Book Update: Not a Failure

December 15th, 2014 by Potato

Before I launched the book I tried to envision how it would do. I did the Fermi math: there are millions of Canadians who need a book like The Value of Simple: people who are not DIY investors, but want to be (I even found stats on the number of discount brokerage accounts that are opened yet not used for DIY*); or who are paying outrageous mutual fund fees and don’t even know it, and would want to look at a low-cost investing method if they only knew. But I knew that despite the size of the target market, very few of those people would buy it. If I hit 10% of them it would be a huge, smashing success, but fractions of a percent were more likely. Sales measured in ppm were possible.

Like a good scientist I defined three levels of success for myself in advance.

I’m happy to say that at the end of the 2nd week of release, I have hit the first level of success — which perhaps I should instead define as not-failure. I have now sold enough books that I have broken even! When I put up my posts on the publishing process I’ll talk more about all the out-of-pocket expenses involved, from paying the artist for the cover, to the set-up fees at the printer, to printing and shipping review copies, to various office and mailing supplies. But those have now been covered by the sales so far. I was pretty sure I would hit this first level going in: I only needed to do a bit better in sales than Potato’s Short Guide to DIY Investing did to break-even, and The Value of Simple is a much better book than that first guide was.

The next level of success I defined as the point where I would get something close to minimum wage back on all the time I invested in writing and publishing the book — easily 1,000 hours that I’ve tabulated (and I’m sure I missed some in that estimate). That’s the point where I would feel really justified in the effort of putting out the book and would call it successful enough to actually consider doing something like that again in the future. That would be “success.” Beyond that would be a “smashing success” — selling over 5,000 copies, which is the approximate rule-of-thumb for being a Canadian bestseller (though whether the book would actually appear on any such list is another question).

The sales pattern for the first two weeks is kind of interesting: a peak at release, then another one after some favourable reviews and giveaways were posted, followed by an exponential decay — though I’m hoping that there will be an even larger peak to come with a lag from the first two as people read it, love it, and go tell ten or twenty friends about it.

* - A third of Canadians would like to invest for themselves, but don’t have the confidence to start. Half of those who have opened a self-directed account continue to pay an advisor.

Poloz Got My Memo

December 14th, 2014 by Potato

In a shocking change from vague mumbles about concern over debt levels, the Bank of Canada broke out The Potato Gambit this week, explicitly saying that houses are over-valued and by how much.

I’ve said several times over the past few years* that the housing bubble is held up by a number of factors: belief that there isn’t a bubble being the main one. There are many possible ways for that belief to be tested and for the bubble to end. Having someone credible coming out clearly on the news stating that there is over-valuation could help end it overnight, as the veil is lifted from the eyes of the masses in one move. In other words, that it would be possible to talk the market down by pointing out that the emperor has no clothes, absent any other catalyst (despite the “need” for rates to rise, or unemployment to rise, or for the yield curve to invert, or CMHC to be reformed, or whatever other supposed necessary condition people come up with).

Stating how much housing was over-valued by was a key component of the gambit — the end of bubbles is always a nasty, drawn-out affair as the market gropes to find solid ground. Many houses will go unsold, their owners trapped as the market goes “no-bid” with people waiting to see where the bottom is, unsure if 10% off the last traded price is a good deal, or just the start of a more substantial correction. So, the theory went, if someone like the finance minister (or as it turned out, the BoC) stood up and said “the market is over-valued, and by this much” then people could bid 30% less, and sellers would know that indeed, that was not just some totally flaky buyer taking the piss but a legitimate post-correction offer that they should take. And the sellers won’t list just to see what they can get — if they’d rather hold than sell at those prices, then they can do that without all the listing and rejecting offers business, keeping inventory at normal levels. Boom, the correction could be over in a day.

All that has to happen is for all the buyers and some of the sellers to get with the program.

