Do These Articles Help You?

Why does this blog make sense for me?

That question has come up often and since yesterday was article 1800, I thought maybe it was time I answered it. If only for my own thinking.

There are several reasons I do it

1. It’s fun. I like to write and this is a good way to express some of the things that seem important to me. Most of the articles are about financial things or the advisor business or maybe education and financial literacy.  There are a few rants, too. Many connect otherwise disconnected ideas. That is the fun part. Like yesterday about financial planning and martial arts.
2. I care that advisors provide a useful and efficient service for their clients. I want clients to find a way to connect to the tactical infrastructure.
3. I think most clients think financial planning is something that is one of, unnecessary, easy, something someone else can do for them. It is none of those. It is crucially important. Especially so in times like these. It is not a good do-it-yourself project and people are led to believe it is. Some can find the insight in these articles.
4. I like to think there is a simple takeaway in each piece, that advisors can use to discuss with their clients. Or maybe a client can take to their advisor.
5. I think almost every adult is financially illiterate when they are young and only a few gain the expertise they need to make sound decisions. Blame the school system and parents who have learned to get along, but do not know how they do it. Learning late is better than not learning, but time is the key resource. Starting late is dramatically more difficult. Learn to start earlier or use the articles to help people see the need.
6. I think many advisors would have trouble giving a complete answer to two simple questions about financial planning. “What is it?” and “What’s it for?”
7. Most clients would have trouble answering the question, “what do advisors do?”
8. I think most clients would benefit from using common tools to make their financial lives more efficient. Simple works. Complex is risky.
9. I think most financial commentators produce mostly nonsense. Exciting sometimes but mostly irrelevant for the average client. No one knows the future and picking a narrow set of statistics to prove some point is wrong. In math, there is an idea that says there is always more than one way to describe a given data set. I like to point oput some of the obvious ones.
10. Like the headline says, “Money is merely organized common sense.” Once it gets past that, people become prey. Few people understand money and value it in the wrong way.
11. I think people start planning in the wrong place. If you don’t know what you are trying to do and what your resources are, it is impossible to decide if a particular tactic (tool) works for you. If someone starts the discussion with a tool without asking how it would work for you, they are working their plan, not yours. Start with strategy. It won’t take an hour to get one that works to begin. Good plans evolve.
12. When people see how hopes, fears and expectations fit seamlessly with readily available tools, financial planning and execution becomes automatic.
13. I think I can help people see the method.

Should I keep doing it?

That is a hard question for me.

I like doing them and up until lately, they were not a burden. They are getting fewer views this year than in other years and that troubles me a little. Maybe I have run out of useful ideas.

The articles take time I could use differently and since they have made $0.00 so far, maybe I should reallocate that time.

They don’t bring in new clients, but I think I am more skillful dealing with clients because of them. I have had to clarify my own thinking on some of the planning points.

Few people comment on them, good or bad, so I don’t learn much. Strangely, easily half the comments come from South Africa or Australia. That may have some meaning, but I don’t know what it is.

Where to from here?

I have not decided yet and as a short term enterprise, I think I will go to 2000 articles, maybe 2018, for symmetry, which should appear around the end of next February.

You can help

Please send feedback.  What you like and don’t like. Some people think they are too long. That might be true but I don’t have the time to make them short. Short and complete is hard. Maybe fewer and shorter would work. Any ideas are welcome.

Please be in touch.  Thanks for reading.

Get A Black Belt In Money

Martial arts teach valuable financial skills

That may not sound quite as you expect, but consider.

1. Martial arts teach composure. There is little that will frighten an advanced black belt.
2. Martial arts teach discipline. Nothing is free. You work to gain skill. Every week, forever.
3. Martial arts teach process. There is a progression from knowing little to knowing much.  Skill does not happen all at once
4. Martial arts teach humility. There is always someone better.

Those same skills add value to financial planning and investing.

The advantage of preparation

A martial arts master realistically expects to avoid trouble. That is their preference and they are good enough at recognizing it that it does not often become a problem. Being realistic though, they prepare for the times trouble cannot be avoided. It might be years before a situation arises. What happens then?

They execute a prepared response to an adverse situation. If someone attacks with a knife held low, the assailant will enjoy a different surprise than if they attack with it held high. Don’t point a gun at them unless you like wearing a cast. A head butt. How amusing that someone thought that would work.

The responses have been practiced hundreds of time, even with no expectation of ever using them. When the time comes they are fluid and effective.

Preparation in the stock market

Most people don’t walk down dark alleys with $100 bills hanging out of their pockets. If you can avoid all the problems of the world, you don’t need a black belt. Just like the stock market. You don’t need any skill if it always goes up. In fact the only valid definition of a financial genius is someone who participates in a rising market.

