Tuesday, July 31, 2007

Strange but true -- bankers can help you

Had an interesting conversation with a finance-minded friend of mine this past weekend.

Like most Canadians, I have a natural distaste for Canadian banks. Don't get me wrong -- as an owner, I love them for the profit-making machines they are. But as a consumer and citizen, it doesn't take very many TV ads trying to trick yuppies into buying a house they can't afford, or conning Boomers by showing how happy the grandkids would be if they'd only take the plunge and finally get that palatial Muskoka cottage to bring my blood to a slow simmer.

Combine my natural aversion to them with the fact that online banking is so prevalent these days, and the result is what it is -- I don't think I've actually stepped up to a teller at a bank branch in a couple of years.

That might be costing me money, my friend informed me over a pint last weekend. "Go down and meet with a banker," he suggested, because they can actually do some good things for you. He said his decision to meet with a banker a few years ago was one of the best decisions he's ever made. Once he opened up about all his debts, all his assets, and discussed what his financial goals were -- everything from home ownership to estate planning, the banker formulated some semblance of a long-term plan, and actually helped it along somewhat by cutting out expenses and maximizing returns in places along the way.

He's now in the market for a house, and he says he's getting mortgage offers well below the posted rates and has fees waived for all sorts of services.

The idea, I think, is that if you grant someone access to every level of yoru financial life, they can occasionally surprise you by coming up with plans and options to make it all happen.

Given how bankers make their money (hint: rhymes with bees) I'm somewhat skeptical of his claims, but I must admit I'm intrigued. I'm curious -- for all we hear that bankers are just in it for the money, does anybody out there have any truly good stories to tell about how bankers have really helped them?

Wednesday, July 25, 2007

Pay yourself first -- no, really

Buy low, sell high. Diversify your assets. Invest globally.

Of all the investing maxims, the one that's always made a lot of sense to me was "pay yourself first" and this month has been an excellent example of why it works.

What with moving, paying for a vacation and the prevalence of those all-too-appealing pints on a patio with friends this time of year, my expenses have been out of whack of late.

In general, I suppose that's OK to do from time to time. I mean, what's the point of having a rainy-day fund, if you won't open it up when it starts to drizzle? But it's not a habit you want to get into.

As it stands, about a quarter of my paycheque gets automatically diverted into my emergency savings fund on payday. It does what its supposed to do in that its automatic -- I literally forget I'm doing it. I was reminded of why that's important today when I was wondering how exactly I was going to manage to pay all my bills AND put some aside this month. I was trying to find the money to put into savings when it occurred to me that it's already been done for me.

Granted, I still don't have very much breathing space in the ol' budget this month. But when you put money aside for yourself before you even consider how to divvy up the rest, it's amazing how fast those contributions can add up.

Wednesday, July 18, 2007

A little knowledge is a dangerous thing

It happens to all of us, I suspect.

Anyone who demonstrates even a passing interest in investing and finance is no doubt inundated by queries and requests from those around them who have no such inclination but are nonetheless looking for easy answers to difficult questions.

If it's not "should I lock in my mortgage now, or are rates going to be lower later?" it's "tell me what stock is going to go up so I can buy it" (my personal favourite...)

The people close to me have no idea I have an investing blog -- they just know I take a weird amount of interest in the business section, and have an annoying habit of yelling at them when they use a white-label ATM to take $20 out on a Saturday night. But I definitely get my fair share of questions like that.

I really want to help out my friends and family in any way I can, but the thing is, I really can't win in these situations. I'd never tell anyone to buy any given stock -- the most I'd ever do is tell them what stocks I've recently bought, and explain my reasons for doing so. But that doesn't stop them from asking. Fortunately for me, I ususally can't even get past "Well, what stock you should buy and how much you should buy of it depends on a lot of things, including your risk tolerance, your investment timeline, and blah blah blah..." before they regret ever asking the question.

I'd like nothing more than to give them the answer that will solve their problems, but I don't even have those answers for myself, so I find it really hard to give them to others. I mean, I've bought stocks that did what I thought they'd do and went up. But I've also bought some losers. I'd love to tell my sister exactly what to do when she calls to say "I'm meeting with my banker tomorrow and I need to know if I should lock in my mortgage or stick with the variable rate" but that really is a no-win proposition for me. Best case scenario, I gain nothing, while the downside is my advice costs her tens of thousands of dollars.

I'm kind of torn on the issue. I hate being put on the spot, but at the same time, I'm glad they ask and are thinking about these issues, because one of the biggest challenges my generation faces is its complete apathy toward things like service charges and interest rates because they think they don't really affect their lives.

I'm loath to tell them what to do, but I also don't want to discourage them from thinking and finding the answer for themselves. I just haven't quite figured out the right answer to give that conveys that sentiment.

I suppose it's no different from a lot of professions -- I'm sure lawyers and doctors get hit up for free advice all the time. But it seems to me that when these questions come up, you really are damned if you do, damned if you don't.

Friday, July 13, 2007

Tech support

Forgive the non sequitur, but technical help from any HTML idiot savants I happen to have as readers out there is greatly appreciated on this one.

According to Statcounter my site's hits have fallen off a cliff this week (0 registered on Tuesday, and 1 on Wednesday, and 0 on Thursday) but I know that's not the case because I've had posts and even comments on those days.

In short, I think the same number of people are coming here daily as they always have (usually in a range of between 20-50 unique hits per weekday) but my statcounter isn't registering them for some reason -- thus defeating the purpose of having a statcounter.

