On Frugality: Considered Spending

Where and how you spend your money is closely related to your ability to retire comfortably. It might be time to consider putting some thought towards it.

Frugal by CafeCredit.com

Spending is something I’ve long thought about. As someone who no longer owns their own car, I’ve come to believe that what we presently own should not dictate the shape of the rest of our lives. I now share my girlfriend’s car, as an intentional choice. I could have replaced my old car, but decided it didn’t make sense. While I still lived in Ottawa, I could bike to work nearly as quickly as I could drive there, including parking, with a fraction of the stress.

Considered spending is a huge part of one’s personal finance success and ability to retire. It all comes down to saving more than you spend, focusing your spending where it really matters and investing as much as you realistically can in low fee products.

With that said, here are some of my thoughts on how one might be served managing their spending habits:

Spend more today to spend less tomorrow. Spending more upfront on quality, can help you save in the long-term. There’s a great quote from Terry Pratchett’s Men at Arms, Captain Samuel Vimes ‘Boots’ theory of socioeconomic unfairness, which sums this up exceptionally well. You may initially spend more, however in the long run you can end up saving in replacement costs.

Spend your money where you spend your time. This can be on a computer chair, good quality shoes or a good quality bed. Areas where you spend most of your time may be areas where spending actually makes sense. If you use something only infrequently, is it really worth allocating limited assets towards?

The bigger the purchase, the more time should be spent carefully assessing whether it is something you actually should be spending money on. Spend some time carefully considering your purchases before going all in. I spent a few weeks researching commuting bicycles before actually buying. This cooling off period, before pulling the trigger really helps put things in perspective. You’re less likely to make an expensive impulse purchase.

Spend money on experiences, not things. Sure, I could spend money upgrading my really old computer, or my phone which occasionally resets itself. I’d probably derive some satisfaction from such a purchase, however, it would be short lived. I’d likely soon adapt to the new widget, no longer quite appreciating the improvement over what I had before. A trip somewhere, by contrast, builds memories and is more likely to have a positive impact on long-term happiness.

Consider your spending and control where you allocate your money. Don’t let consumerism dictate what you should own, or deserve to own. It’s no path to long-term happiness nor to financial success.

Header image: Frugal by CafeCredit.com // CC by 2.0

Canadian Financial Institutions: Buyer Beware

Aggressive sales targets for both advisers and tellers at large Canadian banks may be promoting unethical, anti-consumer behaviour.

Neilson Spencer - Creative Banking

TD Bank has been in the news a couple of times over the last week for somewhat unscrupulous tactics where customers are involved. The issue is staff has a conflict of interest, with sales targets driving customer interactions and product recommendations. Think about that for a second – when suggesting financial products and services, including products you haven’t asked for, they’re juggling sales targets they must reach against your financial well being. This isn’t limited to financial advisers at banks, who I’ve referred to as salespeople before, but includes tellers.

Banks are managing staff performance based on sales. The behaviour they’re reinforcing is one where sales trump all. If you want to remain employed, you have to hit a sales target. We aren’t talking about supersizing your fries at Wendy’s, when they suggest an additional product. We’re talking about investments and line of credits they push, among other products, which may not be ideal for your situation. Aggressive sales targets will lead to aggressive sales behaviour. It sounds like an oversimplification, but that which you reward is that which you reinforce.

The two articles in question have the following headlines and are both fairly interesting, fairly indicative reads:

‘We do it because our jobs are at stake’: TD bank employees admit to breaking the law for fear of being fired

‘I will do anything I can to make my goal’: TD teller says customers pay price for ‘unrealistic’ sales targets

My caution around large financial institutions isn’t new and I’ve been fairly wary for years. For investment advisers to have a ‘suitability standard’ instead of a ‘fiduciary standard’, for instance, bakes in all sorts of issues. They don’t have to suggest the best product for you, merely one that is suitable. So if the product they’re suggesting is higher cost, with no additional benefit over an alternative? No problem! The product is suitable.

