Tangerine’s New Funds First Look

January 3rd, 2021 by Potato

Tangerine just released some new versions of its all-in-one mutual funds with lower fees. They have three flavours: 100% equities, 75-25, and 60-40. The new fees are 0.65%, which is competitive with robo-advisors (the actual MER will have to wait until a year has passed to be reported, but will likely be about 0.7%).

I’ve been waiting a long time for this news. It was over a year ago when they invited me to a survey about lower-cost versions of their funds and the future of their investment arm. I should note that it was a survey just as a regular customer — they didn’t hire me to consult. But, if you’re listening Tangerine, you could. I like consultant money. And the first thing I’d tell you is to not launch a new set of funds with a confusing “ETF” in the title, to just lower the fees on your existing funds. Yes, the funds all have names like “Equity Growth ETF Portfolio” even though they are not ETFs. (Though they are not the first bank to so confusingly name their mutual funds)

After a bit of confusion between announcing the funds in the fall and now, people with the old funds can finally move over to the new ones. And they made it super-easy to do: when you log into your investment account, there’s a great big “switch my portfolio” button. That’ll take you to a risk tolerance questionnaire, after which you can choose your new, lower-fee fund (or one of the old ones if you really want), and your funds will be moved over.

I’m glad it’s finally here, and gives people who have long been wringing their hands about sticking with Tangerine’s super-easy funds or switching to a robo-advisor a reason to stay. It may make Tangerine the killer choice for ease-of-use, especially in non-registered accounts. (Though if they could have shaved another 10 bp off the cost then they could have blown the robos out of the water)

However, I think I’ve read through all the documents on their site, and I can’t for the life of me find what they’re going to actually invest in. They mention an equity and fixed income split, and then a global equity index as the benchmark for the equity part. Does that mean there won’t be any home country bias in the new funds? They’re going to hold ETFs (possibly related party ones, which would likely mean the Scotia ones), but don’t spell out specifically which ones. I think Tangerine’s earned a fair bit of goodwill over the years, so for the moment I’m switching my portfolio there over to the new lower-cost funds to see how it goes, and trusting that whatever the specifics are that they’ll be fine, but some more easy to find details would have been nice (also, consulting money please).

Stephen Colbert making the 'give it to me now' grabby hand

Existential Blog Questions

January 3rd, 2021 by Potato

As we approach another Potatomas [or just pass, if it takes me two weeks to post this], Blessed by the Potato has another anniversary, turning 22 this time.

Perhaps it’s time for a little refresh. Perhaps it’s long past time for a major refresh — sidebars and fixed-width columns are so 2006. And have you heard about SSL certificates? But we can’t just grab a new WordPress template, upload it, and hope it works.

No, we must start with some existential questions to better understand the purpose of the blog and why I do what I do so that we can better decide how to move forward together.

Why does BbtP exist? Why do I still blog after 22 years? I don’t really know, I’ve just always kind of done this. Ok those are too hard, let’s try something else.

Why do I have some ads, but don’t accept paid posts/native advertising? Do I even want to make money?

So hosting a blog costs money, usually (I suppose there are platforms that let you do it for free). But I do it with WordPress and an account at a web server company and a domain name and all that, and it costs money. I had a grand vision of not having to pay for my hobby of blogging and maybe even making some side income back when I started this. Hosting costs let’s say $150-200 CAD/yr for some round numbers. Google Ads has a $100 minimum threshold to hit before getting paid out, and IIRC it took me over 5 years to hit that the first time. I now make an average of $160/yr in advertising (not including affiliate income). Not a whole lot of side income, and indeed over the whole lifecyle of the blog I’m still in the red.

In addition to display ads, I have those referrals in the sidebar. The thing is, all but one of those don’t just round to zero — they are zero. I don’t think I’ve ever gotten a single payment from Passiv or the robo-advisors. Questrade is the most beneficial to users signing up (free money!) and also the only one actually earning its keep — I make roughly $200-250/yr from that program being featured there (though I don’t track the source and its also printed on the bookmarks I give out at talks). Which kind of raises a question: why have them there at all? I am very picky about which referral programs I put up, and think that they do benefit users as well as myself, but still I keep them explicitly over there in the zone where users immediately understand that it is advertising and not content. Even then, people occasionally question whether that affects my impartiality. Is $250/yr worth that? Eh, I’ll leave Questrade and Passiv for now, but now that I’m thinking about it I’ve taken down all the robo-advisor affiliate links.

