Thursday, June 27, 2019

Switch: How to Change Things When Change is Hard

In my quest to better understand how to help people manage their money better, I followed a reader’s recommendation to try a psychology book by Chip Heath and Dan Heath called Switch: How to Change Things When Change is Hard. They explain how human nature makes change difficult, and they offer techniques for overcoming these difficulties.

The book begins with the observation that “Your brain isn’t of one mind.” Kahneman called the two parts of our minds System 1 and System 2, but the Heaths prefer a different analogy: “our emotional side is an Elephant and our rational side is the Rider.” Making changes requires getting the Elephant and Rider in agreement.

We can see the tension with a personal matter such as getting out of debt. The Rider might want spend less, but the Elephant would rather go out to eat than cook. You might think that we’d only have to deal with people’s rational sides to make changes at an organizational level, but you have to appeal to people’s Elephants if you want anyone to care enough to change their behaviour. Even executives need to care about a new idea at an emotional level to move on it.

A common theme in the book is that “What looks like resistance is often a lack of clarity.” When you’re trying to get people to change their behaviour, it’s vital to be crystal clear about what they should do. Any confusion makes it easy to just slip back into familiar old patterns.

Another common theme is the “Fundamental Attribution Error.” We have a tendency “to attribute people’s behavior to the way they are rather than to the situation they are in.” We tend to declare change impossible because of people’s natures when the right prodding can lead to big changes.

Only small parts of the book are directly relevant to financial matters. In one section, the authors are positive about the “Debt Snowball Method.” This is where you pay off small debts first rather than going after the debts with the highest interest rate. The reason is a matter of motivation. Being able to cross a debt off a list provides motivation to keep going. Paying off $200 of a $5000 credit card debt leaves us at risk of giving up.

There are nine steps the authors offer for making a “switch.” Here are four of them.
  • Rather than focus on problems, look for bright spots and encourage more of what is going right.
  • Script very specific changes rather than thinking about the big picture.
  • Find a way to make people feel strongly about the needed change.
  • Shrink the change to a first step that isn’t daunting.

The authors tell compelling stories, and their writing is page-turning. My first reaction is that the book’s methods must work well, but I can’t be sure because I haven’t tried to use them yet. I think the book is worth reading because it gives readers a different way to think about motivating change in themselves and others.

Friday, June 21, 2019

Short Takes: CPP Active Management, Portfolio Rebalancing, and more

Here are my posts for the past two weeks:

Should CPP Exist?

Credit Card Hopelessness

Living Debt-Free

Here are some short takes and some weekend reading:

Andrew Coyne explains the active vs. passive management issue for the Canada Pension Plan. He also digs into discrepancies in the claimed recent outperformance.

Canadian Couch Potato explains why it’s not necessary or desirable to rebalance your portfolio more than once per year. This advice is for those who rebalance based on time. I prefer threshold rebalancing, which is rebalancing whenever my portfolio is sufficiently far from its target percentage allocations. This is really only recommended if you can automate the process. It doesn’t make sense to do all the necessary calculations every day just in case you hit a threshold. I have my portfolio spreadsheet set up to send me an email when it’s time to rebalance, so I never have to look at it.

Tom Bradley at Steadyhand reminds us to focus on what really counts in investing. Hint: it’s not the short term.

The MoneySaver Podcast interviews Dan Bortolotti, the Canadian Couch Potato. They discuss passive index investing, ETFs, Robo-Advisors, and getting started investing.

Frederick Vettese shows in one example scenario that deferring CPP to age 70 is better than buying one of the new Advanced Life Deferred Annuities (ALDAs).

The Blunt Bean Counter explains the rules for the pension income tax credit.

Friday, June 14, 2019

Living Debt-Free

Through a combination of good luck and good habits, I’ve never had a problem staying out of debt. I’ve had to work at understanding what causes others to have debt problems. This is where Shannon Lee Simmons’ book Living Debt-Free has helped me. She lays out a wide range of debt management plans that take into account human nature and the underlying reasons why people have trouble with debt. The book contains a great many stories of people Simmons helped out of debt. These stories illustrate her points well and made the book an entertaining read.

Without thinking too deeply, we might believe that making someone feel shame about being in debt would drive them to cut their spending and pay off their debts. Simmons says the opposite is true. People need to feel good about some of the choices they’ve made to generate the sustained enthusiasm necessary to spend a few years digging out of debt.

“The stronger the negative emotions connected to your debt, the more likely you are to fail at your debt-repayment plan. You’d think it would be the opposite, but it’s not.”