I know we’re only a few days into the new enlightened age, but it’s not looking good so far. The government is not presenting a united front, with Joe Oliver sticking to the old party line that there is no bubble. The media is not following-through on the gambit with the “so there, correct your bidding strategy now!” message, and headlines of “what a 30% correction means for your local town.” There are a few stories taking it seriously, but no real call to action. This article in the Globe has the headline “Why Canadians should consider Poloz’s overvalued housing warning “, which kind of starts to make the case that this is a real issue, but then it ends with “You can, of course, brush off such threats…” And I’m not seeing a massive shift in sentiment on the various forums or at a party this weekend — as credible as the Bank of Canada is, the message isn’t taking hold.

So maybe it will work if it can stay in the news cycle a little longer, but given that this is already the nadir of the market for housing activity, and the story may be forgotten come spring, it’s not looking good for the Potato gambit’s effectiveness. It was worth a shot.

* - Apparently mostly on forums, as I can’t find a post in my archives to link to, other than an unpublished draft.

TFSAs: GIS and Business Income

December 12th, 2014 by Potato

First, a quick boring set of personal notes:

    1. I got sick shortly after the book launch. Not a whole mess of symptoms, just a bad cough — but it’s lingered and if anything has been getting more violent. I’ve lost my voice from coughing, and now sound like a squeaky, sickly 12-year-old. Would you like fries with that? [yes/YES]
    2. I only had a few things left on my post-book-launch to-do list, unfortunately two of those items were spreadsheets to finish fine-tuning and I just can’t brain right now. Thank you for your continued patience. I also haven’t been very good at responding to emails and pushing the book because of all that — please send me a poke if you’re waiting for me to respond to something.
    3. I have been keeping up with shipping books out at least. Remember that you should order by Monday if you want to be sure that your purchase will arrive before Christmas! Note that right now with the sale at Amazon and Indigo that retailers may be the best place to buy The Value of Simple rather than directly (depending mostly on whether or not you’re buying anything else to get free shipping).
    4. Don’t forget to please put a review up on Amazon and/or Indigo if you’ve finished the book!

Two somewhat hysterical issues around the TFSA have been running around the last few weeks. The first is some worry that people can stock big TFSAs and thus have lots of money to live on, but because it’s not income they’ll still get GIS. Will it lead to a TFSA nerf?

Maybe it will. It does seem like a loophole or unintended consequence that in a few years someone could have a pretty decent pot of money in a TFSA and yet still get GIS. Young people starting today may be able to exclusively use TFSAs to fund their retirement, especially if the contribution room doubles next year. But there are already loopholes for otherwise rich people to collect GIS: like many government programs, it is income tested and not wealth tested. So people with tonnes of money in a chequing account earning no interest could collect GIS (though it may not be wise to do so vs. investing in a TFSA), as can people with large real estate holdings that are not spinning off active income. I don’t see the government ever closing the real estate loophole. Maybe they will close the TFSA one in time, but it’s going to take another decade or so before it’s really an issue for enough people to have enough TFSA room to be doing well enough that they clearly shouldn’t get GIS but do.

Moreover, we’ve known this since the TFSA first launched. Indeed, the general advice is for lower-income people to prioritize saving in their TFSA specifically so that they can keep their GIS eligibility.

The second is that the CRA is cracking down on some day traders, disallowing the tax shelter for carrying on business. A key point of information that I haven’t seen in these articles is that the regular partial inclusion of capital gains doesn’t apply for professional traders — it’s all business income. So if you just got lucky in your TFSA it doesn’t look likely that the CRA is going to come after you and disallow the tax-free nature of that gain — it will almost certainly require a few other factors, which would have put your non-registered gains at risk as well. Again, I don’t think it’s something the average person has to start worrying about now.

The Value of Simple is Out

December 6th, 2014 by Potato

The official launch for The Value of Simple was Monday, and there a few more reviews up at Financial Diffraction and My Own Advisor (where the giveaway is still open!). I also had a few readers email me with some great feedback, and I’ve been putting that up on the Reviews page as well.

Amazon and Indigo are now accepting reviews if you’ve had a chance to read it and are willing to write a review. The rankings are quite volatile, but it’s hit #1 in Amazon for the “Retirement Planning” and “Investing: Introduction” categories this week, and #3 in “Personal Finance: Investing” at Kobo, which is pretty cool. Between that and the awesome reviews it’s looking good so far!

