Blessed by the Potato

A quick update to my 2013 active investing summary. Because Michael James put together a neat graph of his investing history, I thought I should make one as well. I don’t have as much history as he does (and I didn’t have a year so positive I needed drawing tools to break the line) so it’s not quite as impressive. My benchmark is a 50/50 mix of the Canadian and S&P500 e-series funds (all my rest-of-world exposure comes in through the passive portfolio). Like him, I had losses a bit worse than the benchmark in 2008, snapped back very strong in 2009, and lost a bit more in 2011. At this point you may notice I’ve had three out-performing years, and three under-performing years. Except for the fact that the magnitude of the out-performing years was (much) higher than the losing ones, this would look very depressing. As it is, it looks much like a coin-toss. It’s quite possible that I have no skill and this was a matter of luck. To defend against that I do passively invest (my RRSP and now Blueberry’s RESP are totally indexed), and it’s the approach I recommend for everyone¹.

I also forgot to repeat my brief approach summary: I try to capture some of the benefits of a passive approach by trading as little as possible. In 2013, my equivalent MER from commission costs was 0.15% (this was helped along by the lack of savings while Wayfare was on mat leave for the first half of the year). Because I know that I am the easiest person to fool, savings from 2014 will go to the indexed portfolio (even though, as Wayfare pointed out, this is the equivalent of performance-chasing — I’m ok with that because I don’t have any buy ideas now anyway).

1. Well, practically everyone. Everyone who isn’t willing to take some accounting courses, read balance sheets and all the footnotes until 2 in the morning on a work night, or suffer through volatility and downturns — and call it fun all the while. Oh, and stuff their puny human emotions into a box and jettison it into space. So yeah, everyone.

There is no authoritative body or ISO standard that defines what “generational” label applies to a given group, or what the age barriers are. When I saw the label “millennials” extended to those born in 1979¹, I thought it was going too far. I personally use the definitive year of 1982. Those born after that point were too young to have the formative experience of watching Orson Welles’ greatest and final film in the theatre: Transformers.

Now, my use of Transformers: the Movie is partly to be funny, and partly to highlight that part of what defines (or perhaps should define) a generation is the shared formative experiences. I find the broad, broad range of ages that many people throw into one “generation” makes this really hard to accomplish. The baby boomers are fairly easy to define because you can see quite clearly the massive up-swing in birth rates following WWII.

But GenX? By some people’s reckoning, people my age are the tail end of GenX, and then after that are the “Echo” of the baby boomers, often also called GenY (though I am myself, as are many GenXers my age and even a bit older, the child of baby boomers). Other than “not baby boomers” I’m not sure precisely what should define GenX. Cable TV, NES, and synth in our music? It’s hard to say what, exactly, people my age have in common with 50-year-olds to join us together in a generation.

After that was supposedly Gen Y, those born around 1980 through to sometime in the 1990’s. Children of the 80’s we used to call them, though in Ontario the last OAC cohort might also be a good grouping metric. Then those born in the 1990’s had their formative years in the new millennium, so they’re “millennials” (though some will hold that the term applies to those born in the 2000s). Except the start date for “millennials” keeps getting pushed back by different sources, until the point now that they’ve completely merged with the Echo generation.

One issue is that we can’t even decide how long a “generation” should span. Again, the baby boomers are relatively well delineated across a nearly 20-year span. But by no means does that mean that all following generations should be 20-year spans, that’s ridiculous (and a big source of the disappearing Gen Y). For some teenage mothers, two biological generations would fall within the same meme generation. More generally, it’s so tough to have shared experiences across that timespan, and the demographic pig-in-the-python factor just isn’t there. So ultimately, it’s an arbitrary label.

And the damned problem is that as useless and ridiculous a notion of dividing up “generations” is, it’s not going away. It’s so much easier and cuter to refer to “millennials” or “GenX” in a column than “young 30-something adults” or “those kids now pouring through high school and undergrad.” And we can forget enitrely about disposing with the human propensity to generalize and engage in ageist stereotyping. We could at least agree on what the delineations for the generations are so we can speak the same language about it. But because it is ultimately completely arbitrary, there are numerous definitions out there. And there is no good choice for who the standard-setter should be (StatsCan won’t touch it, though several academics have tried).

