The fourth blog installment by me in the Investor Education Fund’s Masters of Money has just been posted. It deals with how some people — usually financially weak — don’t have a proper respect for the value of capital when it comes their way. Regular readers won’t be surprised that I’m in the “never break into capital” camp unless it’s a dire emergency.
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As noted in my Wealthy Boomer blog here, American indexing guru and author Charles Ellis [seen in photo on left] gave Canadian money managers both a history and arithmetic lesson on Tuesday. His point in a nutshell is that annual mutual fund Management Expense Ratios (MERs) of 2.5% or so (in Canada) are “terrible” but even the investment counselling fees of 1% (plus or minus 50 basis points) are also excessive.
These numbers may seem small when expressed as a percentage of assets but Ellis said the way to look at it is as a percentage of the return generated by active managers. So even if the active manager could generate a pre-fee return of 10%, the 2.5% fee takes that down t0 7.5%, so amounts to a 25% reduction of the return: or ten times the 2.5% figure that seems so insignificant. If returns are more likely pre-fee 6 or 7%, then a 1% fee takes it down to 5 or 6%, and amounts to a 15% reduction of return, he said.
Ellis himself prefers market-cap weighted index funds or ETFs of firms like Vanguard Group (which recently set up shop in Canada.) Investors can buy the “market” for as little as 10 basis points (0.1%), which long ago was a figure that customers of money managers were accustomed to pay. But as he related in his Monday talk in Toronto, customers didn’t balk when one firm hiked it to 25 beeps, others followed suit and eventually even a full 1% didn’t seem out of line.
This cost-conscious approach consistent with Findependence Day model
None of this should surprise readers of this blog, since the Findependence Day model cuts costs to the bone by emphasizing use of discount brokerages to cut commission costs, and then implementing trades of ETFs or index funds, the fees of which will range from about 8 or 9 beeps to 55 beeps for most mainstream ETFs, and perhaps a bit more for some esoteric ones. Of course, you can also try and pick your own individual securities, although Ellis would probably call that the “loser’s game,” as per the title of his book, Winning the Loser’s Game.
The third point is that you can still benefit from good advice by engaging a fee-only financial planner who charges by the hour, month, quarter or year, or perhaps by the project (which might be a financial plan or portfolio assessment). You can also go the fee-based route but keep in mind that a 1% fee will be on top of the underlying MERs of the ETFs, which could easily run 1.5% or so. For some investors, especially buy-and-hold investors who don’t trade frequently, a traditional commission-based full-service advisor could make sense from a cost perspective, at least relative to a high-fee-based alternative.
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In addition to November being Financial Literacy Month, this week is also Credit Education Week. On Tuesday at the YMCA in Toronto, as part of the launch of Credit Education Week, I gave the following talk which touched on all of credit, financial literacy, the sandwich generation and of course financial independence. All recipients at the talk received copies of Findependence Day courtesy of Capital One.
Here’s the text of the talk:
Laurie had asked me to talk today about the Sandwich Generation. I’ll do that and also talk about life cycle financial planning and the concepts behind “findependence” or financial independence.
Some of you may remember around the turn of the millennium, the National Post distributed four issues of a glossy magazine I helped create, called The Wealthy Boomer.
Well, it just so happens that the final issue featured a cover story on the Sandwich Generation.
We’d commissioned a nice if predictable cover that depicted a frazzled middle-aged baby boomer tearing out her hair as she attempted to grapple with the conflicting demands of an aging parent and screaming children.
I could relate to that at the time because in 2000, we had a nine-year old daughter, four parents and two busy careers. Today, however, daughter is 20 and away at college, and all four grandparents have passed away.
From Sandwiched to Empty Nester
I was pleasantly surprised this weekend to find an extensive review of Findependence Day on Lisa’s PromoteUGuru blog, which you can find here.
Readers of this blog may recognize the part at the end, which is the “Interview with myself” about the book.
It’s always gratifying to get some recognition in the United States. Even though the current (first) edition of Findependence Day is North American in scope (it takes place in both the U.S. and Canada and addresses the tax and retirement system in both countries), most media attention and sales have come from Canada.
I hope to rectify this with an all-U.S. e-book and tablet computer edition that I’m currently finalizing. It’s set primarily in Chicago and Boston and adds a couple of features not in the first or “North American” edition: a glossary and an end-of-chapter summary of what Jamie and Sheena learned. I’d initially resisted doing the latter on the grounds it breaks the “fictive dream.” But in the final analysis, the book is about raising financial literacy, so it makes sense to provide a handy end-of-chapter summary on the main lessons learned.
