Blessed by the Potato

I hate the “I know I haven’t posted in a while, but relax guys I’m not dead.” posts. They usually signal the end of an author’s involvement in a blog, and tend to be the epitaph that stands until the domain registration expires. Yet here I am with one.

I know I haven’t posted in a while, but relax guys, I’m not dead.

Of course, I’ve been at this for 16 years now (nearly 10 on the WordPress platform) so I’m not too worried about this lame set of excuses becoming my site’s final post. I don’t think I can stop blogging, so you’re stuck with me.

The obligatory excuse paragraph: I had a massive non-blog-related to-do list going into my Potatomas vacation. That was completely deep-sixed by the ice storm that left me without electricity, couch-surfing (with a 2-year-old no less) for 10 days. With deadlines at work through January and February, and continued craptacular winter weather, I didn’t make much headway on anything — including projects like the Ballparkinator — until March/early April. Then just as I put the Ballparkinator up, I had to sacrifice a weekend of free time to get my taxes done. Though I’ve been working on a few other posts (which are not yet ready for posting), I haven’t wanted to bump the Ballparkinator from the top until it’s fixed and I can try to push it on you all again.

Unfortunately, for the past few weeks my amazing, incredible baby girl has suddenly forgotten how to sleep through the night or how to sleep-in in the mornings, so I’m chronically sleep-deprived*. Though I’m nearly done fixing the Ballparkinator, I just can’t brain at the moment for careful Excel formula debugging. I also need to rewrite the accompanying post because, to give you a glimpse inside my own mind, I thought the Ballparkinator was something amazing and incredibly useful for people, yet the reception was very “meh” — zero comments! — and I suspect that’s because I didn’t do a good enough job at linking it back to my thoughts on the importance of preparing for multiple scenarios (plus perhaps the fact that it had bugs for early retirement). So it’s going to take a little bit longer to get up, and as I was trying to find a well-rested night off to finish it, my other projects suddenly leapt up in importance.

I’m proud to say that one of those projects was working on the second edition of my book, as hinted at earlier. I completed the first draft of the 2nd edition and sent it around to some friends and colleagues for feedback — I’m a strong believer in beta testing something like this and in the power of constructive criticism and early substantive editing. I expected a few minor changes: typos and requests to a few small sections for clarity, with general criticisms. What came back was amazing: everyone (who has replied so far) has loved it (or lied to me in a way that helps my ego but not my material). By and large, people liked how clearly I explained one thing or another and requested new sections to cover common investing problems and things that confused them or were commonly confused. In other words, I’ve been dealing with a major case of scope/feature creep for the past few weeks. So even though I’ve been writing like a madman** almost every spare minute that I’m not at work or watching Blueberry, none of it has shown up here (yet). For the curious, it is now well over twice as long as the original book, and has gone from the “booklet/short guide” range to “typical trade paperback” length, and I still have a few thousand words to go with the last few suggested section additions (and there are at least 4 readers I’m still hoping/expecting to hear back from). It’s a real book!

I’ve spoken with some people who have gone through the traditional publishing route (Preet Banerjee was particularly helpful) and learned that personal finance books tend to be released in “RRSP season” (even if said book explicitly encourages ignoring such a thing), which with what I’ve read about typical publishing timelines means that if I want to get published this year I need to be pitching to publishers now. I had set Victoria Day as a personal deadline anyway because I know my free time will disappear then due to other commitments, so that just moves my timeline up a bit — but that “just a bit” means that I’ve pretty much had to drop any blog writing for the time being. Though nothing is showing up for you now, I have generated a lot of new material — in addition to posts that I’ll throw up as preview chapters to help promote the book, I have a fair bit of excised material that just didn’t quite fit the book but which could be adapted into a future post.

Then on top of my book writing self-commitments, my dad asked me to take on a personal writing project for him and a friend of his. That friend is now seriously ill and so a project I had hoped to push off to August has taken on rather more urgency. So even once I send off my proposals and manuscripts to potential publishers, my writing focus won’t be coming back to BbtP just yet.