The market, however, does not always rise. In fact it predictably always falls part of the time.

You could check and discover that there is a 10% fallback about once every 11 months. There will be a 20% fallback about once in 45 months. 50% declines are not unknown.

Ask yourself a question. “What do I plan to do when the market falls?”

Not if, when. You should know the answer to that. Otherwise you will panic and fear is a poor counsellor. 

There are other questions.

1. What can I do to avoid problems? Be aware that there are opportunity costs too. Holding nothing but cash will keep the market from hurting you, but at the cost of income and growth. It does reduce taxes though.
2. How do I prepare before the problem presents? If you watch quality managers, their cash holdings tend to rise as the market rises. Things are not cheap enough to buy, so they buy nothing. Less skilled people invest more as the market rises.  They may look good this quarter, but……
3. Should I prepare for all possible contingencies or just the probable ones? Again an opportunity cost question. Preparing for a 20% fall is quite reasonable.  50% is rare and you would give up a lot to defend it.

Relate to the martial arts skills.

Composure, discipline, process and humility. Build investments on those guidelines.

Knowing how you relate to time can make these easier to discover. Falling value you don’t need for 20 years is less stressful than value you need in six months.

Keep things in the perspective of your purpose.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

Index Fund Anomaly

The S&P 500 has 500 stocks within

I suppose everyone knows that, but it is interesting to notice that all stocks do not contribute equally to the return. To think about what the index means you need to know a little about how it is constructed.

Selection and weighting 

The S&P 500 approximately owns the 500 largest companies by market value. The approximation is the selection of the last few and the weighting by market value. As prices change by the minute, the index does not. Certainly no fund adjusts that often.

Other factors matter too. Current filing with the SEC, surprise information that results in a trading halt, could matter.

What if you made your own index. 

Suppose your index has only the top 10 of the 500. You would own the largest of the large cap. Would that be good? Sometimes for sure.

Just now, those ten are outperforming the entire index by about 8%. Roughly 18.5% to 11%.

It gets deeper than that. 

The top 10 contain 20% of the market capitalization of the entire index. If 20% of the base returns 19%, that is 3.8% of the 11% the index as a whole has earned. The bottom 490 then made just 7.2%. The S&P 10 outperformed the S&P 490 by nearly three to one.

Ben Carlson publishes something useful nearly everyday. You should follow him. You can find his thoughts on size here.

Learn more

Before you decide indexes are your savior, learn what an index is. It could be an ETF, a managed fund, or even your own portfolio could be better.

Be a little cautious though, the huge cap selection may not always be the winner. When you read Ben’s article you will find that from 1972 to 2013 there is a strange outcome. If you owned the largest stock in the index each year the index as a whole would have done 12 times better. 50 times your money versus 4 times.

Pay attention to the businesses. Huge cap have done some things right to get there. You might wonder who will be next and who will drop away.

They are all businesses and you need to know at least a little about businesses.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

How Can Good Advice Be Bad

There is a list of good advice items that could be bad:

1. You can rent a home cheaper than own it. If you invest the money you save on the cost of ownership above rent in an S&P 500 index fund you will come way ahead. This is arithmetically true over history.
2. You should buy term life insurance and invest the premium difference in the stock market.
3. You should never buy a managed fund because of the high fees.  Instead, prefer self administered ETFs and index funds and keep the fees for your own account.

Owning a home.

1. You can make a case for either side of the argument. The key is the ratio of the cost of the home to the annual rent. That varies greatly over time. Presently it looks like 16 to 20 times, which indicates rent instead of own.  There are other factors to consider.
2. Mortgage rates to own are quite low now, so buying looks easier, even though you pick up a gaggle of other ownership costs. Municipal taxes, insurance, and maintenance being the obvious ones.
3. What will mortgage rates be during the period you owe the money.  Today is just one of the days you will owe the bank.
4. Would you calculate your savings and invest it every month for the duration?
5. Would you spend any of the accumulation?
6. Do you know how taxes on accumulating income would affect you?

Buy Term and Invest the Difference

There are questions you must ask before deciding

1. How long will you need the coverage? If more than 15 years or so, it is cheaper to buy participating life insurance and cash it in when you don’t need it any more.
2. Have you considered that investments will generate taxable income?
3. Have you considered that your health might change and the permanent insurance might give you a chance to anti-select against the insurer
4. Have you noticed that term insurance is actuarially designed to expire before you do?
5. Have you noticed that the renewal premium at age 80 or so is enough to give you a heart attack?
6. Would you calculate your savings and invest it every month for the duration?
7. Would you spend any of the accumulation?

