Y’all probably heard about Kristy Shen and Bryce Leung, the 30-something couple that turned the Canadian PF world all atwitter when the CBC profiled them and their $1 million portfolio.
In case you didn’t read the story, here’s the
one two paragraph summary. The couple got rich and then retired at 30 or some other ridiculous age. They’re currently doing the same thing many others in their shoes do–travel and start a blog profiling how great their lives are. They’re convinced avoiding home ownership was the key to amassing such a large portfolio.
Instead, the couple put their cash at work investing with noted housing bear Garth Turner, putting their $500,000 nest egg into a 60/40 stock/bond allocation back in 2010. By late-2014, the portfolio had doubled to $1 million. So they quit their stressful (and high-paying) tech jobs, preferring to, I dunno, watch the sunset. Or whatever it is people do who don’t have jobs. Yell at teens, maybe.
Anyhoo, it turns out the couple is very wrong. Avoiding home ownership didn’t make them richer. If anything, it made them poorer.
A deeper analysis
Let’s review what we know about the couple their own financial advisor called “tireless self-promoters and reasonably irritating juvenile 1%-ers.”
- They saved up $500,000 by 2010
- They continued to save large amounts from their well-paying jobs up until the end of 2014
- They had a reasonably conservative portfolio
Let’s use a compound interest calculator to make a reasonable assumption of their portfolio. I used a $500,000 starting balance, a $50,000 additional contribution, five years of growth, and 8% annual return. Here are the results:
Remember, Turner even remarked just how well the two saved, so I think I’m being a little generous on the return. I’d suspect their actual rate of return was much lower and it was supplemented by a higher savings rate.
Now let’s make another assumption. Say they bought an average Toronto house in 2010. Instead of putting their $500,000 down on the house, they put down a measly $250,000, investing the rest.
First, let’s figure out the return on the house. The median price on a property in Toronto was $367,750 in June, 2010. The same property could have been sold for $587,505 back in November, 2014.
Thus, the couple could have turned $250,000 into a gross profit of $219,755. We’ll round that down to $200,000 for expenses like paying a Realtor to sell the place, taxes, and so on. Other costs like the mortgage would have been quite low, since they would only have borrowed just over $100,000. And knowing them, they probably would have done something smart like renting the basement.
We’re up to $450,000 in capital, a good start. But what about the other $250,000, plus the $50,000 added to the pile each year?
Glad you asked. Here’s the results of that:
Add the two together and we get a nest egg of $1.13 million, a full $80,000 more. Or, if you want to look at it another way, they would have ended up approximately 8% richer had they bought a house and then sold it a couple of years ago. They’d be even richer if they had held on until today.
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This is why they’re rich
As the story gained traction, an important detail began to emerge. Back when they worked, Shen and Leung worked really hard. They did the stereotypical tech thing of basically sleeping at their desks. Additionally, they were both in jobs that paid a lot of money. Both made over $100,000 per year for their whole working lives.
Unlike many of their peers, they were smart about it. After realizing they didn’t spend much time at home, they got the cheapest accommodations possible. Why splurge when you’re never there? They were similarly cheap in other aspects of their lives too.
This story sounds familiar, because it’s literally the story of every early retiree. They all worked hard (usually in tech), lived cheaply, had a spouse on board with the plan, and eventually saved up enough cash to say sayonara to working, maybe forever.
The key to their success doesn’t come from investing. It doesn’t come from cashing out stock options. And it especially doesn’t come from avoiding home ownership. It’s all about saving. A high savings rate is 99% of the reason why these people are rich, Shen and Leung included.
There is a simple sauce for retiring early, and it has very little to do with homeownership. As long as you can save aggressively and not shoot yourself in the foot, you’ll make it there.
It’s been good to be a stock market investor since 2009. Orgasmically good, actually. OH PISS OFF DICTIONARY THAT’S TOTALLY A WORD.
According to this fancy calculator, the ETFs that track the S&P 500, NASDAQ Composite, and TSX Composite Indexes are up 17.7%, 22.1%, and 11.0% annualized since a random date in March, 2009, respectively. Even Canada, which has suffered from pretty much every commodity crapping the bed (including, most famously, oil), has still done pretty well.
The funny thing about all of this is people hated stocks back in 2009 and 2010. Everybody warned returns going forward would suck and suck hard. Personal finance bloggers dialed down return expectations of 10% annually going forward to “more realistic” expectations of 5-6%. Naturally, stock markets did very well right after these predictions came out because if there’s one thing humans love, it’s recency bias.
