With my softball league restarting, some golfing, and reading The Intelligent Investor, I haven’t done any writing recently. But I have had a chance to ask different types of small business owners (who are opening up as much as they can) whether they will be able to operate profitably. The most common answer is “we’ll see.” COVID-19 is increasing their costs and forcing them to take fewer customers than they used to take each day. That’s a deadly combination in any competitive market. Behind brave faces I suspect many are just hoping to survive long enough to get back to normal.
Here are some short takes and some weekend reading:
Morgan Housel has an interesting description of why cats sometimes survive high falls better than low falls, followed by a jarring attempt to connect it back to a financial lesson.
Preet Banerjee and Derrick Fung discuss the rise of buy-now-pay-later in online shopping. Making your life worse is getting more and more convenient.
Boomer and Echo compares the financial aspects of renting versus owning a home.
Friday, July 31, 2020
Friday, July 17, 2020
Short Takes: Credit Hygiene, Defending Buy-and-Hold, and more
Here are my posts for the past two weeks:
The Limits of Offering Investment Help
Think Twice Before Taking a 5-Year Closed Mortgage
A Canadian’s Guide to Money-Smart Living
Here are some short takes and some weekend reading:
Canadian Mortgage Trends explains why you should care about your credit “hygiene” and not your credit score.
Tom Bradley at Steadyhand defends buy-and-hold investing.
Canadian Portfolio Manager explains your ETF’s currency exposure. (This article has a second part). Many investors get confused about buying identical baskets of stocks in different ETFs that transact in different currencies. The situation would get even more confusing if we tried to explain that measuring U.S. companies’ stock returns in U.S. dollars is merely a convention; companies with international operations are affected by changes in many different currencies.
Big Cajun Man looks at RESP statistics showing that lower income families aren’t opening RESPs, even though they could be getting the Canada Learning Bond without even making an RESP contribution.
Boomer and Echo discusses the challenge of sticking to your financial goals during the pandemic.
The Limits of Offering Investment Help
Think Twice Before Taking a 5-Year Closed Mortgage
A Canadian’s Guide to Money-Smart Living
Here are some short takes and some weekend reading:
Canadian Mortgage Trends explains why you should care about your credit “hygiene” and not your credit score.
Tom Bradley at Steadyhand defends buy-and-hold investing.
Canadian Portfolio Manager explains your ETF’s currency exposure. (This article has a second part). Many investors get confused about buying identical baskets of stocks in different ETFs that transact in different currencies. The situation would get even more confusing if we tried to explain that measuring U.S. companies’ stock returns in U.S. dollars is merely a convention; companies with international operations are affected by changes in many different currencies.
Big Cajun Man looks at RESP statistics showing that lower income families aren’t opening RESPs, even though they could be getting the Canada Learning Bond without even making an RESP contribution.
Boomer and Echo discusses the challenge of sticking to your financial goals during the pandemic.
Thursday, July 16, 2020
A Canadian’s Guide to Money-Smart Living
Learning about personal finance makes people anxious. Combine this with all the details to learn and the process can be overwhelming. Kelley Keehn and Alex Fisher aim to help people get past these problems with their book, A Canadian’s Guide to Money-Smart Living. The authors introduce the reader to basic personal finance topics without getting into too much detail.
The book begins by trying to get past emotional barriers to controlling spending and getting readers motivated to learn more about personal finance. It then covers paying yourself first, record-keeping, planning, mortgages, debts, credit scores, and investing.
There were a number of details in the book I liked. Many financial writers like to mock the idea that small amounts add up, but not these authors. “The few dollars you spend on muffins, eating out, or other expenditures that you’re not tracking every day, might not seem like much at the time but mount up over the weeks and months and years.”
With so many people seemingly willing to pay any price for a house, it’s important to hear the downside: “Having too big a mortgage payment for your available cash can be absolutely crippling.” A similar message about all debt: “More debt always equals less freedom.”
I was surprised to learn that “if you don’t use your account at least every month, your [credit] score can be negatively affected.” I’m not sure if this applies only to credit cards, or if it’s true for lines of credit as well. I sometimes go several months using only one of my credit cards, and I haven’t used my line of credit in years.
The book contains a good section on the problem with using a supplementary credit card on someone else’s account. One of my aunt’s did this. When her husband died, she had no credit record at all because she was using his credit card account, even though her card had her name on it.
A good point about mandatory minimum RRIF withdrawals: “Withdrawing the money does not mean you have to spend it; all you have to do is report it as taxable income.”