If you’re in debt and don’t have a handle on your finances, “It’s likely that you feel guilty or afraid when you spend money. You never really know when spending is okay or when it’s going to lead to more debt you can’t pay off.”

An interesting part of the book it the idea of “tripwires.” Simmons suggests that you examine your spending over a few months and identify all the purchases you now regret. She then wants you to look for a pattern among these purchases. Possible examples are overspending on vacations, buying things your children don’t need, or fear of missing out. She wants you to identify your tripwires so you can catch yourself before making a purchase you’ll regret later.

Simmons doesn’t believe in scaring people with how much interest they’re paying. “The problem is that using scare tactics as the sole motivating factor almost always leads to failure over the long run.” She prefers to have you find your “touchstone,” which is the non-financial reason you have for wanting to get out of debt. She offers a list of questions to answer to help identify your touchstone. Keeping your reason for wanting to get out of debt front and center in your mind will help you maintain your motivation.

The book contains a series of steps for analyzing your spending, setting a realistic spending level, and calculating your “magic amount,” which is the amount of your income you can put towards debt each month.

Simmons stresses the importance of being realistic about how much you need to spend. If you choose a spending target that’s too low, you’re just setting yourself up for failure. “People give up on their Debt Game Plan if the plan doesn’t feel doable. I’ve seen it again and again.”

“If you’re in a situation where your Magic Amount is zero and you need to reduce expenses, try to reduce Fixed Expenses first, before reducing your Spending Money.”

Simmons has specific recommendations for how to set up your bank accounts. It’s aimed at having a separate chequing account to isolate the money you can spend each month however you wish. This gives you “permission to spend that money to zero without worrying that you’re using money earmarked for bills or savings.” If you want pizza and the account has money in it, you can have the pizza. “No guilt, no shame, no worries. No debt.”

Some minor not-so-good parts of the book

There are a few references to Astrology. Perhaps these are just meant to keep the book light and fun, but they are a red flag for me. I had a family member who believed in Astrology, and she made important decisions about her life and relationships taking into account Astrological nonsense. These few references to Astrology undermined my confidence in the author.

In Simmons’ own story of digging herself out of debt, she planned to withdraw $13,000 from her RRSP and “Once I paid the tax penalty, I’d have $9,100 left.” I know many people mistakenly think of the withholding tax on RRSP withdrawals as a “penalty,” but as a CFP, Simmons should know better.

After cleaning out her RRSP, “That was it. All of my savings, gone. Poof!” It’s common for people to think of their savings and debts separately, but the RRSP withdrawal was just recognition that it had already been spent slowly over time.

The interest rate on payday loans “can be as high as 60 percent.” Try 390%, and that’s before compounding. The compounded interest rate on payday loans is about 3600%!

When you’re in a position of needing to sell investments to pay off debt, Simmons says “you don’t want to sell if you’re in a loss position.” This isn’t good logic. It’s a bad idea to sell something just because it went down, but if you need the money to pay off debt, it shouldn’t matter whether the investments are trading higher or lower than your purchase price.

In a strategy Simmons calls “Stack and Swap,” it can be a good idea to pay certain debts off first to eliminate their minimum payments to free up cash flow. She says to “pay off the [debt with the] lowest amount owing,” but this isn’t right. It’s the ratio of minimum payment to debt that matters. If the lowest debt is $1000 on a credit card with a $30 minimum payment, paying it off won’t free up much cash flow. The targeted loan has to have high payments relative to the debt amount for “Stack and Swap” to work.

In a story about a person named Lee with tax troubles, the difference between $500 and $325 is calculated as $125.


Overall, I found this book both entertaining and illuminating. While I don’t have debt troubles myself, I’m glad to get better insight into how to help others who do have debts. The book has some parts I didn’t like, but they weren’t central to the main themes.

Wednesday, June 12, 2019

Credit Card Hopelessness

We’ve all seen the block of text on our credit cards that says how long it will take to pay off the debt if we just make minimum payments. I suspect this disclosure doesn’t make a positive difference.

Here’s the text that appears on my latest credit card statement:

“At your current rates of interest, if you only make your Minimum Payment by its due date each month, it will take approximately 35 year(s) and 10 month(s) to repay the account balance shown on this statement.”

35 years is a depressingly long time for it to take to get out of debt. And this is for a balance of only a little over $4200. It gets longer for larger balances. I calculate that my minimum payment should be a little over $70, but it’s only $10, which doesn’t even cover interest. Perhaps as long as I keep paying my bill in full every month, my minimum payment stays at $10 so I won’t realize that the interest is actually about $70 per month.