Avoid investment management fees.

There are questions:

1. Do you know what you get for the money you pay in fees and therefore what you will give up when you go the do-it-yourself route?
2. You will be your own advisor. Do you a have a good track record?
3. Will you always save what you are supposed to save to reach your goal?
4. Will you spend any of it when there is no one to call you on it?

Observed results

People who rent tend not to save the extra. People with a paid for home tend to have a greater net worth than renters.

People who own permanent life insurance tend to value it when they are older.  People with valuable term usually are younger and have huge risk needs and little cash flow to deal with them, so no easy saving either. 

People who pay management fees tend to end up with more money because fees buy more than money management. 

The common theme:

1. People are not disciplined enough to invest their savings or avoid spending their accumulations. In the case of the house purchase, try missing a payment and see how the bank will help you be disciplined.
2. People don’t understand how the investment funds return is not the same thing as after tax growth.
3. People have trouble estimating their needs in the distant future.
4. People have trouble doing a complete analysis because some are arithmetically challenged and some forget that there is a lot more involved with investing and reporting to the government than they thought.

You need an apples to apples comparison

If you value your time at zero, and believe you can do a good job in a complex field where you have no experience or training, then almost anything is worth doing yourself. Most of the time though, our time is not valueless and we make mistakes when doing complicated things.

Any narrow argument can make sense when your analysis includes an implicit assumption that all other things are equal.

They never are.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

The Two Sides of Tax Planning

There are always two sides to the tax planning game.

The game involves the people and their government fighting over the same dollar. The game moves at a glacial pace but as in soccer, the action moves from one end to the other.

Just now, the government of Canada has decided to start moving into the other end of the field. Their game is to take away the use of certain structures that allow people to sprinkle income, defer taxes on amounts earned in a business, but not used there, and to minimize the ability to turn income into capital gains which are presently only half taxable.

We usually don’t see the government as tax planners

Well, they are. They use euphemisms for taxation policies. “Revenue tool” is the current favourite. The idea is to extract the money they want in ways that are politically possible. While they may argue that a tax on liquor, cigarettes or gasoline is “fair” they don’t really care. They want the money and use whatever argument they can find to get it.

It has always been thus.

Jean Baptiste Colbert had it right in the 1600s.

“The art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing.”

Citizens do it too.

Their perspective is a little different. They want to keep the most money possible. As with government planning, personal tax planning is a familiar subject.

John Maynard Keynes had it right in the 1930s.

“The avoidance of taxes is the only intellectual pursuit that still carries any reward.”

The current government offensive is first about “income sprinkling” which is just a sophisticated “income splitting” tool.  As long as the rates become higher as incomes become larger, income splitting will be an attractive tool. It address tax planning device number one. Divide income to advantage.

The second tranche of their proposal is to attack the second leg of tax planning – “defer income.”

Canada’s corporate tax system is quite elegant. It integrates corporate tax with personal so that income earned in a corporation and subsequently distributed to shareholders attracts the nearly identical tax that it would if earned directly by the shareholder. The problem lies in when the dividend is paid. It is possible for a corporation, or group of them, to keep 35 cents of each income dollar for a very long time. That deferred tax earns money in the interim and provides a meaningful advantage.

The third attack is on converting income to capital gains. Income type conversion is a tool most planners use. Change income to a type that has a more attractive rate or better deductions.

In all cases, the government makes the rules and the people play according to them. When the people get too clever, the government changes the rules or moves out of bounds or whatever.

Can there be fair taxation?

The government can find many ways to justify their tax methodology. Does justification make the tax fair? It is a perspective issue.

Taxation is only half the question. The more advanced perspective says, “Can any tax be fair if the money is then wasted?” The perspective comes in when you ask what do you mean by wasted. Some people see the CBC as immensely valuable while others see waste. It is a puzzle. There are hundreds of other processes and programs that could fit the CBC place in the question.

Something you may have missed

In a corporation’s financial statement there is often a balance sheet item, “Deferred Taxes” Essentially that is the amount of additional tax that would have been payable if the accounting income was equal to taxable income. There are timing differences. Sometimes the rate a business can depreciate capital purchases for tax purposes is higher than they use for accounting purposes. The deferred tax item keeps it rational.  Some other day they will owe more in cash than the accounting numbers suggest.

The same logic applies to deferred retirement income plans. Some day you will pay more.

The government also has deferred tax amounts. In their cases, it is taxation they will receive in the future but make no expenditure for purposes of government when they get it.

It is called accumulated deficit or government debt. It works the same way as corporate deferred taxes. For corporations and people, there is no tax due now, but we will pay more in future versus, the government approach which is we have spent the money now and will collect it later.