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The following is an edited transcript of a talk I gave Tuesday night to clients of Toronto-based fee-based certified financial planner John De Goey, of Burgeonvest Securities Ltd. I was one third of the proceedings, along with Steadyhand Funds’ Tom Bradley and a contortionist. As part of this advisor’s client-appreciation evening, all his clients received a copy of Findependence Day and Tom’s book, It’s Not Rocket Science.
Here’s most of what I said:
Seeing as this month is being designated Financial Literacy Month, it seems relevant to tell you a little about the book you’ll be receiving tonight: Findependence Day. The book is similar to The Weatlhy Barber in that it’s a mix of fact and fiction although I’d like to think I devoted as much time to the story as to the financial literacy aspect.
Money often the cause of marital discord
Think of it as a financial love story. As Patricia Lovett-Reid writes in the foreword, these days couples can hardly avoid the topic of finances. Financial disagreements are probably the biggest cause of marital breakups.
The basic model of investing described in the book is three-fold. Costs matter and one way to keep costs down is to use indexing or ETFs instead of actively managed mutual funds.
Very few investors are equipped to go it alone without a financial advisor. Even for those who want to cut commission costs to the bone through a discount broker, the book still advocates using a financial planner: either fee-only or fee-based.
What with 24/7 cable TV, the web and now social media, all this glut of information is another reason why I think 99% of investors need an advisor. Even though I can pick up the phone and talk to any number of experts and advisors, I still use a financial planner myself, despite the fact I implement my own trades at a discount broker.
Advisors distinguish between information and knowledge
That’s because I think a good advisor provides knowledge and perspective to help you filter all the noise coming from the mass media and the Internet. There’s a lot more to financial independence than the investing piece of it, even though that’s the part most of us probably fret over most or enjoy. You know the rest of the list: tax planning, estate planning, insurance and perhaps most important what I’d term life counseling or life coaching.
Now I realize there are dedicated life coaches that take more of a holistic perspective and less of a financial one, but for most of us, finances are so central that you may as well view your advisor as a life coach.
I’m seeing a lot more coverage these days of what I call a life cycle approach to investing. Last week, ABC Financial Literacy held a 1.5 hour web session that took exactly this approach with half a dozen experts. They laid out their fin lit tips starting with the childhood stage, moved to post-secondary students, young adults, mid-life and parenting and finally the senior stage.
One blogger is taking this approach at the Masters of Money blogs at Investored.ca , also known as GetSmarterAboutMoney.ca. You may have seen a color ad in the papers featuring five of us, including myself, Rob Carrick, Alison Griffiths, Caroline Cakebread and Preet Banerjee.
I’d urge you all to check it out, as well as turn your kids on to it if they’re old enough. Investored is an educational spinoff of the Ontario Securities Commission and is funded by fines levied against the financial industry. Their motto is “Financial literacy is our number 1 priority.”
I might add that Findependence Day also takes a life cycle approach to investing. York finance professor Moshe Milevsky calls it “a financial voyage through the human lifecycle” while Bob Veres – the American equivalent of Dan Richards, an advisor’s advisor — calls it “A financial Pilgrim’s Progress.”
In a nutshell, the book starts when a young couple – Jamie and Sheena – are 28, and follows them for 22 years because Jamie has decided his Financial Independence Day will be the relatively young 50.
Some would take the view that 22 years is probably optimistic: with our growing longevity, 30 years of saving and investing is probably more reasonable. And if you really like your work, 35, 40 or more years wouldn’t be out of the question.
It takes a quarter century of saving and investing to establish financial independence
Still, the figures I’ve seen is that those who really want to “retire” in the classic sense usually have to do save and invest consistently – year in and year out — for roughly a quarter of a century. That’s why I say Findependence Day is a “get rich slowly” book, NOT a get-rich quick book.
Whether it’s advisable to “retire” so young is another question. In this weekend’s Post, there were a couple of stories that suggested we should be prepared to live to 90 or 100, in which case we may wish to rethink early retirement.
But the point is that our fictional couple undergo a life journey together and that the stages they pass through financially are usually predictable, which is why the ABC web forum focused on the life cycle. So Jamie and Sheena go through the birth of children, the need to save for them in RESPs, buying a home, paying it off and paying off credit card debt. They also have to deal with joining the company pension plan, and RRSPs and TFSAs and all that good stuff that financial planners tell you about.