Superficially, the mandated disclosure with the depressing message of it taking decades to get out of debt seems like it should motivate people to pay more than the minimum payment. However, I suspect it often has the opposite effect. What’s the point in trying if you can’t get out of debt for decades? You might as well give up. I don’t believe these things, but I can understand if people become hopeless about their debts.

I have a suggestion for a different disclosure:

“The amount you have to pay monthly to clear this debt in
1 year is $391,
3 years is $157,
5 years is $112.”

This disclosure is more hopeful and more useful for credit card holders. I suspect this type of message is more likely to induce people to pay more than the minimum payment. We can only know for sure by how strongly banks and credit card companies oppose it.

Monday, June 10, 2019

Should CPP Exist?

When Canada Pension Plan (CPP) expansion was first being discussed, businesses didn’t like the prospect of making larger CPP contributions on behalf of their employees. Money managers and financial advisors weren’t happy either because of the likelihood of it reducing their assets under management. This led to many negative articles about CPP. Here I look at some criticisms of CPP.

CPP is a Ponzi scheme.

No, it isn’t. Detractors only call it a Ponzi scheme to try to make it seem fraudulent and likely to collapse. CPP did begin as a scheme where worker contributions were used to pay retired workers, but it is moving away from that model as it builds assets from new contributions. CPP is on very solid footing now and is set to make its promised payments for decades to come.

We should have more individual responsibility.

That sounds good in theory, but let’s look at how that would play out in practice. Suppose we eliminated CPP, OAS, GIS, and other programs that direct money to low-income retirees. This would likely prompt a few people still working to save more, but we’d still have a very large number of people who would spend all the money that gets into their hands. Once these people become unable to work for physical or mental reasons, they’d have no money for food, clothing, or shelter.

It might be tempting to say “too bad” at this point, but there’s no way we’d want to live in a world with hundreds of thousands of starving old people begging for food on the streets across Canada. A majority of us would demand that the government step in to help these people. This would soak up massive amounts of tax money. A much better idea is forced savings in the form of CPP contributions to reduce the burden on taxpayers.

CPP should be optional.

It’s true that not everyone needs to be forced to save money for their retirement. If we could identify just those who don’t need CPP and let them opt out, then making CPP optional would work well. But that’s not what would happen. Huge numbers of people who need CPP would opt out, and we’d be left with the same problem of massive numbers of starving old people. CPP only does its job properly when it’s mandatory.

CPP management is too costly.

I have some sympathy for this one. Those who actively manage CPP investments are soaking up billions of dollars. I’m skeptical that they will outperform by enough to justify their costs over the long run. One thing is certain, though: they will be able to produce reports that paint their performance in a positive light.

Now let’s compare CPP management to the alternative: allowing people to manage more of their own savings. The returns that we get collectively on our retirement accounts are dismal. Huge fees and poor market-timing decisions are widespread. The current costs of running CPP are a bargain by comparison. Any time we talk about running CPP more efficiently, it’s important to remember how badly most people manage their own investments.

CPP returns are too low.

CPP returns are higher than most people would get managing their own money. The usual analyses that show low CPP returns are quite biased. First, they usually take the example of someone who makes the maximum contribution every year and doesn’t need any of the dropout provisions. These dropouts mean that some of one worker’s CPP contributions become benefits for another worker. A slice of contributions gets redistributed. That’s the way the system works. Those who don’t use dropouts get a somewhat lower return so that others get a higher return. I think of it as most of my CPP contributions are for me, and the rest are essentially a tax.

Another misleading part of many analyses is that they don’t mention that the investment returns they calculate are real, meaning they are above inflation. There is a big difference between a 2% return and inflation plus 2%. Canadians whose long-term returns are inflation plus 2% are doing quite well.

CPP will be bankrupt by the time Millennials retire.

No, it won’t. This is mostly used as a scare tactic to get people to save more for their retirement so that money managers and financial advisors can have more assets under management. The increases in CPP contribution rates from 1987 to 2003 have put CPP on a stable trajectory.


Canadians are far better off with CPP than without it. There is room to improve how CPP is run, but eliminating this program without a similar replacement would be a disaster.

Friday, June 7, 2019

Short Takes: Mutual Fund Costs and more

Here are my posts for the past two weeks:

The Next Millionaire Next Door

Thinking in Bets

Here are some short takes and some weekend reading:

Preet Banerjee gives an introduction to mutual fund costs. If you’re thinking you don’t need to worry about this because your mutual funds don’t have any fees, you need to watch the video because you’re wrong.

