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Nelson Smith

Freelance writer. Contrarian investor. Watcher of baseball. Owner of financialuproar.com. At least my mom thinks I'm funny and/or handsome.

Aug 312015
 
That's what you'll look like in 50 years, millennials.

Two more and he’ll start squirting ink like an octopus. 

In the world of personal finances, retirement savings, and sexy fun times, there’s a common refrain out there. You better save your ass off when you’re young, or else you’ll only have 14 nickels to rub together once you hit retirement age. You’ll be so concerned about cash that you’ll barely be able to enjoy your lightly salted meat and non-threatening television programming. Oh look Mildred! Matlock is on.

I’m not going to deny running out of money is a very legitimate retirement threat, because of course it is. Nobody wants to hit up their kids for money once they enter their golden years. Hell, even getting the average senior to sell the house and downsize is akin to pulling teeth. Which is why I think reverse mortgages are going to become all sorts of popular.

But like I touched on a couple of weeks ago when I said our upcoming retirement “crisis” was severely overstated, I think people who don’t do a whole lot of saving today will still be okay when the time comes to hang up the proverbial skates. They might work a little longer, delaying taking CPP. They might ratchet down the lifestyle expectations, especially after falling asleep in front of the TV 583 days in a row. And remember, most retirees will hardly pay any taxes and don’t have to worry about retirement anymore. I’d be jealous, but they go pee 14 times a day.

If running out of money isn’t the biggest retirement threat, what is?

Dementia

If I make it through this without making six off-color jokes, you all owe me $20. This is going to be tough.

According to alzheimers.org, which I’m going to assume is a pretty good source for this stuff, the average 65 year-old has a 1 in 14 chance of getting Alzheimer’s, dementia, or some other disease of the brain. The chance of it developing doubles every 5 years, which means the average 80 year-old has a 1 in 6 chance of permanently forgetting where they put their keys.

SEE? I LASTED A PARAGRAPH.

I’m sure you all have a relative who got either increasingly stubborn or out of it as time went on. I know I sure have, and they’re annoying as all hell to deal with. “Hey, relative, do this sensible thing.” “HOW ABOUT YOU KISS MY OLD WRINKLY ASS, JIMMY.” “But, why?” “BECAUSE I SAID SO, GODDAMMIT.” (Has mini-stroke) “My name isn’t Jimmy, by the way.”

For a lot people, figuring out asset allocation, pension withdrawals, income splitting CPP benefits, and RRSP contribution room is really hard. It’s why blogs like mine exist, because like hell any of you are here for the jokes. And there hasn’t been a scantily-clad lady in weeks now. Imagine trying to figure out all that stuff while dealing with a brain you know isn’t working quite as well as it used to.

We all laugh at the stories of seniors getting swindled out of their cash by a nice representative of the Microsoft company phoning to see whether their computer is still running. But the fact is those scams work because of dementia. When your brain just isn’t working right, scams seem like reasonable things to do. Short of not letting old people talk on the phone anymore, there’s not much we can do.

Active management during retirement

I’m willing to bet that just about every active investor you will ever meet says they plan to keep picking stocks during retirement. It gives them something to do that isn’t annoy the grandkids all the time. Dividend investors are especially likely to think this way. The whole point of dividend investing is to replace one’s income. Real estate investors are just as guilty. Thousands of guys buy rental houses as retirement projects.

But once the ol’ cognitive functions start getting a little impaired, is somebody going to be good enough at analyzing a company to do so accurately? Hell, most investors can’t pick stocks very well even after getting help from smart folks on the internet. I’m not liking Grandpa’s chances at that point.

Which is why annuities are a smart choice for more people than you’d think. Yeah, I know they’re fee-ridden products that are only sold by the SPAWN OF SATAN financial advisors OF DEATH, but they have a place in many people’s retirement planning. Especially for those folks who aren’t very smart at picking investments in the first place. I’m not an expert on annuities, but I’m sure there are some lower-cost products out there.

Deferred annuities are a product you can put some money into when you’re younger, and have it not start paying out until you’re 70 or 75 years old. You can choose the annuity when you’re younger and still with it, and delaying the payout means a smaller amount of money will go farther when it’s finally payout time.

There are other options too. You could do what my parents have done, and that’s keep a relatively astute member of the family up to date on the finances, allowing that person to slowly take over major decisions as they get older.

Or you could accumulate so much money that all you need to do is put the money in GICs when it’s time to retire and live comfortably on the interest. Which is fine, assuming you’ve got so much disposable income that a 40% savings rate isn’t a big deal. I suspect many people reading this rag can accomplish that, but it’s probably a pretty big stretch to assume the average person wants to do that. They’d rather consume now.

With people living longer than ever, dementia could be a bigger retirement threat than outliving your money. Yet, I see nobody acknowledging it as even a remote risk. The time to plan for such a thing is now, not when you’re Grandma and you aren’t allowed to have credit cards anymore because you keep telling the numbers to the nice man on the phone.

Aug 302015
 

Too much of a good thing is bad for you. Too much alcohol makes you drunk, too much happiness makes you look crazy and too much sun exposure can actually blind you. While the first two are completely unavoidable, you can do something about sun exposure and it’s a hell of a lot easier than locking yourself up in an underground bunker, although that sounds like a pretty cool idea.

First, the Shocker of the century!

