Budgeting Processes

January 20th, 2015 by Potato

Sandi asked me for some thoughts on budgeting and methods to control or track spending for a recent Because Money episode, and right now I’m staring at over a year’s worth of receipts that I just can’t seem to find the time to go through, so it’s probably a good time to talk about the history and evolution of my budgeting process.

A massive box full of receipts from the past two years.

When I was a grad student things were tight and budgeting and frugality really mattered. My entertainment budget was often around $30/mo, which is really easy to blow through if you forgot about the movie you went to see three weeks ago or go out with friends a lot. But I’m really bad at the forward-planning money-in-jars kind of restrictive budgeting — I’m much better about adapting to fit the total budget than hitting it on every category. Though that said, I was just bouncing back a few years in my calendar for something else, and saw where I had mapped out which days I could treat myself to pizza so I was paying some attention to my category limits.

So my method was to gather up all my receipts1 and bills every month and lay them all out on a piece of paper (and eventually, a spreadsheet). I’d group them: food, rent, eating out, entertainment, car, utilities, other. Then all the receipts would be stapled to a piece of paper and filed away (in case I needed more detail than the summary). I started by just tracking things — I came in fairly frugal even from living with my parents — which also helped give me an idea of the irregular expenses that I had to try to amortize. After a while I saw where I needed to put in some more effort, and just made a vague effort to do better. I know, this is the dieting version of “I just eat whatever I want and never feel hungry and end up naturally thin” but there you have it. It didn’t take too long before I came in on-budget most of the time. I never stressed too much about big expenses in one month or another, like car repairs or blowing entertainment out of the water in October and December, or having the categories come out different than I planned: as long as it all averaged out over the year.

Once I had those unconscious frugality muscles built up and a fairly natural sense of my set-point, I started to slack off on the budgeting process. It went from being a monthly ritual done as soon as possible after the month end, looking at each line item on each receipt, to a quarterly and then semi-annual check-up and review process. I found that the medium-length time periods were better for smoothing out the month-to-month noise, but it was still a task I could do in a reasonable amount of time. Pushing out to semi-annual just encouraged more and more procrastination.

After Blueberry was born I only did two more budgets, and now find myself with this massive pile of receipts and notes to go through. And it’s really hard to find the time. I thought I’d get around to it over Potatomas break, with two full weeks off and no natural disasters forcing an evacuation this year. But I didn’t — I just have so much to do now, and it’s really hard to prioritize a budget review because I know that I’m doing more-or-less all right: I’m sending the right amount of money from my chequing account to my investment accounts and Blueberry’s RESP to hit my savings goals, so however it’s happening, it’s all working out.

I know that my savings rate gives me a bit of a cushion to be sloppy with my budgeting — if I slip I might miss out on a year of savings, which would suck, but if something unexpected comes up or I spend over budget I’m not going to be instantly facing credit card debt or the poor house. But I’d still like to know how I’m spending my money, and going through my budgets does give me a nice picture of my personal inflation rate. So I’m thinking I’ll toss most of those old receipts and instead sample my budget for just a month or two to double-check that I’m on track, then go back into unconscious frugality mode again.

In terms of this kind of review-and-try-harder process, I should note that I was naturally frugal before starting my budgeting adventure, and just needed to tweak things a bit. Then once I found my stride, it’s been fairly effortless to stick to it. For many people out there a more rigid budget (with jars or the digital equivalent) might work better, as might be paying yourself first on every paycheque to save (I do not save evenly through the year — most of my contributions to long-term investments are in the front half, and Oct/Nov/Dec are usually negative, drawing down a chequing/savings account balance built up a bit in Jul/Aug/Sep).

So to try to sum up: what works for me is to not stress about it, and just try to be generally balanced and frugal, without focusing on any particular expense. Though my income is now pretty smooth (depending on freelance and consulting jobs), my spending is not, so I look out at the annual averages. If I ever get too sloppy though, that’s going to take a long time to spot and correct the problem.

1. I make notes for some purchases without receipts, and estimate others like “~$20 at Tim Horton’s over the last month.”

The Canonical Portfolio Part 2: Apocrypha

January 13th, 2015 by Potato

In the first post I discussed some of the philosophy underlying the Canonical Portfolio, and of course laid out the basic asset classes and default allocation suggestion. Remember that all asset classes with an ETF to make them investable have a compelling elevator pitch for why an investor should add them to their portfolio — if they didn’t, the ETF wouldn’t exist. So many other authors who pick these non-canonical classes for their suggested asset mixes tend to explain in those terms why they made it in… but that’s not quite enough for me. There are practical implementation issues to adding and rebalancing these different asset classes, in addition to explaining when and why someone would want or need them. Some are difficult to find, with only one or two illiquid or high-cost funds to choose from, others get such low recommended weightings even from their proponents that they’re not worth the effort of discussing, and there’s always the basic increase in complexity from adding more funds to the mix.