Now that we’ve had basically seven years of uninterrupted bull markets, investors have the exact opposite expectations. We expect great returns to continue going forward, justified by things like how low interest rates are the new normal and how all the baby boomers looking for yield in their retirement. If they can’t earn enough to live on GICs or bonds, it’s only natural boomers will gravitate to dividend paying stocks and somehow screw over millennials.
Go ahead, millennials. Complain about it. If you’re loud enough, maybe your boomer parents will hear you from their basement.
These investors are wrong, of course. We’re not in some sort of new normal where P/E ratios will shoot up to 100x, even if Warren Buffett kinda suggested it that one time. The same thing will happen as has happened before. When valuations get too high, something happens that brings them closer to earth.
But what, Nelson?
I don’t know. Nobody knows. Sure, there are probably a few portfolio managers who are positioning themselves accordingly and who’ll look really smart when whatever it is happens, but as of today that’s just a guess.
What I can tell you is we’re almost guaranteed to have low returns going forward.
Why low returns?
It’s really quite simple. Stocks are expensive, and even though more companies than ever are starting to focus on paying dividends, it won’t be enough. Stocks will return to more reasonable valuations. The only question is whether it’ll happen quickly or if it’ll be a long drawn-out process that takes forever, sort of like the newest Melissa McCarthy movie.
Things look particularly bleak for U.S. investors. American stock markets are the most expensive in the world when it comes to CAPE (cyclically adjusted P/E) ratios. Large-caps in the U.S. are trading at a CAPE ratio of 26. Small-caps are even more expensive, with a CAPE ratio of 47. Canada is a little more reasonable, but it still has a CAPE of 18.
Based on CAPE ratios, here’s a table of expected returns going forward, courtesy of Research Affiliates.
As you can see, it doesn’t look pretty over the next decade for U.S. stocks, whether they’re small or large-cap. Things look a little better for Canada, but our expected returns are still under 6% annually, That’s not very exciting.
So what can you do about this? I have three suggestions. I’ll rank them in order of what I find least to most exciting.
Buy cheap domestic stocks
I’ve never really found the overall level of the stock market to be that big of a deterrence when it came to investing. I can still find cheap stocks even if indexes are flirting with record highs.
Today is no exception. There’s plenty of value in Canada’s small and micro-cap space. I think many of our REITs (especially ones with a lot of Alberta exposure) are undervalued. And the U.S. will always have cheap stocks.
But some people don’t want to pick individual stocks. They have neither the aptitude or the patience to do so. And even if we load up on cheap stocks, they’ll still likely get hurt if the market goes does. It is the nature of market crashes.
Which brings me to choice number 2.
Pay down debt
After recently buying a house, I now have a mortgage at 2.7%.
I haven’t really been sweating this debt, but it does weigh pretty heavily on my wife. So we decided to make paying down the mortgage a priority over the next few years with a goal of getting rid of our debt by January 1st, 2019. I did negotiate an out clause on this deal if stocks do crater a whole bunch and valuations become attractive, but as of right now I’d rather take the guaranteed 2.7% return from paying off debt.
If you have higher interest debt, I’d say it’s pretty much a no-brainer to pay that off rather than investing in stocks.
Maybe I’ll continue to do updates on the whole paying down the mortgage thing. Or maybe not. FINANCIAL UPROAR, KEEPING YOU ON YOUR TOES SINCE 1971.
Invest in cheaper equities
So you don’t have any other pressing needs for the cash and want to keep putting money to work in these expensive markets. What’s a fella (or lady) to do?
The solution is simple. Invest in markets with decent CAPE ratios.
The following countries are all expected to return better than 7% over the next decade:
- South Korea
Some of these countries are incredibly cheap. Russia has a CAPE ratio of 5, which means the fine folks at Research Affiliates believe it’ll return 14.4% annually for the next decade. Poland has a CAPE ratio of 8, which is an expected return of 11.9%. Turkey’s expected return on its 9 CAPE ratio is 9.6%. Even those greasy Italians are expected to deliver returns of 10.7%.
If you’re feeling especially frisky, I’m sure there are incredibly cheap stocks in each country you could buy to really goose returns. Or you could just take the lazy way out and buy an ETF. In my TFSA I have a position in RSX, an ETF that tracks the biggest companies in Russia. It has 32 holdings and a net expense ratio of 0.67%, which is a little high, but I liked it as a play on Russia and a play on energy. I’ve done well on it so far, and I intend to hold it for a while longer.