The harmful rays of the sun can cause major damage to your eyes that causes severe eye disorders down the road. Because sun damage is cumulative, you may not feel any adverse effects today, but once you hit a certain age, all the problems start to creep up on you, just like bad cholesterol. Sun exposure is the leading cause of skin cancer and crow’s feet worldwide. Nobody likes crow’s feet.

Long term exposure to UVA and UVB radiation can damage not only the thin skin surrounding your eyes, but also your eyelids which can lead to cancer. The cornea and other internals are also affected and it can lead to cataracts, contribute to macular degeneration, cause pterygium and pingueculum. Another known effect is photokeratitis or snow blindness, which is very painful and can last for days.

With all these sun hazards, it should be mandatory for everyone to wear sunglasses outdoors! But there aren’t any sunglass police, so we’ll just have to make do on our own. You just can’t grab a pair from the drugstore and call it a day, though. There are standards you need to follow so you can give your peepers the best possible chance of surviving a superheated armageddon.

UV Protection

When choosing a pair of sunglasses, always look for 100% UVA and UVB protection. Never settle for anything less. Check the labels or ask your optometrist about the protection level. Also, UV protection has nothing to do with lens color. Darker lens doesn’t mean better UV protection, it’s just the color of the lens.

Quality is Important

Consider it as an investment for your eyesight, so don’t skimp on a good pair of sunglasses. Cheap ones aren’t really worth all the trouble, and are known for their bad fit, poor craftsmanship and cheap lenses that can give you a migraine. Sunglasses that shatter on impact can be dangerous and probably blind you, so check the materials first before buying. The option to shop designer sunglasses for women and men is entirely up to you, but designer brands usually have better build quality, so investing in a pair that would last you a long time makes a lot of financial sense.

Choose Wraparounds or Oversized

The skin surrounding your eyes is very thin and need protection too. Choose wraparounds for maximum coverage that extends towards the sides of your face. Oversized sunglasses can work as well because these can cover half your face, but wraparounds are a better choice overall, especially for sports and other outdoor activities.

Polarized Sunglasses

Glare sucks, especially when you’re driving, on the slopes or fishing. If you spend a considerable amount of time on surfaces such as asphalt, snow, sand and water, you should choose a pair of sunglasses that have glare protection. The only downside to wearing polarized shades is that it’s a lot harder to read your cellphone or the dials on a boat, so this type of lens treatment is not recommended for people riding motorcycles.

A good pair of sunglasses with 100% UV protection plus a wide brimmed hat will keep you safe from the harsh rays of the sun that can destroy your eyesight. You only have two eyes, so protecting them at all costs should be your priority from here on out. Don’t say I didn’t warn you.

Aug 302015
 

Looking young is big business these days, with medical procedures that cost thousands of dollars just for a nip here, a tuck there and some botox on the side. In fact, the anti-aging market is so ridiculously huge, it’s projected to be worth 191.7 billion dollars in 2019. That’s more than the GDP of Ukraine!

Generation Botox

Our generation and a few generations before us are so hooked at trying to look young, they’re chasing the mythical fountain of youth at the expense of their bank account and botox plastered on their faces. People in general, seem to be forgetting one simple truth: it’s not rocket science to NOT look your age and you don’t need to spend a small fortune doing it. All you need is wisdom, which in some cases, don’t come with age.

One of the main faults of the anti-aging group is that their all-out war on aging is a battle they can’t win. It’s like fighting gravity. You’ll lose every time. So, instead of fighting aging, why not work with it and minimize it’s effects a little bit? Isn’t that a whole lot better than being stressed about aging, fighting it all the time and using negative words like “anti” everyday?

Be happy, happy

You’re going to grow old…so will everybody else on this planet. Deal with it. Acceptance is your first ticket to not looking old because you’ll stop needlessly worrying about it all the time. Once you eliminate the stress factor and anxiety you have about wrinkles or bald spots, you’ll not only look younger, you’ll also feel better and maybe lose less hair (you’re still going to go bald, but slower).

There are many ways to look and feel younger than you actually are. Try being happy all the time. It’s next to impossible because of our propensity to mood swings and stuff, but try it without coming off as complete lunatic. Try looking at things differently, with a child’s enthusiasm and a dog’s gusto, like you’re seeing something for the first time and you can see everything great about it.

Busta Move

Another way is to make a habit of working out. Try to mix some cardio like running, cycling or swimming with strength training. Aging slows down our metabolism, so daily exercise is important if you want to look young and fit. It’s also good for the heart and lungs, plus it helps you build and maintain muscle. When you have firm muscles, your skin will be tighter and is less prone to sagging. For men, this means no man boobs!

Some people will say that fat makes you look younger because it’s like having muscles: your skin will be all stretched out. Well…not really. Having a lot of fat won’t make you look younger. It’ll only make you look fat and maybe even lazy. Plus, having a surplus of fat isn’t good for you and the faster you can lose it, the better for your overall health.

You are what you eat

One more strategy to look younger is to eat right. A healthy, balanced diet rich in protein, healthy fats and carbohydrates will get you looking younger, faster. You should also add food that can help stimulate the production of collagen, an essential protein that helps keep our skin stay smooth and elastic. Add mangoes, white tea, avocados, garlic, blueberries, eggs, carrots and dark-leafy vegetables to your diet because these foods are proven to help the body produce more collagen.