Both interesting reads, and while TD has been singled out, this practice occurs in banks across the country, both north and south of our lovely Canadian border. It is highly unlikely that they are the only offender. People who work in banks aren’t intentionally harmful, but the context in which they work promotes consumer adverse behaviour. Listen to suggested product pitches with a healthy dose of scepticism. Educate yourself before you get taken for a ride.

Additional Information:

Forbes on the difference between the fiduciary standard and the suitability standard.

Header image by Neilson Spencer – Creative Banking // CC by 2.0

Sony PRS-T1: Crashing E-books

Sony reader PRS-T1 by Hideya Hamano

Lately, my somewhat dated Sony PRS-T1 e-book reader has been crashing on newer ePub format e-books. I can read a few chapters, and then out of the blue, the device will stall, eventually booting me back to the device home screen. Resuming the e-book and trying to navigate past the crash point creates a reproducible issue.

In terms of buying a new e-book reader, I can’t really make a good case for it. Sure, the device is five years old, but in general, it still gets the job done. You may have noticed this trend, where technology and I are concerned. Why throw out a mostly usable though slightly imperfect piece of technology when you can fix it? Challenge accepted!

Long story short, I’ve since found a really simple way to get around the issue by converting the ePub file.

The Problem

It’s unclear to me if the crash relates to formatting in specific ePub files themselves, certain characters, book length or a result of newer versions of the ePub file format. This issue has really only come up in two e-book files over the past six months or so. A minor nuisance, but a nuisance never the less.

The Solution

I’ve talked about the Calibre e-book manager on my blog before. It serves a number of purposes including allowing you to transfer e-books to your reader.

A lesser used feature allows you to convert e-books directly in Calibre, by right clicking on a title and selecting “convert books”. You’ll end up with another copy of the ePub title, however, it will be reformatted by Calibre. Converted ePub files seems to fix this problem for me. Simply remove the old ePub file from your e-book reader and transfer over the new file created by Calibre. Much cheaper than buying a new e-book reader! The only caveat with all this is that your e-book file must be DRM free for conversion to work. The joys of technology.

Header image by Hideya Hamano – Sony Reader “PRS-T1” // CC by 2.0

Choosing the Right Financial Professional for your Investments

Some tips to help you choose the right financial professional to sort out your investments.

John Liu - Financial Gain

I’ve written a bit about my distrust for the personal finance industry in Canada, given there’s room for plenty of conflict of interest and product recommendations that aren’t in your best interests. Self-educate or be taken advantage of. Over in the U.S., a retirement account fiduciary rule which protects consumers from financial firm conflicts of interest is in the midst of being attacked. When corporate interests are put before consumer interests, you have to look out for yourself. Buyers beware. So, that begs the question: how do you find a financial professional that’s right for you?

What Type of Professional do you need?

Financial Planners

In Canada, financial planners will create a plan, assessing cash flow, retirement, risk management and asset allocation. It’s invaluable to have a plan before you start putting your money to work for you. It may be extremely cheesy, but, if you fail to plan, you plan to fail. What financial planners generally won’t do is suggest specific products or make trades for you. That gets into the realm of financial advisors.

Financial Advisors

Professionals with this title will look at your asset allocation, willingness to accept risk and suggest actual financial products (stocks, bonds, mutual funds, ETFs, etc.). They may also make trades for you, depending on the service levels they provide.

Note: There are absolutely firms that offer both services. It’s just important to be aware that there is a distinction between the two types of professionals and the services they can provide.

Tips on Choosing a Financial Professional

So you’ve figured out what you need, be it a financial planner, an advisor, or both, so what’s next?

