10 Financial Websites You Need If You Are Broke and Aren't So Good With Them Numbers Yet

 

Image borrowed from this guy: http://blog.dnagenotek.com/blogdnagenotekcom/bid/80801/DNA-Genotek-s-top-ten-list-for-2011

Okay. I tricked you a bit. I don't have a top 10 list here. But these eight sites are definitely worth your time if  you want to learn a bit more about managing your finances to build your wealth.

1) Mr. Money Mustache

Readability: 8/10              Entertainment: 9/10       Educational value: 8/10

MMM is the patron saint of the sensible approach to consumer living and financial management. As a result, he retired when he was 30 having made a middle-class salary throughout his 8-year career. The central question for him is whether each time you spend money you are adding to your life satisfaction proportionately. If so, good for you. If not, you wasted your money and should make better choices. Like me, he likes to throw a few fucking expletives around and mock the mainstream financial writers and people who try to sell you things you don’t need.  If you prefer something a bit more couth, see below.

2) Early Retirement Extreme

Readability: 7/10              Entertainment: 7/10       Educational value: 9/10

This is the site a Jacob Lund Fisker, a retired physicist, current writer and financial analyst. He also temporarily retired at age 30. Like MMM, he is utterly logical and very much opposed to current consumer culture. He is much more extreme (you might have guessed that), living on $7000 per year in San Francisco. His approach is encouraging an extremely simple life with the goal of protecting our environment. The guy has some major financial skills and backed by a rather creative and deep philosophy detailed in his book, here. For a briefer introduction, see his 21 day financial makeover. Not for the faint of heart.

3) Bogleheads

Readability: 6/10              Entertainment: 6/10       Educational value: 10/10

Videos! Message boards! How-tos! This is really a treasure trove for the newbie as well as the seasoned investor. Most contributors are high-earners. Many are retired. Some of them retired young. Debt is discouraged.  It tends to focus more on the investing side of finances, helping people to invest cheaply and avoid behavioral mistakes, such as trying to figure out when the market is going to go up and down. This eclectic group follow the life and investment policy of “Saint Jack” John Bogle who started the first low-cost index mutual fund back in the 1970’s. Bogle’s integrity and common sense has been an inspiration for decades and it’s no wonder that his work has spawned a group dedicated to his common-sense approach. There are many highly qualified writers on the site who spend a lot of effort trying to dispel the common nonsense of many in the investment community.

4) Financial Wisdom Forum

Readability: 6/10              Entertainment: 6/10       Educational value: 9/10

Much the same site as Bogleheads, but geared toward the Canadian investor. This is a better site then that above if you want to learn whether to invest in your RRSP or tax-free savings account, as well as how to minimize taxes. But for the basics, you can’t really beat Bogleheads.

5) The Mad Fientist

Readability: 6/10              Entertainment: 6/10       Educational value: 9/10

Fantastic podcast on his Youtube channel. The Fientist also retired in his early 30’s through a sensible yet frugal approach to consuming. He interviews a lot of writers and podcasters including some of those listed here. He has a long collection of blogs as well.

6) Go Curry Cracker

Readability: 6/10              Entertainment: 6/10       Educational value: 9/10

Want to quit work and travel around the world with your partner indefinitely? Think that you could never afford to do that? This couple has been doing just that for more than a decade. Far from being an expensive proposition, their spending is far LESS than it would be if they stayed put. Their tax bill is legally close to zero. They often fly for free. And they know how to get great deals. Of course, it is underpinned by a basic philosophy of simplicity which has allowed them to save enough that this plan is doable. Hm. This appears to be a recurring theme in my list, doesn’t it?

7) Budgets Are Sexy

Readability: 6/10              Entertainment: 6/10       Educational value: 9/10

This guy has a lot of great content. Podcasts. Budget templates. Blogs. Ad suggestions on “side hussles.” For my taste he is rather conventional in that he only appears to save 15% of his income (compare this with ~70% for Mr. Money Mustache or Jacob.) It might be a bit more accessible for many people to find such tips to boost savings rates from 0% to 15%.