You can also take supplements. Collagen supplements have been around for years, while vitamin C and omega – 3 fatty acids can help your skin maintain it’s elasticity and glow. Combine all of these together and you’ll have an all-natural way of minimizing the effects of aging, without costly injections or surgery.

They say that age is just a number, and what’s really important is how young you are at heart. The reality is, nobody cares how many wrinkles you have. No one will stop you on the street and say “Gee, your wrinkles are out of control!” Not even friends or family will say it to your face, because growing old is none of their business. It’s yours. Deal with it, and stop fighting. The more you struggle, the worse off you’ll be.

Aug 282015
 

In Toronto, this house is worth 67 million dollars.

Here at the ol’ FU machine, we’re big fans of passive income. And by we, I really mean me and my 14 imaginary friends. One went back in time to kill Hitler. His name is, ironically, Adolf.

There are quite a few ways you can generate a stream of passive income. Probably the most popular is to buy a stream of steady dividend payers, preferably stocks that raise said dividend each year. I’ve already said my piece against that a million times so I’ll just say this. I would encourage anyone to prefer investing in stocks that pay dividends, but don’t insist on it.

Anyhoo, the other really popular way to generate a nice stream of passive income is to invest in real estate. Real estate is attractive because it’s pretty passive — especially if you get a property manager to do your dirty work — it’s easy to leverage, the assets are very tangible, and hey, people are always going to need a place to live. If that place happens to be the crapbox you own, all the more power to you.

Friend of the blog (i.e. she once took pity on me enough to read this thing) Afford Anything is a big proponent of such thinking, building a mini real estate empire in Atlanta. I guess all the real estate in nice cities were taken, so she was stuck with Hotlanta. She’s done well at it, currently owning a handful of properties that she can manage from anywhere thanks to the help of property managers, general contractors, and a random guy named Billy who likes to point at things.

As someone who has bought rentals before, I can see the attraction in doing it this way. But I also think Paula really glossed over the cost of hiring good property managers, especially if they’re doing stuff like general maintenance for her. We’re talking 10-25% of the value of gross rent, which is a huge cost to pay. Some people might be willing to pay that cost in order to have a passive investment, but take it from someone who used to be in the industry. It’s hard to find a good property manager. They have no incentive to be proactive, so they’ll just be reactive.

Which is why for the folks reading this, I will issue a blanket statement that most of you should probably just give up the dream of building your own real estate empire, especially in Canada’s overheated market. Instead, I think you’d be far better off buying a handful of REITs and just investing in real estate that way.

The big advantage (and risk) of buying individual rental houses is the ability to leverage. You put down your 20%, pay your $800 per month mortgage payment and your $200 per month in expenses, pocket $1300 in rent, and eventually some sucker has paid for the place. Con some banker into letting you do that 4 or 5 times at once, and you’ve got yourself some nice cash flow.

But if you’re feeling frisky (and let me be very clear that I’m not recommending this in any way, shape, or form), you could do something similar with REITs. We’ll use the BMO Equal Weights REIT ETF (TSX:ZRE) as an example, which currently yields 5.6%.

The first thing you do is scrounge up your “down payment,” which we’ll assume is $20k. I suggest looking in the couch cushions first. Then go to your bank and borrow another $40k, and you’re looking at a $60k original investment. You then take that money and use it to borrow another 50% in margin from your stock broker, and boom. You’ve turned $20,000 into $90,000. You then fire that whole $90k into the investment, which would get you 4,912 shares.

Each share pays a monthly dividend of 8.8 cents, meaning you’d end up with $432 in monthly dividends. That works out to $5,187 per year in “rent.”

You’ll have to pay back those loans, obviously. If you borrow $40,000 at prime (currently 2.7%), you’ll be looking at $1,080 per year in interest. And if we use the current margin rates at Interactive Brokers (which has by far the lowest margin rates out there at 2%), you’re looking at another $600 per year in interest.

Sum it all up and you’re collecting $5,187 in rent, and paying just $1,680 in interest. That’s a profit of $3,507 per year on just $20,000 out of your own pocket, for a cool return of 17.54%. That’s not even including capital gains into the equation, since every real estate investor should probably be treating them as an added bonus anyway. You could funnel the profit back into paying back some of your margin loans, or let it ride, baby! I’d be paying it back as fast as I could, but hey. I’m a little scared of outside.

And that’s all there really is to it. Yeah, it’s a risky move, but so is buying real estate heavily on leverage. This way you literally do nothing except collect your dividends. You don’t have to remodel anything, or yell at your property manager. It’s about as passive as it gets. You could even spice up the risk by just buying a handful of REITs that yield more than ZRE.

The only downfall in building your real estate empire this way? You can’t take your lady for a drive past the places you own. Sorry slugger, you’ll have to charm her pants off another way. I suggest loud engines.

Aug 262015
 

HELLO, STOCK VOLATILITY.

Over the last couple of days, the Dow Jones Industrial Average has been more up and down than your average neighborhood crackhead. All sorts of things have been blamed for the volatility, from China’s hilariously inept efforts to deal with the implosion of stock markets there, to all the high frequency traders that sell everything immediately once some algorithm kicks in. But really, it’s God’s fault. He simply doesn’t want you to be rich. He’s seen what you do under the covers, and does not approve.

