The One-Page Financial Plan

August 29th, 2016 by Potato

Carl Richards’ book The One-Page Financial Plan has been out for a little over a year so this isn’t exactly a fresh review. It’s a very quick and easy read, punctuated with Carl’s simple but illuminating sketches.

I want to both sing the praises of this book and damn it, sometimes for the same parts.

The part I loved is the philosophy towards planning, which is to seek a balance between mapping the future out in great detail (impossible as the future is inherently uncertain) and just living for today and playing it by ear. Carl tells us to just make a guess about where we’d like to go in the future. “Don’t be committed to the guess, be committed to the process of guessing.” […] “Once we’ve accepted that a lot can happen between now and the future, financial planning boils down to making the best guess we can about what goals will help us live the life we want. Don’t worry about getting it ‘right.’ You can — and should — simply course-correct your guess when you notice yourself going off track.”

The part that causes me the most dichotomous feelings is the title: a one-page financial plan. I was really excited to see what his one-page plan was, because I really tried to simplify my example plan and it was still over two pages. Here is his “plan”:

Time with family doing things we love!

  1. Fully fund all retirement accounts each year
  2. Fund kids’ education account each year
  3. Save for house

Those are a list of priorities, and this fits so well with the kind of planning that Sandi describes in her library talks, about goals and direction. This is a fantastic exercise to do and I think it’s great that the book covers it so well — this is an easy thing to overlook when trying to plan.

And then I get angry because it’s not a plan, or at least not what you expected a plan to be going in, so the title feels like a cheat. Then there’s a great analogy about putting together a children’s toy, and the picture on the box vs. the detailed step-by-step instructions, which makes me love it again. But that still doesn’t make the picture on the box a plan. Grr!

Anyway, if you were expecting to walk out with a step-by-step guide for creating a detailed financial plan that mapped out how much you had to save in which baskets, you’ll be disappointed. However, it’s a short read, and thinking about your goals and priorities is an important part of the planning process, so it’s still worth your time.

Passive Investing and Non-Linearity

August 2nd, 2016 by Potato

This is a recording of a rant I put together originally for the DIY investing course, but it didn’t quite fit the tone of the course. I didn’t want to throw it away, so here it is as a quasi-podcast for you.

Click here to download the MP3 of the rant.

Transcript:

Markets don’t have simple stories. Market indexes are very useful for simplifying down what’s happening for a quick news report, and with index funds it’s also a handy way to relate that back to your portfolio: if a market index is up, your holdings mirroring that index are also up. But just because we can boil it down to a monosyllabic summary of the action for the day or year or whatever (up/down/flat) doesn’t mean that it’s a simple lever someone out there is pushing, though we like to think of it that way.

We want to think of it that way. We’re comforted by the fairy tales of causation in the news: condition X happened, therefore event Y happened.

It tickles the part of your brain that wants to recognize patterns and fill in the next part. “Here’s a condition, what’s going to follow, onboard pattern engine?” But the damned thing of it is, sometimes there are causal connections, and often there aren’t. If it was just totally random noise we might be able to give in to it, but it’s not — there are some really plausible-sounding stories out there, explanations so great they can explain market moves in all directions.

The stock market is a complex system. It is made up of people (and computers pretending to be people) all acting for their own interests and reasons. Many are only looking at one or two particular companies versus trading a large index. Some are long-term investors unconcerned with day-to-day moves. Some don’t look at the news or events or anything external to the market, making decisions based solely on the trading activity they see other people doing.

I think it would be a really interesting project to one day survey everyone who made a trade and find out why they made the trade that you did. I suspect you would find almost none aligned with the headline in the news that day: “market falls on worries over capital controls in China” or whatever. Instead it would be a thousand different stories that vary from an automatic investment plan to what they had for breakfast to responding to commentary someone else made.

The market average is made up of hundreds of stocks being traded by millions of people around the world, each with their own lives and stories and perception filters, and even though it will all average out to a single, simple result (up/down/flat), it is not because of a single, simple cause.

