Blessed by the Potato

I was on Because Money recently, and the podcast and transcript are now up! We got together to discuss anonymous advice available on many online forums and blogs.

Leading up to the day of the podcast, I started with the assumption that there would be a lot of bad advice and we could spend a half hour lampooning it. But when I started to tabulate it I was amazed at how much good advice was there. These communities are so giving with their knowledge. In some few cases it will lead to sales leads, but mostly not (Reddit, for example, doesn’t even allow signature lines with links back to your website). Yet people with knowledge still give of their time — whether they’re paying it forward from getting helped when they were newbies themselves or just being altruistic, it’s kind of amazing.

There is bad advice too, just not as rampant as we thought it might be. So you have to use anything you read online as a starting point for more research because it’s hard to know whether the advice you’re getting is wrong (or some minor detail of the facts even if the main point is right).

And that leads me to the Paradox of Advice: those most in need of advice least able to discern who should give it.

The other major issue is that if you’re paying a few thousand dollars for a planner or money coach you can just unload everything and let them sort it out. You can’t do that to strangers freely giving of their time on the internet — you need to focus in on what your main question is. And in order to do that, you need to have some idea of the field so you can ask intelligent questions. Good, focused questions are key to getting good advice out of forums. So you have to keep in mind that any question you pose is not going to present a full technicolour image of your situation — it will be a stick figure at best. It’s up to you to make sure the right details are highlighted. As an example of what not to do, back when I was on RFD there was a standard response to questions of the form “what should I do with $X?”: “hookers ‘n blow.” There is no sensible way to answer it otherwise. To a large extent the amount of money a poster has makes very little difference, and “what should I do with it?” is just so open-ended. These blow-off answers were of course reserved for the (many) cases where the poster gave no other details or indication that they had read any of the other thousands of similar questions — or done any other background reading. The unfortunate conclusion is that you need to do some homework on your own before seeking advice.

Another area where anonymous advice can run into problems is the central theme of personal finance: “it depends.” There are so many answers, and none will be precisely right or helpful.

Think of the problem “I’m cold and there are wolves after me.” One very useful, straightforward answer might be to get a house or cabin and go live in there. You’ll be warm and it will keep the wolves out. One that might also work for someone is to get a lightsaber, and pretend it’s a tauntaun. Engineers might then go on a side rant about the R-values the wall insulation should have to properly keep out the cold and the howling, but that debate doesn’t necessarily invalidate the solution.

One point I didn’t think of during the podcast is how anonymous advice can be good: because it’s anonymous, free advice on the internet you should be immediately and automatically critical and skeptical of what is said. Whereas similar advice from a non-anonymous person who doesn’t have your best interests at heart (e.g. a salescritter with conflicting incentives and impressive-looking letters after their name) may not raise any warning flags for you.

“Of course you can’t ‘trust’ what people tell you on the web anymore than you can ‘trust’ what people tell you on megaphones, postcards or in restaurants. Working out the social politics of who you can trust and why is, quite literally, what a very large part of our brain has evolved to do. For some batty reason we turn off this natural scepticism when we see things in any medium which require a lot of work or resources to work in, or in which we can’t easily answer back – like newspapers, television or granite. Hence ‘carved in stone.’ What should concern us is not that we can’t take what we read on the internet on trust – of course you can’t, it’s just people talking – but that we ever got into the dangerous habit of believing what we read in the newspapers or saw on the TV – a mistake that no one who has met an actual journalist would ever make. One of the most important things you learn from the internet is that there is no ‘them’ out there. It’s just an awful lot of ‘us’.” — Douglas Adams

There is a lot of ‘us’ out there. Amazing and wonderful, the lot of you. Freely giving of time and wisdom to help those with questions and doubts.

For those with questions, do try to make it as easy as possible on the volunteer counselors by doing some research first, and crafting good questions. For complex situations or even simple ones with overwhelming detail where free anonymous advice won’t do, there are always advisors, planners, coaches, educators, and geeks with spreadsheets available for hire.

