Blessed by the Potato

Had a great chat on Because Money about who might be well-suited to being a DIY investor, what traits you might want to focus on as a DIY investor, etc., which should be airing later in October. I want to use this post to go down a side alley we didn’t talk much about in the episode.

Only ~13% of Canadians are DIY investors, and most of them started in the last 5 years. While we didn’t quite agree on precisely how many people should/could use a DIY approach, we were all giving estimates well above that figure. There’s a lot of room for improvement.

So what is stopping people from becoming DIY investors, what are the barriers? I like to think in terms of intrinsic and external factors.

For external factors, the environment has been getting a lot friendlier for individual DIY investors over the past few years: low-cost ETFs increase the cost savings available and make it very easy to create broadly diversified portfolios — whatever your position on efficient markets and index investing, it’s undeniably easier to implement than value or dividend or day-trading or whatever DIY strategy, which is part of why gurus like Warren Buffet recommend it for regular people. Brokerages like Questrade offering free purchases makes those ETFs accessible to investors with smaller starting portfolios, and even the bank-affiliated brokerages have extended $10 commissions to all customers without a net worth test. On the other end of the spectrum, Tangerine and the robo-advisors have made it very simple and easy to be a DIY investor — about as easy as a visit to the local bank branch salesperson/”advisor” was, at less than half the cost and without having to find a slushy parking spot in February.

The environment and the tools available to be DIY investors are quite good now — massive leaps ahead of what potential DIYers faced just a few decades ago.

So the remaining barriers are inside people’s heads. Not just their behaviour, but their biases and assumptions that are stopping them from starting, or even looking into whether they should start. Things like assuming you need to be rich before you think about investing, that you need to be a genius or use a lot of math, or get some kind of license or certification to purchase investments on your own.

All of these are easily solvable with a bit of education. Of course I have my own solution for that in the form of The Value of Simple (plus this other thing that I’m working on).

And of course, doing DIY investing doesn’t mean you have to do everything on your own. You can find planners, accountants, coaches, etc. to help with any parts you’re not comfortable with.

So there are a great many people out there — maybe half of you reading this or more — who could move into doing DIY investing to save on fees, or get started with investing in the first place. So what are you waiting for?

As a side point to this side point, there was a bit of disagreement on what DIY is, and I’ll just say I’m not too worked up on the semantics either way. In particular, the question was raised as to whether using a roboadvisor or all-in-one fund with automatic rebalancing like Tangerine was really DIY? For myself, I would count them as part of the DIY route as they still require following your own plan, picking your own product (even if that product is just Tangerine premix #2) and not getting sold on the fund of the week, pushing money to your investments vs having a salesperson trying to pull, and above all, reaping the main benefit of DIY: lower costs.

Anyway, there are a few Because Money episodes from season 2 up now, and be sure to watch for my guest appearance comes out later this month.

In a non-registered account you will at some point have to pay tax on any capital gains, and you have to report that amount yourself. You’ll need some method to properly* track your cost base so that when you sell you know how much of a gain (or loss) to claim on your taxes. [TL;DR — click here to download the spreadsheet]

I often get asked whether tracking ACB yourself is really necessary. Brokerages and mutual fund dealers will track your book value for you, and most of the time they’re accurate. So you could save yourself a fair bit of effort by just relying on their calculation for tax purposes, especially if all of your accounts are in one place. However, if you have holdings of the same ETF/stock/fund at different brokers (e.g., if I had an account at TD Waterhouse holding VDU and one at Questrade holding VDU) then they wouldn’t talk to each other and there would be no option other than to track it myself. They also don’t seem to catch superficial losses. The bigger issue though is that the brokers sometimes make mistakes in the book value calculations, and it is ultimately your responsibility to report correctly to the CRA.

So the only proper advice I can give is to carefully track it yourself to double-check your broker/mutual fund dealer because the onus on being correct will fall on your shoulders. But that said, I do personally know a few people who do not track it themselves and who come out fine (either because the broker/dealer gives them correct information, or because even when there are errors they don’t get audited) — in the real world it’s very tempting (and understandable) to take the free tracking offered. With mutual funds there’s one less step for information to go wrong (at least if you’re buying funds from the issuing company, like TD e-series at TD), so it’s even more likely to be correct, but you’ll never know if you’re the one unlucky customer with a bad book value calculation until you get audited. And of course, the errors they’re making could be costing you money. If you do let the company track for you, at least be sure to hold on to the statements you’ll need to re-do the calculation if it comes to it.