It reminds me of that quote from Men In Black:
A person is smart. A kind, compassionate being. People are dumb, panicky, dangerous animals. [paraphrased]

One thing I try to explain over and over again when talking about index investing is how hard it is to out-smart the market consistently. The whole point is to try to shut out the non-actionable noise, to avoid forced errors, and stick with a consistent, easy strategy… then move on with your life. It is a very difficult thing to do, because you have to have some kind of faith in the markets, and you have to turn off your pattern-seeker. One of the worst things that can happen to a new investor is to make a decision based on some piece of trivial news, and then make money based on that. Because then it’s nearly impossible to turn off the competitive, out-thinking, out-guessing, pattern interpretation engine.

At a library talk I gave recently I had a number of questions from the audience that I didn’t do a very good job of shutting down: things like recent articles about negative interest rates and how that will affect a passive strategy, or what the cause of Black Monday was in 1987. But the fact that the questions were coming in the first place means I wasn’t doing a good job of explaining that passive, control-what-can-be-controlled philosophy.

To try to explain it again in a slightly different way, there are a few good reasons why the passive approach is a smart one, in other words, why active investing is hard.

1. Lifestyle: it requires effort and expertise to be an active investor.
2. Evidence: even the experts do not have good odds of out-performing when picking stocks.
3. Non-linear: the links between putative causes and investment returns can be very non-linear and non-obvious.

For #3, this is the point I think a lot of people are missing on why it’s just so difficult to be an active investor and out-perform. There’s the efficient market side of it: the market is made up of people with the same information you have, so a news article about something (negative rates or employment or whatever) is difficult to use to get an edge. How much of that were people already expecting, how much will affect future business activity, and how much of that will affect future stock/bond returns?

There’s also the complexities of the connection between the real world and the stock market at play. Monish Pabrai has a flashy slideshow about this, but it’s pretty easy to pull examples out of a hat from the past. There have been many inventions where it has been easy to say “this is going to change people’s lives” and be absolutely correct. Automobiles, airplanes, genetics, microchips, the internet, cell phones — these have all undoubtedly been wildly successful inventions that have changed the lives of billions of people.

And none of that knowledge has been good enough to help you make money as an investor. Even if you knew for sure — even if you traveled back in time with the absolute certainty that in a few decades’ time the sky would be filled with jetliners, the pockets of the passengers filled with devices laden with microchips, and the roads choked so full of cars that a decent marathon runner could jog from the suburbs to downtown faster than a car could take the highway — even then, you would be hard-pressed to make money from that knowledge. Most of the car companies in the early phases of that revolution went bust. Airlines go bust so often it’s a joke amongst investors. There’s been one big winner in the cell phone industry, and it’s one of the companies that started off selling computers.

The internet did indeed change our lives. But it also led to a big stock bubble and collapse, showing the importance of higher-level thinking. Indeed, many of the would-be investors and traders of the time were faced directly with the evidence of the internet’s impact, as they placed their trades online in the new discount brokerages that became available. They could not ignore the impact the internet was making or how fast it was growing. So many of them thought the same thing, and bought the same stocks, leading to the bubble, which blew up and cost many of them a lot of money. It’s not enough to know the first part of the story, but also look at what all the other investors (humans and computers) are doing — what’s priced into a stock, what’s a real opportunity, what’s a bubble brewing?

3D printing, medical cannabis, stem cells, solar energy, machine learning, self-driving cars — Mother. Fucking. Fusion. These may be the next revolutions in our lives. Even if you correctly forecast the coming changes, turning that insight into money by way of the complex, non-linear investment market is so very hard. It is not the simple cause-and-effect relationship the news headlines would have you believe.

A final story: the physicist had a cat, and wanted to know how it worked. So he took it apart, and he had a non-working cat. Living things are chaotic and complex and it is very difficult to precisely map how all of the inputs lead to all of the outcomes. And the stock market is a living thing. You can easily share in its growth as a passive investor, or try to out-smart it – but that is much easier said than done.

July Course Update

August 1st, 2016 by Potato

July has just ended and the Practical Index Investing for Canadians course is progressing well. Roughly 70% of the content is done and online, everything that had been projected for June and July, with a few bonus items as well (though two of the videos are still rendering here, they have been shot and will be up soon). I’ve updated the syllabus here.

The towel-day pre-order price is on its way out. You have until Friday to get the course at the incredible rate of $49 (no coupon code needed — that’s the price that’s set on the course platform site). After that it will go up to the next pre-order level before release, and to the final price in the fall.