So, to make the definitions less arbitrary but the source more so, here I present Potato’s Definitive Generational Breakdown. There are multiple potential labels for different groups depending on how you want to split them up, with justifications for each.

1910-1927 – The Greatest Generation. This label has been around long enough that it is in common use.

1927-1945 – The Silent Generation. This label and range has been around long enough that it is in common use.

1946-1965 – The Baby Boomers (“boomers”). Defined at first by demographics and then by a shared love of cars, suburbia, and pop music (and by definition, anything the boomers listened to en masse became popular).

1965-1976 – Generation X (“GenXers”). Some people extend it right into the 80’s, but not me. These people cherish memories of when MTV (and Much) played music videos and still can’t ever quite feel like they belong. Also, thanks to global warming weirding, 1976 was the last year someone could have been born and still experienced an average year for global temperatures: each year since has been above the long-term mean.

1977-1981 – Echo Prime (“primers”). A narrow band of responsible, upstanding citizens raised on a steady diet of Mattel and Hasbro role models, particularly including giant transforming robots. Old enough to remember a world without technology, but young enough to have adapted to it. Their formative years were spent in a world where the Matrix of Leadership was a solemn burden carried for the good of all, and opened only in the most dire of times. A world where you had to work hard, scraping across the surface of the earth to get ahead (and not a universe where everybody could fly because flying is cool and gravity sucks). A world where you had to transform yourself into another shape and behaviour to fit in amongst earth culture and stay safely invisible².

1982-1994 – Children of the Eighties, Echo Boomers (“echos”). Growing up with GUIs most of them don’t remember the horrors of DOS or 640k of system memory. With their boomer parents well-secured in their careers before spawning, and controlling the world (as boomers do), they are spoiled beyond belief. The positive messaging they’ve lived with in their sheltered little lives has meant that even when they do hide their true face, it’s still some unrecognizable, unique-and-beautiful-as-a-snowflake-space-hovercraft thing, making no attempt to fit in at all. Or gorillas and dinosaurs living together, with no sense of scale. For them there’s no respect for the Matrix of Leadership, and a crisis worthy of cracking it open can include any time a rave’s lightshow needs a little something extra.

1995-2010 – Millennials. Too young to remember what the fuss and fear was over Y2K, or for that matter Terminator, they think computers are their friends and live on their smartphones. Language capabilities are nearly completely atrophied: if u tlk 2 dem yul c. Sometimes the children of boomers, they are just as likely to be the organic, free-range kids of GenX. That cross-over point happened (and thus marked the end to the “echos”) around 1995, adding further credence to a separation between millennials and GenY/echos.

2010-2025 – Children of the (Zombie) Apocalypse (CZA or tentatively “GenZ“). The zeitgeist and humanity’s collective imagination clearly indicate that the zombie apocalypse is coming soon, but it is a bit too early to definitively label this generation with the “Z”. It could be any one of a number of apocalyptic scenarios that defines my daughter’s generation. For instance, a robotic uprising is still in the cards, and despite recent disarmament treaties the world still has more than enough nuclear weapons to bring about a Fallout-esque end, complete with skin-eating mutants.

2026-2050 – New Empire Citizens (“We have evolved beyond such arbitrary titles”or “Neckers“). A span even longer than the baby boomers, and an even more prolific demographic bump, these children of the survivors grew up in the New Empire and all its technological marvels. Writing and typing skills have completely atrophied in the wake of telepathic implants, and they have never had to face death at the hands of the shambling hordes and/or robot stormtroopers. Their food comes fresh from “farms” and the bountiful ocean, and the spoiled brats wouldn’t eat a 10-year-old can of cat food found in a basement pantry of the bombed-out house they’re sheltering in — not even on a dare — representing the greatest experience gap a generation has ever experienced from their parents’ time.