Clearly, I’m not in this for the money. Should I be? I mean, that was the whole problem with grad school too, right?

If I was, one thing that we have to circle back to is why BbtP exists. More to the point, why that branding exists. It’s from an inside joke from when I was a teenager. I’m sure that the silly name and address (and possibly my silly writing style) is holding me back. That stuff shouldn’t matter — only the content should — but I’m pretty sure that it does anyway.

I really wanted to take some time in 2020 to sit down and re-think the whole site — whether (and how) to rebrand it, whether to split it into a more professional personal finance type site and a separate personal rant/update site. Whether to just mirror the PF content to the VoS site. Whether to delete a bunch of old posts and only keep a few of the tools and explainers. And of course to get a new theme. But the year was a massive dumpster fire. I’ll put up a separate post on that, but despite being locked at home in front of the computer with no day job for much of the year, I accomplished basically nothing.

Anyway, I’ve done nothing to the site (not even getting that SSL certificate going or changing the URL structure to include post titles in the permalinks), and now that I’m back working I may have missed my window to do anything major with it. So for now, it remains trapped in 2006. But the comments are open (even if it takes me two days on average to clear out what the spam filter catches), so by all means tell me how you think it should be revamped/rebranded/abandoned. Should I ditch the ads and get a Patreon pitch? (I am not liking that the previously unobtrusive banner ads have started including pop-ups) Or is that trend passe, and the thing to do now is to turn the site into a subscription newsletter on substack? Or are blogs themselves relics of another age, and I should shut it down entirely and just put 35-part rants on Twitter when I have something to say?

CPP Calculator Comparison

December 17th, 2020 by Potato

For a long time I was the only game in town when it came to a CPP calculator that included the CPP enhancements — important for planning purposes! [Note: I’ll point back to the article on the calculator and you can download it from there — if I provide a direct download link here I’ll forget to update it next year and I’ll get hatemail in the future]

Now there’s some alternatives. Doug Runchey (yes, the Doug Runchey who writes all the CPP calculation articles) has teamed up with David Field of Papyrus Planning to create a web-based CPP calculator. It can import data from your statement of contributions if you have that, or you can go ahead and enter data manually. We here at Blessed by the Potato Publishing know that as savvy consumers you have your choice of free-to-use calculators, and there are advantages to choosing Excel: the web-based one will throw an error if you enter earnings that are above the YMPE for each year, forcing you to go back and change. every. line. manually. And fill-down is handy when playing what-if scenarios e.g, for retiring early or re-training. However, some people don’t like spreadsheets (heathens, surely, who wouldn’t read this blog anyway), so it’s handy to have a web-based alternative.

Mine is based on years, while the underlying CPP calculation (and drop-outs) uses months, so I have some approximations there. I also approximate the weird way CPP calculates the maximum pension (based on the average of the last 5 years’ YMPE) to make it easier to use real dollars into the future. That sometimes gives me a few percentage points of difference with other calculators and the ground truth — I tried to future-proof it for estimating far into the future rather than making it more accurate for pensions available today. But there will be some difference — on the main page I put a caveat that it’s only accurate to about 5% (which should be good enough for planning purposes).

So let’s see how the two calculators stack up. I compared 3 scenarios: (all amounts are per year in today’s dollars)

Scenario Mine at 65 DRDF at 65 Difference Mine at 70 DRDF at 70 Difference
65 yo, max earnings 31-60 $10,779 $11,215 4.1% $16,062 $16,304 1.5%
35 yo, max earnings 31-60 $15,953 $15,528 -2.7% $22,653 $22,050 -2.7%
45 yo, 30k/yr 25-65 $9,585 $9,380 -2.1% $13,610 $13,362 -1.8%

Honestly, I thought the only differences would come from rounding drop-outs to full years and how I estimated inflation for the 5-year average pensionable earnings, and that the differences would likely have come to ~2%, so I was a touch surprised to see a few scenarios with greater differences. Still, all scenarios are within my 5% “good enough for planning purposes” margin of error (assuming that the real value would either be between our two estimates or that DRDF’s version is precise to the dollar). For long-term planning/what-if scenarios you probably have more uncertainty than that about time off work (like in say a pandemic), and if you’re close enough to need precision to the last dollar, then you may want to hire Doug to run a personalized calculation.

It’s also informative to compare the scenarios: the first two are the same set of earnings, just for different starting points. The difference in the amount of CPP the hypothetical people get is due to the CPP enhancements. The 35-year-old has almost their entire working career (since we don’t start them until 30 – 2016) in the enhanced CPP regime, while the 65-year-old finished just as the announcement was being made.