That said, it’s your portfolio and you can make it as complex as you like. Just remember that there is very little precision in investing, so just as I couldn’t come up with strong reasons for including these various alternatives, there isn’t really a strong reason why you shouldn’t. It’s not worth running into analysis paralysis over a few percentage points allocated to these more esoteric funds — go ahead if for whatever reason it really speaks to you, or you fell in love with the author of a particular alternative model portfolio — or just stick to the basics and be done with it.

Emerging markets are often included in the international diversification piece, and have been a bit of a hot topic with cutesy acronyms like BRICto describe them. Emerging markets add a lot of risk to a portfolio (both in the sense of volatility and chance of loss of capital). Yes, exposure to rapidly growing economies is sexy, but to some extent the profits from that growth will be captured by the multinationals already owned in the US and developed international indexes, and I am personally highly suspicious of some of them as long-term investments. My own feelings aside though, is it an asset class that should be included in the Canonical portfolio? My answer is no: even model portfolios that do like emerging markets only put a small allocation towards them — if it’s only worth 4-6% is it really worth the complication? If you want more risk, you could just turn up the knob on your existing three equity classes (indeed, this is partially done already through the age-10 guide). No, that would not be the same as getting broader diversification to these other markets, but emerging markets are not part of the TD e-series or Tangerine portfolios (though high-MER versions can be purchased at TD).

This last concern is very important for a book or resource laying out the Canonical Portfolio, because it creates pressure on a reader who might otherwise lean towards the simpler e-series or Tangerine choices: are these mutual fund options lesser or weaker because they lack these exotic asset classes? Does that mean the reader should push towards a more complete ETF portfolio1 with all these little slivers of allocation? And honestly, my answer was no, those are full and sufficient portfolios as they are. And if Tangerine is a satisfactory portfolio, then why should I add the complication of these other funds just because they’re available in ETF form? Especially when I could not come up with a guideline or simple rule on when someone might or might not need or want exposure to these alternative asset classes.

Here is a list of some of the other asset classes or ETFs that might be worth considering, but did not make my cut for inclusion in the book (or Tangerine’s cut for their funds, for that matter).

Preferred shares: these look like a blending of bonds and stocks, providing a higher, more tax-efficient return than bonds while being more stable than (common) stocks — and also sitting halfway between the two in the capital structure of a company. Able to provide a relatively high dividend even in a sideways market, preferred shares can be a nice addition and some people suggest adding them by chipping away a little bit of each of the stock and bond allocations. Indeed, Garth Turner is such a fan that he prioritizes preferred shares over international equities for an investor whose portfolio was on the smaller side, and in his more generic portfolio has a high allocation — as much as any other equity slice. But they suffer from a lack of sector diversification that’s even worse than the Canadian market in general. For those with really large fixed income accounts (e.g. those entering retirement), I think it can make sense to start to slice and dice that into regular bonds, real return bonds, and preferred shares… but ultimately I think it’s just not worth the complication for an interesting share class coming from a narrow slice of the economy.

Real return bonds: tied to measures of inflation, real return bonds have protection against one of the big risks to regular bonds. They’re also not highly correlated to stocks or regular bonds, which can be desirable in building a portfolio. However, their expected return is terrible (in part because they are so safe in other aspects); while the lack of correlation to the other “eigenvectors” is nifty, that argument absent some kind of expected return didn’t have much sway for gold, either. The main issue though is the practical reality that there is only one ETF in Canada offering real return bonds that I could offer up as a recommendation, and its MER is rather high at 0.39% (the iShares XRB — Vanguard does not have a real return bond offering, and while BMO does have ZRR in its library, with a market cap of just $37M it raises serious liquidity concerns for me so I wouldn’t include it in the book). Again, I don’t think the other bond funds are seriously deficient because they lack real return bonds, and while it’s not quite such a direct, perfect hedge, the big equity slice of the portfolio has the job of beating inflation. If equities are failing at that, a 5-10% allocation to real return bonds would help the stinging, but only so much.

Real estate investment trusts: this is the one that nearly got me. REITs are a particular weakness of mine in my active portfolio, and while they are not nearly the same thing as individual real estate holdings, I did have a simple justification for when you might want them (if you are a renter). They are nearly as common a selection as the major equity indexes and emerging markets, particularly for Canadian authors. But, like other sector-specific funds, the MERs are getting a touch high, and the diversification is not great (though there are many more quality REITs than there are banks). Though in some ways they look like fixed income or preferred shares, where most of the expected return will come from the steady payout and with some close relationships to interest rates, they are volatile and in terms of capital structure for the companies count as equity — thus if you do include them, you should be looking to count them as part of the equity portion.