Anyhoo, the sell-off has led to some buying opportunities in certain parts of the market. I won’t bore you guys with the individual stocks I’m buying — for that, head on over to the other blog — but we will talk about blindly buying a sector that I think is very beaten up, energy.

Say you’re a long-term bull on oil and natural gas, like me. You’re also sexy as all hell and not the least bit showy about it, also like me. Congratulations, you are a perfect person. As a perfect person, you’re looking for a quick, easy, and cheap way to get in on those cheap energy stocks. Sure, you could scour financial statements until your eyeballs turn to goo in boredom, but most people reading this want nothing to do with that crap. They want results, and they want them now, dammit. What should they do?

The answer is easy. They should just buy an energy ETF and call it a day. They can even collect a dividend while waiting for the price to go up. We all like dividends, right?

But which one to choose? Let me help you with that. And by help you with that, I really mean lead you down the wrong path and inevitably get you bankrupt. Sorry in advance!

iShares

Fund: iShares Capped Energy Index ETF
Price/Market Cap: $9.86/$705 million
Dividend: 3.6%
Management fee: 0.55%

Up first is the largest of the ETFs covering the sector, the iShares Capped Energy ETF. It has a reasonable management fee, has a high trailing dividend yield (which will inevitably come down because of all the dividend cuts in the sector), and has been around since 2001. Over the last year, it’s down pretty much exactly 50%.

Here are its top 5 holdings along with their weightings:

  • Suncor (26.9%)
  • Canadian Natural Resources (16.1%)
  • Cenovus (7.5%)
  • Imperial Oil (6.2%)
  • Encana (3.7%)

As you can see, 43% of the fund’s assets are in just two stocks. Yeah, they’re the biggest and baddest in the sector, but it makes the ETF a little dependent on those two names. And if you add Cenovus in there, you’re at 50%.

It also means you’re looking at big oil sands exposure. The only one of those top 5 without most of its assets in the oil sands is Encana. Yeah, Suncor has downstream operations, but it’s still mostly an oil sands player.

BMO

Fund: BMO Equal Weight Oil and Gas ETF
Price/Market Cap: $9.31/$114 million
Dividend: 4.26%
Management fee: 0.55%

The BMO ETF is a little more interesting, at least on the surface. Equal weighting implies that we shouldn’t see so much exposure to the giants of the sector. Is that the case? Here are the top holdings:

  • Suncor (9.4%)
  • Imperial Oil (9.4%)
  • Enbridge (8.7%)
  • Husky (8.6%)
  • Pembina Pipeline (8.4%)

Yeah, it’s a much different ETF. It includes pipelines, which the iShares ETF didn’t. And it has Husky as one of its top holdings, not Canadian Natural Resources or Cenovus. And there’s definitely more diversification in the top holdings.

But the BMO ETF only holds 14 stocks in total, while the iShares ETF holds 54 total companies. And it isn’t such a great proxy to energy, since it has the pipelines in it to smooth things out. Excluding dividends, the BMO ETF is down just 33% over the last year. That’s good for people holding it over the iShares ETF, but probably not great for those of us looking for pure exposure to energy.

Junior Oil

Fund: BMO Junior Oil ETF
Price/Market Cap: $13.01/$34.8 million
Dividend: 1.2%
Management fee: 0.55%

Just in case the regular energy sector isn’t exciting enough for you, allow me to present the most turbulent part of one of the most turbulent sectors, junior oil. This ETF invests in small, start-up oil companies. You might get the next Suncor if you buy this ETF, but you’ll also get a whole lot of junk that never does anything. It’s like investing in a whole ETF of your loser cousin!

Here are the top 5 holdings.

  • Diamondback Energy (7.9%)
  • Western Refining (5.9%)
  • World Fuel Services Corp (5.5%)
  • Dril-Quip (4.4%)
  • Patterson-UTI Energy (4.1%)

There’s a reason why you probably haven’t heard of these companies. They’re primarily U.S. traded, which means you’re adding in exchange risk into the equation. That’s probably not ideal, but this fund is probably your best way to really swing for the fences.

Horizons

Fund: Horizons TSX Capped Energy Index ETF
Price/Market Cap: $16.02/$5.6 million
Dividend: N/A
Management fee: 0.35%

This fund is very much like the first iShares ETF, but without the liquidity. The Horizons ETF traded just 1135 shares, for a grand total of $18,000, give or take a few bucks. You wouldn’t even need to be a high roller to move the price on this tiny ETF. Y’all should try it. Let’s push this thing around just to troll Horizons.

But hey, the management fee is pretty low. I assume it’ll gain assets as people realize that. It’s only been around for about a year now.

Here are the top holdings.

  • Suncor (25%)
  • Canadian Natural Resources (16.4%)
  • Cenovus (7.4%)
  • Imperial Oil (5.8%
  • Crescent Point (4.2%)

Which should you choose?

I dunno. I’m not properly licensed to make decisions for you and even if I was, I wouldn’t anyway. You people sicken me.

I’d probably just choose the iShares one myself, just because of the better diversification. But there’s certainly the case for picking either of the BMO ones, depending on whether you wanted to roll the dice a little and go with the small-caps, or whether you want the protection of mixing in the pipelines. The Horizons one would be better if only it had some liquidity.

Still, when it comes to the ETFs, the sky is the limit. You could look at the U.S. energy ETFs, or even just bet on oil itself. That’s the beauty of the world we live in.