Excuses and litanies aside, what can you, dear BbtP reader, expect in the future?

1. I will fix the Ballparkinator and revise the accompanying post, but likely not until after Victoria Day now. The top half still works in the meantime.
2. I will dust off an excised chapter or another old draft post in a week’s time so you’ll have something to chew on and stop issuing amber alerts on my behalf.
3. The summer is going to seriously, seriously suck for me on a free-time-to-blog basis.
4. An awesome, much needed book on index investing for Canadians that focuses on implementation and process and still needs a punchy title. If I can’t sell it to a publisher by Christmas, I will self-publish by early 2015. Stay tuned. Until then, I will keep the original up and available as-is.

* – to be fair, much of that is my own fault for working on side projects until too late at night, leaving me with no margin of error for being awakened by screams or yodeling.
** – in that I’m going fast and putting in crazy hours, not in that I am ranting about the oil cartel conspiracy to keep Harper in power by controlling our thoughts with orbital mind-control lasers.

TLDR: A single, straight-line calculation of invest $X/yr at Y% returns is a little too simplistic for your retirement planning, but a Monte Carlo or exhaustive simulation can be overwhelming. I think a good middle-ground is to find a ballpark number of how much you need to save, and to see where that puts you under good, decent, and relatively poor investment outcomes so you can figure out if you’re in the right ballpark. Download Potato’s Automagical Financial Planning Ballparkinator here.

I think hands-down the most common two questions I get related to finances are “how do I…” (for which I’ve written a whole book and have a course) and “how much do I need to save, anyway?” There are a host of tools available on the internet to try to answer this, but they’re all fairly simplistic — as few as three factors are considered, with many hard-coded variables. If you’re still decades away from retirement then you really just need a ballpark number to get started, and for that those tools are pretty good — heck the “save 10% of your income” rule-of-thumb is not terrible, and it doesn’t even specify whether it refers to pre-tax or after-tax income, or to what age range it applies.

But of course I wanted something a little more detailed with more things to tweak. More importantly, I wanted to put up side-by-side comparisons of some important scenarios so people didn’t have to refresh their web browser a dozen times to get an idea of where to go. May I present Potato’s Automagical Financial Planning Ballparkinator. Available in Excel.

There are many possible shapes to the future, so how much you need to save decades in advance will only ever be a rough estimate. This will help you figure out what the general ballpark estimate of that number should be. It’s based on my retirement planning spreadsheet calculator — I added a more robust tax calculation (including OAS clawbacks), and of course the whole soup-to-nuts saving through retirement component, but have removed some of the finer features (like non-flat budgets and personal inflation rates). It does include a separate field for your investing fees (MERs) so you can see the impact of those without having to directly adjust the returns in the scenarios (and more directly, to put that factor front-of-mind).

It calculates forward based on your current savings rate (and a bunch of other assumptions) to find out how long your money will last under that plan, and also estimates backwards from your budget needs, accumulation years investment returns, and a sustainable withdrawal rate to rough out how much you should be saving (annually). Note that the backwards calculation bundles all account types together for the calculation and does not account for taxes — a much rougher estimate and more similar to the simplistic web-based tools common on many bank websites.

The results are presented in a little table to examine three scenarios for future returns (a base, worst, and best case), which you can of course define yourself, and for four risk profiles/asset allocations: ultra-conservative (all fixed income), balanced (50/50), risk tolerant (mostly stocks), and all stocks. This is important as the rules of thumb like “save 10%” are based on having enough of a balance to get something close to equity-like returns on your savings. If you are like many people today, scarred by 2008 and unable to contemplate anything more volatile than a package of bonds, then you will have to cut your spending budgets and save substantially more every year to make up for that ultra-conservatism in your investments. Similarly, if you don’t start investing until you’re in your 50’s, then you’ll have to put away substantially more than 10% of your income.