There were a number of parts of the book that could be improved. One section on how to choose and work with a financial planner needed to start with an explanation of how much money you must have before any planner would work with you. Another section on life insurance paints a picture of a professional life insurance agent carefully looking after your interests. In reality, people need to know how to avoid agents who try to sell them whatever product generates the biggest commission.
On the subject of breaking a mortgage, the authors say that a penalty of “three month’s [sic] interest is common,” when mortgage penalties are often in the 5-figure range. On the subject of mortgage life insurance, the authors fail to mention that typical policies use “post-claims underwriting,” which means they don’t check if you qualify for coverage until after you’re dead.
In an example of a couple getting a mortgage, the authors say that “By paying about $456 weekly [instead of $1982 monthly], for example, they save in interest costs and pay off their mortgage faster.” This isn’t true for these numbers. Paying biweekly or weekly shortens a mortgage when the payments are simply divided by two or four, effectively increasing the total amount paid each year. In this example, the weekly amount is calculated to give the same amortization period as the monthly amount.
In a discussion of whether to pay down your mortgage or contribute more to an RRSP, the authors list 4 factors to consider. However, they miss the most important factor which is how much financial risk you want to carry forward (in the form of leverage) as you age.
In the “Get to Know Your Banker” section, the authors offer mostly obsolete advice about a personal relationship with your banker. Curiously, they end the section with the modern reality: “Loans are approved by a computer program these days – it’s rarely a human or personal process.”
The book gives a table showing the letter grading system Transunion uses for credit scores, but goes on to say that Transunion rated a particular creditor as “fair” instead of “B” as shown in the table. I couldn’t figure out the point the authors were trying to make here.
Among the things to consider when deciding whether to buy GICs is “where are interest rates going?” This is bad advice. Trying to predict future interest rates is a waste of time. Currency experts trade trillions of dollars based on interest rate expectations. An average person trying to outsmart them is just gambling.
“While funds with high MERs may be worth it because of the professional managers they use, it means that those managers need to work that much harder to earn you a decent rate of return.” All the evidence says that trying to find managers who can overcome high MERs over the long run is futile.
For RESPs, you can open multiple plans, “but, as with the other tax shelters, each plan must follow the maximum contribution rules.” A reader could easily be confused by this. The authors mean that the total contribution to all RESPs can’t exceed the maximum per beneficiary.
The last quarter of the book contains several typos that show a lack of attention to detail.
Overall, this book might be helpful to personal finance novices. The best parts are the early sections designed to motivate people to improve their finances and give them tools for changing bad habits.
The book begins by trying to get past emotional barriers to controlling spending and getting readers motivated to learn more about personal finance. It then covers paying yourself first, record-keeping, planning, mortgages, debts, credit scores, and investing.
There were a number of details in the book I liked. Many financial writers like to mock the idea that small amounts add up, but not these authors. “The few dollars you spend on muffins, eating out, or other expenditures that you’re not tracking every day, might not seem like much at the time but mount up over the weeks and months and years.”
With so many people seemingly willing to pay any price for a house, it’s important to hear the downside: “Having too big a mortgage payment for your available cash can be absolutely crippling.” A similar message about all debt: “More debt always equals less freedom.”
I was surprised to learn that “if you don’t use your account at least every month, your [credit] score can be negatively affected.” I’m not sure if this applies only to credit cards, or if it’s true for lines of credit as well. I sometimes go several months using only one of my credit cards, and I haven’t used my line of credit in years.
The book contains a good section on the problem with using a supplementary credit card on someone else’s account. One of my aunt’s did this. When her husband died, she had no credit record at all because she was using his credit card account, even though her card had her name on it.
A good point about mandatory minimum RRIF withdrawals: “Withdrawing the money does not mean you have to spend it; all you have to do is report it as taxable income.”
There were a number of parts of the book that could be improved. One section on how to choose and work with a financial planner needed to start with an explanation of how much money you must have before any planner would work with you. Another section on life insurance paints a picture of a professional life insurance agent carefully looking after your interests. In reality, people need to know how to avoid agents who try to sell them whatever product generates the biggest commission.
On the subject of breaking a mortgage, the authors say that a penalty of “three month’s [sic] interest is common,” when mortgage penalties are often in the 5-figure range. On the subject of mortgage life insurance, the authors fail to mention that typical policies use “post-claims underwriting,” which means they don’t check if you qualify for coverage until after you’re dead.
