally got off our butts to get a quote and make that happen.

But Wayfare came back full of weepy scenarios that appealed to emotion. What if something happened to little Blueberry? What would we do? Wouldn’t we want to be able to take some time off work to care for her or grieve? Yes — but doing so would not ruin us. We would survive and so we don’t need to insure against such a low-probability event. And if she died, I would not expect to long survive her.

“What if she got some childhood illness and then couldn’t get insurance of her own when she was an adult? If we get insurance on her now, then she can be automatically insured when she’s older and won’t have to go through this process.” Insuring the ability to get insurance is taking things too far for me. That’s second-order insurance. The fact that Miss Sunlife was able to make this argument stick firmly enough in Wayfare’s head for her to try to enthusiastically convince me of the need to insure our daughter demonstrates her level 8 insurance warlock sales skills. There were also pitches for critical illness insurance (which, reading the materials in hindsight, would not have covered this particular critical illness) and life insurance for us.

This crazy process started from a trip to the insurance saleslady looking for disability insurance for Wayfare, a self-employed person. She did not come back from that initial 2-hour meeting with a quote for disability to consider, so I told her to give up on Miss Sunlife and go talk to one of the nice people who stop by the blog who’re tuned in to the insurance world to figure things out and get a quote (or tell us what route we should really be taking to get one). But she’d already started with Miss Sunlife, and Miss Sunlife was nice, so she persevered. It took several more visits and lots of documentation archaeology (including lots of making Wayfare wait on hold to try to get the right documentation out of her doctors’ offices) to finally get a quote to decide on, and even then it was a quote, not a matrix of choices — each refinement to what we might want would require another visit. After many visits in person (because this can’t be done over the phone or online, obviously), we chose the options we wanted and needed, and put it through to the underwriters. Finally, Wayfare heard back: her application was denied. So she wasted hours of time and a few subway tokens, and the rejection letter doesn’t even give a reason (because her self-employment income history is variable with a recent mat leave, so she should try again in a year or two after that falls off? Because of pre-existing health issues and she shouldn’t waste her time again? Because something at the insurer got accidentally shredded and they didn’t want to ask for it again?).

It was a disappointing result, and a discouraging process: even if we were successful in getting insurance, it’s hard to believe that people who may not be fully sold on the need for disability insurance would put themselves through that massive time-sink. I didn’t even go through it myself (I am part of a group plan at work), but watching how much time it took, it will be hard for me to push freelancers I meet who really are under-insured to go take care of it.

1. This is because we live in way more space than is needed by a single-parent family — a 3-bedroom house with two freelancer office spaces. A (tragically) single-parent subset of our family could readily down-size to a 2-bdrm apartment. We also live in a massively expensive city in part to solve the two-body problem. One of us being out of the picture would free the other to move anywhere else, with a lower cost of living.

Trump and Investing

November 7th, 2016 by Potato

Someone taking the course asked this question, and I’ve seen it in multiple other forums lately: how would a Trump win in the election affect my investments? (Or similar ones like should I sell or should I delay investing until after the election?)

This is the sort of question that is very natural to ask, especially if you read the news or watch TV — the business entertainment channels are full of talking heads discussing these sorts of events and what effect they may have on markets. But remember, there is always a Trump (or Brexit, or sequestration, or imminent recession, or rate hike, etc., etc.).

It’s very easy to see some cause of uncertainty and doubt and let that translate into fear of investing (or staying invested). But there are some much better questions to ask yourself before selling in fear over a certain event:

  • Do I believe the evidence that short term events are extremely difficult and/or impossible to successfully trade?
  • Is the risk already “priced in”?
  • What happens if I’m wrong? For the 2016 US election example, the S&P500 is down about 3.5% on the month as I write this. How big of an effect would a Trump win be? What’s the likelihood of that? It may be partly priced in already – and then if Clinton wins, the market may snap back up. It may even snap up if Trump wins.
  • What happens if I’m right?
  • Do I want to open that door? This is perhaps the most important question of them all. Trading on short-term fears is a behavioural finance mistake – you have a long-term plan that involves expecting events like this and riding through them. Even if this time you have correctly read the situation and have insight others in the market lack and you are positioned to make money (or avoid a loss) from your brilliance, do you want to open the door to this kind of activity?

Remember, most of the time most people get these kinds of moves wrong and will end up doing worse than if they had just held on. And getting one move right and making money at it can paradoxically be bad for your long-term plan, because it’s very hard to believe after that fact that you were either just lucky, or that this was that one time when your intuition/analysis was superior to everyone else’s. So the next time some short-term event comes along, you’ll be more likely to make a hypothesis and react, rather than sticking to your long-term plan. Even if you lose more money on the next three events than you saved on the first short-term trade, if you’re like most humans you’ll still be tempted to act on your feelings for the fourth event, because that first success convinced you that this was a smart thing to do.

This philosophy and investing approach means that there will be a time when you “just knew” that some terrible thing was going to happen before it did. You may kick yourself for not acting… but try to remember all that other things you “just knew” were going to happen but didn’t. So maybe you will lose some money next week because of fear surrounding the election (or maybe not – who knows!). But by sticking to your long-term plan anyway you’ll also save yourself from that time when the talking heads said you had to stay in cash after selling out in 2008 until the March 2009 bottom was “re-tested” or that other time when the bad jobs report surely signalled the start of a new recession.