But before that, we kicked it off with a launch party on Saturday. I gave a short talk and then answered some questions on the book, focusing on how my training as a scientist gave me some perspective on personal finance and investing, and what I was trying to take from my experiences and put into the book.

In particular, the effect of inflation and the importance of investing was an important lesson. Back when I was starting my PhD I got a 4-year scholarship, but nobody in my department finished a PhD in less than 4 years — I had to save and invest myself to be ready for a likely year 5. For students who didn’t have a scholarship, the take-home pay for working in the lab was just $16,000/yr, which is what I was set to face after my scholarship ran out. Now that is not a lot of money to live on, but it’s not like the department set that low rate consciously: it just crept up on them. In fact, at the time my supervisor did is PhD, students would have had the same $16,000; a student starting today will also make $16,000 — and will still have to live off of $16,000 in five or six years at the end of their degree. That’s not to start a long rant on science funding and grad school and everything, but to look at the importance of inflation.

At some point, that was probably a perfectly reasonable stipend, but inflation has eaten away at the buying power over the decades. And the same fate awaits money left in a savings account that isn’t keeping pace with inflation. Your hard-earned savings will seem a pittance in retirement if they’re allowed to be ravaged by inflation. Getting a return that beats inflation is critical, and that brings you to appreciate the importance of investing — a way to get an above-inflation rate of return.

It also hammers home the need to save and invest so that you can prepare to support your own retirement: OAS and less-than-full-CPP are just about $16,000 (even full CPP does not take you much higher), which is not a level I would call providing for a comfortable retirement.

Holiday Orders: For some reason Amazon is reporting estimated delivery times into mid-January, even for books that were ordered on launch day. I believe there’s a good chance that those estimates will come down in the coming weeks — the supply chain just isn’t that long — but if you need a book before Christmas, orders placed through my direct site by Dec 15 should arrive before Christmas at regular shipping, and rush orders can be arranged after that if needed. I have not heard anything one way or the other from customers, but Indigo indicates that they have books in stock so you should be able to get a copy in time from there. They also put the paperback on sale today (it’s actually cheaper from Indigo now than directly from me!)

Update: Sure enough, customers have received update emails from Amazon with new shipping estimates for next week (2 weeks total). The purchase webpage still says 1-2 months though.

Finally, sorry for the lack of posts — between being swamped on all fronts, the database powering the site decided to crash this week and I had to trouble-shoot and go back a few days in the backup.

Value of Simple First Reviews and Launch

November 26th, 2014 by Potato

It’s almost launch day for the Value of Simple! It’s also the last day to pre-order and get free shipping on the paperbacks (as of Thursday they will just be regular orders as the mail wouldn’t arrive until after the Dec 1st launch anyway).

I’ve put a new page up on the Value of Simple site to track the reviews as they come out. Financial Uproar and Michael James on Money are the first two to come out, and as a paranoid author I have to tell you they practically brought tears to my eyes. There was some part of me that was worried people wouldn’t like it, so it’s just amazing and relieving to read (and re-read, and re-re-read, and print out and stick on the fridge) those reviews. So great to see that people who are experts in this field get it and liked the book (and of anyone, I trust these two to honestly — and constructively — critique it if they didn’t). They’re each giving away copies, so be sure to head over and enter for your chance at an extra one (you can always give it to a friend).

At some point a few weeks after the launch I’ll do a more detailed post on the work behind-the-scenes for the book. I will say that there are a lot of milestones and I had a lot of deadlines I imposed on myself to get it done and make sure it was out before Christmas, RRSP season, and changes to mutual fund fee disclosures, and I have hit almost all of them — but there are still two things I need to do before the weekend, and with a major day job project due on Thursday that’s going to make for a busy Friday night on my part to catch up!