8) You Need a Budget

Readability: 6/10              Entertainment: 6/10       Educational value: 9/10

One of the key aspects of managing finances properly is budgeting, and YNAB does it about as well as anyone could. They have a standard bit of software that anyone can use to track spending as well as set up categories of spending. The only downside, it isn’t free. But paying for it could save you a fair bit in the long run. You can compare your spending against your decided budget at the beginning of the month. The software also allows one customize plans. Not good at keeping track of records? It is possible to link your debit card/credit card to your account and automate the whole process. As Peter Drucker said, “That which gets measured gets managed!”

Yanus Varoufakis on the Inappropriateness of Seeing Economics as Applied Math

Some great bits of history and social commentary here. Very much concerned about the folly of quantifying economics and and obsession with measuring things. He draws out some of the implications toward the end which include helping capitalism avoid criticism from dominant classes thereby benefiting the capitalists.

https://www.youtube.com/watch?v=ptGsHxdhgYo

How I invest--step by step

So you’ve never invested before. And you want to start, but don’t know how. That’s where I come in.  You also don’t want to lose all your money, so you don’t trust the brokers or the banks. And you don’t trust financial advisers. Well, I’m not a financial advisor. *

Assuming that you’re going to take a leap of faith with me, here is what you’ll need to do to become a first-time investor in Canada and how to avoid some common pitfalls. Basically, your goal should be to get good investment returns, while managing your risk. Part of the way you get good returns is by minimizing your costs of investing. Many investment options can be done cheaply. However, there is a very profitable industry out there trying to take your money (through high fees) and promising you superior returns. This is what most Canadians do through their pension funds. But you can do it yourself! And your bank may just help you to set it up. They can be very helpful if you know what you want.

1) I opened a brokerage account.

Canada has more than 10 brokerages, many of them online. Even if not fully online, one can set up an account in person and manage it online. To set up an account, one needs a bank account, an address to send statements to (this can be done by e-mail) and some form of government issued ID--a driver’s license or passport will do. Take your documents to your chosen broker, and they will create your account.

2) I provided seed money to my account.

This will typically involve making a bank transfer from an online account to the brokerage account. It’s as simple as making a bank transfer to a friend. Simply choose the account you want to transfer from, and then transfer to your brokerage account. Some brokerage accounts provide discounts for having a minimum amount in the brokerage account. I happen to use Scotiabank, so I’ll provide screenshots of how I do it.

A) Selecting the bank account (e.g. Basic Banking)

 B) Choosing the amount to transfer.

You’ll probably want more than $20, if you are buying more than 1 stock. I’ve just chosen $20 at random.

C) Confirming the transfer. 

Now you have money in your brokerage account and you’re ready to buy stocks!

If you’re not comfortable with online banking, you can also pay your broker to essentially do the same thing for you, but it will cost you an extra $50 per trade. I chose to keep that $50 for myself. The transaction only takes a couple of minutes.

3) I decided what product I wanted.

Uh-oh! What do you want? How do you decide? Life is so complicated! To keep it simple, the main asset categories are stocks and bonds. Stocks represent a partial ownership of companies, and as such, are the main driving force of the market. Bonds are essentially loans made to companies as well as various government bodies. Stocks, on average, earn more, but are more risky. Bonds earn little (much more than your bank account, typically) but have fairly stable prices.

4) But which stocks? Which bonds?

If you don’t know which ones to buy, you might consider buying all of them, or a very large selection of them. This is called buying an index fund. You could buy a piece of 60 of the largest Canadian companies all at once, as I do. The ticker is HXT, and you will see my purchase of that below. If you want to buy a piece of all the others, order the XMD fund. Similarly, a large Canadian bond index containing 320 different bonds, both government and corporate can be purchased in the same manner, using the ticker XQB. An added bonus of buying these funds through Scotiabank’s I-shares: there is no commission fee!

There are plenty of different funds to buy that aren’t restricted to Canadian stocks and bonds. More on that in a later post.