Small cap tilts: I did prefer Vanguard’s total index to the S&P500 and the TSX Composite to the TSX60 for the added diversification, but did not mention getting small cap or value-tilted funds to increase this weighting. There are several to choose from for US and International, if you’re willing to go to a US exchange — but that’s a tough thing to recommend for the base Canonical portfolio (I’ve already received some flak over including Norbert’s gambit as an optional thing for getting VTI in RRSPs). The Canadian small-cap ETF from iShares has a relatively hefty MER of 0.6% and a really high weighting to the volatile junior materials sector.

Dow and NASDAQ: the Dow Jones Industrial Average is a collection of 30 companies that is popular largely for historical reasons — nonetheless, there are many funds available to invest in it if one wanted to (including e-series versions). Similarly, the NASDAQ has its own index that is quite technology-heavy. However, the main Dow and NASDAQ companies are also in the S&P500 (or VTI), so there’s no reason to slice-and-dice US exposure to include these other indexes.

Fundamental indexing: as an alternative to traditional market-cap-weighted indexes, FTSE has created indexes that weight companies on various characteristics of the investment. This is a really neat idea in theory, but the costs of implementing it are pretty close to the expected out-performance such an approach should bring — and in Canada they’re even less diversified than the already-tilted TSX Composite. Here’s a post from Y&T that Kyle put up after a short discussion with yours truly on the matter.

Bond fanciness: maybe it’s my bias towards a focus on equities, but I just did not want to get into the options for slicing and dicing the bond exposure into short term and long-term, government, corporate investment-grade, high-yield paper, real-return, or international bonds. In addition to the implementation problems facing the real return bonds, it could almost become a whole book on its own to discuss how and why someone would want to tilt their allocation — bond funds can be surprisingly complex.

Dividend and income funds: the dividend growth community loves dividends, and looking backwards dividend stocks do seem to be highly competitive with the broader markets. There are also many funds appealing to “yield-hungry investors” full of former income trusts — but when should someone be “yield hungry”? Focusing on payout also cuts out large swathes of the market.

Sector funds: whether it’s energy, biotech, utilities and infrastructure, or precious metals, many investors can’t help but have a preference for a particular sector, no matter how much they may otherwise believe in broadly diversifying and keeping things simple. These can then show up in their model portfolios, but then there is very little concordance between them — if you read enough they almost cancel each other out to form the broader indexes!

Berkshire Hathaway: though technically an individual stock and not an index fund at all, BRK does have some of the good properties an index investor would be looking for: they hold a diversified portfolio of businesses, keep turnover to a minimum, are tax-efficient, are highly liquid, and have effective management fees that are quite low. Michael James and Financial Uproar have written more about Berskhire Hathaway as an index-like investment, and in full disclosure, I personally hold some in my RRSP and count it as part of my passive portfolio. But it once again requires buying on a US exchange, so not appropriate for the book.

To sum up, there are lots of ways to build an index portfolio that is reasonably simple and stays true to the philosophy of diversifying and minimizing costs. As Michael James said in that last link “Most proponents of indexing strategies don’t quite manage to implement a pure index approach. They often come close to pure indexing, but they can’t resist adding some sort of twist,” and there are lots of possible twists. I’ve worked with people getting started with DIY investing, and seen the confusion that having multiple portfolio options out there can cause, especially when there is no clear reason for choosing one model over another. Hopefully the consensus that is the Canonical Portfolio will help — and that’s what I was aiming for in The Value of Simple — a good-enough portfolio that you can run out and get started with right away.

1. Indeed, this has been a major concern for people who come out confused by the MSGttPP — they see the cutesy name of “Uber Tuber” and worry that the “Complete” portfolio is a misnomer.

The Canonical Portfolio

January 4th, 2015 by Potato

Making the case for investing is relatively easy — investing is what gives you growth beyond your own savings, so that you can save at a reasonable rate and meet your goals. Investing through index funds is also not a hard sell: control your costs, get the market return, keep it simple. Where people sometimes get stuck though is deciding which indexes they should invest in. There are, after all, numerous indexes to follow (and funds to invest in), especially if you include sector funds.

