Let’s Answer Some Financial Questions From Reddit

Let’s Answer Some Financial Questions From Reddit

Ah, Reddit. The place where we go to see pictures of cute kitties, stupid memes that have already been posted 84 times, and scantily-clad pictures of OP’s mom. It was also primarily responsible for electing Donald Trump, so thanks a lot, jerks.

We’ve already made fun of Reddit at least once before, back when I lamented the lack of decent questions on the personal finance subreddits. Nice work, everyone, using it as your own personal Google.

And then there are people who respond, for no reason but to gain imaginary internet points. Some of Canada’s PF bloggers are active on Reddit and use it to increase their brand. I get that. I’ve even seen a few of them do it effectively. I don’t get why personal finance enthusiasts would spend time answering questions for nothing. Those are actual skills. Leverage them into getting paid, yo.

Anyhoo, because I am a giant hypocrite, allow me to answer some of Reddit’s best questions. Did I say best? Sorry, that was a typo. These questions are terrible.

Uh, Nelson?

(exasperated sigh) God I hate you.

Why are you so mean to people just starting their finance journey?

It’s not that. Really. I just want people to use their own grey matter once in a while. Or figure out the search function. Trust me, your question has been asked before.

I see

Also, Financial Uproar got suggested as a blog to read in one of those threads, and some asshole downvoted it. So, yeah. BURN THAT PLACE TO THE GROUND.

Half off house

half-off-house

(Literally laughs ass off)

Okay, there’s gotta be more to this. Let’s open it up and see what aconfusednoob gives us for details.

aconfusednoob

First of all, Mr. Noob isn’t very good at math. At best, he’s buying the house for 55.5% of its value. At worst he’s paying nearly 63% of the house’s value. But whatever, this is a minor detail. Let’s go straight into the craziness of this plan.

First of all, these two sets of people need to hammer a lot of details out. Who gets the rent from the college kids? How will they decide how much rent the parents pay after a decade? Who decides what repairs need to be done? Who covers expenses like insurance and taxes? Hell, we don’t even know where the place is. There are way more questions than answers.

If I was this guy, I’d buy the place without any written agreement in place. Then I’d boot the parents out like they were slobbering drunks at closing time. Take that, assholes.

Joint accounts

joint-accounts

People. How many times do we have to go over this?

Bank accounts do not matter. At all.

Even if you pay a small fee, who cares? A few bucks a month isn’t keeping you down. It’s keeping nobody down. Just pick a bank account and be done with life.

And while you’re at it, don’t chase savings account promotions. Having money sitting in the bank is silly. Invest that ish, yo.

Do the kids still say ish and yo?

They never did.

NO TIME FOR YOU, ITALICS MAN.

Please validate my choices

YES. These ones are my favorite.

criticize-portfolio

We’re going to need to check the details on this one. It’s sitting at zero upvotes, so here’s hoping for some crazy junk in there.

portfolio

YESSSSSSSSSSSS. Guys, OP fucking delivered. There’s so much here I don’t even know where to begin.

Half of this crap really doesn’t matter. You have two RBC credit cards? A decent credit rating? Oh boy. SOMEBODY GET THE FAINTING COUCH, NELLY’S GONNA PASS OUT.

He’s also buying company shares that pay a dividend of 20%? I’d be impressed if it was true. It’s not.

Also, what’s up with a guy making $150k not contributing a nickel to an RRSP? I’m seeing too much of this. TFSAs are all fine and dandy, but high income earners who aren’t taking advantage of RRSPs are basically lighting money on fire..

Finally.  A bizarre question on cheques

endorse

I don’t even know what to say. Why don’t you just take a picture of it using your smartphone like a regular person?

Investing small amounts

investing-1000

First of all, if you only wanted 10% of your portfolio in VAB (Vanguard’s bond fund), why would you invest in it first? That doesn’t make any sense.

About two years ago I talked about how index investors are making the whole practice way the hell too complicated. This is exactly what I’m talking about. $1,000 isn’t a inconsequential amount of money. I would gladly take it if you didn’t want it. But if you’re looking to build a million dollar portfolio one day, then it’s peanuts. Just get it invested in equities and ask questions later.

And while you’re at it, consider some more alternative options if you only have $1,000 to invest.

Should I pay my debt?

10k-lottery

Three question marks, guys. OP is serious.

I’m glad you asked, OP. Listen closely, because this is going to get complicated. First, you’re going to need to get yourself one of those offshore shell corporations. I’d choose Panama, but it’s really up to you. Then you invest the cash in inverse volatility futures, generating an income stream by selling puts. Then you need to invest that income in structured exchange notes, preferably ones that trade on the Nikkei exchange.