5) I bought the product I wanted

The simplest way to do this is to execute a market order. That means you will buy the stock or bond (fund) at whatever price the market is selling for. This changes throughout the day, but normally not very much. Markets close down if the index loses 7%, which is considered extremely volatile. If you make a market order, then you agree to buy your asset for the highest price that people are currently offering to sell. As you see from the screenshots, the most recent market price for HXT was $24.57, so at the time, I expected to be able to buy at a price similar to that. For 10 shares, I expect to—but might not be able to—pay $245.70.

A) Clicking on “Make a Trade”

 

B) Entering the symbol of the stock or bond you want (e.g. HXT).

 

C) Clicking on “preview order.”

 

Uh-oh! I-trade doesn’t think this is a smart purchase at this time. 

Nice of the bank to warn us of volatile prices. So alternatively, you may decide to make a limit purchase, as indeed the brokerage automatically has suggested. If you want to be sure that you are not paying more than, say $24, for the HXT fund, enter $24 as your limit price. On the one hand, you don’t face the risk of paying too high a price. On the other, if no one wants to sell HXT below $24, you won’t be able to buy it.

Under order type switch from “market” to “limit” and type the maximum price you are willing to pay today for the stock. Then preview the order to make sure that you’re not trying to buy 1000 stocks when you mean to buy 10.

 

10 stocks at $24 each for $240 total. That seems right. So enter your access code and submit the order, if that’s what you want.

Incidentally, the market didn’t go low enough for me to get to purchase the stock. Maybe next time.

5) I Hold!

The popular notion of how to make money in the market is by buying at low prices, selling at high prices, and banking the difference. This is basically correct; however, that doesn’t mean that you should wait for low prices and buy then; wait until the market is at a high and sell then. Why not? Because you don’t know where the highs and lows are! No one knows. If you buy now perhaps the price is not as low as it could be, but it will very likely be much, much higher in the future. In the immortal words of the great Jack Bogle, “Stay the course.”

6) I Sell (eventually)

After you’ve held your assets for a long time and allowed the miracle of compound interest to build your wealth, you may be ready to sell. Perhaps this is when you are retiring. Perhaps you are buying a house. In any case, if you’ve held your money in stocks, and your luck matched the average luck of the market over the last 100 years, you’ve earned 6.9%, after inflation, per year. That is, after every 10 years of holding your investment, is has probably doubled in value. (strictly speaking, increased 94%). Selling is as simple as buying. Login to your brokerage account, select the asset that you want to sell and how (again, a market order is the simplest). After someone buys your asset, their money will be deposited into your account. You can then transfer that money to a regular bank account online and enjoy the $94 on every $100 invested which you earned for nothing!

Too good to be true?

Maybe. Stocks have some risk associated with them. In particular, if you decide to buy a stock and then you panic and sell when the price drops, you are quite likely to lose money by investing. This is a good argument for holding some bonds as well as stocks. Bad markets won’t seem quite as bad. If you think that you can figure out when the best times for buying and selling are and try to use your keen senses to make superior returns, you will almost certainly fail. (Sharpe and Modigliani have Nobel prizes in economics for showing that YOU can’t beat the market reliably.) Of course, no one knows the future. The past 200 years have been very good for investments, and stocks in particular. That does not guarantee the future will be successful, but it is not an unreasonable bet. There are ways to decrease risks, however. Rather than try to time the market, dollar cost average. Rather than buying individual stocks, buy index funds. Don’t forget about bonds.

Every investor needs to keep in mind that investing is inherently risky; but taking that risk is precisely how people manage to grow rich. On average, the market has grown considerably, in spite of major crises. The market failed catastrophically during the Great Depression and the Great Recession of 2007-09. We had a major World War. Inflation ate away earnings during massive inflation of the 1970s. But even if we include those events, 6.9% is the average return, per year. From my perspective, a 6.9% compound return is a really expensive opportunity to give up.