They also include a break-even graph, which is something I’m on the fence about.

Breakeven graph for CPP with lines crossing at age 80

I had the idea to add one in to my calculator a few versions ago, but there were two main problems with that: 1) it’s work and I’m short of time and kind of never want to have to dive into CPP calculations again, and 2) I’m afraid it’s terribly misleading. This deserves its own post (which has been in the works for years now and has been scooped (and done better) by MJoM and a recent paper by Bonnie-Jeanne MacDonald) but briefly, it’s a mistake to try to frame it as a decision where you want to get the most out of CPP in an expected value calculation. The point is not to be playing a game of you versus the government* where you die at 75 and go “ha! I took CPP early and WON! Screw you, government!” These break-even analyses frame it wrong and get you thinking about how long you’ll live (which we are really bad at estimating) and make a decision based on that.

CPP has enormous, unmatchable longevity insurance benefits. There, that’s the main point and why you shouldn’t get too hooked into these break-even calculations. Basically, you should always defer it to 70 unless you can’t because you need the money now (i.e., you don’t have the savings to live off of in the first place — which should cover those who would get GIS), or you have a specific diagnosis/severe risk factor that limits your life expectancy (not that your parents died young of something with weak inheritance [like getting hit by a car or having a heart attack] or that you can’t possibly imagine growing that old). Just saved myself another 3,000 word post.

Some people also frame it as spending more early vs later, which is wrong too. As Michael James puts it (though I can’t find the specific post to point to), delaying CPP to 70 lets him safely spend more of his savings now, knowing that the long term is taken care of by CPP — he gets to safely spend more throughout his retirement, including the early years by deferring CPP.

PS: Doug & David say when you sign up that they won’t spam you, and that’s mostly true. They look to have a script set up to send you messages for the 3 days after you sign up, but they’re not solicitations.

Picture of 4 emails from David Field in my inbox after signing up for his CPP calculator

* – I have to credit Sandi Martin with coming up with this analogy.

Does Anyone Know About Captive Insurance?

December 1st, 2020 by Potato

As the title states, this is a question to all the smart BbtP readers out there — does anyone know much about captive insurance companies?

I came across the concept when looking into how a certain popular be-all robo-advisor was offering people a way to buy bitcoin. Now, without going on too much of a rant, bitcoin is stupid in large part because it’s stupidly hard to get and keep. There are huge barriers to entry to regular people, but it’s going up and people want to buy, so there are a whole host of businesses springing up to serve that market. There are companies that are buying bitcoin on their balance sheet1, trusts that simply serve as publicly-traded securities that hold bitcoin, as well as a bunch of brokerage/exchange type services that range in professionalism from a group of basement-dwelling hackers cosplaying as investment bankers to groups with actual infrastructure and legal agreements.

There’s a huge trust problem with bitcoin (or crypto in general) — if you lose your keys, or get hacked, your coins are gone. If you die and forget to give your heirs the key (or let them know the coins exist in the first place), they’re lost forever. If you let someone else hold your coins and they get hacked (or fake their death and abscond with the money or whatever else might happen), then they’re gone, with no regulator to cry to reverse the transaction. For the most part, people don’t seem too worried about this — it’s a mania after all, you can’t sit around when there’s buying to do! As far as I’m aware, all of the more-convenient ways to access bitcoin trade at a premium, indicating that people want the convenience and are willing to pay for it (or can’t arbitrage it away).

So I checked out that be-all robo to see what all the fuss was about. And while bitcoin isn’t covered by CIPF, they say they’re insured. So if you click through the fine print, they’re using the services of an American company specializing in being a custodian and exchange for crypto. And they have a Bermuda-based captive insurer providing $200M of coverage, and that sounded weird to me. I don’t really know how captive insurers work — I could do a search and see that it’s when the insurer is wholly owned by the company taking out the insurance, which explains the name. But I don’t know how to answer the main question: do they actually have $200M in assets to backstop that insurance policy (or sufficient re-insurance)? Is there a Bermuda-based regulatory filing database like SEDAR?

Hopefully one of you knows.

1. I fully expect Tesla to announce they’re doing that or have been doing it all along and that’s the explanation for the interest income anomaly.

Whether to Lease Your Condo in a Pandemic

November 21st, 2020 by Potato

Rents are dropping in Toronto, particularly for downtown condos (the market that had been driven up the most by the AirBnB crime syndicate phenomenon in the first place).