Tracking it is not all that hard a mathematical exercise, the tricky part comes in being careful to put everything on the right side of the ledger and to follow-through each year. There can be a lot of transactions to put in there, including annoying “phantom” distributions that change your cost base but didn’t actually show up in your brokerage statement. There are a number of tools out there to try to help you with your ACB, including a web-based calculator and spreadsheets from several sources, like this classic (if sparse) one from the old Canadian Capitalist blog.

I myself use a very barebones spreadsheet similar to CC’s, but it’s not a great model for others to use because it depends on me knowing what it is I’m doing with the ACB calculation to create each new row as needed.

So I’ve created a new template that I hope is better suited to the target audience for the Value of Simple (click here to get the sheet). This sheet assumes that you’ll have a fairly typical experience of buying/DRIPing many shares/units over time, and only occasionally selling. So rather than save space and intersperse all the transactions as they happen, it’s set up to go with your workflow. I assume that you’ll go through various modes. First you’re buying and holding, then it summarizes your ACB for a sale with all the adjustments from RoC and reinvested capital gain distributions, then you make a sale (or series of sales), and then get back into buying mode. Then each of your funds gets its own tab.

As with many ACB trackers, the superficial loss rule can throw you for a loop. It’s hard to catch everything that can trigger a superficial loss, so there is no automatic check for it so you won’t have a false sense of security — you’ll have to catch those situations yourself (though there is a sample of that case so you can see how to adjust your cost base for when it does happen).

* – I often stress the importance of tracking this yourself. That’s because it’s so tempting to not track it properly and independently and rely on the “book value” or “cost” listed on your brokerage statement. Most of the time this will be correct and you could have saved some record-keeping effort. However, sometimes it won’t be, and then you’ll be mis-reporting to the CRA. It’s analogous to tracking your TFSA contributions yourself: the CRA online tool or phone reps may be able to accurately tell you how much room you have left, but in the rare case where that’s wrong the penalties will still fall in your lap. So I’ll try my best to tell you how to track and report properly, and make it as easy as possible; if you choose not to and get audited, at least you’ll know what you did wrong!

Stamp collecting is pretty much the definition of boring. Yet stamps are useful things that enable exciting mail to happen. Most people just care that they can put a stamp on an envelope and a birthday card or letter will show up in someone else’s mailbox a few days later. So if we had some big national collective worry that not enough people were getting birthday cards, I don’t think we’d start by trying to get people excited about stamps in and of themselves — we’d just want to get people using them. And to stretch the metaphor, we may see people using high-priced couriers and worry that they’re not getting value for money. Maybe FedEx comes right to your door, but for just a bit of effort to walk down to the post office and source an envelope yourself, you could get your mailing done a lot cheaper.

Because you read the post title, you know this is turning into a stretched analogy to investing.

A few months ago a writer for the Globe contacted me for a short interview¹ around the premise of how to make investing more exciting.

I think investments and the whole process of investing are — to most people — pretty boring. And that’s a good thing: investing should be boring. No one’s going to text their friends about putting their money in a diversified, balanced portfolio with reasonable fees and deciding on a level of professional advice that they think they need and is appropriate and delivers value. It’s like watching a kettle of water boil or paint dry or grass grow, except instead of a few minutes, hours, or days to see some action you’re talking decades for your investments to do their job for you. It’s beyond the scope of our every-day sense of scale. Fortunately, with index funds and automatic purchases the boredom doesn’t have to be noticeable, either: you can do some reading and come up with a basic plan over a weekend or two, and then your plan only takes a few minutes or hours per year to maintain — the boring investing stuff can become a background process — so you can get on with your life and do all the fun, exciting stuff you want to do.

And then that’s ultimately what the point of investing is: to help you meet your goals. Watching your child graduate from university, that’s exciting — and having the resources to help pay for your child’s post-secondary education helps make that happen. Clocking out at your job for the last time and knowing you’ll have the money to enjoy a comfortable, stress-free retirement, that’s exciting — and signing up for a company RRSP match and investing some savings yourself can help make that happen. Having an emergency fund to act as a cushion so you’re not constantly stressed out about your financial situation… ok, well that one isn’t terribly exciting, either, but it’s nice and a lot better than the alternative.

Putting money away and investing it — using your RESP, RRSP, and TFSA — will help get you to those exciting goals, but that part of it is dull dull dull². And that last point about having an emergency fund for security so you know that if your furnace breaks down you can handle it speaks to the other side of the coin for not trying too hard to solve the problem of your investments being boring: they should help remove stress from the rest of your life, not add to it. There are some weeks where boring would be just fantastic.