1 – Via this post at Boomer & Echo.
2 – I’d just like to say at this point that I’m even impressing myself for milking the crap out of my Transformers analogy/joke. Of course, I only had 3 hours of sleep last night so who knows how that actually comes across to a rational, rested mind.

Let’s think of financial planning as taking a voyage across the ocean. I appreciate that this is likely a poor choice of metaphors as I am not a sailor and neither are you, but let’s work through it.

You set off with some destination in mind. Checking the map and detailed charts with the typical winds and currents ahead, you draw a line to plot your course (with the help of some basic high school trigonometry to factor in the wind and current). A glance at the stars to be sure, you set your sails and put your back into the oars. The journey of a lifetime!

Within minutes you find you’re off course: a particularly larger than average wave has just moved your bow a degree off course and slowed you imperceptibly (though your instruments can give you the course deviation to two decimal places). No matter, a quick calculation, a pull on the oars and an adjustment of the rudder has set you right again. Then another wave. And a gust of wind… which then suddenly dies.

The conclusion is obvious: you simply can’t adjust for every ripple, it would drive you mad and lead to needless effort trying to compensate for tiny effects that may just cancel themselves out anyway. But you can’t very well cross an ocean without making a few course adjustments, otherwise when you do hit shore (if you hit shore) you may find out that you’re way off target. Ending up in Bangor, Maine is way worse than ending up in Newfoundland. Have you read Stephen King’s documentaries on the horrors plaguing Maine? Some kind of compromise has to be reached that will let you respond to the important changes so that you can get back on course, without over-correcting to everything.

You can play it by ear, and try to feel your way towards a happy medium, but that might involve some white-knuckle moments early on as you over-react to every tiny ripple along the way. In physics we (by which I mean Michael James) might put a low pass filter on the response function, or perhaps a hysteresis, to make the input-adjustment mechanism work better. When sailing you might only check the stars once a night, and hold the tiller steady against the waves.

To leave the metaphor and talk about financial planning, for problems like this there are lots of other practical solutions. You could just limit how often you check when you’re off course (once a year, say), or act only when you’re off course by some threshold (like when your asset allocation is off by more than 5%). Many of these adjustments will be minor if the perturbation is small: normal fluctuations in return or expected lumpiness in your monthly spending. Some will come on suddenly: though you may model and anticipate inflation as a continuous, steady percentage, you may find instead that your bills are perfectly flat through the year until March when your utilities jump 7% all at once while Mac & Cheese goes from $0.99 to $1.29 without hitting any of the intermediate values.

Some adjustments may be more major, and require much more of an effort to correct for. Like disability, losing a job, or a major global market crash. They’re also usually highly emotional times, which can lead to less-than-optimal decision-making. The midst of a market crash is the last time you want to be re-evaluating your risk tolerance and end up selling low, and while you’re sick may not be the time to rework your financial plan. So part of the planning process should, ideally, involve sketching out your course corrections in advance.

I don’t much care precisely how you go about it or what your contingency plans are, just that you think about it and come up with some. Don’t want to dictate how you make your course adjustments, just that you do. Thankfully, Michael James had a recent post on coming up with a formula for adjusting spending in retirement based on changes in portfolio returns. A generalized scheme might have two relatively simple components:

1. Identify, in advance, points where you will assess your progress. Decide how you will measure that progress, and what deviation would call for corrective action. What events are worth responding to, which aren’t?

2. Decide what action you will take while things are calm and you have your background research front of mind. Write your contingency plans down. You don’t want to be making those decisions while emotional after realizing that your plan is not working out, or trusting a plan from years earlier to a foggy memory.

For example, if you find after 5 years that your savings rate has lagged (perhaps because you can’t stay on budget, perhaps because of several emergencies/unemployment/etc), how would you get back on track? What would you do to your budget, how would your investments change? If equity returns were lower than planned for 10 years, would you put more into equities because you expect some mean reversion, or less because they’re losing and dumb? This is one area where your answer in advance might be different than your emotional answer later, and where you get into sticky questions of whether the data that led to your expected values was simply wrong. Would you stick with your asset allocation and adjust your budget?