That raises an important question: what should owners of a vacant condo do? Advice is all over the map, from those who say to sell it while valuations are still high1, to those who say to rent it out tout suite to avoid cash burn, to those who say to do the opposite and hold off because rents will go back up one day but renting at a low price now will lock you in to covid rents until the tenant leaves.

Not so long ago when prices were increasing all the time, real estate bulls had the logic that the best predictor of the near future is the present, so better buy now before it gets even more expensive. Well, that argument can work in reverse too: better take the rent you can get now before rents drop even more — or to bleed money with a vacancy if they don’t go back up. On the other hand, Toronto real estate has always been a story of hope and bullishness over all comers, and unrelenting bullishness and irresponsible leverage has won every time so far, so why not one more victory for that unstoppable pair?

How do you even approach such an important decision with such uncertainty and completely opposing advice? Congratulations to the regular readers who said spreadsheets. Save us math, you’re our only hope!

First off, consider the two choices for renting the place out: early, or late. That will help frame the third choice of selling the place (or possibly buying more while prices are “low” because you can make multiple millions but only go bankrupt once so the risk-reward is clear).

Renting now is more-or-less certain what you’re going to get. The main uncertainty is how long your new tenant will stay in place (which is only a concern if rents to go back up substantially faster than rent control guideline increases). But you can pull a number out of a hat and likely not be too far off. These are downtown condos we’re talking about, even at a discount to market rent it’s quite unlikely a tenant will stay for more than 5 years (or that your intended holding period is that long).

So you’ll have just 3 factors for how much money you’ll make: R, the current market rent; E, your expenses2, and Tr, the amount of time the renter stays, which is unknown but we’ll pin at 60 months.

So renting right away will give you: (R – E)*Tr.

So far so good. Now if you decide to wait, you’ll still have expenses, E, to pay to carry the place. You may have additional expenses that the tenant would normally pay for, such as utilities, but we’ll assume E stays the same for now. So you’ll be losing E for a period of time, let’s say Tv, the length of time until there’s a vaccine or widespread normalcy or what have you, and you get your once and future rent again. Let’s call that A. You’ll then get that for the remainder of Tr after Tv has passed.

Waiting then will give you: (A – E)*( Tr – Tv) – E*Tv

There’s a lot more uncertainty here: how high will A get, and how fast? All the way back to pre-covid highs by the spring? Maaaybe, but IMHO that’s unlikely because that was in part driven up by AirBnB, and pandemic aside, the city has finally moved to restrict AirBnB rentals. But maybe you laugh at my foolish hope in the rule of law and say that it will never be enforced, so that’s fine. Maybe you should consider the scenario where A isn’t all that much higher than today’s rent, R. And you also don’t know what Tv is going to be. It could be a few months, as some on the real estate blogs are saying, it could be a few years to get back up to pre-covid rents.

One approach to make the decision is to compare something mostly known today to an expected value of a bunch of possible outcomes. But before we do that, you have to stop and examine the risks. You could be “totally sure” of an outcome, but if being wrong would ruin you then you maybe shouldn’t take the risk anyway.

So some real estate investors are deep-pocketed with massive unrealized capital gains, so a year or three of vacancy doesn’t really phase them. Their advice to wait may mean little to the start-up specuvestor who expected the condo they stretched to buy to make money, not demand it while they are also financially strained from the pandemic. If 3, 6, or 12 months of that negative E term starts to look like bankruptcy, then you may need cashflow now even if it caps future potential gains (or you may want to look at selling while the selling is still pretty decent).

If you’re able to survive different outcomes, then you can do some math on expected value. How likely is the scenario where rent goes all the way back up in 3 months? How about the one where it takes a year? How about the one where you wait 18 months and settle for rent that’s the same or even lower than today? An expected value is just a weighted average of each of the outcomes, where the weighting is your guess on the probability.

You can plug all those in to a spreadsheet, and give yourself some information to work from.

Here’s an example of how that might work:

Pre-covid rent: $2250. Expenses: $1600/mo. Current rent: $1860.

Renting now would earn $15,600 over 5 years (at which point we assume the tenant with the cheap rent leaves and it’s ceteris paribus).