In The Value of Simple I present a simple portfolio of just four funds1 that will meet the needs of pretty much any investor out there, with a simple rule-of-thumb to determine the main split:

  • Bonds (your age less 10), e.g. 25% if you’re 35 years old (which could be for example TDB909, VAB, XBB, or XQB)
  • And three equity classes, split roughly evenly with what’s left:

  • Canadian Equities (e.g. TDB900, XIC, or VCN)
  • US Equities (e.g. TDB902, XUS, VUN, or VTI)
  • International Equities (e.g. TDB911, XEF, or VDU). [Or, use VXC to cover US and other International in one step — especially helpful for those who pay commissions to buy/sell ETFs]

And that’s it. This is the Canonical Portfolio, a generally agreed-upon mix that will serve you well2,3.

However, there are lots of different points of view and thoughts on what should be in an index fund portfolio, and I had to do a fair bit of thinking on the various options when writing the book. Everyone has their own thoughts on what a passive index-based portfolio should look like (or even multiple such portfolios), and what rules of thumb should help determine the asset allocation (with many using fixed allocations and the usual “adapt as needed” disclaimer), and how fine the distinctions and allocations should be cut.

My guiding principle was that I wanted it to be easy to follow, simple, and not confuse readers while still capturing the kinds of investments that it needed to. Basically, to make it as simple as possible but no simpler. It’s also important to be able to explain in clear, simple terms why someone should pick one option over another when there are choices to be made. So in the case of covering the spectrum of Tangerine through TD e-series to Questrade I could do this: there is a clear trade-off between complexity and cost. But for asset classes beyond the basic four I could not come up with such a rule, and did not feel that the Tangerine or e-series methods were lesser portfolios for their lack of emerging markets or other asset classes4.

The top categories in investing — the unanimously agreed-upon eigenvectors of investing — are the ur-classes of stocks (risky stuff) and bonds (safe stuff). There are many sub-divisions and combinations of these, which we’ll get to, but clearly having some of each is a vital part of a decent portfolio. Precisely how much is a tricky, individual question of risk tolerance and time horizons, but the simple age-based rule-of-thumb should get you close.

Then for risky stuff the first complication is that we need to get international diversification: nearly5 everyone writing from a Canadian point-of-view agrees on this point. How much to weight the US, rest-of-world, and Canada is again tough: some home-country bias makes sense, but we are only a tiny part of the global economy. An even split is a compromise that’s easy though, so that’s what I recommended, and some Vanguard research seems to back that up as coming within a reasonable range (and still more broadly diversified than the typical Canadian investor).

The US is an obvious choice for international diversification, with the rest of the developing markets tracked by the FTSE Developed Ex-North America (formerly MSCI EAFE) index as well-accepted options. And this is indeed what I have included, and products to invest in each of these categories are available through each of the methods I cover in the book: Tangerine, TD e-series, and ETFs.

Beyond that it gets increasingly grey.

In the next post, we’ll go through a few of the other asset classes I considered mentioning in The Value of Simple but ultimately decided that they would not sufficiently serve the readers to include.

1. Or just one fund at Tangerine with the four classes contained within.

2. This is not a rigid prescription, and as unhelpful as it is to say, you will have to adapt it to your own circumstances and inclinations: for instance, you may be more or less conservative than the age-based bond allocation would suggest.

3. Coming up with a clever name is apparently de rigueur: CC did it with the Sleepy Portfolio and (similar to the Canonical Portfolio), and CCP did it with his array of 7 model portolios (also found at the end of the singularly titled “MoneySense Guide to the Perfect Portfolio” or MSGttPP). I had originally called this the Doctor’s Portfolio, but no, that’s a rubbish title, forget that title… and it’s not about making it eponymous. Canonical, for those who don’t use the word as regular parts of their vocabulary in reference to sci-fi plots or physics, means standard, accepted, etc.
Edit: CCP has updated the model portfolios in 2015 (a week and a half after this was published) to remove much of the confusion and cutesy names — all of the model portfolios are now very closely aligned with the Canonical Portfolio.

4. This is a real concern: I don’t want people to feel pressure to move up to a more complicated ETF portfolio because of fear that they’re missing something major with TD e-series or Tangerine.

5. Larry MacDonald being the main Canada-only holdout.

One Day…

December 31st, 2014 by Potato

The Value of Simple has been out for a month now, and as my first “real” book it’s great that my friends are still willing to talk to me about it. Most often though when I say it’s about investing, I hear some variation on this comment:

One day I hope to have money to invest…”

I know I have an investing book to flog, but no, that’s not the right attitude at all. If you’re closer to 40 than 30 you should have some, or be really close to that point. Having money to invest shouldn’t be some far-off, lofty goal.