In an example of a couple getting a mortgage, the authors say that “By paying about $456 weekly [instead of $1982 monthly], for example, they save in interest costs and pay off their mortgage faster.” This isn’t true for these numbers. Paying biweekly or weekly shortens a mortgage when the payments are simply divided by two or four, effectively increasing the total amount paid each year. In this example, the weekly amount is calculated to give the same amortization period as the monthly amount.
In a discussion of whether to pay down your mortgage or contribute more to an RRSP, the authors list 4 factors to consider. However, they miss the most important factor which is how much financial risk you want to carry forward (in the form of leverage) as you age.
In the “Get to Know Your Banker” section, the authors offer mostly obsolete advice about a personal relationship with your banker. Curiously, they end the section with the modern reality: “Loans are approved by a computer program these days – it’s rarely a human or personal process.”
The book gives a table showing the letter grading system Transunion uses for credit scores, but goes on to say that Transunion rated a particular creditor as “fair” instead of “B” as shown in the table. I couldn’t figure out the point the authors were trying to make here.
Among the things to consider when deciding whether to buy GICs is “where are interest rates going?” This is bad advice. Trying to predict future interest rates is a waste of time. Currency experts trade trillions of dollars based on interest rate expectations. An average person trying to outsmart them is just gambling.
“While funds with high MERs may be worth it because of the professional managers they use, it means that those managers need to work that much harder to earn you a decent rate of return.” All the evidence says that trying to find managers who can overcome high MERs over the long run is futile.
For RESPs, you can open multiple plans, “but, as with the other tax shelters, each plan must follow the maximum contribution rules.” A reader could easily be confused by this. The authors mean that the total contribution to all RESPs can’t exceed the maximum per beneficiary.
The last quarter of the book contains several typos that show a lack of attention to detail.
Overall, this book might be helpful to personal finance novices. The best parts are the early sections designed to motivate people to improve their finances and give them tools for changing bad habits.
Monday, July 13, 2020
Think Twice Before Taking a 5-Year Closed Mortgage
The internet is full of debates about whether to take a mortgage interest rate that is fixed or variable. However, what gets less attention is whether the mortgage is open or closed. The most common fixed-rate mortgages are closed, and this means you’d have to pay a penalty if you break your mortgage.
I can already hear most people saying “but I’m not going to break my mortgage, so I don’t have to worry about penalties.” However, the future can surprise us. If breaking a mortgage cost us a finger, we’d think a lot more carefully about what might happen to make us break our mortgage: job loss, job moves to another city, divorce, health problems, bad neighbours, and more.
Mortgage penalties aren’t as bad as losing a finger, but they can be bad enough. Suppose you took out a 5-year mortgage at TD Bank 2 years ago, and it has a remaining balance of $300,000. According to Ratehub’s mortgage penalty calculator, the cost to break your mortgage would be $16,463!
Lenders deserve some compensation if you break a closed mortgage, but a penalty this big far exceeds any reasonable compensation. The way they justify it is to do the calculations based on “posted rates,” which are much higher than the interest rates people typically pay. The gap between the posted rate and the real rate is highest for 5 year mortgages, and gets smaller for shorter mortgages. This declining gap size is what pumps up the mortgage penalty calculation.
So, when you’re trying to decide whether you’ll come out ahead with a fixed or variable rate mortgage, think carefully about what might happen that would force you to break your mortgage. A mortgage penalty can easily be larger than the cost difference between fixed and variable interest rates.
I can already hear most people saying “but I’m not going to break my mortgage, so I don’t have to worry about penalties.” However, the future can surprise us. If breaking a mortgage cost us a finger, we’d think a lot more carefully about what might happen to make us break our mortgage: job loss, job moves to another city, divorce, health problems, bad neighbours, and more.
Mortgage penalties aren’t as bad as losing a finger, but they can be bad enough. Suppose you took out a 5-year mortgage at TD Bank 2 years ago, and it has a remaining balance of $300,000. According to Ratehub’s mortgage penalty calculator, the cost to break your mortgage would be $16,463!
Lenders deserve some compensation if you break a closed mortgage, but a penalty this big far exceeds any reasonable compensation. The way they justify it is to do the calculations based on “posted rates,” which are much higher than the interest rates people typically pay. The gap between the posted rate and the real rate is highest for 5 year mortgages, and gets smaller for shorter mortgages. This declining gap size is what pumps up the mortgage penalty calculation.