Figuring out your future spending needs may be the most difficult part. For your future budget you can start with your current spending needs, and take your best guess as to how they will change in the future. More travel, but less commuting? No more mortgage payments, but added expenses for lawn care & snow removal that you used to handle yourself? The default in the spreadsheet is to take 75% of your current spending budget, but definitely put careful consideration into this figure — and try out a few iterations.

Note that this is not a full financial plan, not by a long shot. There’s nothing here about contingency plans, goals, motivations, asset allocation, rebalancing plans, insurance, emergency contacts¹, taxes and tax shelters, short-term savings goals, or really much of anything else. I’m hoping one day someone will get around to showing us what a good, complete financial plan looks like. Until then: ballpark, get started, evaluate, adjust.

Also, if you need help estimating how much you’ll get from CPP, I have a tool for that here.

1 – no, not poison control. Who will calm you down when markets are roiling? Who will your family call if you’re dead or incapacitated, who has your will?

Update, April 16, 2014: Thanks to Spudd at CMF (no relation) for pointing out that there was a problem with early retirement scenarios and the RRIF table. I’ve provided rough guidance for that going back to age 20 — it might not be the right amount to start withdrawing from an RRSP right away, but it should be reasonably close and at least returns something for early retirement scenarios now. I’ve replaced the sheet on the site, the link remains the same.

Update, July 2017: I’ve fixed the “backwards” calculation with a better approximation, one that uses a few different ranges of sustainable withdrawal rates. There was also a pretty bad bug when RRIF withdrawals satisfied cashflow needs, but money was still being pulled from a TFSA anyway that’s now fixed.

Canadian Capitalist and Squawkfox have created rebalancing spreadsheets to help you when it comes time to rebalance your portfolio. They are somewhat simplistic and hard-coded with the funds — this is a good thing if you’re following the Sleepy Portfolio or one of the Couch portfolios: just enter the current value, the money you have to add, and see how to split your new purchase up.

I wanted one with a bit more flexibility: one that would allow for a few broad categories of investments, with sub-investments. For instance, if I had small bits of cash left over at various points through the year I might throw them into a TD e-series fund, and as long as my overall Canadian/US/International split was ok I wouldn’t worry about rebalancing the e-series versus ETF splits. Or similarly if I had several sub-products to make up one sector, like counting BRK.B and VTI together for US exposure, but not caring too much whether that split was 50/50 or 60/40. Also rather than just entering the current value, the sheet lets you enter the price and the number of units in your various accounts. With the units entered, half the work is done for the next time you want to rebalance (just update the unit prices).

The sheet calculates and displays the variances (how much you are off by), and then also calculates how many units of each fund you need to buy to get back into balance. Note that you should generally round down so that you don’t over-spend the funds in your brokerage account. In the top row you can enter how much new cash you have to invest, or enter a negative value to withdraw cash from your portfolio.

The spreadsheet is available here in Excel, or through Google Docs* here. Enjoy!

* – Google can try to call it Drive, but Docs has stuck with me.

In the comments to the first post on regulating financial advisors someone brought up the issue of regulatory burden: the extra paperwork and delays imposed on businesses. Nicole went so far as to call it “onerous” and “strangling” — and that’s just for the regulation already in place, which we’ve criticized as not providing enough protection.

There are lots of examples of regulatory burden out there, for many stakeholders. I regularly suggest that people go with TD Waterhouse to be able to invest in e-series funds over TD Mutual Funds because of the extra steps and forms needed to fill out and mail in to convert an account and the possible limitations of the KYC forms. I never got my CFP/CSC because it’s just not worth my time to take the courses and exam for what the designations would bring me; if something like that were to be a mandatory requirement to talk to clients about investing and their financial plans that would keep me and several other part-time educators/planners/coaches/DIY-support people out of business.

But a certain amount of form-filling, records-keeping, and education overhead should be expected in any business. The correct amount of regulatory burden is highly unlikely to be zero, and if it brings important consumer protections then that’s a good thing.