*This is not financial advice, since dispensing financial advice entails a host of certifications, and membership cards which I do not possess. However, I do possess a couple of economics degrees, teach the subject and do invest myself. But there are certainly no guarantees of financial success from me. Just what I think are good principles.

**Disclaimer: I invest with Scotiabank and buy iTrade products. I'm quite happy with the products but they don't pay me to advertise them. I hear good things about other brokerages as well.

The High Cost of Low-risk Investing

The Globe and Mail has yet another doozy of a weird finance article. I have previously used their articles for a game I play with my high school students called “Spot the Nonsense.” In their latest piece, they profile David Trahair, a chartered accountant, who owns his own accounting firm, who has authored 5 personal finance books, who gives advice on stocks and who apparently hires someone to give him financial advice. How does that work, exactly?

“Virtually Risk-free Portfolio”

A risk-free portfolio is not obvious nonsense to everyone, so we’ll break it down. What does Trahair do with his finances? He is an ultra-conservative, to the point of eccentricity--the financial equivalent of people who build fallout shelters, or buy zombie repellant. He invests completely in GICs (guaranteed investment certificates), on which he claims make more than 2% and a “high-interest savings account,” which appears to currently pay a paltry rate of either 0.75% or 1%. Given that he has allocated about 50% to each, his rate of return is likely to be close to 1.5%. That rate would have just beaten inflation last year, failed the year before, beat it in 2013 and failed in 2012. So this strategy has some risk of losing purchasing power, over time.

But more to the point, this strategy would have missed out on the stock market gains of the past. The Canadian stock market (TSX) has historically gained 6.1% per year, trouncing these returns. If you don’t own productive resources, you miss out on the gains they provide. When you buy a guaranteed investment certificate or put your money in a so-called “high-interest” blah, blah, blah, what happens to your money? The institutions that you lend to buy productive assets (stocks) or lend it out to businesses (bonds). The banks take the risk because they believe that they will earn more than they pay you. So employing this strategy has a high risk that you will be a sucker.

Not rejecting stocks

The claim of not rejecting stocks sounds alright. But what is written here seems really odd to me.

“Mr. Trahair does not categorically reject stocks. He is okay with gaining exposure when risk is low – that is, when optimism is at an ebb.”

I guess that makes sense in principle; but he isn’t invested in stocks, according to the earlier part of the article. He also says that “more than half of the portfolio” is cash, which seems a bit odd. Technically, 100% is more than half, but still, an odd way to express the fact.

The next part is a bit more troubling. He consults with his advisor (!) about buying more stocks if there is a market crash. There was a market crash! Canadian stocks dropped 30% relative to highs, at which point I wrote about the discount on stocks, as did others. I guess he and his advisor missed that. I don’t have a big readership just yet. I’m new.

But setting aside that oversight, there is a problem with the whole concept of buying stocks when risk is low. No one has any idea when such a time would be. It is true that I thought earlier this year to be a smart time to buy, because stock prices had gone down. But I would never call that low-risk. The market can always keep falling. It is very unclear what magnitude of financial catastrophe Trahair is waiting for.  

“His worst move”

“Critics may say staying out of the stock market is a bad move, Mr. Trahair notes. But he finds they often have an association with the financial industry and “make their living selling stocks and mutual funds.”

I believe a healthy dose of scepticism is important and investors should be vigilant. But it is truly bizarre that he, an advisor, would be critical of financial advisors. And particularly so, given that the article is there, in part, to advertise Manulife, where he gets his high-interest savings account. I have no qualm with Manulife but I find it very odd that they would be placed above scrutiny, unlike stock brokers. One should be very careful when making large financial decisions, such as how to handle a retirement portfolio. But that doesn’t imply that stocks are inappropriate.

