Vanguard’s New All-in-One ETFs

April 1st, 2018 by Potato

Lots of people have been talking about Vanguard’s all-in-one ETFs that launched fairly recently. Dan @CCP talked about them in the back half of this podcast (and the first half is with me if you missed it :), and has a whole separate post on them, and likely will have another in the future as they’re generating a lot of discussion and questions.

In general, I like them: for a modestly higher MER, you get a one-stop investment portfolio.

One point I really like about them that hasn’t been talked about much is the fact that there is only one thing to look at for your portfolio. We talk a lot about the importance of having balance and diversification — so much in bonds, for example, to limit the losses you might experience in a market crash. However, in the moment people rarely look at their overall portfolio and say “Well, I’m only down X%, which I was prepared for, and my bond allocation is doing its job so all is good.” No, instead we tend to focus on the biggest, reddest number on the screen — and of course in a 3 or 4 fund portfolio, you’ll see each position individually, and have to do some math to see the portfolio as a whole.

With an all-in-one fund, you will only ever see the portfolio as a whole. You won’t second-guess your international fund during Brexit, your bond fund when interest rates are hiked, or your Canadian index fund when oil tanks. And there is a lot of investor behaviour management in the simple fact that in a diversified portfolio there is always at least one thing that is disappointing (under-performing the rest if not actually down). Not to mention in a crash — it’s hard to tear your eyes off the big red number on your losing-est fund and feel like the world is ending when that’s all that’s in the news, even if the rest of your portfolio is holding things together reasonably well. These funds will help avoid all that, and that’s the main reason I’m a big fan — all-in-one funds are best positioned to help actually match up that notion of risk tolerance for your overall portfolio and what you really see when you check in on your portfolio.

Now, these new funds do not mean that these ETFs are making Tangerine, TD e-series, or robo-advsiors obsolete. They do make investing in ETFs easier: just one thing to purchase, and no rebalancing. But you still have to deal with buying ETFs, which can’t be automated like Tangerine or TD e-series mutual funds can be. It does slightly complicate the nice one-dimensional relationship between cost and complexity that was the choice between Tangerine/robo-advisors/e-series/ETFs before. One-fund ETFs will be cheaper with automatic rebalancing, while e-series will have manual rebalancing but the ability to set up automatic purchases, and avoids the more complicated order entry of ETFs (rounding down to whole units, limit orders and bid/ask prices, worrying about market hours, etc.). I still think that overall I’d put one-fund ETFs to the right (i.e. more complex overall) than TD e-series — while rebalancing can be a pain and a bit confusing, you don’t have to do it often, while making regular purchases as easy as possible is more important to long-term success.

And if you are interested in these ETFs, you have to let the simplicity work. I mean, that’s what you’re paying extra for. I’ve seen hundreds of questions and thoughts since these launched in various blog comments and forums where people are trying to tweak the allocation to what they really want: buying VGRO and a bond fund for example, or buying both VGRO and VBAL to get an intermediate bond allocation. Just like with Tangerine’s funds a key point is to just round your desired allocation off to the nearest 20% or so to fall in to one of the choices on offer rather than trying to get lost in the details. Once you try to add more funds into the mix to get what you really want, you lose the whole benefit of the one-fund simplicity: buying more than one fund means it won’t automatically rebalance any more, and at that point you might as well buy a third (or fourth) fund and save the extra cost on bundling it up.

DIY Root Canal vs DIY Tax Stuff

March 19th, 2018 by Potato

Jason Heath pulled out a version of a quote I hate in this Ask MoneySense article on OAS clawbacks:

“Few people would think to Google how to perform a root canal, let alone try it themselves. But lots of people try DIY tax and financial advice.”

Now, it’s hyperbole, and I’m going to rant about it, but I don’t disagree with the main thrust of the article or the next part of that quote: “If you don’t have an accountant, contact one and buy an hour of their time. Bring a list of questions or send them beforehand, so you can get an income tax “check-up.” It may be well worth it even if you only do it once in your life or at least once in a while…” The last half of that paragraph, getting a check-up to have some common questions answered, is entirely reasonable and a good suggestion.