Other ETFs exist for these other countries, it’s only a matter of googling. You can do that, right? Just substitute “Pornhub” for “Turkey ETF”.
Geez, kid. Put a shirt on.
So I’m kinda a gym guy now, even though they (we?) are collectively the worst group of people on the planet. I get pissed off when there are too many people hogging my equipment. I now have my own locker, which is just the same empty one I use every time I show up. And I’ve even begun to acknowledge some of the regulars with knowing nods.
I hate what I’ve become.
I don’t really have much interest in lifting weights, so I’m usually on the cardio machines or in the field house playing some kind of sport. The elliptical has become my workout of choice. They have TVs too, which is a nice touch. It’s nice to be distracted while you work out.
But after a little while, TV wasn’t really doing it for me anymore. The nice thing about watching sports (my program of choice, always) is you don’t really need to hear what the commentators are saying. It’s easy to follow the play. So I stopped listening to the TV and started listening to podcasts instead.
I quickly abandoned podcasts too, for a few reasons. I couldn’t really find ones that were very interesting. The length varied too much. And I found I’d kill 10 minutes looking for something interesting before I’d even start to workout. Nuts to that.
So I switched to audio books. And let me tell you guys, it’s been amazing.
Regular readers already know I’ve made this change. I talked about listening to a book about the Bush family, and what it taught me about networking. It was a valuable lesson, especially for a guy like me whose networking strategy can usually be summed up with “leave me alone.” I’ve spent more time trying to interact with people since, with decent results.
The book on the Bush family was about the fourth one I “read” while huffing and puffing away. Let me tell you about the first one, and how it managed to make me enough money to pay for my gym membership for the year…and then some.
The book is Warren Buffett and the Art of Stock Arbitrage by Mary Buffett, who leveraged her 12 year marriage to Warren’s son Peter into a mini-empire of writing books about her former father-in-law’s investing methods. Ms. Buffett name drops her former father-in-law’s name approximately every second sentence in the book, which probably has to be a little annoying for ol’ Warren. But hey, good for her.
The arbitrage book is a good primer on the basics of the practice. Basically, arbitrage is the act of buying something knowing there’s a very high chance you can sell it for slightly more money at a later time.
The most common way to do this is through merger arbitrage. Say Company A decides to acquire company B for $20 per share in cash. Company B is okay with this, Company A has the cash, and everything is good.
And yet, company B’s shares won’t immediately trade at $20 per share. They’ll end up anywhere from the $17 to $19.50 level, depending on a few factors, including how secure the market views the transaction, the time in between the announcement and the closing date, and any potential regulatory issues.
Say this transaction looks to be rock solid with a closing date of just a few months out, so it trades at $19.50 per share. That small almost guaranteed profit is the arbitrage situation. It might not be the sexiest return in the world, but it can turn out pretty lucrative.
Say we have two months until the deal closes. A 2.5% return isn’t much to get excited about if it takes a year to earn it, but over two months it works out to a 15% annual return. Now we’re talking.
Both Mary and Warren Buffett stress one thing about merger arbitrage. You have to invest in deals that look extremely likely to succeed. I made that mistake in the past when I wrote about BlackBerry’s merger arbitrage, but luckily I didn’t invest anything in it.
(I still hold BlackBerry shares, and I’m still losing money on them. If y’all need me, I’ll be shaking my fist and swearing at anyone who has one of their phones. Since that’s nobody, you won’t have to worry about me swearing in public. More than usual, anyway.)
Back in May, MTY Food Group announced it signed an agreement to agree to acquire Kahala Brands Ltd., a deal which had everything merger arbitragers are looking for. Insiders owned 93% of Kahala shares, meaning it was pretty obvious management was all for this. MTY’s shares popped more than 25% on the news, indicating the market was pretty happy with the deal. In short, everybody was happy, and when everybody is happy good things happen.
For a short time after the deal was announced, shares traded at between $130 and $140 each, even though the price agreed to was closer to $150 per share. So I picked up a small position at the higher end of that range and held it for approximately a month, making a cool $10 per share for holding just over 30 days. Annually, the return worked out to 80%, less taxes and trading costs.
The amount of profit made on that one trade was enough to pay for my gym membership for a whole year, plus some spending money. Not bad for some skills I refined while working out. And I got to keep my shirt on the entire time.
Let’s wrap it up
In 2016, I really hate how people claim they can’t learn things. Not having the time is the most common excuse, yet these people still seem to find time to watch three hours of TV a night.