One reason I took this “life cycle novel” approach is that I realized that this is a good way to talk about financial planning. After all, financial planning is all about creating a route and mapping out possibilities and contingency plans, then building in allowances when things don’t quite work out as planned.
As we all know and John Lennon reminds us, Life is what happens to you while you’re busy making other plans. Jamie and Sheena disagree about a number of things and are on the verge of divorce. You’ll have to read it to find out the outcome but you can imagine that this would put a crimp in his plans to make 50 his Findependence Day.
Notice I didn’t say “retire” there. I don’t think most financial planners would counsel retiring at 50. As Toronto computer consultant Art Benjamin once said – this is in the book – most jobs are marginally better than daytime television.
I define Findependence as the day you realize you don’t HAVE to work for a living, even though you may decide you WISH to continue to do so. It’s subtle difference but one that can seriously affect how you perceive your work. And no, for those who follow my blogs, I don’t QUITE consider myself as having arrived there. I’m 58 and currently end my blogs with the number 61 as my best guess: when our daughter is graduated from university .. and of course CPP eligibility starts at 60, and the company pension plan gets better the longer you hang on and …well, you know the drill.
Other authors have come to a similar conclusion, such as Julia Moulden in her new book, RIPE. She sees the boomers becoming entrepreneurs and “ripening” into their true vocations in their 50s and 60s.
There are many examples of people, especially creative artists, working well into old age, often till their dying day. I joked about this in a House Ad the FP has been running in recent weeks. If you’ve seen the “Right to the Point” ads featuring various National Post columnists, you might have seen one from me:
Certainly, working well into one’s 60s and even 70s is not going to be unusual: Last week, Reuters ran a story that was one of the most popular on the FP web site: 31.4% of Americans 65 to 69 were still working in 2010, versus just 21% in 1990. Many are still in harness in their 70s: 18% of those aged 70 to 74 were still working in 2010, up from 11% in 1990.
Andy Rooney only retired a month before his death at 92
And while it did quote one woman who sadly fretted about working until her dying day, I might point out this isn’t necessarily all that tragic. Last Friday, former CBS News commentator Andy Rooney died at 92, and he’d “retired” only a month earlier. Rooney spent 33 years on 60 Minutes.
The question arises whether working that long kept Rooney living to such a robust old age, and whether if he had stopped at say 65 or 70 if he would ever have lived that long. I somehow doubt he would have.
I do think it’s unusual to keep working that long in a corporate environment. My notion of Findependence is that you create enough wealth that you don’t have to rely on a corporate or government salary – so that you can pursue your bliss, whatever it might be.
I can understand that by their mid 60s, most people may want to rid themselves of corporate politics and commuting, even if they plan to do something else, such as consulting, building a business or perhaps finding a way to spin money from the creative arts.
Once a year, we often take a short holiday in Buckhorn, near Peterborough, and there’s an arts and crafts show that’s just filled with retired baby boomers, most of them with good pensions, who are now trying their hand at the creative arts.
In my Saturday column, I mentioned a book by branding expert Lisa Orrell called Boomers into business. She advises boomers to “turn what you know into dough.” Or as a friend of mine put it – Norman Evans — we should start getting paid for what we know, not what we do.
Another example of passion for work: Steve Jobs
A few weeks ago there was another example of someone much richer and more famous than Rooney who worked very near to the end of his life. For many of you, I’m sure the death last month of Steve Jobs was a real wake-up call. Talk about wealthy boomers: he was worth $8 billion when he died at 56.
I just read his biography – by Walter Isaaccson – and it was a fascinating read. Clearly, Jobs had reached his Findependence Day: arguably he reached that around age 30 when he first left Apple with $100 million. But I remember at the time his saying he was still a young man and still had much to achieve. So he created NeXT and Pixar and then magically returned to Apple after a dozen years when they acquired NeXT.
We all know what happened next: he created the iMac, the iPod, the iPhone and then the iPad, transforming about six industries: film, music, newspapers, magazines and books. And, oh yes, did I forget computers?
My point though is that Jobs loved to work and create. Money was really just a byproduct of his passion. He really only stopped working in August, two months before he died, and even then I’m sure he was chomping at the bit to create yet another great new product – reportedly he had his sights on transforming the television industry next and no doubt that’s already in Apple’s pipeline.