Aug 242015
 
Worst pie chart ever.

Worst pie chart ever.

Here at the ol’ FU machine (which is capable of love and hate, FYI), we like to do little experiments. There was that time I tried to figure out if you could blindly pick the worst performing dividend aristocrats and outperform the market, and then there was that time I told y’all to just stop buying train tickets, which are totally similar enough to mention in the same sentence. So yeah, Einstein, I think I know a thing or two about experiments. Don’t you have a baby to make smarter?

But this experiment is going to take the cake. As part of my obsession with beating the market without trying, I got to thinking about a sector rotation strategy that I was certain would do well. It would be simple to execute, be effective, and elevate me to glory. IT WOULD BE CALLED THE SMITH MANEUVER OH GODDAMMIT. Curse my last name straight to hell.

Here’s the plan, in all of its simplistic glory.

You’d choose between the six largest sectors on the TSX — energy, financials, REITs, gold, information technology, or the TSX 60. You’d then figure out which of the sectors did the worst in the preceding year, and pour 100% of your money into it, borrowing an extra 300% just to be safe. Hey, it works for real estate investors.

No, you wouldn’t do that last part. But you would hold that sector for the entire year, switching into that year’s worst performing sector at the beginning of the next year. It’s probably easier to explain it if we just go ahead and do it. Presented in very sexy table form, the results:

Year Sector Result
2005 Gold +21.4%
2006 Info Tech +23.9%
2007 Energy +7.9%
2008 REITs -39.6%
2009 Info Tech +55.7%
2010 Gold +24.5%
2011 Info Tech -20.7%
2012 Info Tech +5.9%
2013 Gold -46.4%
2014 Gold -7.5%
Total -20.8%

It probably goes without saying, but that did not outperform XIU, the ETF equivalent of the TSX 60. Excluding dividends, it rose 87.4% during the decade, absolutely trouncing our effort.

Now before you go ahead and tell all of our attractive lady friends what a moron Nelson is, the experiment actually did quite good up until we ran into a mess with gold. At the end of 2010, the experiment had delivered returns of 52.8% compared to the TSX 60’s performance of 49.9%. And at the end of 2012, it had returned 59.7% compared to the TSX 60 only going up 38.2%.

Basically, it was just the last two years that squashed the theory. Before that, there was some pretty major outperformance, and I think I may know what caused it. I had to limit the search to six sectors because the TSX has a pretty serious over concentration in a few sectors. There have been some recent entries in the ETF space that cover some of these sectors but some cover U.S. stocks as well (i.e. North American sector ETFs) and others weren’t terribly diversified. There’s no way I could include them in the test.

But I can include them in a test for the U.S. market. So let’s try it again, this time focusing on 12 different American sectors, including:

  • Healthcare (IYH)
  • REITs (ICF)
  • Basic materials (IYM)
  • Consumer products (IYK)
  • Energy (IYE)
  • Transportation (IYT)
  • Financials (IYF)
  • Industrials (IYJ)
  • Technology (IYW)
  • Utilities (IDU)
  • Telecom (IYZ)
  • S&P 500 (SPY)

I used these sectors because the ETFs have been around the longest, and because they seemed like a good representation of the whole market. Using the same rules as we did for the Canadian test, how did we do?

Year Sector Result
2005 Tech +2.6%
2006 Telecom +29.7%
2007 Healthcare +7.4%
2008 REITs -45.5%
2009 Financials +20%
2010 Utilities +1.6%
2011 Utilities +14.6%
2012 Materials +5.5%
2013 Utilities +12%
2014 REITs +29.3%
Total +66.3%

Okay, now we’re talking. That’s a pretty solid performance, with only one real dud year in there. Because we had a better selection of sectors, we weren’t stuck taking gold right when it went down the crapper again.

But the experiment still didn’t beat the S&P 500. During the same decade, SPY was up 70.1%, which doesn’t translate into much of an outperformance over a decade, but it’s still there. And remember, the 2015 sector the experiment would have chosen is energy, which has obviously underperformed the broader market. So we’d be further away from the S&P benchmark.

So to sum it up, no, it doesn’t look like you can beat the market just by buying the most beaten up sector blindly. Sorry kids, looks like you’ll have to come up with something else to beat the market. Like pogs. I hear those are a great investment.

Aug 212015
 

Last week, I interviewed Donald Trump, and the week before I interviewed Kevin O’Leary. In the finale of the interview series, I sat down with Generic Debt Blogger, who has a (mostly) neglected Twitter account, and once did a guest post here at Financial Uproar 

woman_standing

Nelson: Generic Debt Blogger, thanks for joining us on the interview series. Do you have an actual name, or should I call you GDB?

GDB: My name is Madison. Or Piper. Or Lena. Think of the most derivative name you remember from college, and I have it. You know, that stupid overachiever who thought that college had to be AMAZING, even though regular people think it’s just a pit stop to get to where you want to be? Well, I have a secret. That girl was me, and I started a blog. We’re very interchangeable.

N: Well. That was very…self-aware. Maybe I’ll just call you GDB.

GDB: No, silly! Tee-hee! Call me by my very clever pen name, Centsible Sense. I am literally the first person to make that joke. We like to have fun over at my blog.

N: Okay, Centsible. How’s your quest to pay down those student loans going? Because lord knows, you have debt. You always do.