There is definitely a place for professional advice — both planners and accountants. But there’s also a place for DIY-ing things.

The tired root canal analogy makes it sound like you have to be crazy to approach your taxes on your own. But just like with dentistry or medicine, there are lots of things that are totally reasonable to DIY (or Google-then-DIY). You would not go to your dentist every time you had to brush your teeth or floss, and you shouldn’t clog up your doctor’s office with every minor cold or papercut you get, even if you would go for a root canal or surgery. If you have a canker sore it’s totally reasonable to hit Google and gargle some warm salt water. Not everything is a root canal, not everything needs a professional to manage. And especially when it comes to taxes, there are too many people in the world who shrug and say “get an accountant” rather than helping people learn to DIY (which may be related to regulations and the fear of being sued).

This particular article also really highlights an important aspect of the issue: when we’re talking about mouths, people generally have enough background information to know what is at the totally-DIY-able level (like daily brushing) and what is at the I-need-a-professional level (like fixing a cavity or getting a root canal). When it comes to finances, lots of people don’t have the basic literacy to find the answers they need or use them appropriately. Here, finding the OAS clawback threshold is pretty easy, and planning around that is a decent edge case where it’s not unreasonable to do some DIY around it, but also not exploitative to suggest it’s worth getting a professional’s input. However, the person asking the question doesn’t seem to know that the threshold is about clawbacks, not reporting — you have to report everything. So they couldn’t find the answer because they didn’t know how to ask the question (or interpret the answers they likely did turn up). There’s some essential background knowledge missing that’s going to make DIY a challenge here — indeed, to know what can be done on your own.

What then is the answer? I really don’t like a blanket “this is like a root canal and you shouldn’t do it yourself” type approach — as someone who makes tools to help people DIY stuff, that is anathema. People shouldn’t be dependent on professionals; DIYing many things shouldn’t be construed as an impossible, whack-a-doodle notion. But at the same time, there is a financial literacy gap that makes it easy to point out the challenges in implementing DIY approaches. And people shouldn’t be afraid to get some help and pay appropriately.

“Adulting” help is becoming more important and more available. Indeed, the suggestion Jason makes after the hyperbole that I took so much issue with is good — I really like the suggestion to get a few hours of a pro’s time to get questions answered well. Not “get an accountant to manage all your money stuff because you’re hopeless” but “get a block of time and ask some questions to figure this out properly.”

Of course, the analogy to medicine or dentistry really breaks down in personal finance, because our own gaps in knowledge and ability vary. It’s not as clear-cut as this thing is only for professionals, while you’re out of luck if you need help with this basic everyday thing. Especially as paying by the hour for advice is a model that’s becoming more available: no longer is it that investing is the thing you need a pro for, in part because selling an investing product is the only way for them to get paid. Now money coaches and people like Chris are there to help with things like understanding your money and building a budget, while rarefied applications like investing are completely accessible to DIY-ers.

The Market Can Go Down?

February 6th, 2018 by Potato

Panic!

The US market was down about 4% today, following a ~2% decline on Friday. Everyone on the news and social media and forewords in their books seems to be reminding investors not to panic.

Forget that, let’s PANIC!

Look at your portfolio, and that loss. How many up days did it wipe out?1 Now is this it? Or could we have another week, another month of days like this? Where’s the bottom???

Now, with that fear feeling very real and sitting quite uncomfortably in the pit of your stomach, how comfortable are you with the way your portfolio is? Are you ready to ride out whatever the uncertain future has in store for us?