Or you could just pay down the damn credit card debt. Either or.

Leaving the country

leave-the-country

These people actually exist? YESSSSSSSSSSSS. Don’t move to Canada though. We don’t want you.

I like how OP just sort of throws it out there at the end that moving to a brand new country with only $1,000 might be a bit of an overreaction.

Last one.

Going nowhere fast

going-nowhere

Ah, the humblebrag. Sure, I’m worth more than 98% of other 27-year olds, but I’m struggling too guys!

I run into this with readers and other bloggers every now and again, and I’m always reminded about the value of patience. Becoming wealthy isn’t supposed to happen overnight. It’s supposed to be a gradual process. It’s supposed to be hard, dammit. If it isn’t, you won’t value it. Look at lottery winners if you don’t believe me.

This person has too many goals that cost too much money. I know your parents told you to reach for the stars or some other such nonsense. But the real world isn’t like that. We only have a finite amount of resources. Focus on one goal at a time, preferably one that isn’t graduate school.

Remember That Fidelity Study That Said Dead Investors Did The Best?

Remember That Fidelity Study That Said Dead Investors Did The Best?

About two years ago, seemingly every financial news outlet picked up on a study done by Fidelity Investments. This study claimed the company had looked over the accounts of thousands of individual investors, and they found a theme. The people who didn’t touch their portfolios did the best.

Fidelity threw a whole new twist on some tried and true advice, however. They pointed out that people really couldn’t resist the temptation of touching their investments. The only people who didn’t bother were dead. Thus, dead people had the best investment returns. The second best were basically dead, at least to Fidelity. They were the people who forgot they had an account.

This begged a few questions. How did dead people have portfolios that grew for long periods of time? Wouldn’t control of these accounts eventually turn over to people more, uh, alive? And how did Fidelity figure out these people were dead? I like to imagine the phone call.

“Hello, this is Brenda from Fidelity. I’m looking for Bob Johnson.”

“This is Bob. How can I help you?”

“Just checking in to see that you’re not dead, Bob. Talk to you again in a decade.”

So why am I bringing up this study again a year later?

Funny story

Allow me to quote from the New York Times.

Here’s how to get better returns in your retirement account: Pay as little attention to it as possible.

That was the conclusion of a study by the investment giant Fidelity, according to a 2014 article on Business Insider. The article relayed the transcript of a Bloomberg program in which the well-known money manager Jim O’Shaughnessy said that people who had forgotten that they had accounts outperformed everyone else.

Fidelity, which has received inquiries about the study ever since, without knowing why, told me this week that it had never produced such a study.

Oh man that’s great. Somebody made the whole thing up.

Here at Financial Uproar, I spent a lot of time trying to debunk various financial myths. You don’t need a six month emergency fund, since $1,000 is more of the optimal amount. RRSPs don’t have to just be used when you retire. And retiring early won’t make all of your non-sexual dreams come true. I hope after coming here a few times you’ll have at least a bit of skepticism surrounding “rules of thumb” and other such things.

But at the same time, the whole buy and hold investing idea is a good one. There’s a lot of value in finding a few good ETFs and sticking with them, especially for rookie investors. So I don’t want to disparage the message, because it’s a good one.

Seriously though, I’d still like to know what happened. If anyone knows more details, hit me up.

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No, These Millennials Didn’t Get Rich By Avoiding Homeownership

No, These Millennials Didn’t Get Rich By Avoiding Homeownership

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:

Eh, close enough

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:

compound 2

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.

The TSX NEX is Filled With Trash

The TSX NEX is Filled With Trash

tsx nex

My rule of thumb is this.

If the glove don’t fit, you must acquit!! 

Topical, Nelson, Real topical.

When it comes to investing, large companies are almost always priced efficiently. There are thousands of analysts spending tens of thousands of collective hours poring over the latest earnings release from Suncor Energy. The chance of you or I discovering something important hidden in a footnote on page 57 is pretty much nil.

The smaller the company, the better chance you have to identify some sort of mispricing. Big investing firms aren’t going to follow some tiny obscure company that only does a few million per year in business. There are countless opportunities hidden among these stocks. I did quite well investing in MRRM, for example, making a little more than 50% in just under a year. When I bought it, it had a market cap of $7 million.

Many of the smaller companies in Canada hang out on the TSX Venture Exchange. The vast majority of stocks on the exchange are either in the energy or mining space, as hopeful entrepreneurs scrounge up enough outside investor cash to get a company worth a few million. They get a listing on the Venture exchange, and hopefully put their dream plans in motion.