So rather than trying to shift the way you view investments from boring and stressful to some form of exciting, I think they should be boring — complete with all the wonderful things that being boring brings.

As for getting motivated enough to take that first step towards investing, instead of gamifying investing or finding some way to make it feel exciting, instead I suggest asking yourself what are some things you’d like your investments to do for you? What are some of your dreams or goals that your investments may help you realize?

For me, I like to view my investments as a great pool of potential, all the future stuff I will want and need, just gestating and developing. Somewhere in there is the seed of the new car I’m planning to get in about 8-10 years when my current one (now 5 years old) is ready to be replaced — it’s maybe got vestigial gills and a tail, but it’s starting to take shape. There’s all the stuff I’m going to have in retirement, which are little more than blastocytes out there in this stretched metaphor, but the seeds have been sown, and I’ll just have to wait to see how they develop.

1. Given the time that’s passed, I suppose it’s safe to say that that interview is never going to see the light of day and I’m not scooping anyone by sharing some of what I said.
2. Well, for most people. Some of us, like stamp collectors and baseball fans, are totally engrossed in this activity which to outsiders is totally boring.

I’ve talked about fee-for-service planners before, and how I think it’s how the financial advice industry should evolve — it’s a model that removes many conflicts of interest from the relationship, and maximizes transparency. I’ve even said that as a heuristic for finding an advisor it’s not a bad one, especially as at this point only a few have opted to go down that road.

So it was great when MoneySense created a directory of fee-only planners. ‎I linked to it a lot, it’s included in the book as a valuable resource, and lots of other people liked having it available, too.

They’ve now scrapped the list and are starting something new where they will not just provide a list of planners and what some might see as implicit approval, but also give them ‎an explicit seal of approval. The new process involves a hefty application fee, which will help pay for the magazine to do a survey of past clients, but will mean many fee-only planners will not choose to pay for inclusion so the list will be less inclusive. $2500 is a big fee for a directory listing, so the MS version of the directory is likely to become substantially smaller, and likely skewed towards the most expensive advisors.

I think there’s a lot of value in a free and open directory of fee-only planners.

So I’m going to create my own directory of fee-for-service planners. This will be a more buyer-beware type of directory. It will have no seal of approval, and use free tools and a minimum of volunteer effort (so forgive the barebones look). The only requirement for an advisor to get listed is to fill in the intake survey and have the appropriate business model (i.e. primarily fee-for-service). Those caveats out of the way, I think it will also be hugely useful to the community and capture a lot more planners and coaches than a closed directory with a high entry fee.

The directory is a simple Google Docs spreadsheet and there is also a sidebar link for the directory that more plainly introduces it than this post — please link to that version of the post and directory.

The intake form for advisors/planners/coaches to use is here.

Caveats: the important caveat is that this is meant to be an open listing and these are not recommendations. I don’t have the resources to vet any of these listings. I’ve mentioned a few more on the permalink.

Through the rest of this week I will start contacting the advisors that I know of to start filling out the form and adding themselves, so expect the directory to be a bit barren for the first little bit.

Thanks, and I hope you all find it helpful!

As much as I love blogs, if you’re coming to a topic for the first time and need a orientation and structure it’s hard to beat a good book. However, there are so many out there covering so many aspects of personal finance that it’s hard to know where to begin — especially as a Canadian, where suggestions from across the border can be hard to translate into practice here.

I’ve put together a reading guide to help people decide what Canadian personal finance books to read, which is a question I find myself answering a lot. I think something general and easy to read is a good place to start for nearly anyone. In fact, I recommend a few books designed to be general introductions — despite re-treading over some common ground, each brings a bit of a different view and adds information. That helps set the stage for the other books to follow, whether you need more help conquering debt and a budget, want to start investing, or just learning more about how to be a smarter consumer. A reading guide like this can also help put things in context: it’s hard to jump right in to investing and how to manage your retirement nest egg if you haven’t yet given any thought to the notion of saving for the future.

The reading pathway is a PDF infographic type document — click the image above or this link to download it.

I did reach out to a few others for their opinions on what to include for people starting out, but I’ve read a lot on the topic and used my judgement to create the pathway: the final curation, summaries, and opinions are all my own.

Disclaimers: I am the author of The Value of Simple, one of the entries in the pathway. I also embedded links to each book for convenience, and did use my Amazon affiliate code in those links. This did not affect my choice of books for the pathway.

Please feel free to share/mirror the PDF — the attribution is built in.