  • In general, what you’re going to be looking for is a “fee only” professional. They will generally charge an hourly rate. If you’re looking for an advisor that actually manages your portfolio, you may be getting into “percentage of assets under management” territory.
  • Ideally, the person you work with should not receive a direct commission from the specific investment funds they suggest. This is important, because it removes a substantial conflict of interest. If they’re pushing their own products, and receiving a commission for it, whenever you buy or sell, they’re less likely to suggest lower fee, better suited options. Directly ask them how they’re paid.
  • Don’t be tricked by an impressive sounding combination of letters, following a person’s job title. Ask what the designation following a professional’s title indicates. Is the designation managed by the financial industry, or administered by an independent organization? The CFP (Certified Financial Planner) designation in Canada is one of the more recognized designations, despite it not touching on index investing.
  • You’re going to want to avoid banks and large financial institutions. Unfortunately, while you may have a longstanding relationship with them, they make money by selling overpriced financial products. Their advisors lean more towards salespeople, which I’m uncomfortable with.
  • If you want index mutual funds or index ETFs, it’s important to ask upfront whether this is something they advise on. Not all financial designations provide education on these products.
  • You’re also going to want to assess how responsive the professional is, and how easily you can have a conversation with them. If you can’t get in touch with or understand them, they’re not someone you’re going to want to work with over the long-term.
  • Oh yes, finally, avoid insurance companies when looking at investments. This may sound obvious, but they’re extremely likely to try and sell you an array of insurance products instead of actual investments. It’s true that you can tax shelter money within the investment portion of a life insurance plan, but why wouldn’t you just buy an actual investment?

Resources

  • For Canadians, Holy Potato offers a list of fee only financial planners and coaches.
  • MoneySense also provides a list of approved financial advisors. I’d go with the Holy Potato list first. The MoneySense article is a pay for listing service.
  • Preet Banerjee has a good, far more detailed write-up on choosing a financial planner.
  • MyMoneyCoach has an article on how to find a financial advisor
  • Despite everything I’ve said above, Steadyhand is a solid option, if you’re comfortable with actively managed mutual funds and associated fees. I’ve suggested them a couple of times before, despite the fact that I would not use them myself. They’re probably the best pro-consumer actively managed mutual fund firm in Canada.

Header image by John Liu – Financial Gain // CC by 2.0

Thoughts on Millionaire Teacher: Second Edition

The second edition of Andrew Hallam’s Millionaire Teacher may very well be the only personal finance book you need to read this year.

Millionaire Teacher - 2nd Edition

ISBN: 9781119356295, Author: Andrew Hallam

Let’s get this out of the way: Millionaire Teacher is my favourite intro to personal finance book. I first read Andrew Hallam’s Millionaire Teacher a little under two years ago, after which point I gifted two copies to people I thought could benefit from the information. This is the first book I’ve felt compelled to do that for, and also the first book I’ve thought I needed to re-read, with the January 2017 release of the second edition.

For people who want to understand how to better manage their money for the long-term, increasing your chances of a comfortable retirement, this should be your go to book. The writing is clear and low on jargon. It covers a ton of information I wish I’d had coming out of high school.

With that said, I trotted over to my local library and picked up a copy, with the hopes of reading new information on ETF investing and robo-advisors, which were absent in the first edition.

What the Book Covers

  • Intelligent spending
  • Investment growth over time (the power of compounding)
  • The importance of investment fees (why index funds work and why actively managed funds on average underperform market return)
  • Controlling for poor investor / investing behaviour
  • Asset allocation (the importance of investing in both stocks and bonds)
  • Index investing in different countries (including Canada, the U.S. and Great Britain with sample portfolios)
  • Alternatives to do-it-yourself investing
  • Dealing with investment advisors/brokers (effectively, having a BS detector and knowing which questions to ask)
  • Avoiding common mistakes (why buying gold may not be wise, avoiding investment newsletter advice, etc.)

New Personal Takeaways

  • Consider a guaranteed pension plan within the context of the fixed portion of your holdings. This implies that you can hold more equity and less fixed assets in your RRSP/TFSA/Taxable accounts. Ah to actually have a pension.
  • Do-it-yourself investing, which is my preferred strategy, may not be ideal for everyone. Simplicity is sometimes worth the price premium where people may not want to spend an hour a year managing their portfolio. In those cases, the additional investing cost can be worth it.
  • The new segment involving asking banks about putting together an index fund portfolio matched my experience with TD bank directly. It is not a strategy they actively support. They will throw information at you to try and dissuade you from this course, despite research backed findings indicating that it provides a greater probability of success.