Rent later might have four equally weighted scenarios, say you wait a year for things to settle out and see where rent is at, and maybe it’s fully recovered, maybe partly recovered, or maybe you decide to wait a bit longer if things are on the upswing but still a bit below the peak, or maybe you get lucky and rent goes through a huge whip-saw and gets back to where it was in just 6 months.
1: Rent for $2250 after 1 year, vacant until then = -$19,200 + $31,200 = $12,000
2: Rent for $2000 after 1 year, vacant until then = -$19,200 + $19,200 = 0
3: Rent for $2250 after 18 months, vacant until then = -$28,800 + $27,300 = -$1,500
4: Rent for $2250 after 6 months, vacant until then = -$9,600 + $35,100 = $25,500
Average/expected value: $9,000

So here’s a spreadsheet, play with your own numbers and assumptions… but three of the scenarios above lost out to renting right away, even at a 17% discount. You have to have either very low expenses or very high hopes for a speedy rental recovery to make the case for waiting for the market to recover. Or fear a rent-controlled tenant will stay substantially longer than 5 years.

Psst!

Hmm?

Psst, Potato!

Oh hey, it’s Italics Man, paying a visit from Nelson’s blog.

Yeah hey, expenses don’t matter.

And indeed, if you’re paying the same expenses whether you rent the place out or not, then you can drop that term in all the math: the only thing that changes between the scenarios is the revenue (though if your expenses change, such as having to pay utilities that a tenant would otherwise pay during a vacancy, that’s a different story). So we could simplify it down even further: look at the difference in rents and how long it takes to go from one level to the other. Taking $400/mo less means you lose ~2 months of rent every year. So if you figure a tenant might stay for 5 years at the lower rent if you rent right now, then your breakeven point would be to wait for 10 months for a full recovery. If that sounds unlikely, then you may as well rent now. Given that renting now means you don’t have to endure 10 months of highly negative cashflow, I’m inclined to think that renting now really should be the preference given these numbers, but I also think getting all the way back up to pre-pandemic rents in a matter of single-digit months is quite unlikely.

However, including a version with the expenses may be important when framing the decision. After all, in the case where you wait a very long time (#3 above), you not only made less money, you had a loss on the condo. Even in the other cases, waiting starts with a loss, which you need to be prepared for and see when making that choice — do you have that first $20k on hand to survive to the high-rent near future you predict? People are sometimes much more motivated to avoid losses than increase gains. When all the numbers are positive, the decision looks very different.

More importantly, remember that there was a third choice: selling and bailing. Here’s where it makes all the difference to look at the amounts with expenses versus just the difference in revenues. If your expenses are high enough, then either the choice of lower current rents or waiting for higher rents may have you staring at a big loss and an even bigger cashflow hole. That may mean selling into a slightly weaker-than-last-year market may be the way to go for you, to take your lumps now rather than bleed cash over the next year or two.

And of course, all of these numbers have more uncertainty than I’ve indicated. For the most part, I think I’m being generous to the owner considering delaying — I didn’t include any scenarios where they wait only to find rent has gone down further. It depends on your view of the market, but I have a hard time believing that after the year that 2020 has been that rents will be sharply recovering for downtown condos any day now.

On the flip side, some people are worried about rent control and a tenant paying less than market rent for even more than my arbitrary 5 years. If you think you may get stuck for a decade or more you can try to convince yourself that it’s worth it to hold a vacant unit for an extended period of time. If you’re worried about being stuck with a below-future-market tenant for 12 years then you might be able to talk yourself into two whole years of vacancy (depending on the difference in rents, etc.). Of course, by that same logic you should have never rented over the past few years anyway, when downtown rent inflation was out of control — getting 10% less than you could get next year was a bad move if you were worried about the tenant sticking around for infinity years with rent control. As the magnitude of the gap between current and future rents widens then you may have an argument for tenants having more of an incentive to stick around – being just 10% below market may not have been enough to get them to forestall their life plan of moving from your 1 bdrm to a 3 bdrm in the burbs, but maybe a 17% would get them to hang around just to spite you? Still, I think there’s an underlying current of fear around rent control that leads people to make these suggestions to keep a place empty rather than make some money and house someone at the same time, rather than a serious economic analysis.

Anyway, feel free to check your own assumptions and situation, but I suspect that the best strategy is going to be to accept that the market sucks right now and rent anyway rather than prolonging a vacancy on hope, or to sell if your view on the long-term market has been changed.

1. While the downtown condo market has cooled a bit from the peak, valuations are still historically high, and astronomically high on a cap rate basis thanks to lower rent, as rents have dropped more than prices.

2. We’re not going to worry about inflation or time value of money to keep things simple, but yes, the costs would be expected to increase over time, with an additional big bolus of uncertainty from what property taxes will do after the sledgehammer that covid was to the city’s finances.