Blessed by the 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 VIU). [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 well^2,3.

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. And Vanguard also introduced it’s all-in-one ETFs.

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

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.

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.

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.

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.