So, when you’re trying to decide whether you’ll come out ahead with a fixed or variable rate mortgage, think carefully about what might happen that would force you to break your mortgage. A mortgage penalty can easily be larger than the cost difference between fixed and variable interest rates.
Thursday, July 9, 2020
The Limits of Offering Investment Help
Family, friends, and blog readers often ask me for investment advice. The challenge with helping these people is that even if the advice I give is good, the results they get can end up being disappointing.
Many times I’ve agreed to look at a person’s portfolio. The most common problem I see is high mutual fund costs with little meaningful financial advice given in return for those costs. Another problem that’s less common is a portfolio that is too concentrated in a small number of stocks.
In most cases, it’s obvious that the investor would be better off in the long run with a very simple portfolio holding nothing but one of Vanguard’s asset allocation ETFs (VEQT, VGRO, VBAL, VCNS, and VCIP). This isn’t the only good way to invest, but it’s better than most people’s existing portfolios.
So, if I were to give one-time advice, in most cases it would be to sell everything and buy an asset allocation ETF. I might add some advice on not timing the market and avoiding tinkering. However, this would leave a big problem. Dan Hallett explained the problem well on a recent Moneysaver podcast:
If the people coming to me for advice are willing to change their entire portfolios to match my suggestions, what will happen the next time the stock market is down and they ask someone else for advice? The answer is they’d make another big change in portfolio strategy.
Jumping around from one strategy to another is a bad idea, even if we’re jumping from good strategy to good strategy. We tend to want to make changes after our current strategies have had a bad period. We end up in a buy-high-sell-low cycle.
These problems place limits on who I’m willing to help with their investments. Unless I’m confident I’ll be around to stop people from getting in their own way, my advice becomes part of the problem instead of a solution. So, I’ve only helped a modest number of people very close to me.
Some financial advisors might applaud my choice saying that financial advice should be left to the professionals. However, only a minority of financial advisors are part of the solution rather than part of the problem.
Many times I’ve agreed to look at a person’s portfolio. The most common problem I see is high mutual fund costs with little meaningful financial advice given in return for those costs. Another problem that’s less common is a portfolio that is too concentrated in a small number of stocks.
In most cases, it’s obvious that the investor would be better off in the long run with a very simple portfolio holding nothing but one of Vanguard’s asset allocation ETFs (VEQT, VGRO, VBAL, VCNS, and VCIP). This isn’t the only good way to invest, but it’s better than most people’s existing portfolios.
So, if I were to give one-time advice, in most cases it would be to sell everything and buy an asset allocation ETF. I might add some advice on not timing the market and avoiding tinkering. However, this would leave a big problem. Dan Hallett explained the problem well on a recent Moneysaver podcast:
“I have long been convinced that I could lay out exactly what somebody needs to do, and the vast majority of them would get in their own way.”
If the people coming to me for advice are willing to change their entire portfolios to match my suggestions, what will happen the next time the stock market is down and they ask someone else for advice? The answer is they’d make another big change in portfolio strategy.
Jumping around from one strategy to another is a bad idea, even if we’re jumping from good strategy to good strategy. We tend to want to make changes after our current strategies have had a bad period. We end up in a buy-high-sell-low cycle.
These problems place limits on who I’m willing to help with their investments. Unless I’m confident I’ll be around to stop people from getting in their own way, my advice becomes part of the problem instead of a solution. So, I’ve only helped a modest number of people very close to me.
Some financial advisors might applaud my choice saying that financial advice should be left to the professionals. However, only a minority of financial advisors are part of the solution rather than part of the problem.
Friday, July 3, 2020
Short Takes: Tesla, Reducing Stock Allocation, Retirement Strategies, and more
I had to laugh watching Elon Musk gloat on Twitter about Tesla’s recent success and rising stock and the effect it’s had on short sellers. “Tesla will make fabulous short shorts in radiant red satin with gold trim.” He’s not a fan of the U.S. Securities and Exchange Commission (SEC): “Will send some to the Shortseller Enrichment Commission to comfort them through these difficult times.” “Who wears short shorts?”
Here are my posts for the past two weeks:
Investing Perfection
Talk Money to Me
Here are some short takes and some weekend reading:
David Aston says now is the time to reduce your allocation to stocks if you couldn’t stand the recent stock market turmoil. The best advice is to stick to a financial plan and its asset allocation percentages, but for those who’ve learned that they just couldn’t stomach the 30% drop in stock prices, the best move is to wait until stock prices have recovered before selling off some stocks. Today’s higher prices are giving these investors their opportunity. Unfortunately, it was when stocks were low that social media was filled with bad advice to reduce your stock allocation.