If you make learning a priority, it’s not that hard to do. Replace TV with reading, or taking one of the million free courses out there, Hell, even cruising educational subreddits instead of the newest from r/adviceanimals can expand your knowledge, although I’d stick to books, myself.
My merger arbitrage profit will likely be the first of many. I learned and got slightly less fat at the same time. Finally, multi-tasking works.
The world of personal finance is filled with approximately 530,382,091 blogs, each unique in its own special way.
Even the debt blogs. Hell, especially the debt blogs.
Some of these are good, some are terrible, and most are somewhere in between. But since we naturally think the things we create are fantastic, even the terrible ones keep going–at least for a little while. How Financial Uproar has lasted almost six years is beyond me. We all know this site sucks and I have about as much sticktoitiveness as a baby doing calculus with about an eighth of the cuteness.
As I continue to evolve from a monkey to something slightly resembling a man, I find myself not reading many personal finance blogs any longer. I still check out the ones from this list of the best ones out there semi-regularly, but that’s really about it. It’s nothing personal; I just find that there isn’t much I can learn from somebody’s house purchase journey, their portfolio of index funds, or the myriad of identical debt repayment or saving cash on groceries tips. That stuff just isn’t valuable to me any longer.
That doesn’t really make these blogs bad, per se. It just doesn’t make them valuable to me. Sometimes I forget there’s a difference between the two.
Instead, I’ve switched my reading, at least a little. Here are five different financial websites I check often that aren’t finance blogs.
Red Flag Deals
Before I buy anything worth more than about $10 I’ll check the deal forums at Red Flag Deals.
There are thousands of
cheap-asses deal hounds who regularly post there, letting the masses know about the latest hot buy they’ve found. Some of these deals are fantastic, others pretty meh.
Every category is covered. Want to find a cheap getaway? No problem, especially to Asia or Europe. Electronics? Oh you know it. Store flyers to find the cheapest steak? Yes, including the one guy who goes to Costco every week and takes pictures of their in-store only sales.
Before you buy damn near anything, I’d recommend checking it out.
Wait what? Nelson, come on. Who shops at eBay?
I do. Pretty often, actually. In fact, I’m starting to go there more than Amazon lately. GASP NOBODY TELL THE CHILDREN.
Here’s an example. Right after buying our new place, I decided I’d finally bite the bullet and buy myself a bidet. It’s cheaper than using toilet paper, it feels good, and I swear to God once you try it you’ll never go back. The Japanese are better than us in many ways, bidets included. The French are not.
So I go on Amazon and found the bidet I wanted (I bought this one, btw, which is working well for me. Would definitely recommend). It was $63.02, which I thought was a reasonable price.
Before I checked out, I went on eBay and searched for the exact same product. In a matter of seconds I found it for $11 less.
The best part was when it showed up at my house a few days later in an Amazon box. CAN’T LET THE MASSES KNOW I SHOP AT eBAY, RIGHT?
Basically, I do this. If I’m pretty sure there isn’t a robust deal market for something, I’ll check Amazon and eBay for it. Whichever one ends up cheaper gets my business.
The other nice thing is you can use Paypal to buy stuff on eBay, which is nice for guys like me who end up with Paypal balances from my various online activities (cam shows, mostly).
It doesn’t really matter which one you choose. As long as you’re reading the news daily, you’ll end up ahead of most other people.
I like the National Post, but those bastards now limit me to just 10 articles per month like jerks. So instead, I just follow a few different media outfits on Twitter. My news now comes from a combination of the National Post, CBC News, the Globe and Mail. Wall Street Journal, and so on. Business Insider is pretty good too, except there’s a lot of stuff on politics on there these days.
In 2016 it’s easier than ever to stay well informed about what’s going on around us. You don’t have to be like Warren Buffett and read five newspapers a day, but it’s still good to spend 20-30 minutes daily on the news.
Motley Fool Canada
Okay, I’m biased, since I write for that particular site. So we won’t officially count it as one of our financial websites. Think of it as more of a bonus. WE TAKE CARE OF OUR READERS HERE AT FU.
If you’re looking for Canadian-specific advice on individual stocks, it’s the best place to go. Nowhere else gets even close.
Another decent choice is Seeking Alpha, which focuses on American names. There’s a lot of content there and I find the crap-to-good stuff ratio a little lacking sometimes, but there’s a great deal of good stuff there. There’s also plenty of news stuff there, making it a decent place to get your American-centric business stories.