If you’re not feeling so good after today’s loss, well the reality is that this is what markets do sometimes. This is normal. If you’re having trouble handling this, then a few things may be at play:

  • You could have too much risk in your portfolio. Changing that to something more appropriate for the long term may be a good thing to do when the loss is still minor (just don’t time the market – don’t change it back “when things are more settled” – if you can’t handle risk now, you can’t handle risk).
  • You could be untested. This is your first test, there will be more – start getting used to it. Feel the fear and discomfort, then remind yourself that this is what all those books and articles were talking about, and learn to suppress it.
  • You may be paying too much attention to minor day-to-day moves – when it makes the front page it’s hard to tune out completely, but you may want to stop checking in on your portfolio if there’s nothing to be done.

There are various things you can do to try to handle the uncertainty, which I know is not easy, especially if this is your first real experience with volatility.

  • First, try talking yourself through it. This is normal, it’s happened before, it’ll happen again. Etc.
  • Second, try reminding yourself that stocks going down while you still have money to save and put to work is a good thing for you.
  • Third, try using it as a lesson to check in less often.
  • And finally, go watch Bridge of Spies and ask yourself “would it help?”

gif from the Bridge of Spies – ‘You don’t seem alarmed.’ ‘Would it help?’

So yes, ultimately I’m giving the same “Don’t Panic” message as everyone else, but if you are feeling emotional about the markets then try to use that fear to learn something — either about your risk tolerance, or how to manage fear when markets are erasing years of gains instead of weeks.

1. Not that many, actually – this only took us back to ~mid-Dec.

DIY vs Robo Quick Challenge

January 11th, 2018 by Potato

I was challenged a while ago to figure out if DIY investing is really worth it for regular people when you factor in the value of the time and effort spent — should I even be putting time into things like the book and course to help people learn to invest when robo-advisors are the future?

And of course the first defense is that even if a robo-advisor is doing the work, you still need to do some reading so you’re prepared for the risks and uncertainties inherent in investing, etc. But the point is still there: are the savings of DIY worth the extra time it takes now that robo-advisors exist?

I decided to do a quick back-of-the-envelope comparison. Though there’s no way to know for sure that I didn’t tweak the assumptions to get an answer I liked, I assure you that these are the first reasonable estimates that came to me as I was trying to be fair — we are “doing it live” so to speak.

So do-it-yourself investing requires a bit of time and effort, and the question is how do you value that time and effort to figure out when it makes sense to DIY vs. just pay a robo-advisor? For this I’m going to assume that we’re only talking registered accounts, so no ACB and other tax reporting headaches of a non-registered account (and besides, if the robos aren’t tracking it for you then a more complex robo portfolio may be more work than a simple DIY one).

First, you have to learn about your risk tolerance to make sure you’re ready to invest at all, come up with a rough plan, figure out whether to prioritize your TFSA or RRSP, etc. But that’s a wash as even if a robo-advisor is handling the day-to-day aspects of your investing, you still have to deal with that.

There will be more up-front costs to learn how to invest as a DIY-er. You’ll have a bit more learning to do for DIY investing, like the mechanics of making trades and rebalancing, choosing a model portfolio to follow, as well as some investment in learning to control bad investor behaviour. The Practical Index Investing Course is $299 $169 and a one-stop resource, with another ~15 hr required to work through it — so the total cost depends on what you value your time at. Let’s use $25/hr and call it $544 in up-front investment (more if you’re going to go with the library card and time method – the course will save you lots of research time, which is the point of it /self-promote).

Then on-going effort is small but not nil. For the TD e-series route you may have to spend 2 hours/year or so on tweaking your automatic contributions and rebalancing; for ETFs it might be more like 4 hours/year. Plus the ongoing MERs of the funds (and the robo-advisor’s fee for that option).

Element DIY e-series DIY ETFs Robo-advisor
Time: learning about risk tolerance, planning Same – this is table stakes for investing Same – this is table stakes for investing Same – this is table stakes for investing
Learning how to trade and manage portfolio $544 (one-time) $544 (one-time) 0
Annual cost of funds 0.45% 0.2% ~0.7%
Annual effort to maintain $50 $200 0
Total cost for $10,000 for 5 years $1,019 $1,644 $355 (*)
Total cost for $100,000 for 5 years $3,044 $2,544 $3,275 (*)

* – includes “first $5k managed free for a year” offer calculated with real all-in costs.