However, the way regulations and reporting are structured can have huge impacts on the eventual regulatory burden. Consider for example something I have some experience with: applying for a grant to do some medical research. You could apply to the US National Institutes of Health (NIH) and or to the Canadian Institutes of Health Research (CIHR). In both cases the basic document outlining the experiment you’re looking to fund would be say 13 pages. On top of that you’d have a detailed 5-year budget and a justification for the funds you were seeking, a half-page lay summary for the funding agencies to release to the press or the elected government representatives, and some kind of CV to demonstrate that you had the experience and ability to carry out the research you proposed.

Now both funding agencies take very seriously the protection of research participants and have fairly similar rules and regulations in place for that protection, but the implementation and regulatory burden is night and day in my mind. In Canada, your grant would now basically be complete: CIHR’s protection of research subjects rules are separate from the grant process, and all institutions sign on to it before they can enter a competition. They know that any research is going to be reviewed by a research ethics board that meets their standards, and will get a copy of the approval before releasing funds (if you’re successful in the first place). If the experiment calls for anything terribly out of the ordinary, then it’ll have to be explained in the proposal anyway. Compare this to the US, where the proposal part of the grant submission is almost like an afterthought to the stacks of appendices and tables that have to be filled out — including some that no one really seems to understand (including the NIH help staff I’ve spoken to), where you have to predict the racial breakdown for any proposed study (how many whites, blacks, asians, etc. will you recruit), but then also the “latino/non-latino ethnic breakdown” (how many latino asians vs non-latino asians will you include in your study??). It’s stressful and confusing (Spain and Portugal aren’t included in the countries of origin for people considered hispanic?) and totally bizarre (why do they care about this stuff? Will they really reject my grant over this?). For basically the same mandate and ultimate protection of research subjects, the regulatory burden is quite different between the agencies because of how they approach the problem and where they place the reporting requirements. By having so much paperwork up at the application stage it creates a lot of work for the ~80% of NIH applicants who will not get their grants funded because the scientific component wasn’t competitive enough for the severely limited funds.

Also, some protection comes with virtually no on-going regulatory burden. The Residential Tenancies Act sets out many protections for tenants, but aside from modifying what you can put into a lease there is no paperwork for landlords or tenants to fill out in the regular course of business beyond what you’d need anyway. Indeed, you get some of that for better than free: by standardizing certain terms, responsibilities, and practices they don’t have to be separately negotiated and drawn up in a lease. Everything is handled on an enforcement basis: only after a problem arises does someone end up having paperwork to fill out. Now at that point it can be very onerous (dealing with the LTB is no picnic, especially for landlords), mostly due to the delays involved. But for most people most of the time, it’s reasonably strong regulation with little overhead cost.

So I think that implementing a better model for financial advice and regulation thereof can be done in a way that minimizes the regulatory burden. It’s something that can and should be kept in mind as a new regulatory framework is thought out (especially the implementation aspect), and kept in balance with the benefits.

Sometimes being mean can be fun. No, that’s not right. Sometimes when I’m having fun I can come off as mean. I don’t aim to be mean, so this is a tough blog post to approach because that is just about all I have to offer. Let us pretend that I have been possessed by Greg McFarlane and this is a guest post FRotM: Book Edition.

A little while ago I got a piece of email that I ignored as being basically spam: a request to review and blurb a new book (actually titled: “A Free Investment Book for You”). Pitched as “a “How to” guide to obtaining compound returns of 20 percent, 30 percent, or more annually from investing in stocks and to do so in a manner that’s worry-free for the investor.” and “The Sane Approach to Investing in Stocks for Insane Profits.” I decided to be nice and junk it. That kind of pitch turned me right off: it looked like it was either not refined enough to know it’s contradictory, or a scam.