Finally, the book launch event is this Saturday! If you’re in Toronto please come out — it will be a great financial literacy/meet-and-greet event. My events team* has been going all out: catering (by Pickle Barrel!), getting a giant poster of the book cover made to display, figuring out how to post directions to the room within the venue, all that nitty-gritty stuff. It should be fun and educational: I’ll give a brief talk about investing and the importance thereof, and may make some reference to the fact that I just wrote a book about it. I have foresworn from using powerpoint so that part will be kept short and more narrative, then we’ll break into Q&A and general discussion. It will be pretty informal and family-friendly (Blueberry will be there) — one advantage to hosting at Mitchell Field Community Centre is that there’s an indoor track to let the munchkins run around on if they start to get too raucous :) You can find more details and sign-up here.

* - Wayfare and her parents.

Robo-advisors

November 20th, 2014 by Potato

I haven’t talked about the new wave of robo-advisors in large part because I’ve been neck-deep in book stuff, but now that Sandi has her excellent post up, let’s get into it.

Important book notice: there’s less than a week* left to go to pre-order and get free shipping or a special price on the ebook! Read more about the book here.

Not so long ago an article came out by Dan B/CCP concluding that robo-advisors were impossible in Canada. I took it as a challenge and started sketching out the plans for one and lining up programmers to make it happen — but then almost immediately sat back down to focus on the book first (which I was hoping would be successful enough to provide the risk capital to build the Canadian robo-advisor**).

It appears as though I’m not the only one who took the article as a call to arms, as less than 6 months later the robo-advisor invasion began.

It is a very cool concept: for less than the cost of a full advisor you can get access to a passive portfolio that will be automatically rebalanced: low-cost passive investing with the convenience of throwing cheques at your mutual fund salesman. As Sandi points out, not everyone is prepared or cut out to be a DIY investor, so some intermediate-fee, intermediate-service options are very welcome.

I do have a few concerns, however:

  • These are almost all new companies.
  • They launched within weeks of each other (or, inconveniently, within days of building the comparison spreadsheet).

Combine those two and I have some doubts that they will all still be here 5 years from now***. There are only a few discount brokerages in Canada: those with the big 6 banks, Questrade, Qtrade, and Canadian versions of multinationals (HSBC, VB, IB). That could be because of oligolopistic collusion, or because it takes some scale to survive. I’m not sure ~4 new players will survive — though if they do it will likely be because of a large shift away from high-cost funds, which will be welcome. And given how closely they launched, I have fears that at least a few of the offerings rushed to market not fully formed (though no reports yet of any problems so maybe all is copacetic).

On top of that is the challenge of deciding which one to go with: the fee schedules are like a tax return, with marginal rates and a dependence on which province you live in. Oh, and what exactly you invest in as the fees for the underlying funds are often on top of the headline price, and those vary with your risk tolerance choices. Yes, that helps them keep costs as low as possible, but means Sandi had to make a complicated spreadsheet just to compare the offerings. I have concerns that the complication and multiple layers of fees could turn people off.

Finally, they just aren’t that cheap. Yes, they’re head-and-shoulders better than a high-cost actively managed bank fund, but they can’t even match TD e-series on fees. If TD ever decides to open e-series to their salesforce then these guys could be in trouble. For some people, these offerings will be well worth it (and again, Sandi makes that point much better), with costs well below that of a high-fee mutual fund salescritter and possibly equivalent service. For others, saving a few hundred or even thousands of bucks a year will be worth going the DIY route and investing directly in the same ETFs these services use****.

Which of course brings me back around to The Value of Simple — the how-to guide to for all this ETF and investing stuff. You should at least read it so you know what you’re paying your robo-advisor (or human advisor) to do for you.



* - Why less than a week when the book doesn’t come out for almost two? Because it normally takes a few business days to ship, so if you order after ~Nov 26 it wouldn’t arrive until after Dec 1st anyway.
** - Also, all of the programmers/developers I knew were too busy doing something to try to improve cancer care and research. Priorities, I tell ya.
*** - Not to engage in fear-mongering. There’s no reason to suspect that any of them are on shaky footing, just talking about general competitive pressures. Also, your underlying holdings will be fine even if one does go under or get absorbed — the worst-case is more likely inconvenience and a triggering of capital gains in a non-registered account if funds have to be liquidated and converted to the new custodian’s nearly equivalent offerings.
**** - Of course, I come from the bias that DIY is not so hard and not so scary and lots of people could be doing it. If you’re stuck on the other side of the fence, then a robo-advisor is a much smaller hop from a “full”-service advisor.