The updates will be coming slower now, though. You’ll notice in the syllabus that though most of the course is there, there are only a few things scheduled to be completed in August, and nothing for September. That’s because I know I’ll be too busy at the day job to get any material up through then, so it won’t be until October that the final bits of the course are up and done.

If you have any suggestions (or prefer that I prioritize one section for August) send me an email and let me know!

—-

First time hearing about this? The Practical Index Investing for Canadians course is an online course to help you learn how to become a do-it-yourself investor. It builds on the material in the Value of Simple as well as the Money 201 and other lectures I’ve done since to help you get started as DIY investor.

The BC GVA Tax

July 28th, 2016 by Potato

Hard to miss the news out of BC this week as a surprise tax on foreign purchasers of Vancouver-area real estate was launched, along with new data showing that foreign money in BC real estate is actually quite substantial.

It’s hard to say what this will mean in the near-term: will foreign money find a loophole and keep pouring in? Will Vancouver crash while the firehose of hot money shifts to Toronto and Victoria? Will 15% prove to be no kind of barrier considering that prices have gone parabolic this last year, and how desperate some of the hot money is to leave? Indeed, that last point had been made often enough before this news on the high prices and risk of a crash in Vancouver — “so what if it crashed even 75%, walking away with $500k clean is better than losing all $2M” people would argue.

No Grandfathering

The tax takes effect next week — a good move so we don’t see a spike in sales looking to beat the change, as we have with long-anticipated CMHC changes in the past. However, one strange aspect is that there’s no grandfathering in: deals that were already in the works that close after Aug 2 will have the tax applied.

For some people, that’s going to be exceptionally painful: not all foreign purchasers are wealthy oligarchs skirting capital controls. A newly recruited UBC assistant professor coming up from the US who happened to buy a place at the wrong time is going to have a huge cash call at closing soon, or will have to forfeit their deposit to walk away from the deal if their lawyer can’t argue force majeure.

Normally when a tax such as this is put into place there’s a grandfathering provision, where people who had already made deals under the old rules get taxed according to the old rules. Whether this lack of grandfathering is a bug or oversight from the rushed nature of this tax or a deliberate feature is another question.

How could it be a feature, you ask? Well, this tax is not so much about raising revenue or equalizing opportunities in the market so much as it is a psychological message. I even saw (though I didn’t keep the article to link) a BC official say that if this tax succeeds in its mission it won’t collect a single dollar — it’s intended to run foreign money out of Vancouver, not just tax it. And it does this in a flashy, surprising, attention-grabbing way. By sucker-punching a few deals in progress it will sacrifice a few innocent bystanders and create huge resentment and awareness amongst foreign buyers (and their local realtors) that BC is not a place to be making deals you can’t afford to have go sour. It will help address that sticky notion that Canada is a safe place to park (or in the parlance, launder) money, with stable, reasonable government that is gun shy on meaningful interventions.

Indeed, if there’s any good to come out of this, it will be the anecdotes from this (and from the Urbancorp mess in Toronto) reminding buyers that there is significant risk to “investing” in real estate, especially with long-duration pre-construction contracts at massive multiples of rent where anything can happen between when you sign and when you take delivery. Hopefully this pain will resonate for a generation, like Nortel did for reminding equity investors in Canada that risk exists. Your grandchildren will start saying that “real estate can only go up” and the neighbour will over-hear and shout over the fence “the BC tax on foreigners! Fly, you fools!”

And yes, there’s also the “they should’ve” arguments that draw away from the impending martyrdom — no “regular” person should be buying pre-construction, that’s a playground that by all rights should be restricted to accredited investors who can afford the risks and delays (of which a 15% surprise tax is actually not the worst thing that could have happened). And junior UBC profs and other people coming in to actually live in the city should have waited until they got their permanent residency status before buying (and rented even then, given the price-to-rent insanity in the city). But that’s cold comfort to people who face a large, surprise tax because of a lack of a simple grandfathering clause (and a tax that’s a cash call at that — no word yet that they will be able to roll this into a mortgage).

A Clear Message
"Get Out" scene from Terminator

What Next for the Bubble?

At the same time as the tax was in the news, CMHC finally woke up and labelled BC as having “problematic conditions.”

