Blessed by the 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!

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.

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.

June is nearly over and the course development is progressing well. There are a few parts near the beginning that I had flagged for completion in June. With just a week left, a few may slip into July. However, section 8 (Taxes and Tax Shelters) is complete, including parts that were not expected for several months yet — overall the progress is going well.

I think prioritizing that section was a good move, as it was of interest to some of the students who had signed up for the early access, and it creates one complete section to better show what the course is and what it adds above and beyond the walk-through in the book.

I’ve updated the syllabus here. [Edit: here is the latest syllabus for July] The Towel Day/pre-order price of $49 will continue until mid-July, when it will ratchet up as the full release gets closer. If you’re interested in learning more about how to become a do-it-yourself investor, be sure to sign up soon!

Things have been quite busy at work lately, but I’ll be taking some time off over the summer (and I’ll have fewer all-nighters) which will also help keep the course development on track (and I may even be able to catch up on the timeline).

In other news, Brexit Brexit CPP.

Happy Towel Day!

As you know, I’m a fan of Douglas Adams, borrowing the “Don’t Panic” message and putting it in large, friendly letters at the beginning of my book. So it’s only fitting that I do something special for Towel Day.

First off the predictable move: you can get a big Towel Day discount on The Value of Simple by buying through my e-commerce site and using the code TowelDay. Now until Friday only!

But let’s get to something better and more thrilling than that, something more keeping with the spirit of Towel Day. First, a blockquote to remind you of what that spirit is:

“A towel, it says, is about the most massively useful thing an interstellar hitchhiker can have. Partly it has great practical value. You can wrap it around you for warmth as you bound across the cold moons of Jaglan Beta; you can lie on it on the brilliant marble-sanded beaches of Santraginus V, inhaling the heady sea vapours; you can sleep under it beneath the stars which shine so redly on the desert world of Kakrafoon; use it to sail a miniraft down the slow heavy River Moth; wet it for use in hand-to-hand-combat; wrap it round your head to ward off noxious fumes or avoid the gaze of the Ravenous Bugblatter Beast of Traal (a mind-bogglingly stupid animal, it assumes that if you can’t see it, it can’t see you — daft as a brush, but very very ravenous); you can wave your towel in emergencies as a distress signal, and of course dry yourself off with it if it still seems to be clean enough.

More importantly, a towel has immense psychological value. For some reason, if a strag (strag: non-hitch hiker) discovers that a hitch hiker has his towel with him, he will automatically assume that he is also in possession of a toothbrush, face flannel, soap, tin of biscuits, flask, compass, map, ball of string, gnat spray, wet weather gear, space suit etc., etc. Furthermore, the strag will then happily lend the hitch hiker any of these or a dozen other items that the hitch hiker might accidentally have ‘lost’. What the strag will think is that any man who can hitch the length and breadth of the galaxy, rough it, slum it, struggle against terrible odds, win through, and still knows where his towel is is clearly a man to be reckoned with.”
–Douglas Adams, The Hitch Hiker’s Guide to the Galaxy.

It has not been a secret that over the past several months I have been working on an online course to complement The Value of Simple and help people get set up as successful do-it-yourself investors. It was almost a year ago that I posted the first draft of the course outline. Since then I’ve given more library talks, a guest lecture for Ellen Roseman’s UofT course, and had more conversations with experts and potential students on how to better refine the course. Most importantly, I’ve done a lot of reading on delivering an online course effectively, and changed my approach to it.

However what I have not done is finished the bloody thing.

So here is my towel: I have the structure, I have a few modules done and uploaded, I have a history of building and delivering courses and workshops in science and personal finance. If you believe that I have just mislaid the rest of the course you can buy it right now at a huge discount, and help test it and shape its evolution as it comes together.

How big a discount? You can get it for just $49 right now as a Towel Day/pre-order special, roughly¹ 80% off! Why just $49? In part as a tribute: that’s the age Douglas Adams was at his untimely death. And in part because this is early, early access — so early it’s better called a pre-order. However, it will be finished, it will be polished, and if you plan on signing up eventually then doing so now is a great deal. (Note: no coupon code needed, I’ve simply set the price at that level and will raise it for new subscribers as material is added and the course is fleshed out)

Click here to go to the course page and enroll!

1. Roughly because though the final price will likely be $279, I’m very tempted to make the final price $246 because you can even!