Changing My Tires and Pants

November 12th, 2014 by Potato

I just changed my tires over to the winter rubber. It was a gorgeous day for it, but it made me reconsider what I’ve been doing.

It may surprise you to learn this, but not so very long ago I had something called “free time” — as a grad student (and then post-doc) I had a lot of flexibility in when I could show up to work. I didn’t have a daughter so I could do pretty much whatever I wanted to on the weekends. And I didn’t lose nearly 12 hours out of my week, each and every week, to the ever-fucking TTC. Because I didn’t make much at all, giving up some of my free time to save money was a good, good deal.

Back then I paid $20 each spring and summer to get my tires changed over. Well, the last time I went and had someone else do it they seriously scratched a hubcap trying to use a crowbar to take off a tool-less wheel cover, they said they were upping the price to $30 for a change over, and I had to spend nearly three hours to get it done between the drive there and waiting on-site. I said never again: I’d start doing my own tire change-overs. It’s not mechanically complicated, and a good wrench, jack, and jack stands were only a few hundred bucks — I’d make it back in just a few years. Plus it gave me the flexibility to do it on my schedule (like Sunday afternoons), something that suddenly mattered as I had just landed a “regular job.” An added bonus was that I wouldn’t have to remove the car-seat to fit the tires in, which would add an extra half hour or so to the process of going to a shop. Everything pointed to DIY tire change-overs. That Potatomas the in-laws got me a jack and stand kit and I was in business.

So I’ve done my own changeovers for a few years now. Each year I come out aching because I am too old for this ish. But it counts as exercise, so yay I guess. It takes me way longer than I ever expect — the first two times were nearly four hours, and even now that I’m better and faster it still takes at least two. But I can do it more-or-less on my schedule. And having a proper jack and practice came in handy when I got a flat and had to change it in sub-zero weather. The math has kind of balanced out and I have all the tools now, so I just keep going with it.

This fall’s iteration has changed the equation though: I ruined a pair of perfectly nice pants*. Now that’s partly my fault for not thinking ahead: I have not-nice pants and shirts specifically for tasks like that, so not getting changed into the proper attire was sheer idiocy. I keep thinking that my time is much more valuable these days and I should just pay someone, but it still takes about the same amount of time to go somewhere — and this year I was limited more by the never-ending fall drizzle than by weekend availability. And paying someone would entail a lot less effort and sweating — and I could possibly read or write something useful while in a waiting room somewhere.

Getting the equipment for changing my tires was going to lead me on a whole automobile maintenance self-sufficiency quest: next I would start doing my own oil changes, and well… actually, that was about as far as I ever intended to go. The pros can handle the rest. Anyway, ruining pants that were only a few months old has really thrown a wrench into the frugality aspect of DIY car maintenance — that’s like the cost of two changeovers right there. I like knowing that I can do it myself, and that it’s a minor challenge I have met, but it is not a fun pastime that I would do anyway. If I have to add in the cost of ruining clothing to the DIY column, taking the car to a shop looks a lot more appealing for this spring.

* - if you must know, by being fat and attempting to squat. Riiiiiip…

Publishing Behind-the-Scenes: Pricing

November 11th, 2014 by Potato

I have a few posts on the publishing process in the drafts folder, but I don’t plan on getting into that until a month or two after the book is released. However, I did want to talk briefly about pricing because I’m worried about a potential scam and other issues with the retailer listings of The Value of Simple.

The potential scam is that Indigo has a “used and rare” edition of the Value of Simple for sale. Rare is right — there are precisely 8 copies in existence* that are not currently in front of me. However, unless one of three reviewers has decided to flip their copy, the others are either accounted for or are still in the mail. The odds that someone actually has a copy at this point to be selling used is virtually zero — and they’re charging more for the used one than a new one, which also suggests a scam attempt.