If there was a viable Canadian alternative to Wisebread I would have listed it. But as far as I can tell such a thing doesn’t exist.
It has everything personal finance related in one place. There’s a daily post on great deals. There are roundups featuring other great reads. And there are multiple articles every day talking about all sorts of other financial topics.
The beauty of a site like that one versus a blog is there’s always going to be something there for everyone. The half of you who are here for the investing stuff hit back ages ago because this post isn’t your cup of tea. You won’t have that problem at Wisebread.
Honorable mention: Lifehacker, which is basically the same thing. But nobody likes Gawker Media so it only gets an HM.
Know any other financial websites that deserve to be on this list? Comment it up, yo.
According to most everyone in the personal finance blog-o-net, student loan debt is worse than the latest Melissa McCarthy movie. Oh stop pretending she’s done anything good since 2013. This is an actual shot from her latest movie, The Boss, which I had the misfortune of seeing in the theater.
The main reason why people hate student loan debt so much is because so many of them fell into it to get their education, and then had to work really hard to get out of it once they got a job. Some even took such terrible steps as (gasp!) moving back into their parents’ basement or getting a roommate or whatever.
I know. Such sacrifice. Little orphan Jimmy with no hands or feet wants you to have his last dollar, personal finance blogger who had to cut out takeout coffee to get out of debt slightly faster.
As I’ve argued before, student loan debt isn’t so bad provided you use it to get somewhere you want to be. Getting a degree in women’s studies, psychology, or theater probably isn’t a good idea. Degrees in nursing, accounting, or education are usually much better bets, since they usually come with pretty good employment prospects.
Related: Instead of whining about student debt, do something to help
Look at it this way. Say you have income potential of $40,000 per year if you don’t go to school or $60,000 if you do. And it’ll cost you $25,000 in student loan debt to do so. Why wouldn’t you spend $25,000 to make a $20,000 increase in annual income? I’d do unwholesome things for a return that succulent.
Okay, perhaps it isn’t student debt itself we have a problem with. People are happy to get into debt assuming it gets them better income prospects. Maybe it’s the amount of student debt that peeves everybody off.
With stories of six-figure student loan balances common, we all know there’s definitely people out there who borrowed far too aggressively. For every doctor with $100,000+ in student loans, there seems to be an equivalent amount of people who somehow managed to rack up that much getting a PhD in some arts subject that isn’t compensated very well in the marketplace.
But it turns out even that’s wrong.
The reality of student debt
It seems counter-intuitive–at least, at first–but the New York Times confirms it. People with large amounts of student loan debt are not the big problem.
According to an article from last year, the people with the highest student loan amounts ($100,000 or more) were actually the least likely to default. People with more than $100,000 in student debt in 2009 only defaulted at an 18% rate by 2014.
That’s compared to people who owed between $1,000 and $5,000, who defaulted almost double as much, or 34% of the time.
So what gives? The explanation is pretty simple. People with the most student loan debt tend to have the best employment possibilities. Those with small amounts likely failed out before they got started, meaning they have no additional income potential. In fact, many probably saw their earnings potential take a hit because they quit steady employment to pursue schooling.
The solution to our student loan problem is always presented as finding ways to have people borrow less. But it’s obvious that isn’t all these is to it. It isn’t so much the amount borrowed that’s the problem; it’s the ability to pay it back that separates a good risk from a bad one.
The easy solution
There’s an easy way to create a system that accomplishes this. All we need to do is limit the amount of student loans to degrees that don’t have much in earning prospects.
I don’t know many teachers who aren’t gainfully employed. I do know at least one theater major who currently works as a server in a restaurant. If they both owed equal student loans, I’d bet on the teacher being able to pay them off over the drama student.
Although that might be my Canadian bias showing since teachers tend to get paid pretty well up here. They start at $60,000 per year here in Alberta.
But that still doesn’t cover people who go into debt to take very specialized courses. How many real estate agents do you think go into debt only to discover they’re terrible at sales? There are probably a million more examples, never mind people who got pressured into taking college courses who never should have gone in the first place.
The solution to that is perhaps forcing each borrower to enter into an income-based repayment program. That would make payments affordable for everyone, even those who see no additional salary bump because of their education. Other ideas outlined in the Times article include stretching out the payment period from 10 years to 25 in select cases or switching students to an income-based approach as soon as they fall behind.
Student loans are complex. I’m not sure I have a solution, but it is interesting to think about them in deeper ways than they’re currently analyzed.