The Sense

The end of the piece has a breath of fresh sanity. Trahair recommends that people keep their stock allocation to 100% minus their age. This is a well-know and sensible formula, if mildly conservative for some tastes. Many Bogleheads have a similar investing principle, and they maintain a fantastic resource on how to choose what kind of assets (stocks, bonds, GICs, cash) to invest in. They have a very data- and thought-based analysis of what your likely risks are as well as your likely returns, although they do focus on the US market. If you want to go a bit deeper, you can even consult their investment philosophy; again a very sober and sound account. Their sister site is the Financial Wisdom Forum which gets into the same information with a Canadian focus. 

Are You Paying Too Much For Your Investments? Probably.

Plenty of regular people are sceptical about paying a company to manage their money, and for good reason. But the reason may not be what most people suspect. People often talk of the stock market being like a corporate casino. You buy stocks. The people who sold them make money. You lose money. Finally you cash in your stocks and shake your head without even the benefit of a complementary dinner or live show.

But this sad picture isn't quite right; the stock market--and by extension, the mutual fund market--has been a clear win-win proposition for decades. Probably centuries. It's just that the investment manager wins more than the typical investor. In Canada, investors who buy stock mutual funds pay an average of 2.56% of total money invested to the manager of their fund, which is about 42% of the historical return (6.1%) of the Canadian stock market per year. In other words, if you invest $100,000 in your pension fund and the market returns 6.1%, you pay out $2560 every year to have it managed. That would leave you with $3540 in investment returns*.

Investment managers claim that they are justified in charging such high rates, since they can pick the best stocks and beat the market. Researchers (at Morningstar, for one recent example) have been quite critical of this position for some time, and it looks like the fund managers are finally starting to learn.  Jason Zweig at the Wall Street Journal reports that fund managers seem to be giving up on the proposition that they can beat the market at all (See also here. But ignore the absurd headline.) Instead, these savvy managers are buying passive index funds which are simply a large group of stocks that move in line with the stock market as a whole. Now if even your money manager has given up on the idea that they can beat the market, why should you pay them 2.56% of your investments?

There is really no reason that I can conceive. You would save yourself a lot of money by instead buying a Vanguard Canadian stock index fund for a fee of 0.05% of your investment. At approximately 50x cheaper than the average mutual fund, you can save about $2500 per year in investment costs if you invest $100,000. Or you could buy an American stock index fund for 0.15%. If you don't like Vanguard as a company for some reason, i-shares sells a similar American index fund for 0.11% of your investment. There are a host of stock market index funds and bond funds sold all over the world that have much more reasonable fees than what the typical Canadian has been sold on paying.

Of course, investing is risky business and stock index funds are not guaranteed to outperform all mutual funds. But the traditional mutual fund is at a distinct disadvantage relative to passively managed index funds. And if you happen to have money already set aside in a traditional high-cost mutual-fund, there may be tax implications of transferring that to an index fund, so don't go cashing out everything without doing your homework. Financial advisors (not me) can be quite useful in sorting through the legal details in that regard.

So good luck out there, in these turbulent times. I hope we investors can save a bit more on unnecessary fees and get a few more bucks in our pockets. Maybe we'll even run into each other at the poker tables some time. Be kind.



*Fear not, perceptive reader. Your Sceptical Economist realizes that the managers' calculated fees of $2560 are not more than your expected returns of $3540. If stock returns were exactly 6.1% every year, you, the investor would indeed get about $1000 more than the manager. But a variety of factors make this a better shake for the manager, including investor decision errors, and the compounding effects of variable return rates. 

*Photo source: http://www.freeimages.com/photo/money-down-the-drain-1537821

A Dangerous Time to Invest? / The Sky is Falling!!!

The Silliness

“Yes! The stock market is down another 2.5% points! 11.8 points for the year,” I said joyfully. My colleague, Bill, is accustomed to hearing such strange things from me early in the day, but he had a puzzled look on his face that begged for an explanation of my mirth.

“Oh, right. That’s a good thing, because I invest in Canadian stocks.” As he continued to stare at me, I first asked myself whether I had slipped into speaking Esperanto, but quickly remembered that most people think that stock crashes are bad events that ought to cause investors grief. Also, I don’t speak Esperanto.