The other pricing issue is that I set up the book’s barcode to encode a Canadian price of $16.95. It says in plain text “Canada $16.95″ on the back (which you can clearly see in the back cover image on Amazon). It is listed (from what I can see) in Ingram’s distribution catalog as having a Canadian price of $16.95, and the Library and Archives Canada ISBN service has it at $16.95. The price, in other words, is clearly intended to be $16.95 in Canada. Yet Indigo has it at an “online price” of $17.05 (”regular $17.95″) and Amazon.ca at a whopping $19.xx! I’m not too concerned about ten cents at Indigo, so I haven’t been bugging them, but Amazon could make people angry by charging so much more than the clearly labelled price (and I don’t want them angry with me!)

It seems that there’s a behind-the-scenes aspect to Canadian pricing that I wasn’t told and didn’t consider: Amazon, and maybe even Chapters, may not pay the Canadian price when they buy the book wholesale from the distributor. Often, books have what I sometimes call “FU Canada” pricing, where the price is higher in Canada, and by a fair bit more than the fair exchange rate would suggest. I figured this is my book and it’s not for Americans so I wouldn’t set a USD price at all. At the last stage in listing it with Ingram for distribution I found I had to include a US price (their “choose only those markets you wish to distribute to” turned out to mean “choose only those markets in addition to the US that you wish to distribute to”). So, on the fly, I set a price a bit higher than simply the fair exchange rate (also to try to discourage an unwary US bookstore owner who didn’t read the description closely enough from ordering it and disappointing an American buyer). This seems to have backfired as now the Canadian stores (and Amazon.ca) are using prices higher than what’s listed. I’ve tried contacting Amazon. I had a friend try contacting Amazon as a concerned customer, and they told him the “manufacturer” (I thought for books the term was printer or publisher?) set $19.xx as the MSRP and they do not “fix the price.” Retailers are of course free to set their own prices above MSRP if they so choose and can make money doing it, but I don’t like the fact that Amazon seem to be saying that $19.xx** is the MSRP when clearly — clearly – it is not. Update: Amazon has lowered the price to $17.05. Close enough.

Hopefully that will get sorted out after release. And while I will welcome any sale through Amazon, so far I’m only linking to the (correct!) [the Kindle listing was correct out of the box:] Kindle listing because I don’t feel right pointing people to a price that’s incorrect by such a margin.

In the meantime, if you’d like to order a copy at the “proper” price of $16.95 (plus a nickle in rounding fees) there’s always my own store — and pre-orders will get free shipping and no tax. After the pre-order period though, if you have a lot of things on your shopping list (or even just multiple copies of the Value of Simple) it may be better to pay slightly more at the retailers because they’ll give you free shipping if your order is large enough (and through dark magicks and unholy pacts they can make a parcel arrive in a day whereas Canada Post will take at least four to deliver the ones I send).

Finally, a while ago (when I was still pushing Potato’s Short Guide to DIY Investing) I set up an author account at Goodreads. The way they handle common names (like mine) is quite frustrating: neither of my books is actually linked to my profile, and despite submitting two trouble tickets with their “librarians”, I’m still listed as authoring just one work: Is That Cat Dead?: And Other Questions about Poison Plants, which I didn’t actually write. I know what you’re thinking: “but Potato, are you sure you didn’t write that? It does sound exactly like the kind of book you would have written in March 2010 when you were procrastinating on submitting your doctoral thesis and were seriously sleep-deprived. You might just not remember.” And ok, there are blocks of time that I can’t really account for during that period, but I’m pretty sure I lost them to StarCraft 2 and Facebook, not writing a book about cats and poison plants.

* Outside of the Ingram printing facility, as I just got the email that the first print run is done.
** The $*.xx here is because the price is fluctuating ($19.34 one day, $19.29 the next), which also suggests that they are doing some funny conversion and mark-up math on the USD price rather than using the CAD price.

The Paradox of Advice

November 5th, 2014 by Potato

I was on Because Money recently, and the podcast and transcript are now up! We got together to discuss anonymous advice available on many online forums and blogs.