Summary

If you’re going to read one personal finance book this year, try to make it this one. Personal finance books tend to be dry, though this one tends to avoid that pitfall entirely. This book can help you gain a better understanding of how to get your money working for you. In comparison to other, similarly targeted titles like the Wealthy Barber Returns, I found this title less anecdotal with a far better flow.

Additional Resources

Mutual Funds: Hidden Costs Matter

Why understanding hidden mutual fund fees is important. Should you consider moving to Exchange Traded Funds? What’s the impact?

OTA Photos - Analyzing Stock Market

For a while now, I’ve been considering switching from TD Bank’s E-Series index mutual funds in Canada, to lower cost index ETFs. When you’re starting out, TD E-Series funds are great and admittedly, less daunting than dealing with ETFs. They provide a painless way to get your money working for you. As your portfolio grows in value though, it may be worth considering what you’re paying.

I definitely suggest considering the e-series funds for early Canadian investors, for the following reasons:

1) No fee to buy or sell in a TD Mutual Fund / TD Direct Investing account

2) You can set-up an automatic monthly purchase plan, automating adding money to your investments, at no additional cost.

3) They’re some of the lowest cost bank provided index mutual funds in Canada. Tangerine, for instance, has an average MER of about 1.07%. My TD E-Series portfolio was averaging somewhere between 0.42% and 0.45% in fees, based on my allocation.

4) Buying and selling through TD’s platforms (be it TD EasyWeb or TD WebBroker) is extremely simple. You tell it how much of a fund you want it to buy, and off you go.

5) You don’t have to worry about market trading hours. It’s much easier than directly using the stock market to make a purchase. You place a dollar value order and away you go. The order is taken care of after market hours (time to post the transaction and the like is another matter).

ETFs on the other hand, are more complex to buy and sell, and unless you’re on Questrade, will likely have a transaction cost of about $10 each time you buy or sell. ETFs are traded during stock market hours. You’ll generally want to buy them when the stock market is actually open to avoid unexpected price surprises. Mutual fund transactions, by contrast, are processed at the end of the business day, which makes buying and selling a little easier. Further, with ETFs you have to consider the current bid-ask spread, and figure out how to price your order. Not complicated, really, however with mutual funds, you can just enter a total dollar amount you want to buy, and you’re off to the races.

With that said, as your portfolio grows in value, ETFs can provide a notable fee savings, through their lower Management Expense Ratios (MER). Factor in advisor fees, and the cost difference grows even larger.

A Cost Comparison between TD E-Series Funds and Vanguard ETFs

Let’s do a quick Comparison, comparting TD’s fund expenses to Vanguard Canada’s, to give you a better idea of what a regular investor might be paying.

TD E-Series Fund MER

TDB900 (Canada) TDB902 (U.S.) TDB911 (International) TDB909 (Canadian Bond)
0.33% 0.35% 0.51% 0.50%

Vanguard Canada Fund MER

VCN(Canada) VXC (International including U.S.) VAB (Canadian Bond)
0.06% 0.27% 0.13%

Note: Vanguard’s VXC covers U.S. and international markets all in one fund, which accounts for the difference in number of funds.

Given these percentages will look small to most, being a fraction of a percent, let’s do some math. Assume Bob has $100,000 dollars invested in each of these portfolios. For TD, we’ll go with a simple 25/25/25/25 asset allocation split equally across their four funds. In Vanguard’s case, we’ll go with a 33/33/33 split for their funds. Let’s see what the annual cost difference looks like.