I'm on the new blogger template, as I have been for awhile, but something definitely appears to have gone awry this week. Any theories? Do I need to reinstall counter code or re-ping something?

Any bloggers who blog on blogger (how meta!) out there, I'd appreciate some theories.

Thursday, July 12, 2007

You're going to need a bigger boat

Alternate title: why it's hard to diversify

Despite the Oracle of Omaha's sermons on the dangers of overdiversifying, I must admit I believe in the principle of hedging your bets. Sure, if you're as smart as Buffett, you can set your lot in with your top 10-or-so stock holdings, secure in the knowledge that they're likely to outperform.

But since the rest of us can't really expect to "beat the market" on a consistent basis, spreading your money around between assets that rise and fall out of sync with one another to try to ensure that you end up on top overall in the end is a sound policy. This works great if you have substantial assets, but a lot of DIY investors -- especially when they're starting out -- don't have enough capital to easily diversify, and fees quickly eat in to returns.

If you were an investor starting out who wanted to be able to sleep at night but retire wealthy, I'd probably recommend the Couch Potato strategy. It goes by many names, but in a nutshell, it entails buying a basket of low-fee index funds in different sectors (a classic choice for a Canadian might be 25% in a Canadian stock ETF, 25% US, 25% international and 25% bonds) to spread the risk around. Then, once or maybe twice a year, you sell off gains in the winners and pad up the losers with the proceeds. The idea is to maintain that 25/25/25/25 ratio, only the total value of the portfolio (as opposed to the ratio) goes up year after year.

The problem? In Canada, in my experience, doing that can rack up a lot of trading fees.

Let's say you started out with $8000 to invest. (For the record, I think this is actually a lot more than most people have starting out, but I'm trying not to skew the numbers too far in my favour here) You put $2000 into an ETF in each of the above sectors. At the end of the year, let's assume that the Canadian portion has risen to $2300, the US portion dropped to $1950, the international portion rose to $2100 and the bonds rose to $2050. Your portfolio is now valued at $8400. Well done! So 25% of that would be $2100. This is your new goal for each sector's value at the start of the next year.

Under the classic couch potato rules, you should then sell off your gains in your big winners ($200 from Canada) and pad up your laggards (USA and to a lesser extent, bonds) So you buy $150 more worth of the US ETF, $50 more worth of the bonds ETF, and leave the international portion the same.

The problem? With some Canadian "discount" brokers, you may pay as much as $30 per trade. In this scenario, you pay $30 to sell off part of Canada, $30 to pad up USA and another $30 to pad up bonds. Total cost = $90. Which represents 22.5% of the gains you made that year. You won't get very far giving away 22% of your gains every year to trading fees. And these don't even include other things, like the fee a broker may charge you to manage the account if its an RRSP (as high as $75 in some cases)

I realize I've skewed the numbers a little bit to prove a point (the simple truth is that in today's day and age, nobody should be paying $30 per trade anymore because you just don't have to) but the point is still valid: it's hard to do the right thing and diversify when you're working with small amounts of investment capital to start with. Many people recommend using low-fee index funds like TD's e-funds for just that reason, and I must admit, it's an option I wished I'd considered for myself starting out.

I realize it's slow and plodding, but if you forgo the e-funds route, maybe a wise thing to do starting out is either keep it all in a high-interest savings account until you reach a certain plateau ($10,000 maybe, that you can spread between only three sectors) or, riskier still, put it all into one relatively secure holding (a balanced mutual fund, or a Canadian bank stock, maybe) until you reach the point where you can diversify yourself without holding yourself back.

I know it's risky to put all your eggs in one basket for a time, but it certainly seems better than the alternative outlined above. Most investors starting out have time, if nothing else, on their sides, so it might not be the end of the world if they take a huge hit. Just get back on the horse, and stick with the long-term plan.

Monday, July 09, 2007

I finally got around to ordering my free credit report on Friday, a move I've been procrastinating about for as long as I can remember.

Why? I honestly don't know why it's taken me so long, but I suspect it's becasue deep down, part of me is afraid of the results. I know there's more than a few random credit cards I applied for all those years ago during Frosh Week. I'm sure they've long-since expired, but nonetheless, they're no doubt kicking aronud on some file somewhere -- along with the HBC credit card I signed up for to save 20% on a wedding gift, before promptly cutting up the card.

I'm not really expecting to have a "good" score since I'm fairly young and have not really ever borrowed a large sum of money to demonstrate my ability to pay it back. So I won't be too upset or surprised if my number is a little low. The methodology for determining your score appears to be more secretive than the outcome of the next Harry Potter book anyway, so I'm really more interested in getting a list of accounts than seeing what my number is -- I'm a ways away from getting a mortgage, anyway. Plenty of time to make it right before it matters.

But I really have no idea what form the damn thing is even going to take. Has anybody ordered a free TransUnion report recently? What will it look like? Will I get just a number, or a codified list of all my historical accounts? Both? And do you get more if you upgrade to the paid report?

Friday, July 06, 2007

Pot Pourri

The Market Guy has made his long-overdue return to financial blogging with a new column. Welcome back. You were missed. Even better from my perspective, he's spotlighted two of my holdings, BMO and Artis REIT -- calling the latter the "the consensus discount candidate in the REIT space."

Speaking of BMO, after the run of bad news they've had, it's refreshing to read some bad news for a bank that's someone other than them.

Updated my net worth on NetworthIQ and as predicted, while the line is still headed in the right direction, my growth is slowing down. Should be a temporary thing as funds that would normally be directed towards investing are being put to other uses during the summer. Back on the horse in the fall, hopefully.