The Rational Reminder Podcast interviews retirement expert Fred Vettese who has done excellent work on finding retirement strategies that can work for you rather than working for banks, insurance companies, mutual fund companies, and their salespeople. I’ve written before about some areas where I disagree with Vettese, but I consider these differences to be minor. Following his advice is very likely to give a good outcome. The main area of disagreement concerns spending patterns as we age. I’ve read the same studies Vettese references, and what I see is data that mixes together retirees who made their own choices of how much to spend with some retirees who were forced to spend less as their savings dwindled prematurely. The net effect is that if we back out data from forced spending reductions faced by some people, retirees’ natural tendency to spend less as they age will start later and be less severe than the full data set appears to show. This is disappointing news for people looking for the green light to retire with less saved and to spend freely in their 60s. However, we need to ask ourselves whether we want to model our own retirements on the experience of others who made their own choices, or whether we want to include a component of forced spending reduction from dwindling savings. All that said, though, Vettese’s retirement plans are better than most I’ve seen.
Christine Benz has some excellent advice for young investors just starting out, as well as a few words for more experienced investors.
Robb Engen at Boomer and Echo says COVID has eliminated any chance of meeting his stretch goal of becoming a millionaire by the end of 2020. But, he says “I won’t get kicked out of the personal finance blogger guild if it takes a few extra months to make it.” The housing and stock markets may have something to say about it taking only a few extra months. This illustrates the problem with getting too tied to net worth goals. Robb has the right attitude of not being too concerned. We have some control over our incomes and saving rates, but no control over the prices of volatile investments. In the long run a net worth target can be a reasonable goal, but in the short run, it’s more of a hope.
Big Cajun Man gives an overview of the Registered Disability Savings Plan (RDSP) along with links to more details.
The Blunt Bean Counter describes his experiences working from home.
Here are my posts for the past two weeks:
Investing Perfection
Talk Money to Me
Here are some short takes and some weekend reading:
David Aston says now is the time to reduce your allocation to stocks if you couldn’t stand the recent stock market turmoil. The best advice is to stick to a financial plan and its asset allocation percentages, but for those who’ve learned that they just couldn’t stomach the 30% drop in stock prices, the best move is to wait until stock prices have recovered before selling off some stocks. Today’s higher prices are giving these investors their opportunity. Unfortunately, it was when stocks were low that social media was filled with bad advice to reduce your stock allocation.
The Rational Reminder Podcast interviews retirement expert Fred Vettese who has done excellent work on finding retirement strategies that can work for you rather than working for banks, insurance companies, mutual fund companies, and their salespeople. I’ve written before about some areas where I disagree with Vettese, but I consider these differences to be minor. Following his advice is very likely to give a good outcome. The main area of disagreement concerns spending patterns as we age. I’ve read the same studies Vettese references, and what I see is data that mixes together retirees who made their own choices of how much to spend with some retirees who were forced to spend less as their savings dwindled prematurely. The net effect is that if we back out data from forced spending reductions faced by some people, retirees’ natural tendency to spend less as they age will start later and be less severe than the full data set appears to show. This is disappointing news for people looking for the green light to retire with less saved and to spend freely in their 60s. However, we need to ask ourselves whether we want to model our own retirements on the experience of others who made their own choices, or whether we want to include a component of forced spending reduction from dwindling savings. All that said, though, Vettese’s retirement plans are better than most I’ve seen.
Christine Benz has some excellent advice for young investors just starting out, as well as a few words for more experienced investors.
Robb Engen at Boomer and Echo says COVID has eliminated any chance of meeting his stretch goal of becoming a millionaire by the end of 2020. But, he says “I won’t get kicked out of the personal finance blogger guild if it takes a few extra months to make it.” The housing and stock markets may have something to say about it taking only a few extra months. This illustrates the problem with getting too tied to net worth goals. Robb has the right attitude of not being too concerned. We have some control over our incomes and saving rates, but no control over the prices of volatile investments. In the long run a net worth target can be a reasonable goal, but in the short run, it’s more of a hope.
Big Cajun Man gives an overview of the Registered Disability Savings Plan (RDSP) along with links to more details.
The Blunt Bean Counter describes his experiences working from home.
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