Tuesday, April 13, 2010

Findependence Day

The book Findependence Day is a work of fiction that teaches financial lessons in the style of The Wealthy Barber. The author, Jonathan Chevreau, is a personal finance columnist for the Financial Post and National Post.

Trying to marry compelling fiction with financial lessons isn’t easy. I was curious to see how Chevreau would try to do this. It was obvious from the beginning of the story that the finance parts were going to be central. The first page contains financial lessons. You might think that this means the fiction part took a back seat, but this didn’t turn out to be the case.

By the time I got about a third of the way through the book, I was hooked on the story. It’s not exactly a Stephen King thriller, but I was hooked enough read the latter two-thirds of the book in a single sitting on a lazy Sunday morning.

I won’t give away the story other than to say that it is about a couple who make plenty of typical financial mistakes, but manage to succeed with the help of some expert advice.

There was one point where the marriage of fiction and finance was a little strained. While an expectant father waits to see his wife who is in labour, he coolly discusses financial matter with an expert advisor. In the hours before my first son was born I could barely string words together.

For the rest of this review I’ll focus on a few of the financial lessons.

Qualifying for a Mortgage

In a discussion of whether the young couple would qualify for a mortgage, the expert says “You qualify if you can fog a mirror.” That line cracked me up. Some home buyers seem to think that banks are doing them a favour by granting them a mortgage, but in reality, the banks are hungry for this business.


One part I couldn’t make much sense of was “If mutual fund Management Expense Ratios or MERs are running between 2% and 3% a year, they’ll cut your investment returns by 20% or 30% over three or four decades.” A 2% MER for 30 years takes away 45% of a portfolio. A 3% MER for 40 years takes away 70% of a portfolio.

Hacking Online Brokerage Accounts

According to one of the book’s characters, online brokerages guarantee the full amount in an account in the event that some cyber-criminal breaks in and transfers all the assets out. It makes sense to me that brokerages should cover losses in this case, but I was never too sure how it would play out. I’d like to see actual documentation of some sort to confirm that customers have this protection.

One of the main themes of the book is that becoming financially independent is best done slowly by making good financial choices through your life rather than going for the big score. Amen to that.


  1. The comment about MERs eroding 20% to 30% of your returns is perfectly plausible. Actually, I think it is often higher.

    A balanced portfolio might reasonably be expected to return 7% to 9% before costs over a couple of decades. Subtract two or three percentage points from that and your returns are slashed by a quarter to a third.

    $100,000 invested for 20 years at 8% would compound to about $466,000. Reduce the return to 6% because of costs and you'd have $320,000. That's over 31% less.

  2. You weren't too cognisant before your second son was born either! I'm sure the waitress enjoyed her $20 tip!

  3. Couch Potato: Perhaps what was meant was that MERs cut 20% to 30% of the returns each year. I was trying top make the comment make sense applied to the entire multi-decade investment period.

    Actually, a gross return of 8% would be expected to be reduced to 5.86% per year by a 2% MER. Isn't math wonderful?

  4. Is there an annual return at which at 2-3% MER would only reduce the portfolio value by 20-30% over 20-30 years?

    Let me give it a try. I'll pick a 25% reduction due to an MER of 2.5% over 25 years.

    Well, I was going to do the heavy lifting of actually calculating it, but I found an online compounding calculator and determined that even an assumed 32.5% return over 25 years, when reduced by 2.5% results in a 38% reduction in the final nest egg. Yeesh! How high would you have to go to achieve "just" a 25% haircut?

    You appear to have caught Chevreau with an error. Maybe he will see it on your blog and recalculate.

  5. Gene: Canadian Couch Potato's comment made me think that maybe Chevreau meant a 20% to 30% reduction in the yearly return (based on a 10% gross return and roughly a 2% to 3% MER). I wouldn't call this an error. I suspect that I misunderstood what he meant and that this quote from the book could be made a little more clear.

  6. Ah, yes, maybe so. When I read the quote you cited, I had the same initial conclusion as you.

    Your calculation of a 3% MER destroying 70% of a portfolio's value over 40 years is truly alarming. Clearly, market efficiencies should have eliminated such high MERs a long time ago. The mutual fund industry devotes a lot of resources to keeping clients uninformed of the huge expenses incurred by buying traditional mutual funds.