Monday, March 30, 2015

Getting Fired

I’ve worked in high tech for a long time now and have lived through many rounds of layoffs. I’ve noticed that employees generally handle the possibility and reality of getting fired quite poorly. (Disclaimer: No, I didn’t just get fired. In fact, my employer of several years seems quite happy with me. But that could change any time.)

Possibility of Getting Fired

Employees are mostly complacent about the possibility of getting fired. That is, until a colleague gets fired or their employer announces upcoming layoffs. Then most employees are nervous wrecks until it seems like layoffs are over. Then they slowly transition back to complacency. There are people who don’t follow this pattern, but most do.

Whether they are in a period of complacency or fear, few employees do much to prepare for possibly being fired. If you force yourself to confront the reality of what would happen if you lost your job, it becomes self-evident that you need emergency savings and should limit debt. But the possibility of getting fired is so scary for most employees that they refuse to allow for this possibility in their planning. The few times I’ve said to a group over lunch that I wake up every work day knowing that this might be the day I get fired, it silences the group for a while.

I can almost hear many readers’ saying to themselves, “maybe others are at risk of getting fired but not me.” People who think this way are among the many who later say “I can’t believe they fired me.”

Response to Getting Fired

After observing many people during the first couple of weeks after getting laid off, I’ve seen lots of different reactions. But there is one thing that is nearly universal: people decide to take a break for a while and not look for a new job right away. They offer various inventive reasons for this choice, but the real reason is usually quite simple.

It’s scary to put yourself out there and attend interviews. If you choose to delay looking for work, you’re just avoiding pain in the short term. But let’s take a longer view. Unless you’re wealthy, you’ll have to find new work eventually. By delaying you’re just extending the period of time when you feel lousy about yourself and you and your spouse are scared about money. Why would you want more of that?

I’m not suggesting you start interviewing on the day you get fired, but it shouldn’t take much more than a few days to process what happened to you and begin to move on. If you find new work before your severance pay runs out, you might even be able to double-dip for a while.

In summary, try to be realistic about the possibility of losing your job. In addition to financial preparations, it makes sense to do small things like get a personal email address so you’re not cut off from friends when your work address disappears. If you do lose your job, avoid making up smart-sounding reasons for delaying looking for new work. Suck it up, prepare a resume, and start hitting up colleagues and friends for ideas for finding a new job.

Friday, March 27, 2015

Short Takes: ACB Tracking Problems, Cost of Moving, and more

This week I wrote only one post on the reason why trying hard at picking stocks isn’t likely to benefit most investors:

Trying Hard at Stock Picking Doesn’t Help Much

Here are some short takes and some weekend reading:

Justin Bender reports that when RBC Direct Investing tracks the book value of its clients’ holdings, it isn’t converting each transaction into Canadian dollars as required by CRA. Justin doubts that most DIY investors are making proper currency adjustments. Am I one of the few people who looks up the Bank of Canada daily exchange rates to get my taxes right? One thing I’ve never understood is why the Bank of Canada limits their daily exchange rate data to the past 10 years. Why not just give us access to all the data they have? The cost of the extra storage would be a tiny fraction of a penny.

Preet Banerjee has a video explaining all the different costs that come into play when you sell a house and buy another one. His conclusion: stay put as much as possible.

Frugal Trader at Million Dollar Journey gives us a peek into how he has run his personal finances over the years. I see a lot of similarities between his situation and mine (family of 4, lived off only one income, aggressively paid off debt) and some differences as well (he controls spending with a tight budget; my wife and I have no budget and just don’t bother to spend much).

Big Cajun Man explains his best financial decision ever.

Boomer and Echo explain the benefits of setting up an RESP for your children.

My Own Advisor takes some reader questions about how he handles his portfolio.

Thursday, March 26, 2015

Trying Hard at Stock Picking Doesn’t Help Much

In a post that inspired many debates among commenters, My Own Advisor asked why we should bother to buy individual stocks at all. In a rebuttal to indexers, one commenter, Pullingmyselfup, asked the following question (lightly edited):

“Why is investing the only job, hobby, or activity where people are told not to try?”

It’s true that indexing proponents discourage people from trying to pick their own stocks and suggest they just buy an index of all stocks. Golfers can improve through training and practice; why can’t stock pickers improve?

The truth is that we can improve our abilities to analyze stocks. But investing offers an alternative not available to golfers. Imagine if you had the option to receive the average prize at the next professional golf tournament without doing anything at all. Instead of hoping for some natural golf talent, buying equipment, spending years building skills, and traveling to tournaments, you just sit on your couch and collect the average player’s prize.