“Just” can be a dirty little word. Sandi Martin has done that rant a few times, most recently on Twitter, and Chris at Rags to Reasonable incorporated it into his love letter to financial planning.

To put it simply, not everyone has the background and expertise for all problems to be easy, or for short-hand to make sense. “Just open a brokerage account and buy 3-4 ETFs that give you global diversification” is good advice, in that it is something someone could act on and would be in their best interest. But unless they already have a brokerage account and experience buying stocks or funds and the associated skills and knowledge, the “just” is deceptive as to how hard that is to do the first time. Now to toot my own horn, that’s exactly why I wrote The Value of Simple the way I did, because so many other guides take for granted that you already buy and sell stocks or mutual funds and they just have to convince you to shift your focus to a slightly different set of things you already know how to buy. But making the implementation seem like it should be oh-so-simple can make people feel bad for asking how they’re supposed to go about it.

But it’s hard to see that when it’s something you know and know well. So let me give you an example from science: just take a Fourier transform, and solve in frequency domain (or in imaging, k-space). This is rather simple, rather helpful advice that can solve a number of life’s problems (or at least, physics problems). But this advice is probably completely unusable unless you’re about three or four years deep into an undergraduate physics or engineering education. Indeed, it may not even make sense without some background knowledge in the field (are those words?).

For I would wager the majority of Canadians out there, acting on “just buy a few ETFs” is just as difficult to implement as “just take a Fourier transform” without doing some further research. (Fortunately, that further research in the first case will not involve several years of undergraduate math and physics, and can be done with a single book, pulling up a few dozen blog posts, hiring some coaching/educational help, or taking a course or two).

When talking about passive investing and diversifying across many asset classes, a common quip is that if you knew in advance which asset class would perform best, you’d just put your money there. Since you can’t, you diversify.

Well, in a recent issue of MoneySense, Norm Rothery delved into the “hot potato” that does exactly that (he also wrote about it in August of 2015). Using a momentum strategy, it goes all-in on whatever the hottest sector was over the previous 12 months. The extra return over a more vanilla, diversified approach is sweet — too much to ignore without some further thought.

Norm puts in a number of disclaimers at the end of the article, but before going ahead it’s worth thinking about those risks and more.

Firstly, I have to point out that going all-in on something (even something as diversified as a broad-market ETF) opens you up to blow-up risk. It didn’t happen in the recent past, but that’s not saying it couldn’t. That’s a fundamental risk of concentration — you could go all-in on the one asset class that goes down one year, then switch and catch the next loser.

It also looks to me like a strategy that’s possibly not very robust and vulnerable to execution risk. I don’t have data on returns with monthly resolution going back very far to test out how robust it may be, but it’s easy to get for the ETFs available to Canadian investors for the 2008 market crash and do a spot check. Norm mentions that the monthly rebalanced version of the hot potato only fell 10% in 2008 and recovered by 2009. Going into 2008 the hot potato had you do a few little dances between XIC and XBB. In August of 2008 it would have had you buy XIC, just to eat a 12.5% loss, and switch back to XBB the next month. If you went on vacation and missed that switch by two months, you were down 33%; if you missed by five months you were down 40%.

Momentum is a weird thing in the markets: it’s there, it looks to be exploitable, but it doesn’t have a “mechanistic” basis: controlling costs does, as does diversification — you can predict that those “should” work in the long term. But for momentum, even if there is some psychology or whatever to the momentum effect in general that makes it a real effect that may possibly form the basis of a successful strategy, what is it about trailing 12-month returns and monthly rebalancing that worked so very well for the historical check of the hot potato? Could that shift in the future to 6 or 24-month returns being the momentum sweet spot, and leaving someone using 12-month/rebalanced monthly strategies in the lurch? Are the features of momentum stable and exploitable enough to bet it all (or even compromise with dynamic sector weightings) on something like the hot potato? Or is this an accident of over-fitting historical data? Those question marks may make it a difficult strategy to stick to when a period of underperformance eventually comes along.

Larry Swedroe has an article looking at momentum in general that’s worth reading, in particular the line about how the strategy becomes less valuable as correlations between global markets increase.

I don’t know, and haven’t invested a tonne of time doing research here — hopefully Norm or someone else has a more data-driven answer. For now, I’m not brave enough to try it with actual dollars in the uncertain future — I’ll stay diversified and lazy.