I provided a table of three great options for index investing in The Value of Simple (excerpt in the last blog post). Why those three? Quite simply because they represent the best options available in the market, at various points of trading off cost and simplicity. Aside from paying an advisor to do it for you, nothing gets simpler than Tangerine’s single fund and super-simple website and tablet app. You don’t even have to call someone to set up a preauthorized purchase plan. Many fund companies have regular (no-load) mutual funds that track the main indexes, which will let you set up a good index portfolio with ~4 funds. However, rebalancing 4 funds is the level of difficultly that TD e-series sits at, and nothing is as cheap as that in the mutual fund game. Beyond mutual funds there are ETFs, which is where it gets as cheap as it possibly can, but at a significant step up in terms of difficultly. Questrade offers no-commission purchases, low commissions for sales, and accounts only have to have $5000 to avoid maintenance/inactivity fees.

Here’s a list of the other options, and why they didn’t make the book:

• BMO: Though BMO offers low-cost index funds traded on the stock exchange (ETFs), and in a quasi-Vanguard manner allows its mutual fund investors to invest in the same indexes, it does not manage to make the offering very attractive. Though you can buy in with as little as $50, the MER on their Canadian equity fund is 1.05% — barely a hair below Tangerine.
• CIBC: Index funds have high minimum purchase ($500) and high MERs — at 1.14% it’s higher than Tangerine’s.
• National Bank: Their index funds are moderately competitive, with MERs of just 0.66%. The funds are a little less diverse than I would like — the Canadian index tracks the TSX 60 rather than the full composite, and the US index tracks the Dow (30) rather than one of the larger indexes like the S&P500. The minimum initial investment is $500.
• PC Financial: It looks like PCF has recently updated their offerings to get closer to Tangerine. Their portfolios are marginally more expensive, and include more asset classes. Their “Balanced” fund, for example, has 50% fixed income, of which 5% (of the total fund) is in international bonds. The international equity component is split with separate European and Asia-Pacific indexes. Each fund “portfolio” has a slightly different MER; the balanced fund is 1.09%. Like their CIBC parent, they require $500 to invest at a time. PCF offers a 0.1% discount to the CIBC MER (it’s not clear from their website whether this is included in the MER listed), but this discount is distributed quarterly as extra units and counts as taxable income in non-registered accounts — a nightmare for bookkeeping in a non-registered account.
• RBC: Their index funds are not outrageous with MERs between TD’s e-series and Tangerine — but at 0.72% it’s still beaten by TD’s e-series.
• Scotiabank: The mutual funds arm of Scotia has high initial investment requirements ($1000) and with an MER of 1.00% on their Canadian Index fund they are not competitive with TD — it’s barely better than the simpler Tangerine.
• Scotia iTrade: Scotia’s discount brokerage arm was one of the first to come out with commission-free ETFs (mere weeks after the release of the first book, I might add). However, only a select list of ETFs are available, and none of them are the mainline ultra-low-cost broad indexes. You can build a decent portfolio from their offerings (e.g. to follow the broad TSX composite you would buy both HTX for the TSX 60, and XMD to cover the rest), but the average MER will be closer to ~0.3%, at which point TD’s e-series don’t look so bad, or for large accounts even paying the commission for XIC will put you ahead of using the list of free-to-purchase ETFs.
• QTrade: (Different from Questrade) has some commission-free ETFs; basically the same list as Scotia iTrade.
• Virtual Brokers: Very competitive with no-commission ETF purchases, but require $15,000 minimum account to avoid fees. This was basically a coin-flip as to whether I wanted to include it or not, and in the end I didn’t see anything from VB that Questrade wasn’t already offering, so I kept the line-up as simple as I could.

I was a little hesitant at first to recommend specific companies, but the fact is that they offer indisputable advantages for the reader, and giving detailed step-by-step instructions is only feasible with a few definite options.