Maybe it’s an issue of perceptions: many people may see “an investor” as some old moneybags, banker-type character from the Monopoly board game, rather than everyday people like you and me who may have as little as $1,000 to sock away in a TFSA for the long term. Indeed, do a Google image search on “investor” and the entire first few pages are people in suits, followed a little ways down by old people smiling in front of computers. No one imagines investors as people with toddlers running around at their feet. But yes, they too may be (should be) investors, and exactly the target market who would be helped by The Value of Simple.

You don’t need a big pile today if you’re at the part of your life where those savings will start flowing in now — you’ll be investing that little bit, month by month.

If the savings aren’t coming in then given that it’s New Year’s Eve as I write this, it may be a great time to resolve to fix it.

Now of course, if you’re in debt then you’ve got to focus on getting out of that hole. Maybe aggressively paying down your mortgage first is your plan and it works for you, and investing outside of that may still be a decade or so in the future. But if you’re living right at your means, where everything coming in is getting spent, then no time like the present to fix that — you will need a buffer and long-term savings. That’s easier said than done of course, and I’m sorry for that, but the earlier you start the better.

I’m a believer in just-in-time learning — I don’t want to push the book on someone who’s still scraping by while in school, or dealing with debt after it, because it’s just not going to resonate at that point. But many people are (or should be) investors who don’t think of themselves as investors.

Scaling Problem: House Size and Heating Bills

December 25th, 2014 by Potato

There was an article in the Globe & Mail a while ago claiming that it’s best to go with a smaller house because the bigger the house, the bigger the associated bills. Ok, that makes perfect sense.

But then it went on to claim that “it would seem reasonable to assume that it would cost twice as much to heat (or air condition) a 3,200 square foot home than it would one that is 1,600 square feet. But, as reasonable as this seems, it’s incorrect; it actually costs more than twice as much. […] Circumstances vary, but it can cost up to three times as much or more to heat and cool a home that is only twice as big.”

Now that just doesn’t make physical sense to me. We all know how scaling laws work: assume you have a spherical house, then the surface area will scale by r^2, while the volume will scale by r^3.

Ok, we don’t live in spherical houses, but still, this guy’s math must be way off. So I thought about it, and scaling with houses is actually a problem without any clear answer. Let’s set aside the complications like your own body heat or the waste heat of your home server farm (everyone has that, right?) and just talk about heat loss through the outside walls: even narrowed down with all that ceteris paribus it’s still a tricky question because houses are not spherical.

The simplest case I can think of is to take a cubical house. It has 6 unit surfaces: the roof, floor, and 4 walls. Now if you make that house twice as big by adding a second storey, the roof and ground floor are the same, and you’ve doubled the size of your walls (8 unit-walls). So doubling your floor space was less than doubling in your heat transfer area: only 1.67 times as much.

There are other ways to double the size of a house. You could go longer: expanding your floor plan from a unit square to a 2×1 rectangle. You only save on one shared wall between the unit squares in that case, so you do nearly double the outside area: 6 unit walls facing the outside, 2 floors, 2 roofs… but that’s again a 1.67 times increase (though more roof and floor with fewer walls added). Oh yeah, that’s just the first case turned sideways.

If you want to go crazy with shapes you could try find a way to get really inefficient. If you built a really long house (or made a C-shaped house to fit it on the lot — same difference for walls) that was 5 times as big as our unit square house, then it would be 3.67 times as costly to heat… wait that’s still going in the way I thought it would, with bigger houses being more costly, but scaling less than the increase in space.

In fact, the only way the author’s math works out is if you do non-apples-to-apples comparisons, like one house at 1,600 sq.ft. with 8’ ceilings and one at 3,200 sq.ft. with 16’ ceilings to drive the volume up but not the livable space measured in square feet. Or maybe it comes down to one of the complications I ignored, like floors and walls being roughly equivalent in terms of heat loss… but I doubt it.

He does mention more windows and doors just after the part I quoted, but again that doesn’t make sense to me. Yes, I lose more heat through my door than through a solid wall, but my house has two doors. A slightly bigger house would still have two doors. My parents’ house, which is maybe 2.5-3 times the size of our house, does have four doors, and my friend’s parents’ house, which is in-between, has three. But again, the number of doors are not scaling up faster than the increase in the size of the house. And the portion of the walls that are windows is not really any different with the bigger house.

So I will conclude for now that yes, a larger house will cost more to heat and cool, but it’s likely to scale less than the difference in size, because math. Fortunately, the massive building boom of recent times means that somewhere out there are a few developments with good test houses, ones built with the same insulation and materials and styles, but to different sizes. If anyone has some experimental data to back up (or refute) the spherical house reasoning, I’d love to hear it.

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.