GDB: It’s hard paying down debt! Instead of spending $500 per month on clothes, I’ve had to cut it back to $300. A girl can barely clothe herself for $300! And then I had to cut back my wine consumption! And Starbucks! And manis and pedis! And dates! And 4 GB of data per month on my new phone! I still spend on those, but still. I had to slightly cut back. I’m all about balance.

N: What else are you doing to pay down your debt faster? Maybe you have some tips for my readers.

GDB: Two words Nelson…SHOPPING BAN. OH MY GOD, have you even done a shopping ban? It’s so INSPIRING!! My life was just filled with disposable garbage before. Now I’m spending so intelligently! I’ve cut $5,000 per year from my spending! And it felt great! I’m so blessed to have discovered shopping bans!

N: So, I’m confused. You still buy things like Starbucks, meals out, and other stuff that could be easily cut, yet still call it a shopping ban? How do you decide whether something is included in the ban or not?

GDB: (pained look) Oh look girls, we have a non-believer here! Tee-hee! Nelson, it’s really simple. You decide beforehand what’s included and what isn’t, and then change the rules once it gets hard! I’m allowed to buy all necessities, 3 meals out per week, Starbucks, the *occasional* mani and pedi (once every two weeks, because only hobos have rough cuticles), and $5,000 per year worth of travel.

N: Wait. You just said you saved $5,000 in spending, but then you spent it on travel. So what exactly have you accomplished?

GDB: God, you’re just a hater. Why do you have to look at everything negatively?

N: I prefer to call it the truth.

GDB: The truth is you’re a meanie.

N: So what are your plans now? Are you going back to school?

GDB: How’d you know?!?!

N: Lucky guess. What are you going to study?

GDB: I’m getting my masters! In psychology! No, wait. It’s women’s studies! Or maybe it’s in social work! I definitely think more education will make me more employable in the future. Way more more than real world job experience. No boss looks for that, and I would know. I’ve held down a full-time job for months now.

N: That seems to be a pretty common refrain from new grads. Why wouldn’t you be a little more patient and wait a while longer? It seems like you’re rushing life a bit.

GDB: Nelson, I can’t stay. Did you know the boss asked me to make coffee once? Can you imagine? The patriarchy is conspiring to keep me down, and it’s not going to change unless me and my sisters stand up for ourselves!

N: I’m not even going to justify that with a response. So, how much do you have in your emergency fund?

GDB: $10,000.

N: And how much do you owe in student loans?

GDB: $52,583.94. Not that I’m counting or anything! Tee-hee! 😉

N: Why wouldn’t you put that money towards your debt?

GDB: You NEED an emergency fund, silly.

N: No, actually you don’t, especially if you have a job that’s pretty secure. And even if you do happen to get laid off, you could use credit temporarily. Or you could at least invest your emergency fund.

GDB: It IS invested, thank you very much! Tangerine and 1.1% FOR THE WIN. I’m pretty good at investing. It’s *almost* as much as the 4.25% that my loans are charging.

N: I don’t think that’s actual investing.

GDB: I have an investing e-course. Want to hear about it?

N: You seem woefully unqualified to have an investing e-course.

GDB: I’ve made money over the last TWO years.

N: Don’t you think that money would be better put to use paying down your debt?

GDB: No. You know what? You don’t get to judge how I live my life. PERSONAL FINANCE IS PERSONAL PERSONAL FINANCE IS PERSONAL PERSONAL FINANCE IS PERSONAL PERSONAL FINANCE IS PERSONAL PERSONAL FINANCE IS PERSONAL.

N: That was very necessary.

GDB: It’s okay. I’m getting married next summer, and together my fiancé and I will tackle that debt! But first, nine months of wedding talk! Want to hear about my budget? It’s ONLY $26,000, which means I’ll have to make a lot of sacrifices on things like the rings, my dress, how many guests we invite, the catering budget-

N: Sorry, we’re out of time.

Aug 192015
 
"Give me all your money...So I can invest it, obvs."

“Give me all your money…So I can invest it, obvs.”

If you’ve been paying attention to the world of personal finance on the interwebz, you’ve probably heard a thing or two about robo-advisors, which are, depending on your perspective, either the greatest thing since flush toilets or the actual literal spawn from Satan’s seed.

First, let’s take a look at what the hell a robo-advisor is, and then we’ll talk about whether they’re all that or not. Well, I’ll talk. You’ll do that thing where you listen, but with your eyes.

What’s a robo-advisor?

Ever since the days of Robocop there, man has dreamed of finally shirking off all of his work to robots, leaving him free to watch videos of cats on computers. At least, I’m assuming that’s how that movie went. I never actually saw it.

A robo-advisor isn’t even a robot. It’s a software algorithm that invests for you, based on a specific risk profile. If you tell it you like to regularly mount (NOT THAT KIND OF MOUNT, GEEZ) bulls just to get bucked off and possibly crushed a few seconds later, you’ll probably have a lot of stocks in your portfolio. And if you’re like me and charge your phone when it hits 60% “just in case”, you’ll probably not be a lot of fun in general. Oh, and you’ll own more bonds.

I’m not quite giving robo-advisors enough credit, but that’s pretty much it. They do other stuff like tax loss harvesting, rebalancing, and so on, all while charging investors a very small management fee, often between 0.10% and 0.50% of their assets.