For the average investor, a low-cost index investing approach is the easiest and simplest method available, and also provides the highest chances of long-term success. While there is a lot of material available on why investors should choose passive approaches over high-fee active mutual funds and what passive investing products exist, the average investor is at a loss on how to implement a passive index investing plan. The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing provides a plain-language explanation of how Canadians can implement a low-cost index investing strategy, with step-by-step instructions and a focus on developing good investing processes. Coming December 1st.

This is a brief excerpt from my upcoming book The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing. It has been edited to stand alone.

After you’ve done your planning and are ready to invest you have to set up an account somewhere and implement your plan. For most people passive investing through index funds is the best way to go, but even within that strategy there are many options out there. Two key considerations are the cost of investing and the complexity of the system, which may become a balancing act between the two. Don’t underestimate the value of simple — an easy-to-follow investment plan will pay in the long-term if you’re more likely to stick to it. Though nearly every bank and brokerage provider will have some form of account and fund for you to invest in, three excellent options using low-cost index mutual funds or exchange-traded funds (ETFs) are at Tangerine, TD Direct Investing, and Questrade. Each one provides greater cost savings at the trade-off of increased complexity.

In my opinion, TD Direct Investing and their e-series index mutual funds represents the best balance between cost savings and effort required. This is not because I receive any kind of compensation from TD, but rather because I truly believe that the e-series index funds are the hands-down winner for investors starting out. They offer the ability to invest in passive stock and bond indexes, in non-registered, TFSA, RESP, and RRSP accounts, with low MERs on the funds and (if you satisfy certain conditions) no other annual fees. Then they are not much more expensive for ETFs when your account grows larger and you’ll already be familiar with the platform.

Tangerine (formerly ING Direct) is a good option for people with smaller accounts. Things are even easier than TD with their investment funds: all you have to do is pick from one of four basic asset allocations, and they will take care of the rebalancing — and they will even help you decide on your asset allocation through a questionnaire. Just make your regular contributions to the fund you’ve chosen, which you can easily automate with a pre-authorized payment plan. There are no extraneous fees beyond the MER. Tangerine is, simply put, as easy as investing gets without paying a commission to have a salesperson do it for you. The simplicity is great, but the MER of the Tangerine funds is more than double that of the TD e-series funds (yet still half that of typical funds). As your assets grow, this cost difference will become more noticeable. At the hundreds-of-thousands level, you’d be able to go with a fee-based advisor who would use index products for you for a similar fee.

For the absolute cheapest option, commission-free ETFs at Questrade can’t be beat. You pay nearly nothing to buy, and a small commission to sell (about $5-10 per trade, depending on how much you’re selling). And the on-going MER of the ETFs is as low as you can possibly get for investments. However, the order-entry process is a fair bit more complex than with the mutual funds for Tangerine and TD, and you have to deal with rounding off to whole units rather than just investing a given dollar amount.

Three Investing Options — Effort vs. Cost

There are many other options available: every major bank has an associated discount brokerage arm where you can buy the same ETFs available at Questrade or TD Direct Investing; some banks and mutual fund companies offer relatively low-cost funds that are competitive with Tangerine’s. These three options, however, are the archetypical combinations of low fees and convenience at various points along the trade-off. I will provide step-by-steps for using each, along with general information for buying ETFs at brokerages other than Questrade.

Footnote from the table: 40. Assuming 25% in each of a bond fund, Canadian, US, and International equities. For dollar comparisons, assumes $10 in commissions per year. If you decide to shift to ETFs and want to stay with TD Direct Investing, assume that you will have about $40/yr in additional commissions over Questrade. Rounded to 3 significant figures.

This has been an excerpt from The Value of Simple, a how-to guide to index investing for Canadians coming out December 1, 2014.

If you’re interested in opening a Tangerine or Questrade account, I have referral codes in the sidebar which will provide both of us with a bonus.

One of the challenges I think people have with investing is that the actual purchasing part is quite unlike other aspects of our daily lives. We use metaphors like “fruits and baskets”, describing different accounts (RRSP, TFSA, etc.) as baskets where you place investments (cash, stocks, bonds, funds thereof) — but you can’t go down to your local general store and ask the shopkeep for a half dozen index funds off the back shelf to stick in your basket.