Now I am a fan of robo-advisors and they do have their place — lots of people will be well-served by going to one and not everyone wants to be a DIY investor. That’s important so I’ll repeat it: regardless of the potential savings of DIY, not everyone will want to (or should) do it all on their own. Plus there are other potential benefits, for instance a robo-advisor may help prevent bad investor behaviour (and read Michael James’ comment to further reinforce that — any savings can be swamped by bad investor behaviour).

But it looks like even if you give a decent value to your time ($25/hr here) and assume that there’s a big up-front commitment required to learn it, that DIYing can still make sense and be worth the time and effort for moderate-sized portfolios. I picked 5 years out of the air as a reasonable amount of time to amortize those up-front costs — the longer you think that’s good for, the more DIY will pull ahead (at least where the portfolio is large enough to make sense in the first place). For smaller portfolios, the time might not be wisely spent on DIY efforts, though small portfolios do grow into large ones and there is some value to just sticking with one method.

Note that putting a value to your time also reinforces the traditional wisdom that you need a ~5-figure portfolio for ETFs to make sense over TD e-series — even with commission-free purchases, the MER savings may not outweigh the effort with smaller portfolios.

FLM and the Wonder Bread Abomination

November 1st, 2017 by Potato

Financial literacy month is upon us, and I have another stretched metaphor for you.

Bitches Get Riches had this post in the summer on learning to cook for yourself, which will help kick this off. Even if you don’t become good at cooking or build a large repertoire, out of necessity most people are going to learn to cook a few things at some point in their lives. Parents will teach kids what is and is is not food – often one of the first things they teach them after “hey, I’m Daddy. Say ‘Daddy’.”

So then you’re well prepared for when this horrific ad appears in your feed:

An ad for Wonder Bread suggesting the reader put pizza sauce (or ketchup) on a piece of bread, lay down strips of -- quote unquote -- white cheese, and toast until barely melted to make what they term is a Mummy pizza.

You’ll just know, because you have some measure of food literacy, that this is not a recipe you should attempt. And that any smiles you’ll be enjoying will be at your own expense for attempting to pass this off as food. Or you’d just know that if, for shits and giggles, you did make it to throw up on your Instagram, that you’d never give it to a kid as “food” and never, ever, ever give it to a kid calling it “pizza”. That ketchup and barely melted cheese on a piece of bread is an abomination and is in no way a pizza, let alone one deserving of a made up -acular adjective, and that even if you used pizza sauce a) you wouldn’t put it on a piece of wonder bread and b) you’d at least leave it in there long enough for the cheese to bubble you monster. (Wayfare notes that ketchup and cheese is kind of like a grilled cheese sandwich and this might not be so horrific if they passed if off as that instead of pizza, which I would still not eat)

Anyway, this is pretty clearly the sort of ad you would instantly know is just a bad idea because of food literacy. If you never really bothered to learn about what makes food good (or what makes pizza the High Food of the Special Day rather than something other than a slice of bread with sauce and barely melted “white cheese”), you might get taken in by this perfectly legal ad. And indeed, though all would instantly recognize the moral repugnancy of the act, there is no actual law against calling a piece of bread with ketchup on it “pizza”. Though perhaps there should be, consumers are completely unprotected against predatory recipes such as this, and attempting to protect them would be a big regulatory hassle1

And of course, so it is for financial matters. Except that’s not something we all learn proficiency with. If you saw an ad for a monstrous mash-up product like a market-linked GIC, it might look neat, the ad copy might even sway you into putting some of that in your children’s portfolios. And you might even call it a “good investment”, never knowing what true pizza, I mean investments, taste like without developing your financial literacy.

Looking for a place to start? I’ve got a reading list here.

1. And even then, you might end up with protections such as nutrition labels and ingredient lists that help protect against some form of abuses but will not solve all the problems and sometimes require their own, different form of literacy to parse.