“Stocks are on sale!” This seemed to be mildly more sensible and it was definitely English this time. So I continued on.

If you are an investor who plans to be buying stocks into the future, you should prefer the price of those stocks to be low right now. The only time that it is important for stock prices to be high is before you sell. This year is an unlucky time to be selling stocks and retiring. But if that is so, it should be a good time for buying. To see how that works, suppose that you managed to save $10,000 this year. Good for you. Historical returns of the Toronto Stock exchange are 6.1%, before inflation, so if the future matches the past, then your $10,000 could grow to $18078 by 2026.

“But isn’t it risky to buy when the market is falling?” one may ask. This question needs to be unpacked. We don’t know that the market is falling. We know that the market has fallen. Is it going to continue to fall this year? Possibly. But it is far riskier to buy after the market has been rising. Market rises are what ultimately result in crashes when the bubbles burst. This current downturn has followed a period of market growth going back to 2008. That crash followed a period of people over-investing in US houses and related products. Before that, the crash of 2003 was the result of people getting too excited about the internet boom, which became a bubble that ultimately burst. People feel secure after they see a period of increasing stock prices, when that’s precisely the wrong time.

In fact, one of the best predictors we have of future stock market price is Robert Shiller’s cyclically adjusted price to earnings ratio (CAPE). The intuition behind it is that we should examine the average earnings of stocks over the previous 10 years. Divide that by the current average price in the stock market. Historically speaking, people buying American stocks will pay 16.65 times the yearly earnings for a stock on the main index (S&P500). So if the CAPE is much above 16.65, stocks are said to be expensive and we should expect a slower or negative growth of stock prices. If they are less than 16.65, cheap. Stocks should grow faster than average. But if the CAPE is exactly 16.65, we expect stocks values to grow at their average rate, around 9.5% per year.

Source: http://www.multpl.com/shiller-pe/

In the US, Schiller’s CAPE was found to account for about 40% of the 10-year future stock market returns. So we can predict to some extent how valuable our investment will be, in ten years. On the other hand, it explains very little of the return this year. The message is clear. In the short-term, the markets can do just about anything. But in the long-run, buying the stocks of companies with high earnings—or buying the stock market when it is cheap—has been a winning move. Also, crucially important: there are no guarantees. The casino bets that each night it will make money on slot machines, but sometimes the customer gets lucky and the casino has a bad day.

So just how cheap are stocks right now?

That depends where you are buying. American stocks are relatively expensive right now. At the time of writing, the American stock market** had a CAPE value of 24.42, perhaps overvalued by 50%. So a prediction based on the CAPE would suggest American stock prices probably won’t increase much over the next 10 years.

What about the Canadian market?

The Canadian market hasn’t been studied nearly as much as the American. Still, we do have some basic statistics. According to the Wall Street Journal, Canada’s historical CAPE average is 19.4 as of last year. As of late January, the Canadian CAPE was 16.9. This would suggest that the Canadian market is a bargain—undervalued by perhaps 15%, which is about the value of the fall of the Canadian market from its high in 2015. Average returns of the Canadian Toronto Stock Exchange between 1979 and 2016 were 6.1%, before inflation (original calculations based on this). So if the past is a useful guide, we should have higher than historical returns.

Yeah, but isn’t it risky to invest in the stock market now? Well, it might be. You already asked that question. There tends to be an advantage to using historical data and economic theory to make decisions. It might be true that this time is different. Maybe the economy is going to grow at a much slower rate than the past 200 years. Maybe we are seeing the beginning of a new era. But consider that the optimists said the same thing during the tech bubble of the late 1990’s with undue optimism. Allen Greenspan and Ben Bernanke said the same thing during the American housing bubble: “This time is different.” We were supposed to be entering an era of stability and continuously improving economic indicators. But it wasn’t really so. During upswings it can be easy to get on the bandwagon and proclaim that all is well and there is nothing to worry about. But the same tendency obtains during depressed economic times. And with the benefit of hindsight we can see that those periods of difficulty give way, eventually, to better times.