Governments can be largely unaccountable

As long as people don’t understand that government debt is a future tax, the government can create the illusion that tax rates are low. The debt, coupled with liabilities for promises they have made and for which they have no money, is a vast sum. To meet them, they will have only a few choices.

1. Collect taxes from people who may not be able to pay and who certainly don’t want to pay. Lots of hissing.
2. Renege on the promise to pay their bonds. Politically difficult. There are many examples in history of what happens next.
3. Renege on promises. Reduce pensions or medicare coverage or stop spending on keeping infrastructure safe and usable.
4. Find new revenue tools.

Only new tools will be tried until they are desperate.

Citizens can make it harder for them by treating anything they pay the government as a tax. Fees, cigarette prices, gasoline prices, estate tax, income tax, sales tax, and a hundred more.  Some visible, some not.

Think it through

There is no fair way to get money that will be wasted.

The only fair tax is one efficiently collected, wisely administered, and where the money provides a benefit to the citizens they could not have gotten any other way for the price. We don’t have to benefit from every program, but we should expect the provided value is worth the price.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

Using Tools Is A High Order Skill

Humans and some animals use tools. 

Tools add power. They allow you to magnify strength and skill.

Tools accumulate our experience. They are a condensation of all the effort that has come before. They package technique and technology. One of my great-grandfathers was a carpenter. He might not understand a Sawzall at first but he would soon learn to use it.

Nail gun. Easy one. Using screws instead of nails. Again easy. Prefab beams. Laser levels and distance measurement. There is little that he used still in use.

I remember asking one of the older partners in the accounting firm how they got along without a photocopier years before. People did the work instead of machines. Much harder.

There are more tools than what you find at Home Depot.

Meditation is a tool. So is yoga or running. Financial tools are numerous. Relaxation, motivation and entertainment tools abound.

Each helps us share in the experience of those who came before.

Farm tractors are expensive

I talked to a farmer recently. He told me big tractors run roughly $1,000 per horsepower. A 300 horsepower tractor seems expensive at $300,000, but how much would 300 horses cost? Who would feed them and clean up after them? One person can operate a tractor, feed it, clean up and be home for dinner.

Pay attention to your tools.

Find if you have enough and the right ones. It is not smart to reinvent them. It is not clever to refuse to use them because of price.

Always consider the full range of costs to avoid them. Doing nothing has a cost too.

Tools are your friend if you use the right ones and use them well.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

Being A Better Investor

People are superb pattern makers

If you give people a vast horde of information they will find patterns within it. Much like the movie “A Beautiful Mind” where,  while in a state of schizophrenic confusion, mathematician John Nash could find patterns that had meaning to him but no other. 

The stock market provides such a vast horde and one must be careful how it is used.

What if there was less short term information?

Would you better off? It seems so. In the late 1980s psychologist Paul Andreassen discovered that when people were given frequent information about price changes in the stock market, they did far worse than those who were given price information alone. The ones with just price information did about 56% better than those with price change information.

Daniel Kahneman makes a similar point

“When no specific evidence is given, the prior probabilities are properly utilized (people use the base rates); when worthless specific evidence is given, prior probabilities are ignored.”

I think that means when people have enough specific evidence they find patterns in the noise and ignore historic reality.

Predicting the precise future is not possible

We can however make our lives simpler if we predict that future will be somewhat like the past. It is known as the Lindy Effect. Things that have been useful for a long time can expect to work for a long time to come. Not very precise, but it is hard to imagine the changes needed to make capitalism fail. In fairness, it would be harder to imagine what would make socialism work. Perhaps we are best served by the ideas that people will:

• Work to make their lives more comfortable
• Want better for their children
• Be resourceful
• Adapt as they go along

Times have changed and people are still adapting

Then internet makes information pervasive and nearly instant. People assume they must process it as quickly.

A hundred years ago, an exchange of letters could make decisions into months long structures. Today, hours is more normal.

What has been lost?

Time to reflect. Most good decisions are not perfectly formed in the first draft.

The speed of information has changed, but our ability to process information is still pretty much as it was a hundred years ago. So to Kahneman’s point. Having a lot of information, a recent capability, may lead you to spurious patterns.

Don’t notice the complex pattern when there are simple explanations of the same data. 

Bad analysis hurts you.

Change is everywhere but it is often just embellishment on a solid foundation of things that work. Do not dismiss the past too quickly. Seek fundamental ideas and see how they will last for a long time.

Most important, don’t believe everything you think.

“I used to think that the brain was the most wonderful organ in my body. Then I realized who was telling me this.” Emo Phillips

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772