Leading up to the day of the podcast, I started with the assumption that there would be a lot of bad advice and we could spend a half hour lampooning it. But when I started to tabulate it I was amazed at how much good advice was there. These communities are so giving with their knowledge. In some few cases it will lead to sales leads, but mostly not (Reddit, for example, doesn’t even allow signature lines with links back to your website). Yet people with knowledge still give of their time — whether they’re paying it forward from getting helped when they were newbies themselves or just being altruistic, it’s kind of amazing.

There is bad advice too, just not as rampant as we thought it might be. So you have to use anything you read online as a starting point for more research because it’s hard to know whether the advice you’re getting is wrong (or some minor detail of the facts even if the main point is right).

And that leads me to the Paradox of Advice: those most in need of advice least able to discern who should give it.

The other major issue is that if you’re paying a few thousand dollars for a planner or money coach you can just unload everything and let them sort it out. You can’t do that to strangers freely giving of their time on the internet — you need to focus in on what your main question is. And in order to do that, you need to have some idea of the field so you can ask intelligent questions. Good, focused questions are key to getting good advice out of forums. So you have to keep in mind that any question you pose is not going to present a full technicolour image of your situation — it will be a stick figure at best. It’s up to you to make sure the right details are highlighted. As an example of what not to do, back when I was on RFD there was a standard response to questions of the form “what should I do with $X?”: “hookers ‘n blow.” There is no sensible way to answer it otherwise. To a large extent the amount of money a poster has makes very little difference, and “what should I do with it?” is just so open-ended. These blow-off answers were of course reserved for the (many) cases where the poster gave no other details or indication that they had read any of the other thousands of similar questions — or done any other background reading. The unfortunate conclusion is that you need to do some homework on your own before seeking advice.

Another area where anonymous advice can run into problems is the central theme of personal finance: “it depends.” There are so many answers, and none will be precisely right or helpful.

Think of the problem “I’m cold and there are wolves after me.” One very useful, straightforward answer might be to get a house or cabin and go live in there. You’ll be warm and it will keep the wolves out. One that might also work for someone is to get a lightsaber, and pretend it’s a tauntaun. Engineers might then go on a side rant about the R-values the wall insulation should have to properly keep out the cold and the howling, but that debate doesn’t necessarily invalidate the solution.

One point I didn’t think of during the podcast is how anonymous advice can be good: because it’s anonymous, free advice on the internet you should be immediately and automatically critical and skeptical of what is said. Whereas similar advice from a non-anonymous person who doesn’t have your best interests at heart (e.g. a salescritter with conflicting incentives and impressive-looking letters after their name) may not raise any warning flags for you.

“Of course you can’t ‘trust’ what people tell you on the web anymore than you can ‘trust’ what people tell you on megaphones, postcards or in restaurants. Working out the social politics of who you can trust and why is, quite literally, what a very large part of our brain has evolved to do. For some batty reason we turn off this natural scepticism when we see things in any medium which require a lot of work or resources to work in, or in which we can’t easily answer back – like newspapers, television or granite. Hence ‘carved in stone.’ What should concern us is not that we can’t take what we read on the internet on trust – of course you can’t, it’s just people talking – but that we ever got into the dangerous habit of believing what we read in the newspapers or saw on the TV – a mistake that no one who has met an actual journalist would ever make. One of the most important things you learn from the internet is that there is no ‘them’ out there. It’s just an awful lot of ‘us’.” — Douglas Adams

There is a lot of ‘us’ out there. Amazing and wonderful, the lot of you. Freely giving of time and wisdom to help those with questions and doubts.

For those with questions, do try to make it as easy as possible on the volunteer counselors by doing some research first, and crafting good questions. For complex situations or even simple ones with overwhelming detail where free anonymous advice won’t do, there are always advisors, planners, coaches, educators, and geeks with spreadsheets available for hire.