Then he followed-up. Clearly this was a real person and not a robot emailing me, so I wanted to put him out of his misery. This is what I sent back:

“I don’t think I would be a good choice for you as a reviewer/blurber. I don’t think 20-30%+ returns and “worry-free” can be put together like that, so seeing it as the central part of your message is troubling. I work as an editor so my reviews tend to be critical in the first place, and starting off on a bad foot already might not lead to a review you would like.”

He still wanted to send me a book, calling me “an excellent candidate for reviewing my book… my desiring your participation at this stage is a testimonial to the respect that I have for you and your work.” Ok kid, flattery will get you everywhere. I got the book. I read the book. I was open to having my mind changed: maybe it was a good investing book and he just needed to work on his email marketing. Alas, it was about as bad as I feared, shy of not advocating that readers borrow money from friends or remortgage their houses to invest.

Rather than tearing into it wholly, I just want to pick on one specific part: those worry-free 20-30% returns. In the book he lays out the 10-stock portfolio that brought him a 128% return in under 5 years. He compares that to just 45% on the S&P500. But that is a mistake. This is basically a giant case of getting a little bit lucky with stock picking, and a lot lucky with timing. He bought in 10 chunks through the end of 2008 and the beginning of 2009 — yes, he just happened to start investing at a generational low in the market that was followed by a massive, unrelenting bull market. No wonder he thinks 20% returns are worry-free. Anyway, it looks like he’s comparing his portfolio purchased across several time-points that span the market lows to a single time-point for the S&P500 from before the Lehman Bros event. It was easy enough to look up the S&P500 total returns and compare an index portfolio that made purchases on the same dates as he did, and the actual comparison would then be 104%. Yes, his picks out-performed, but it’s not nearly as impressive. Oh, and most of those same picks were hit way harder in 2008/2009 than the index was, so if there’s a repeat then so much for the “worry-free” part.

Then he lays out a second 16-stock portfolio that only has a bit over a year of tenure. He boasts a 29.6% return versus the S&P500 at 26.3% [figures not audited]. Yet that portfolio includes one position that just so happened to return 243% in a year. Exclude just that one outlier, and the portfolio underperformed. By a lot. Sure, sometimes that’s how investing works, but that’s not the kind of track record you base a book around (and again, hoping for a single lottery-ticket-stock to pay off while almost half your portfolio declines in an amazing bull market year is not my definition of “worry-free”).

I cannot in any way recommend this book — I haven’t even mentioned the title because I feel bad for the kid, and I don’t want this to be the only review that comes up in Google. But I warned him, and he asked for the review anyway.

Now he did start off by thanking his editors (amongst others), and on a micro level it’s a fairly tight text. With my own self-interest in mind paying for a few editing passes can help make a book more digestible (especially a self-published one). Unfortunately, the over-arching shortcomings cannot be saved by layout and grammar. It really needed a peer review — and some robust back-testing — before being sent off for a copy edit as the basic premise appears to be flawed, based on a mistaken return comparison and a great deal of luck. Though mentioned often in how the book was presented, the issue of worrying and freedom thereof was not covered.

Page distribution:
Completely blank, not even page numbers (colouring fodder for your young daughter!), 10%.
Small investing nuggets not even fleshed out enough for a blog post (e.g. 431 words on coattail investing does not blow me away with content), 30%.
Specific information* on companies found in a stock screener that will be instantly out-of-date in book format, 25%.
Index (the kind to look stuff up, not the S&P500), 4%.
Drivel, 7%.**
The purported approach/method/secret, 2%.***

* – Includes estimated future EPS growth rates to two decimal places, though all the percentages round precisely to X.00% so I don’t know why the digits were necessary in the first place.
** – Harsh but accurate summary.
*** – Totals may not add to 100% because math is hard and fact-checking is for losers who don’t have insane profits to chase. Also, yes, depending on how liberal you want to be on what counts as part of the approach versus general rehashing of Warren Buffett quotes, just ~2% on that topic. Spoilers: use PEG, buy when below 0.75-1.