The big thing is investors never see an actual live advisor. Everything is done automatically by the software, with very minimal human involvement. All the information is there for folks who want to look, but you’re still pretty much on your own.

The logic behind some of the portfolios is pretty interesting. They invest in stuff with a proven history of beating the markets, including equal weight indexes, small-cap stocks, and seeking out the lowest cost index funds. To be honest, I’d say many of the robo-advisor portfolios are better than those recommended by actual non-robot advisors.

Naturally, the folks who are huge finance nerds are very exited by the prospect of robo-advisors taking over and making everyone’s non-sexual dreams come true. They already manage their own portfolios, think it’s quite easy thank-you-very-much, and think everyone should cut costs as low as possible. Managing your own cash is ideal, but for the folks who can’t, a robo-advisor would work just as well for just a little more in costs.

But is that really something that’s going to happen? This is when I start to get a little skeptical.

Why do people hire advisors?

I used to own shares of Investors Group (IGM Financial on the TSX), even though I was thoroughly dissatisfied with the interview process, their sales tactics, and the high-fee mutual funds their advisors constantly push.

Why? Because to someone uneducated, Investors Group looks like the ticket. Look at their marketing if you don’t believe me. They know you’re scared, but don’t worry. Your local Investors Group consultant will wrap you up in a nice warm blanket that smells vaguely like lilacs. You pay very well for this, but the average person doesn’t know that.

It’s been a good business for years, but that’s about to change. In 2016, regulators will require mutual fund companies to disclose what the fund costs in dollar terms, not just percentage terms. This looks to be a pretty big deal for the average mutual fund investor. A 2.5% fee on $100,000 in assets doesn’t seem like much. But $2,500 in fees seems like a lot more, especially in a year when the market goes down.

Smart people are aware of this, and are positioning their business accordingly. Some advisors are really pushing wrap accounts, which put investors into low cost ETFs with a management fee of 0.5% to 1% of assets to manage it. Others are embracing a fee-only model, which ends up being a pretty good deal for folks with a lot of assets, and a lousy deal for somebody just starting out. It’s hard for someone with $10k in the bank to pay $1,000 or $1,500 for a complete financial plan. That’s not much for someone with $1 million in the bank, but it’s a prohibitive cost for a lot of people.

Which is why I think a hybrid model is the ticket.

For years, banks have been giving free financial planning advice to go with the mutual fund sales. People have issues with the poor quality of this advice sometimes — and rightfully so — but it’s essentially a loss leader to get the person in the door. They show up for a “free” financial planning session, and it gives a fully diversified financial services company a chance to sell them insurance, a mortgage, expensive mutual funds, and so on. Selling each of those products is a nice payday for an advisor. Selling them all easily justifies spending a few hours per year on financial planning.

Selling expensive mutual funds isn’t going to cut it any longer, but there will always be a call for the other stuff. And for many people, the option to talk over their problems with a knowledgable financial planner is very valuable.

And that’s the crux of why I think robo-advisors have a long way to go before they’ll dominate the market. Most people get value from the calm, reassuring voice sitting across the table telling them that market declines happen. Us finance nerds constantly forget just how clueless the average person is about this stuff. And remember, financial planning is about more than just investments.

There will always be a small minority of people who feel comfortable doing everything themselves. But the vast majority need reassurance, hand holding, and somebody seductively stroking their thigh. Which is why I liked Investors Group as a stock before the fee disclosure rules changed, and why I think there will always be a market for a regular financial advisor — no matter how they get paid.

Aug 172015
 

You’d think this would be common sense, but I see so many people who are constantly screwing this up.

If you talk to any financial advisor, most PF bloggers, or the bottom of my shoe, they’ll all tell you the same thing. As you get older, you should become more conservative in your investments. Most will recommend you take your age and subtract it by 100 or 110 to get the proper bond allocation. If you’re 55, then you’re looking at being between 45 and 55% in bonds. If you’re 111, you’re probably dead. Can I have your watch? Oh wait, you’re dead. (takes watch)

Of course, dividend growth investors don’t see it that way. They’re content in being close to 100% invested in stocks almost all the time, knowing that the growing dividend stream (which they’re a little sexually attracted to) will be enough to sustain their dreams of soft meat and annual trips to Arizona in their retirement. CPP will be their bond component, dammit.

And hey, that’s okay. If you’re so obsessed with dividend growth investing that you’re willing to see the strategy even through the times when the market falls 30%, then good on ya. But as we all know, many investors panic during market bottoms, crystalizing paper losses when the going gets too tough. They are the investing equivalent of Jay Cutler or a Russian hockey player, at least in Don Cherry’s erotic dreams.

It’s why I think a dividend growth strategy is unsuitable for a lot of investors, especially those people who are approaching retirement age. It’s tougher than most people think to even pick the best dividend aristocrats, and nobody wants to see a huge decline in their portfolio just a few years before they retire, even if dividends stay steady. The investor who truly doesn’t care about the amount every time they log in is few and far between.

But after saying all that, maybe there’s an argument that both dividend growth investors and traditional portfolios of 50-50 stocks and bonds are both doing it wrong as someone approaches retirement age.

The case for going 100% bonds

No, that’s not a typo. There’s an interesting argument to be made that an investor should approach a 100% bond allocation as they hit retirement age.