Bob’s TD E-Series Annual Cost Breakdown:

Fund Value MER Cost
TDB900 $25,000 0.33% $82.50
TDB902 $25,000 0.35% $87.50
TDB911 $25,000 0.51% $127.50
TDB909 $25,000 0.50% $125.00

Bob’s Total Annual Cost with TD: 82.5+87.5+127.5+125= $422.50

Bob’s Vanguard Canada Annual Cost Breakdown:

Fund Value MER Cost
VCN $33,000 0.06% $19.80
VXC $33,000 0.27% $89.10
VAB $33,000 0.13% $42.90

Bob’s Total Annual Cost with Vanguard: 15+40+67.5+32.5 = $151.80

Bob will pay an additional $270.70 yearly, on a portfolio of $100,000 with TD’s E-series when compared to Vanguard. If you consider the power of compounding amounts in your investments, you should also be aware of the power that compounding costs can have to eat away at your retirement money.

I would wager many investors don’t quite consider the impact these costs can have on your ability to retire comfortably. Over a lifetime, these annual costs can account for tens of thousands of dollars that you might otherwise have available in your accounts. The cost gulf between quality index ETFs and mutual funds grows when you look at actively managed mutual funds, with MERs between 1.6% and 2.6% on average in Canada. Are you getting value for you you’re paying for, or are you ensuring bank advisors/brokers have a great vacation, fueled by your retirement savings?

Summary

TD E-Series funds, or even ETFs, are not for everyone. There are other options available like Tangerine or Robo-advisors, where you transfer money, and they handle portfolio asset allocation in low cost funds. The key take away from all this, is ultimately that costs matter. There’s no requirement for firms to show you what exactly you’re paying holistically, even with the new CRM2 regulations in force in Canada. The regulations will show what you’re paying for investment advice, but not so much what you’re paying for your actual investments. Costs matter, and if you don’t take charge of what you’re paying, nobody will.

Resources

  • Canadian Couch Potato on whether moving to ETFs makes sense.
  • Morningstar has a two part series on what Canadians pay for mutual funds, if you want to learn about different types of costs. Part one and part two are linked.
  • Steadyhand has a relevant article explaining investment costs, including a useful infographic.
  • Vanguard has a great write-up on the differences between mutual funds and ETFs.
  • Bonus image, by Sacha Schua (CC by 2.0) which spoke to me, when learning about ETFs (I found my first experience buying ETFs more stressful than I anticipated):

Sacha Schua - Thinking about my ETF hangups -- index card

Header image by OTA Photos – Analyzing Stock Market // CC by 2.0

Democracy is Broken: Failures of the Best Political System We’ve Got

Democracy is the best system we’ve got. However, there are certain inherent deficiencies which are important to consider.

Feral78 - Democracy

It’s easy to look at Canada’s neighbour to the south and judge, or think their political situation is unique. I’d argue, however, that the current events are a likely outcome, a direct result of the way modern democratic systems are structured. Be it Canada, the U.S. or the U.K., there are some fairly obvious problems. Watch the news, and more oft than not, it’s competition instead of collaboration. The goal is to undermine, and win, but at what cost?

The amount of political divisiveness, or in-group and out-group thinking is absolutely destructive. Calling someone a “lefty” is used as an insult, as if merely existing on that side of the spectrum invalidates all opinion and rational thought. Similarly, derisively calling someone out for voting Trump is equally harmful, regardless of their reasons for casting their vote as they did.

It creates an us versus them mentality, which will never lead to common ground. Ideally, and perhaps naively on my part, I believe people on both sides of the political spectrum would be best served working together for the best long-term outcomes for their country. Unfortunately, because people are subject to human biases, that’s not really how our democracy works. Party lines are drawn, and positions are held and fought over, with nary a side willing to give an inch. This is absolutely not limited to U.S. politics. Winning is not winning if you have to give something up, or so it goes. Game theory, this is not.

If you follow the Canadian federal political system, you have minority parties, such as the Conservatives and NDP party constantly squabbling, pushing forward ridiculous scenarios like “elbowgate”. That is certainly not a collaborative form of government, but rather one where political gain is achieved by undermining one’s opponent. On the other side, the Federal Liberals, with a majority, have little incentive to work with their opponents, for a better Canada. Often, political platform promises are made and quickly trampled. So much for electoral reform, which was one of the pillars of Trudeau’s campaign.