What effect will all this have on the bubble? Hard to say. Bubbles are driven by the madness of crowds. On the one hand there are reports of locals trying to back out of deals on the news of the tax — the existence of the tax has shattered their confidence in the meme that rich foreigners will continue to drive the price of property up to something on par with Monaco or New York. If confidence in “infinity” as the upper bound to GVA house prices has indeed been shattered, then that alone may help the market come back to earth regardless of what happens with HAM and whether the tax actually changes anything on that side of the equation. However, Vancouver in particular has been astoundingly immune to the forces of reality (WMAGNFARB), and eschatology is a scary and imprecise business. Plenty of bubbles have caught second and third winds (and the GVA is at least on its third wind now); some have “melted” while others were “like someone flicked off the lights.” Even that second type takes time to appreciate as it plays out in real time — RE does move very slow, and even what we call a “hard stop” in the history books is still several months of uncertainty in the present.

As for the GTA, it would not surprise me if enough people will believe that HAM will flood the 416 instead, driving the parabola for another year or so to apogee.

These things take time to sort out, and in the meantime my core message remains to rent and avoid the whole mess.

The GTFO Calculator

July 18th, 2016 by Potato

I was stuck on the subway for a long time today. A really long, sweaty, stinky time. My commute this morning took two hours door-to-door thanks to numerous PAAs (Passenger Assistance Alarms — they happen so often they’re just referred to in acronym form) on the line. It’s a hot July day, and though the train is air conditioned, much of that time was spent loitering at various platforms with the doors wide open, sucking in the hot platform air (superheated by the A/C exhaust). It’s days like this that really drive home how much Toronto was not built for the enjoyment of its citizens.

Nelson had a post with a title that seemed targeted right at me today, explaining how much lower the cost of living is in small towns (mostly driven by the lower cost of housing), which is a great opportunity for teachers and other professions who get paid about the same amount no matter where they go (indeed, there is a surplus of new teachers in the big cities, while his local school has unfilled positions).

Comparing living in a small town to living in Toronto or Vancouver has a lot of subjective factors to consider, from amenities and attractions to salaries, job prospects, and the network effect. Indeed, I used to live in the virtual paradise of London, Ontario, which featured a modest cost-of-living, all the day-to-day amenities one could want, jobs within walking distance of livable communities, good curling, and all within a short drive of Toronto for weekend visits and the odd bit of ephemeral culture that wasn’t native to London. However, my family and Wayfare’s family live in Toronto, so — network effect at play — when we spawned we came back upstream to do so here in the GTA. Plus we both have graduate degrees and work in specialized fields, and we both make more in the GTA than we would have in London… though in London we might not have needed to make so much, possibly leaving more time for leisure and Blueberry.

Aside from my own situation, I see still more and more people pour into the GTA, and many of them do not have any particularly specialized jobs, family ties to the area, or difficult two-body problems to solve. Indeed, many are young and single, lamenting the costs of home ownership, and I’m left wondering: “Why are you in this city? GTFO!”

At what point does it make sense to take a paycut to move to a smaller city? At what point does a higher salary in a big city offset the higher costs of living? Enter the GTFO calculator.

Here you can enter your salary in the big city and a smaller centre, as well as the salary hit your spouse might have to take to follow you into fire, into storm, into darkness, or into Hamilton. Then you can enter the different housing costs and assume all else is equal to see approximately how much better off you’d be with the GTFO move — and how long it would take for your dirty city money to make up for the bubblicious living costs. There’s even a fudge factor cell for renters, or people who want to factor in having to get a 2nd car or whatever.

It’s set up as a Google Sheet with a protected range over where the magic happens, so you can just type right into the input range to get your answer instantly (a trick I copied from Sandi). So, how much more do you have to make to balance out the higher housing prices of Canada’s more expensive cities? Find out for yourself now!

Preview of the GTFO calculator on Google Sheets

Forced insight: you may find that seemingly large paycuts are still worth it (in a financial sense at least) because of how very expensive Toronto/Vancouver houses are now. It takes a lot of years — likely more than you have — making an extra $10-30k to outpace an extra half a million in mortgage debt.

Quibble: I didn’t (and don’t plan to) build in different rates of salary growth. Just wave the magic “real dollars” wand. Some fans of the big cities will quibble though that it’s not so much starting salaries that are higher, but that there’s more room to climb the ladder and get to a (much) higher salary with time.

Note: there is a way to parallelize the Google Sheets, so if you see more than ~4 people trying to edit it at once, let me know and I’ll get off my lazy butt and do that.