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?

The Much More Important Lesson From Royal Bank’s Hiking of Bank Fees

Not pictured: Satan

Not pictured: Satan

Last week, Twitter was all, uh, atwitter, about Royal Bank increasing its bank fees. Some of the changes which go into effect on June 1st include:

  • If you use up your free monthly debits (raised from 10 to 12), you’ll have to pay a fee to pay your mortgage, car loan, or any other loan automatically taken out of your account. That fee is from $2-$5 per transaction
  • If you have a kids or student account, this fee is $1
  • Seniors now have to be 65 to qualify for discounted banking packages. The previous age was 60

Related: See how Vanessa holds a mutual fund with a 2.46% annual fee to get free banking.

Basically, these fees mostly affect the $4 per month account, which people have been using and then getting for free by having two of a credit card, mortgage, or investments with the bank. That’s exactly why Vanessa ended up buying that mutual fund with a 2.46% MER, to save that monthly fee.

Here’s what gets me about this whole thing. It’s really easy to maintain free banking, even by staying at Royal Bank. All you need to do is stay under the minimum of 12 transactions per month by putting everything on your credit card, and paying it off at the end of the month. It’s easy, and you’ll earn rewards from your credit card at the same time.

But instead, we get comments like this, from an anonymous Globe and Mail reader:

There are some very uncharacteristic yet refreshing waves of discontent appearing amongst the usually calm waters representing the Canadian investor.

Personally I am loving the sudden backbone exhibited by shareholders on the say-on-pay issue. Gone are the days when the AGM is stacked with insiders, fund managers and other biased fart-catchers. Gone are the days when entrenched major shareholders and pension funds simply rim the bum of the Board and endorse whatever it recommends.

And now banking fees are under the microscope. Well … it is about time. Banks today are being paid by their customers more and more for doing less and less. This is a fact and it is beyond dispute.

Not gonna lie guys, I’m pretty impressed he properly hyphenated the fart-catchers bit.

I’ve talked before how it’s stupid to care about bank fees. Rather than getting pissed off about losing a few bucks a month, I’d recommend everyone get busy earnin’ so they’re in a position where they don’t care about a lousy bank fee. So let’s not talk about bank fees anymore.

Instead, let’s talk about RBC is inadvertently teaching us something really important about marketing and business with these new fees.

Worst customers

Because we haven’t had one of them in a while, let me tell you a story about my days selling chips. This one is about my worst customer.

He ran a small convenience store an a village of about 200 people. The chip display was immediately across from the cash register, so he’d look at it, every single day. If he ran out of hickory sticks early, he’d complain constantly the next time I was there. So I’d give him extra hickory sticks, and then he’d run out of something else. He responded by asking for extras of everything, even though a full 20% of items were in danger of going outdated. (I was allowed 1% of sales as outdates) Since everything was a guaranteed sale, he didn’t care about outdates at all. So we’d argue about it, constantly.

It got to the point where going there was a chore. Wal-Mart sold $3-$4k worth of chips every week, with almost no headaches. This guy sold $100. When I left, I heard that the next driver fired him as a customer. In hindsight, I probably should have done the same thing.

Anyway, the point is this. Every business has crummy customers. To deal with them, you have a couple of choices. You can either a) suck it up or b) fire them.

By raising their fees, Royal Bank is telling all their worse customers to hit the road without actually telling them.

Anyone with a brain and an internet connection knows that Canada has several banks with very little in the way of fees. They offer a trade-off of no fees for reduced service. Most financially savvy people are okay with this, so that’s the direction they go.

But for some people, this isn’t good enough. They want the benefits of having a branch they can drop into to complain, without paying to do so. I can see why people want this; but I can also see how these are money-losing customers from the bank’s perspective.

Each time they increase fees, a certain amount of freeloaders head on over to Tangerine or PC Financial. Many other potential freeloaders complain, but stick around. What a great way to fire your worst customers without actually doing it.

The other nice thing about this is from the other banks’ perspective. Now they’re free to raise fees, conveniently offering the excuse that they’re just doing it because of RBC.

If you’re the kind of customer who has had a meeting with someone in a bank somewhere about free banking, you are a bad bank customer (especially if you have a credit card you pay off each month and no mortgage). I won’t begrudge you for wanting to get something for free, but at least understand that there’s a reason behind this that isn’t just OMG ROYAL BANK IS GOUGING US SOMEONE CALL ELLEN ROSEMAN.

And better yet, if you think the banks are really screwing over customers, maybe you should buy shares. Seems to me like a company that charges outrageous fees should be a pretty good investment.