John Robertson looks at potential future costs with all-in-one ETFs if you want to change your asset allocation in taxable accounts as you age. This isn’t much to worry about if your RRSPs hold as much as your taxable accounts, because you can make low-cost changes just within your RRSP to change the asset allocation of your entire portfolio.

Justin Bender explains that any tax inefficiency in holding Vanguard’s asset allocation ETFs in a taxable account comes from the bond holdings rather than equities.

Thursday, June 6, 2019

Thinking in Bets

The world is an uncertain place, and according to Annie Duke, author of Thinking in Bets, we’re better off accepting that we don’t know for certain what will happen than to keep trying to guess the future. It’s better to assign probabilities to different outcomes and adjust them as necessary rather than pick an outcome and doggedly defend that choice. Individually her ideas are familiar, but taken collectively, they amount to a rational truthseeking lifestyle.

Duke is best known as a highly successful poker player, and although this isn’t a poker book, she uses a number of vivid poker stories (and many non-poker stories) to illustrate her points. She says that “all decisions are bets” because your choices lead to gains or losses of money, time, and other things that matter.

One of Duke’s early points is that we need to avoid “resulting,” which is a poker term for judging a decision by how things worked out. Walking across a highway blindfolded isn’t a good idea, even if you don’t get hit by a car.

One interesting point is about how we form beliefs. We think we hear an idea, “think about it and vet it, determining whether it is true of false,” and then “form our belief.” In reality, when we hear something we tend to believe it to be true, and “Only sometimes, later, if we have the time or the inclination, we think about it and vet it, determining whether it is, in fact, true or false.”

“Our default is to believe that what we hear and read is true.” “It doesn’t take much for any of us to believe something. And once we believe it, protecting that belief guides how we treat further information relevant to that belief.”

“Fake news isn’t meant to change minds. As we know beliefs are hard to change. The potency of fake news is that it entrenches beliefs its intended audience already has, and then amplifies them.”

So what can we do about the way we form beliefs and harden them? Among poker players, an antidote is “wanna bet?” When someone challenges us to a bet based on our beliefs, it leads us to ask ourselves many good questions: “How I know this? Where did I get this information? Who did I get it from?”

Rather than relying on others to challenge us to bets to help weed out wrong beliefs, Duke suggests “Incorporating uncertainty into the way we think about our beliefs.” Instead of believing something is 100% true, we might admit we’re only 70% sure. This makes it easier to reduce this probability in the face of new evidence instead of rejecting the evidence and doggedly sticking to the original belief. “This shifts us away from treating information that disagrees with us as a threat, as something we have to defend against, making us better able to truthseek.”

We have a tendency to believe our good outcomes are the result of our skill, and bad outcomes are the result of bad luck. This interferes with learning to improve our skills. Duke’s “learning loop” depends critically on correctly identifying both good and bad luck. To develop skill we start with a belief, take some action that amounts to a bet on that belief, view the outcome, throw out the part of the outcome due to luck, and update our belief. If all bad outcomes are bad luck, then we won’t develop skill. Failing to recognize good luck impedes learning as well. I had extraordinary good luck investing in 1999, and it took me about a decade to see that I was better off with index investing.

Our thinking about luck can slow learning in another way. Our habit of being competitive with others and thinking them lucky when they succeed impedes our ability to learn from their successes and failures.

Duke suggests forming a group of friends or colleagues committed to truthseeking and “thinking in bets.” This helped her learn to play poker at a very high level, and she sees benefits in business and other activities. She sees the failure to truthseek as a reason why some groups fail. In my experience, another big reason for business failure is self-interest. If you need to keep your job, you agree with the boss, even when you think he or she is wrong. It’s a rare employee at any level who feels free to disagree with a company’s top management.

A young Duke was told “It’s all just one long poker game.” This is “a reminder to take the long view, especially when something big happened in the last half hour.” I make a similar point when I talk about “the 1000-foot view.” I get a lot of benefit from trying to keep things in perspective. Few outcomes that seem terrible in the moment are very important in the long run.

Another important idea in the book is that when we make a choice, there are several possible outcomes. In our financial lives, this way of thinking is critical. Just because a bet has a positive expectation doesn’t mean it’s a good idea. If one of the reasonably-likely outcomes would be devastating, we should make a smaller bet or not bet at all.

Overall, I enjoyed this book for its vivid explanations and the way it tied together many familiar ideas into an action plan. Duke offers a set of tools for overcoming some of our natural tendencies to keep believing things that are wrong. Even a small improvement in this area can pay large dividends in life.