Even after you decide that you want to keep things simple and use a straightforward indexing approach, and you have to figured out what to buy to fit that plan, you have to figure out how to buy those investment products. The big barrier can come when you have to go and “buy an XIC.” There’s no counter you can walk up to and make that happen.

The investment industry is either full-service (with associated fees) or a completely do-it-yourself “wholesale/auction” experience. The high fees attached to many products are built in assuming that you will pay for planning, stock-picking, and other help even if you never get it and you’re only after someone to help you make the transaction. Many people are disappointed with the depth and quality of the advice they receive in a bank branch, and are surprised to find that the staff are in fact in a sales role. Whether satisfied with the advice or not (and in many cases one needs more background knowledge to know that they should be dissatisfied), I think many Canadians are shocked at the fees when put in context.

I think some Canadians do go into the bank not looking for advice, but for a shopkeep. So they’re not dissatisfied with advice because they never really expected any — they were just looking for help making a transaction. But again, the fees for that level of service are shocking.

I would have thought that with TD’s e-series there was enough of a MER there to let the branch staff help with placing orders — even if they were not allowed to spend time on e-series clients — but instead the e-series are completely off-limits to branch staff. There is no minimal-cost “purchase assistance” type service. The closest equivalent is Tangerine, which packages everything together for you so you just need to throw money at the account — it’s the closest implementation I’ve seen to how many people talk about “buying an RRSP.”

And that’s just mutual funds: with ETFs there are added levels of confusion for people expecting the shopkeep model. It is not at all like going in and picking up a cool book that your friend recommended from the shelf — it’s more like buying livestock at auction crossed with a old-time bazaar where everyone is selling everything to everyone else and the prices change by the second.

It would be interesting if someone could take a one-time commission (not an ongoing trailer fee forever and ever amen) to make that a more pleasant retail experience. Put up a list of prices that stay where you put them, and the shopkeep eats the fluctuations; or to make buying ETFs more like buying mutual funds where the division from the money you have to throw at the asset class happens automatically, and where no one gets burned by limit orders or the lack thereof. Getting back to reality, there’s no getting around having to learn this somewhat different (but once you get it, not difficult) way of purchasing investments.

Of course, to help people navigate on their own when there is no clerk to guide them is why I wrote The Value of Simple, and that implementation part forms the meaty middle of the book. Maybe one day more banks and fund companies will drop the pretense of offering high-cost advice and stock picking to every customer, and instead offer transaction assistance for low-cost index funds. Until that day comes, sign up below to receive updates on the book.

By now you all know that I’ve been working on an investing book. I’m pleased to announce that the title is The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing.

I’m aiming for a December 1 release and I’m really excited about it. I’ve put a lot of work into refining the book and testing it out with readers (novices and experts) to make sure it works. I even like love the title.

Briefly, The Value of Simple: A Practical Guide to Taking the Complexity Out of Investing is a plain-language guide to implementing an index investing strategy for Canadians. With a focus on developing good processes to minimize the room for human error and step-by-step instructions, the book walks investors through the elements of managing their finances for the long term: how they can determine an appropriate asset allocation, devise a savings plan, stick to it through automation, track their investments, and deal with the inevitable issue of taxation. It provides tools and templates, along with default suggestions and rules-of-thumb to help prevent analysis paralysis and get investors started as soon as possible. Moreover, it directs the reader to focus on what can be controlled, to minimize effort and complexity.

For the average investor, a low-cost index investing approach is the easiest and simplest method available, and also provides the highest chances of long-term success. While there is a lot of material available on why investors should choose passive approaches over high-fee active mutual funds and what passive investing products exist, the average investor is at a loss on how to implement a passive index investing plan.

Investing doesn’t have to be complex to be successful. Indeed, simple solutions are valuable and are more likely to succeed in the long term. This book will guide you through implementing those simple solutions.

There is a separate webpage for the book (click here!) where you can find more details and pre-order it (and soon, purchase it). You can also sign up for email updates below (and I promise to only send a few):