Index Investing: Beyond the Three Options

October 29th, 2014 by Potato

I provided a table of three great options for index investing in The Value of Simple (excerpt in the last blog post). Why those three? Quite simply because they represent the best options available in the market, at various points of trading off cost and simplicity. Aside from paying an advisor to do it for you, nothing gets simpler than Tangerine’s single fund and super-simple website and tablet app. You don’t even have to call someone to set up a preauthorized purchase plan. Many fund companies have regular (no-load) mutual funds that track the main indexes, which will let you set up a good index portfolio with ~4 funds. However, rebalancing 4 funds is the level of difficultly that TD e-series sits at, and nothing is as cheap as that in the mutual fund game. Beyond mutual funds there are ETFs, which is where it gets as cheap as it possibly can, but at a significant step up in terms of difficultly. Questrade offers no-commission purchases, low commissions for sales, and accounts only have to have $5000 to avoid maintenance/inactivity fees.

Here’s a list of the other options, and why they didn’t make the book:

  • BMO: Though BMO offers low-cost index funds traded on the stock exchange (ETFs), and in a quasi-Vanguard manner allows its mutual fund investors to invest in the same indexes, it does not manage to make the offering very attractive. Though you can buy in with as little as $50, the MER on their Canadian equity fund is 1.05% — barely a hair below Tangerine.
  • CIBC: Index funds have high minimum purchase ($500) and high MERs — at 1.14% it’s higher than Tangerine’s.
  • National Bank: Their index funds are moderately competitive, with MERs of just 0.66%. The funds are a little less diverse than I would like — the Canadian index tracks the TSX 60 rather than the full composite, and the US index tracks the Dow (30) rather than one of the larger indexes like the S&P500. The minimum initial investment is $500.
  • PC Financial: It looks like PCF has recently updated their offerings to get closer to Tangerine. Their portfolios are marginally more expensive, and include more asset classes. Their “Balanced” fund, for example, has 50% fixed income, of which 5% (of the total fund) is in international bonds. The international equity component is split with separate European and Asia-Pacific indexes. Each fund “portfolio” has a slightly different MER; the balanced fund is 1.09%. Like their CIBC parent, they require $500 to invest at a time. PCF offers a 0.1% discount to the CIBC MER (it’s not clear from their website whether this is included in the MER listed), but this discount is distributed quarterly as extra units — a nightmare for bookkeeping in a non-registered account.
  • RBC: Their index funds are not outrageous with MERs between TD’s e-series and Tangerine — but at 0.72% it’s still beaten by TD’s e-series.
  • Scotiabank: The mutual funds arm of Scotia has high initial investment requirements ($1000) and with an MER of 1.00% on their Canadian Index fund they are not competitive with TD — it’s barely better than the simpler Tangerine.
  • Scotia iTrade: Scotia’s discount brokerage arm was one of the first to come out with commission-free ETFs (mere weeks after the release of the first book, I might add). However, only a select list of ETFs are available, and none of them are the mainline ultra-low-cost broad indexes. You can build a decent portfolio from their offerings (e.g. to follow the broad TSX composite you would buy both HTX for the TSX 60, and XMD to cover the rest), but the average MER will be closer to ~0.3%, at which point TD’s e-series don’t look so bad, or for large accounts even paying the commission for XIC will put you ahead of using the list of free-to-purchase ETFs.
  • QTrade: (Different from Questrade) has some commission-free ETFs; basically the same list as Scotia iTrade.
  • Virtual Brokers: Very competitive with no-commission ETF purchases, but require $15,000 minimum account to avoid fees. This was basically a coin-flip as to whether I wanted to include it or not, and in the end I didn’t see anything from VB that Questrade wasn’t already offering, so I kept the line-up as simple as I could.

I was a little hesitant at first to recommend specific companies, but the fact is that they offer indisputable advantages for the reader, and giving detailed step-by-step instructions is only feasible with a few definite options.

For the average investor, a low-cost index investing approach is the easiest and simplest method available, and also provides the highest chances of long-term success. While there is a lot of material available on why investors should choose passive approaches over high-fee active mutual funds and what passive investing products exist, the average investor is at a loss on how to implement a passive index investing plan. The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing provides a plain-language explanation of how Canadians can implement a low-cost index investing strategy, with step-by-step instructions and a focus on developing good investing processes. Coming December 1st.