Thinking through all these things, while fighting with glorious insomnia, I came up with a list of issues or deficiencies, which hamper the effective functioning of democracies, be they Canadian, U.S. or British.

Informed Voting

No requirement for informed voting: groups can make better decisions, to a point, when the people making decisions have thought deeply about the issues at hand. When you have people strictly making decisions based on party name, feelings, or the charisma of a leader, we all lose. This may be an area where our educational system has vast room for improvement.

Confirmation Bias

People focus on facts that confirm what they already believe: political opponents may make extremely good points, but if people are vested in their current point of view, it’s extremely difficult to bring them around to another point of view. Never mind the current fake news trend, or fake news calling trends.

Party before Country

Supporting party before country: “Oh, I always vote liberal.” This line of thinking, without critical thought on what the party presently supports, is of no long-term benefit to the advancement of a nation.

Short-term Focus

People choose short term self-interest over long-term country benefit. This can lead to single issue voting. For instance, if lower taxes, or increased jobs to lower middle-income households is most important to you, this is more likely to be a determining factor in who you support. So yes, the party you vote for may create jobs for your demographic, but what’s the bigger picture? What other policies are they promoting, and what will your country look like? What does the platform, considered holistically, mean? Is the leader truly someone you’d feel comfortable with, running your country?

Similarly, politicians are focused on ratings and rewarded based on a rather short timeframe. This incentive shifts focus from long-term country direction to one of more shortsighted policy. Why focus on difficult, long-term solutions that may take decades or even generations, when you can focus on the next four years and get more votes.

Emotional Arguments are more Persuasive than Facts

People are easily swayed by emotional appeals and simple solutions, whereas factual argument and opinion require deeper thought. Thus, facts start to matter less than feelings. In this way, people become easily manipulated into voting against their own long-term interests. If you’re unemployed, it’s easy to find another group to blame for your unemployment, despite the situation being multifaceted. There may be less manufacturing jobs, there may be less demand for the widgets being produced and your skillset may be outdated. It’s easy to lay blame on a single factor, based on feeling.

The Dark side of Charisma

People choose charisma over substance. Which politician is more likable and trustworthy? What this means is that often, where the message is coming from can be just as important as what they’re saying.

Poor Voter Turnout

A high proportion of voters abstain from voting. This means that parties get elected who were not even selected by the majority of the capable voting pool. As such, the party in power may only represent a subset of the population, and not the general population at large.

Corruption and Special Interest Influenced Policy

In positions of power, without proper regulation in place, politicians may be predisposed towards certain initiatives, based on private and foreign donation. Recently in the NewYork Times, the British Columbia Liberal government was exposed for taking party donations from private and foreign interests, due to limited regulation. What they’re doing is perfectly legal, though is it ethical, and in the best interests of the constituents?

This is not limited to BC, Canada, the U.S. or the U.K. To some degree, this is an issue where politicians are able to receive compensation from private interests. If you receive a paycheck from different sources, you become beholden to those sources.

Argument from Socrates

Historical, cultural and societal context gives people an understanding of the environment in which they’re voting. Without an understanding the context, including how government operates, people may not be situated to rationally choose government. How do you gauge the effectiveness of that which you do not understand? Democracy as a hereditary right begets inherent difficulties (many of which are discussed above), including the potential election of demagogues who prey on popular desires and prejudices, rather than well thought out positions.

There’s an interesting YouTube video, by Alain de Botton, on why Socrates hated democracy. Definitely worth the four minutes of your time.

Summary

With all this in mind, it’s easier to get context for the democracy we live within. A first step would be to understand that just because someone has different political leanings from you does not immediately invalidate their position. Lashing out and mocking people with a different point of view, as things go, is a fairly base response. It’s easy to judge, harder to understand. Working through these issues is probably not easy, though things worthwhile rarely are. It’s easy to feel smug, looking at the goings on in the U.S. or the U.K., however, I’d wager we’re really not all that different in the end.

Header image by Feral78 – Democracy // CC by 2.0