Of course, we don’t have this option in golf, but we can do it with investing. Instead of competing with the bulk of investing dollars controlled by professionals, we can just get their average performance by investing in index funds.

It’s true that if I work at it I can learn to analyze stocks better. But I won’t become better than the average professional investor. I can shrink the gap between me and the pros, but I’ll remain better off just buying index funds.

There are a small number of investors who may be able to build the skills necessary to compete effectively with investing pros, but almost all of us are better off focusing on a sensible asset allocation and buying index funds.

There are some who will say they’d rather play golf than sit on the couch. So would I. But I know I’ll never play well enough to compete with the average golf pro. Sometimes for amusement I look at some individual stocks, but I don’t buy them because I can’t compete with investing pros.

Stock picking isn’t the only activity where the option of just taking the average result is available. Consider poker. In a friendly game where there are no pot rakes or seat fees, the average player makes nothing at all. The money shifts around, but the total amount held by all players stays the same. If you want to get the average result of all players, just don’t play. In fact, you’ll beat the average of the other players this way after we consider costs like pot rakes and seat fees. A similar thing happens with indexing. Index investors actually get better results than investing pros after we consider the lower fees that indexers pay.

The number of active stock pickers who beat indexing over the long run is very small, but the number of active stocks pickers who say they beat indexing is very high.

Friday, March 20, 2015

Short Takes: Advisors Behaving Badly, Misleading Statistics, and more

Here are my posts for this week:

The One-Page Financial Plan

What Interest Rate is Your Annuity Paying? 

Here are some short takes and some weekend reading:

Dan Hallett reports that many financial advisors are churning their clients’ assets into Deferred Sales Charge (DSC) funds ahead of the new CRM2 regulations that force disclosure of costs. DSCs are a way for advisors to get paid up front whether clients stay invested for the long term (at high yearly fees) or pull their money out early and pay a penalty.

Patrick at A Loonie Saved makes a good point about how someone wanting to mislead with statistics can shop for time periods that support a particular conclusion.

The Blunt Bean Counter reminds us that with low oil prices, now may be the time to look into tax planning with flow-through limited partnerships.

Canadian Couch Potato looks at the merits of preferred shares.

My Own Advisor takes a run at a list of questions most investors don’t ask themselves. His answers are fairly short because he’s a buy-and-hold investor. My answers were even shorter because I’m a buy-and-hold indexer.

Big Cajun Man is celebrating his 10th year blogging. It doesn’t seem so long ago that he got started.

Wednesday, March 18, 2015

What Interest Rate is Your Annuity Paying?

If you buy an annuity for $100,000, and it pays $6000 per year, that seems like a 6% return. But that’s not actually the interest being paid. Most of each payment is just your own money returned to you. Here I try to work out what interest rate an annuity actually pays.

To do this, I worked out what interest rate the insurance company would have to make to exactly cover all the payments to a large group of people who buy the same annuity. For that I needed actuarial tables that predict how many people will live to each age. I used data from Statistics Canada. Note that this is not the same as just using average life expectancy; I actually assume the insurance company keeps making payments to remaining survivors each year.

There are many types of annuities. Here I focus on the simple case where there is no guarantee period, which means that the payments stop when you die, even if that happens shortly after buying the annuity. I also looked only at single person annuities with level payments (no increases to account for inflation). I repeated the calculations for males and females of ages 60, 65, 70, and 75.

The following chart shows the results. To use this chart, take the annuity payout percentage and find it on the vertical axis. Then see where it meets the appropriate chart line to find the interest rate on the horizontal axis. For example, RBC’s Annuity Calculator tells me that a 70-year old man in Ontario would have to pay $313,820 to get $2000 per month ($24,000 per year) for the rest of his life. This is a payout of 7.65%. The chart says the insurance company needs to earn 1.6% per year on the man’s lump sum to break even.


Of course, this 70-year old man is getting more than just 1.6% interest. He’s also being freed from longevity risk. Well, maybe he’s just being partially freed. After all, the real value of his payments will decline with inflation over the years. Even with the reduced longevity risk, 1.6% interest seems quite dismal. That’s unlikely to keep up with inflation.

I like the idea of reducing longevity risk, but the payouts on annuities just seem way too low. You can see this more clearly if you look at annuities that increase payments every year to account for inflation. The starting payments on these annuities are much lower.

This is just one more example of how you have to sacrifice returns to eliminate risk.