What if things were looking better than planned: you had more money saved thanks to good budget discipline, luck, or good equity markets. Would you relax your budget and let yourself spend more, or would you remove some risk by shifting your asset allocation? Perhaps you’d prefer to stick to the original plan and keep the extra headroom — if there continues to be a surplus your heirs can have it, or you can retire early.

There is uncertainty in the world. This makes people deeply uncomfortable. The solution is not to pretend that the uncertainty is not there, but to prepare for it.

I’ve been a Bell home phone user forever. With two multi-day power outages in the last decade, and multiple 8-12 hour outages with loss of cell reception in the last year, the sheer reliability of plain old telephone service (POTS) is a feature I like and am willing to pay for over digital IP options. Plus the quality — I can’t stand talking on my cellphone and will call people back if I’m at home (or at my desk at work) and they try my mobile.

However, Bell is expensive, and has a ridiculous notion of inflation. For a service that has not really required any capital investment on their part or high marginal costs, the rate has gone up by about triple that of CPI over the last decade, and with a 7% increase this year on our bill, it was one straw that made me want to cancel. They’re also more expensive than their competitors (like Teksavvy), but we know Bell — as much as I may hate having to call their telemarketing department, the service just works and we can rely on it to continue to work. That should be the case for a POTS reseller as well, but we were willing to pay a few dollars more per month to stick with Bell. Yet the gap was significant at around $10-20 per month, so we used the old trick of calling to complain and got a discount to bring it closer. A $10/mo discount for 12 months was a small price for Bell to pay to keep us happy and loyal, and make the price a little more fair. And when that would expire we’d call back and renew it, often missing out on a month in-between without a discount.

This has been the routine for years now. It’s tiring and I keep asking if they can just put a permanent reduction in the rate to make it competitive, but the constant threat to cancel with discount is just their mechanism. It’s how they do business, so that’s the game plan we follow. Yet this year when I called in, they wouldn’t give it to me. They would give me a “great” rate on internet and TV if I switched everything over to them, but that’s not happening (Bell: you burned too hard on UBB to try to pretend you have an affordable unlimited service now). As a phone-only customer, I could take my business elsewhere: they didn’t want it.

What really set me off though was the incredibly awful and shady accounting practice they had for the end of the discount. Rather than immediately seeing that the 12-month discount had expired, they continued to put it on my bill, and charge me the reduced rate. Then in a later month they retroactively took it back and hit me with a massive one-time bill. Likewise, on the first bill with the new, 7% higher (in a year when inflation is less than a percent) rate, they retroactively applied it to the previous month. That is needlessly infuriating. In essence, it’s a billing error. I shudder to think of the damage that could be done with such practices for someone living closer to the edge in their budget, with multiple services with Bell, opening their bill one day to see a (one-time) double payment required.

I finally had enough of it and have switched. I tried Teksavvy first — great prices and I love them for internet — but they wouldn’t take my money. For whatever reason, Teksavvy has put in a “stop sale” on home phone service. Even though it’s still advertised on their website, they won’t take me as a phone customer. Primus would however, so off I go (though they are a touch pricier than Teksavvy’s unobtainable teaser pricing).

Active investing:
Note that even though I did win the Financial Uproar Misfit Bloggers stock picking competition this year, and did actually invest in each of my picks, my actual returns were not nearly as good as what you see in the contest. Partly because, you know, the fact that I own more than 4 stocks. I should also note that I came in last place for 2012, such is the nature of these contests. Anyway, my rate of return (IRR) for 2013 was bang on 20.0%, which is a fair bit below my passive benchmark return of 23.9% (though in an absolute sense it was a fantastic year). I invested heavily in Dundee International, which has slid through the year, and sold too early on many winners (with at least two going on to roughly double after I sold them). There are loads more mistakes to point out, including checking out mentally through the fall when I was busy as balls. With that under-performance and no strong investing ideas in hand, this year’s savings will be going into the passive portfolio.