His case was of course unique. He was passionate about products and design, experienced an unprecedented early success and experienced a level of power, fame and fortune that most of us could only dream of.
Personally, I think I’d knock off with $800 million, let alone $8 billion. I mentioned Jobs in that Saturday article too, which was in response to the Reuters story I mentioned that recounted how American boomers are facing a retirement crisis.
Boomergeddon or Boomers into Business?
This is nothing new, though. A year ago, I reviewed a book called Boomergeddon, which said boomers would be hard pressed in retirement – what with the decline of employer DB pensions and even Social Security itself seeming pretty tenuous. Most experts I talk to think Canada’s CPP and OAS are in relatively better shape but few would counsel relying exclusively on government for our income in old age.
The fact you’re all here tonight suggests you believe private savings and investments is perhaps the most important piece, except perhaps for business ownership. That’s another theme of Findependence Day.
Most of us should be prepared to work well into our 60s but being prepared to keep working is not in itself a substitute for establishing financial independence. You still need to save and invest and plan your financial future for the inevitable point when you’re no longer physically or mentally able to work – or even if you are, when you can’t find employment.
Increasingly, it will be necessary to create your own employment, start a business or be a freelance consultant.
Fortunately, as Lisa Orrell says in her book, it’s a good time to leave the corporate womb and find your own way in the world. With the Internet and modern social networking tools like Facebook and Linked in, you can leverage your network and community very easily. New publishing tools like ebooks and print on demand, webcasting and web radio, email marketing etc. gives us an infrastructure.
There will be a question-and-answer session after Tom’s talk and a chance to sign books. Thank you for your attention.
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After a bit of a hiatus, the third of my Masters of Money blogs has just been published.
You can find “Being an Owner, Not a Loaner” by clicking here.
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On Friday, veteran CBS broadcaster Andy Rooney passed away at the age of 92, just a month after retiring. This news came too late for a package of stories in the FP this weekend about retirement but it could easily be added as an example. As I wrote here, if you have passion about your work, age is almost irrelevant, assuming you still have your marbles physically and mentally.
When I flagged this story on social media, one family member seemed to be relieved by this theme, since her own finances are in such a state that she doesn’t expect to retire any time soon. But even if you take the case of Andy Rooney to heart, that doesn’t mean you should see this as a license to stop saving and investing for the future.
For one, there may indeed come a time when you do lose your marbles — physically or mentally or both. The years when that occurs will be costly and you won’t be generating new income.
Second, even if you’re ready, willing and able to work (As the EI forms ask), you may not always be able to find a willing employer.
So even if you don’t think you’ll ever retire, you still need to shoot for a degree of Financial Independence. The book to which this web site is devoted makes continued reference to the distinction between Retirement and Financial Independence, or what I call Findependence.
In short, plan to work as long as you’re passionate about your calling, even into your 90s. But that doesn’t mean you can take a pass on saving for the future. It’s still prudent to cut debts and maximize pensions, RRSPs/IRAs, TFSAs/Roth plans and even keep adding to your taxable accounts.
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For those who prefer getting their information on video, the MoneyShow has just put up a 4-minute video with me about Findependence Day, which you can access by clicking here. This was taped for MoneyShow Toronto in September, just as this web site was launched. One of the first items in the September blog archives was the talk I gave there.
Most of the themes explored in this blog are touched on in the video, including how to keep costs down while still benefiting from the advice of a professional financial planner, use of ETFs and discount brokerage, hedging the downside and other topics.
There’s a second video I’ll post shortly that describes in more detail how investors can protect themselves and hedge portfolio volatility.
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As noted on my Wealthy Boomer blog earlier this week and in my Wednesday column in the Post, the month of November is now being dubbed Financial Literacy Month. Check my recent blog entry here to review an excellent 1.5-hour web presentation on financial literacy hosted by ABC Life Literacy Canada. It’s interesting because it takes a life cycle approach to investing: with experts focusing first on young children, them moving along the life cycle to university, entering the work force, family formation, mid life and finally retirement.
Findependence Day takes the same life-cycle approach, which is why celebrated finance professor and author Moshe Milevsky described it as “a financial voyage through the human lifecycle, introducing the reader to important concepts in portfolio theory, investment analysis and retirement planning.”
Or why the advisor’s advisor, Bob Veres, called it a “financial pilgrim’s progress.”
Get rich slowly