Essentially, the strategy goes like this. You plan to retire at 65, and you’re currently pushing 55. Your retirement portfolio is 65% stocks and 35% bonds, with most of the stocks of the blue chip variety because you want to be more conservative as you age. So far, it looks to be a pretty standard portfolio.

But instead of gradually moving to a more 50/50 weighting, you start exchanging your stocks for bonds pretty aggressively with the goal to get to a 90-100% bond portfolio by the time you hit 65.

Here’s the thought process for the strategy. The last thing you want is to suffer through the second coming of 2008-09 right when it’s time to retire. And since nobody can predict when the next crash will be, you should be proactive and reduce risk on your own. Protecting cash right at retirement age is paramount. If the crash happens right when you turn 65, you might be forced to delay your retirement, stretch for yield, or hit up your kids for gas money.

Of course, most people can’t survive a long retirement on a 100% bond portfolio, especially in today’s interest rate world. What you’d do is start to move back into equities after you retire, eventually getting back to something like a 50/50 split again. The thought process is once you’ve locked in your nest egg at 65, you can afford to take on more risk because you plan to live another 20-30 years. At that point, the risk goes from a market crash at the wrong time to running out of cash before you keel over from neglect because the damn grandkids never come to visit.

That’s the whole strategy. It certainly has its merits, although I can see the logic in having a 50/50 split around retirement time as well.

Aug 142015
 

Last week, I treated y’all to an interview with one of the most polarizing figures in the finance community, Kevin O’Leary. And before that, I interviewed the most legendary investor of all time, Warren Buffett. Continuing the interview series is Donald Trump, infamous real estate developer, star of The Apprentice on NBC, and current Republican presidential candidate.

donald-trumpNelson: Donald, thanks for taking the time today. How’s life on the campaign trail?

Donald: Nelson, do you know how exhausting it is to blame the Mexicans for absolutely everything? It’s so tiring it’s almost like I know what it’s like to be an undocumented worker hanging out in a Home Depot parking lot. I’m very much documented, thank you very much. But still, it makes me 0.00000003% more sympathetic to their plight.

(Donald starts looking around, focusing on the area behind me)

N: Umm… what are you looking for?

D: Are there any Mexicans back there? Because if there are, I swear to God…

N: Nah. Just a French-Canadian girl.

D: Better kick her out of the country too. Just to be safe.

N: I spent a little time on your website, and I’m not seeing much in the way of details about your policies. Could you explain a little more about what exactly you plan to do if you’re elected.

D: Well Nelson, it’s simple. America has lost its way. Obama has literally ran this country into the ground. Did you know that we’re losing people to CANADA for God’s sake? In Canada, you have to wait 5 years to see a doctor. In Canada, 96% of the population is on welfare. In Canada, you don’t even get to exercise your GOD GIVEN right to wave your gun in the face of anyone that pisses you off. If Obama has his way, America will turn into Canada. I WILL NOT LET THAT HAPPEN.

N: I don’t think you’ve done your research on Canada. It’s really a nice place.

D: Research? RESEARCH!? I don’t need no goddamn research. You bookworm nerd people can say whatever you want, but I don’t need books and figures to make decisions. I trust what’s in my guts, dammit! My spleen can make better decisions than a dozen eggheads looking at all the facts and figures they want. And you know what? My spleen is telling me that living in Canada is like simultaneously getting punched in the face and the balls.

N: So, are you going to tell us what you’d do as president, or not?

D: Simple. Whatever Canada does, we’ll do the opposite.

N: Fair enough. Let’s talk a little more about your real estate career. Want to talk about how your companies have gone bankrupt several times?

D: Sure, I’ll talk about it. Nelson, here’s the deal. I was an aggressive real estate developer. Why wouldn’t I be? I went bankrupt and then started back up again pretty much the next day, all without losing very much personally, since I’ve diversified away from owning 100% of my own companies. Why would I be conservative? That’s like telling a lion not to KILL, EVEN THOUGH IT LOVES TO KILL KILL KILL KILL KILL KILL KILL KILL I’M GONNA LITERALLY KILL HILARY I SWEAR TO GOD.

N: Yikes. Better not let the Secret Service hear that.

D: Hear what?

N: Exactly

D: Nelson, we have to talk about something. I understand you have a bit of an infatuation with my daughter, Ivanka.

N: What? Oh, geez. Uh, I just find her attractive, that’s all.

D: Stay away from my daughter. Just because she dated Topher Grace doesn’t mean she’ll just date *anyone* you sick monster.

N: Wait. Topher Grace dated your daughter? I’m impressed

D: It ended when she beat him in an arm wrestling match.

N: Did he cry after?

D: We both know the answer to that

N: How did that go when she brought him home to meet you?

D: You know how you haven’t seen Topher Grace in anything since 2008? That’s because I broke his spirit.

N: Hey Donald, we’re almost out of time, I was just wondering if you’d say it for me.

D: Say what?

N: You know…

D: No, I don’t.

N: Oh come on. It’s the phrase you’re known for.

D: You mean “make America great again?”

N: No, that’s not it. You’d say it at the end of each episode.

D: Oh! No, I can’t.

N: Come on! It’s only two words. Just say it.

D: I-

N: SAY IT! SAY IT! SAY IT! SAY IT! SAY IT!

D: Fine, I’ll say it. Nelson?

N: Yes?

D: Fuck you.