Power outage:
When last I posted, the outage was into its sixth day for us. We ended up being without power for seven days, only to come back to find that despite all our precautions one of the pipes burst. That led to another few days of couch-surfing as our water stayed off and the kitchen was torn apart to fix it. It was actually a bit of a miracle the landlord was able to fix it that fast — much more difficult and we would have had to wait for an outside plumber to do the job. However, we were left with a bit of a mess to clean up (the first mess from when we evacuated in the cold and dark, leaving behind dirty dishes and what-not, then cleaning out the fridge and freezer, then a pile of drywall dust and insulation everywhere). Then, just after we moved back in, we had another 2.5-hour outage. As soon as the lights started to flicker I realized I have some mild form of power outage PTSD now. It was so much colder that night than the ~0°C night when the power first went out: the house cooled as much in those 2 hours as it did in the first 12 of the original blackout (when we were starting to talk about evacuating). Thankfully this time it was both short and we had some communication from Toronto Hydro on what to expect. At least the house is clean now. I’m not sure the fridge and freezer have ever been this clean.

Busy:
I came into my 2-week winter “vacation” with a massive to-do list, to catch up on all the stuff I had been pushing aside while I was so busy in the fall and also to start some new projects (like to finally sit down and start crystallizing the 2nd edition of my book, and to help set up all the computers my family got for xmess). Well, I lost two full days to driving alone with the ice storm and power outage, to escape (in poor conditions) to my dad’s at first, then shuttling back and forth from Wayfare’s parents’ place to check on the house and run the portable heaters in a vain attempt to prevent the pipes from freezing. And I could forget about being productive while staying over at someone else’s place. Then we had to clean up the mess caused by the prolonged power outage. So I don’t have any new posts finished for you, no progress on cleaning out the junk in the house (just cleaning of the junk), and I haven’t even looked at a request to write a book chapter, let alone thought about the material itself. I am not remotely caught up on sleep, either.

Though speaking of sleep, after spending a few days couch-surfing through this disaster, I have come to appreciate the couch for its sleeping art. As a side sleeper, couches are not so bad, though tossing and turning often means completely flipping my setup around to keep my back to the back of the couch. But I like having that warm, soft vertical surface against my back. I think someone should invent a bed with side uprights like a couch has, but with a decent amount of flat space for sleeping and no bloodly couch cushion voids. Uprights on either side, that would be awesome.

Past Writing:
My book has now made it to #12 in the Business & Finance, Personal Finance, Investing category on Kobo. Note that this says more about how few books on investing people buy than it does about my success. Indeed, all of my earnings from Kobo are still theoretical as I have yet to hit the sales threshold needed to actually get a payment from them. Also, I got a call from the GBGHF top dog on New Year’s day to thank me for the brochures I put together for them: in less than a year, they are over three-quarters of the way to their three-year fundraising goal. They’re finding that having a (high quality) physical brochure is really helping them when they meet with donors, especially when they carry them around for those serendipitous meetings. It’s also helped with their other efforts: having the staff profiled in those brochures opened the door to prominently featuring staff in their other ads and communiques

Blueberry:
Blueberry was bad at dinner tonight, putting her grubby hands into her hair. And not just like “huh, my head’s itchy” brushing her hair, but after touching her head and getting told not to by Wayfare, she stared us down and planted both her hands on the top of her head with an evil grin plastered on her face. Then after we cleaned her up, I sat in the chair in the living room and stared at her in what I considered to be a stern and parental manner. She mugged and smiled and tried to get on my good side/make me break character. I held my disapproving ground. Then she spontaneously ran full-bore at me, crashing into my chest in a massive attack hug.

The hug game was born. A few more minutes of running, giggling, and hugging and all was forgiven (you try suppressing a grin against that onslaught of cute). This is the best thing that has ever happened in the history of everything.