There’s a bit of a wild west mentality over on the Venture exchange. Insiders regularly take fat six-figure salaries to be in charge of companies that have no revenue and little hope of ever making money. Many of these companies play fast and hard with accounting rules. And most are constantly raising money to keep afloat.

Trying to find good investments on the Venture exchange is the investor equivalent of turd mining. You’ll find some gems, but you’ll have to wade through a lot of stinky stuff to find it.

Knowing this about the Venture exchange, this chart probably makes a lot of sense.

tsx venture 2011-16

Yes, kids, that is a 78% decline over the last five years for the TSX Venture Composite Index. Gold stocks were riding high in 2011, which didn’t end well. Energy helped give it a little support, but that died off in 2015. The Venture exchange is so out of favor you can’t even buy an ETF that covers it. The two that were in existence quietly went away.

Here’s a list of the top holdings of the index. Yes, at least one is a marijuana grower. See if you can guess which one!

venture top 10

 

Besides the marijuana grower (that’s Canopy), we have a couple of tech companies long on ideas and short on cash, a company trying to mine gold in Peru, and a few energy companies. Storm, the largest of the bunch, has a market cap of $370 million, and apparently no desire to graduate to the TSX.

Basically, to encourage companies to list at all, the TSX Venture Exchange has more relaxed rules. Fees are also less for Venture companies. So as you can imagine, the more, uh, questionable stuff ends up on the Venture exchange, while the actual businesses graduate as quickly as possible to the main exchange.

In a world where Dragon’s Den, Shark Tank, and various other forms of venture capital are a thing, apparently having two exchanges wasn’t good enough for the folks at the TSX. Other alternative exchanges were popping up, as big banks realized they didn’t really need the TSX taking a small cut of every trade.

So the TSX decided to launch a new tier of trading, focused on the stocks that didn’t qualify to trade on the TSX or TSX Venture exchange. It’s called the TSX NEX, and it’s something you should never touch.

Most of the companies on the NEX have been either kicked off or have voluntarily given up their TSX/Venture status. Often this happens because a company doesn’t bother to release earnings results. Because hey, when I’m looking for investment opportunities, I’m attracted to companies that can’t be bothered to tell investors what’s happening.

Most companies end up on the NEX for a period of time and then quietly get suspended or delisted. There are approximately 410 companies listed in the company directory, and approximately 180 are suspended. There are others that have halted trading for whatever reason.

Interestingly enough, I actually own a stock that trades on the NEX Exchange, Automodular. That sucker is up nicely for me, gaining about 50 cents per share all told. I recently tried to sell at $2.70 but couldn’t get anyone to buy. The company looks to be liquidating, we’re just waiting for the results from the a lawsuit it filed against General Motors.

I’d recommend most investors ignore the TSX Venture entirely. It’s filled with crappy mining stocks that will never see the light of day. The amount of effort to find the good stuff in there probably isn’t worth it for the average person.

I’d especially recommend investors stay the hell away from anything trading on the NEX Exchange. Fortunately, they’ve made it easy, requiring every ticker symbol on NEX to end in .h. So if it says .h, that means stay the Hell away.

The Best Ever?

You guys know that I like to make fun of stupid people on here. I try to focus mainly on the financial decisions, but come the hell on. That kind of stupidity has a way of moving beyond the financial stuff, and into the most important parts of grey matter.

But I discovered an article earlier today that was so bad and so terrible in every way that I just had to drop everything and make fun of it. Yes, that even included my pants. TMI? TOO BAD I’M ON A ROLE NO STOPPING NOW.

It’s called The National Lust For Home Equity Lines of Credit: Should We Worry?, and it’s possibly the greatest thing I have ever read. I literally cannot wait to get started.

Murad Ali and Arsheen Haji live large thanks to easy access to their home equity lines of credit, joining the many Canadians succumbing to the same temptation.

Ah, yes. The ol’ ‘borrow to consume using your HELOC.’ We’ve seen this before, but certainly not to this extent, as you’ll see.

For the Toronto-area couple, it all started back in 2009 with a lavish $78,000 wedding.

Rather than spend $78,000 on a wedding, how about I do something else. Let’s have a blog party. I’ll go buy like $1500 in booze, some chips, and maybe rent a swanky hall for a couple g’s more. And then, I’ll go to the bank, get $75,000 in 20s, and slowly burn them while y’all watch and drink craft beer. Make sure to take lots of selfies, because obvs.

I’m accomplishing the same thing, really.

Then came numerous overseas vacations.

Check off another box in the “crap millenials waste cash on checklist.”

When touring Egypt, Ali bought four souvenir papyrus scrolls for $6,000. In Italy, Haji picked up a $7,000 Chanel bag.

Why buy one, when you can buy four, amirite Ali? When it comes to spending money, that man is not here to screw around. And apparently he’s taught his lady well too.

After the birth of their daughter, the couple moved into a newly built home and spent more than $100,000 on upgrades, including a custom kitchen, hardwood floors and a high-tech fireplace.

What kind of people move into a “newly built” home and say “you know what? This place is GARBAGE. Let’s get our guys in here and spend another six figures on this dump?”

So how exactly did these guys afford all this stuff, anyway? Are they independently wealthy? Inheritance from a long-lost uncle? Did they win the lottery?

Nah.

The wedding, trips and high-end purchases were made possible with cash from two home equity lines of credit secured against a couple of investment condos the family owns. The debt from those loans now totals $370,000.

JESUS H CHRIST WHAT IN THE ACTUAL HELL?

Can somebody please tell me this is a parody piece before I have a stroke? Please? I’m actually begging you right now. I don’t want to die.

They also recently got an unsecured $30,000 line of credit to buy solar panels for their new house.

OF FUCKING COURSE THEY DID.

“Hey, we’re, like, at least 400 g’s in the hole. You wanna get solar panels? It’ll save us pennies per year.”

(Doesn’t respond, too busy masturbating over her Chanel bag)

“We are addicted for sure. Who wouldn’t be addicted to something so easy [to get]?” says 35-year-old Ali about the free-flowing lines of credit that have enabled him to splurge on the finer things in life.

Does Ali realize these loans have to be paid back? Because I’m not sure he does.

“It’s easy, accessible cash at a very cheap price. The banks make it so easy for you to obtain it,” says the software engineer.

Not mentioned: the part where he went down to the bank and was told to sign on the dotted line or else they’d blow his brains out.

Wait. I’m being told that didn’t actually happen.

 

Ali is now considering borrowing more money against the equity in his new home.

WHERE’S A GUN? TELL ME WHERE I CAN GET A GUN BECAUSE I SWEAR TO GOD I NEED TO GO SHOOT SOMETHING.

He admits he’s antsy about adding to his debt when the family already has a substantial mortgage on their 5,000-square-foot house.

A 5,000 square-foot house for three people, by the way. That’s a lot of space for the couple’s baby to crawl around. Hell, maybe that’s the whole plan. Just let the baby get lost somewhere so it doesn’t get burdened with all that debt.

But the place is still largely unfurnished and he’s yearning to install a $40,000 glass railing for the staircase.

If only there was a way to have avoided buying a house that was so big that you didn’t have enough furniture for it BEFORE YOU BOUGHT THE GODDAMN THING.

Here’s a list of things I would spend $40,000 on before I used it for a glass railing for my stairs:

1. Anything

“Without the glass railing, the look of my stairs is not doing it justice,” he says.

There’s your problem right there. Shitty stairs. The rest of your life is peachy keen.

Right now, the couple could probably afford the extra loan payment. Currently, both he and Haji, a business analyst, can cover the bills and still have money left over for savings.

This might be the greatest sentence I’ve ever read. Sure, they’re going backwards each month, but they’re putting money away, dammit! Doesn’t that count for anything, HATERS?

Props to Haji though, for getting people to pay her to analyze their business while clearly having the math skills of a nine-year old. I honestly wish I was confident enough in my own abilities to pull off something like that.

 

While Ali and Haji like to spend, they believe they’re behaving responsibly and say they’re aware of potential pitfalls. That’s why they’re still undecided about another loan.

 

 

“Hey, we’re prudent. We’re going to wait a couple of weeks before spending on our next bullshit material thing we don’t need. Responsibility is hard work.”

If you get a line on this [house] and God forbid something happens to me or [my wife] and we are unable to sustain our lifestyle or stream of income that we have, then we would be in trouble and that may lead to us losing this house,” says Ali.

It “may” lead to them losing the home. Wow.

Ali, buddy, lean in close. I have a secret to tell you.

If anything happens to you or Mrs. Ali, you’re fucked. So unbelievably fucked.

And that’s why some rooms in the family’s home remain empty.

SUCH SACRIFICE. WHERE’S DEAD GHANDI I’M GONNA CALL HIM AND LET HIM KNOW ABOUT THE SACRIFICE.

Ali shows CBC News his large, mostly barren master bedroom and talks about his grand plans to furnish it — sometime in the future.

“Without the credit line, it’s slow,” he laments.

Even starving children think Ali is in a pretty tough spot. “Here” said Timmy, aged 4, with no hands or feet. “Have my last dollar. I was saving it for prosthetics, but I want you to have it instead.”

But things could always change. The couple says just last week the bank called, inquiring if the family was interested in another loan.

But I thought Canada didn’t have irresponsible bankers?