All posts by Robb Engen

Stop giving Markets your attention

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When I got an activity tracker several years ago I was horrified to learn just how sedentary my lifestyle had become. I’d drive to work, park my butt at a desk for eight hours, drive home, park my butt on the couch for a few more hours, and go to bed. It was mindless laziness.

I fit right in with the average North American, who walks an average of 3,000 to 4,000 steps per day.

Steps to improve my steps

My activity tracker suggested a goal of 10,000 steps per day. I was motivated by the step counter and helpful nudges to get myself moving. I started parking in a free lot about 1 kilometre away from work, adding an extra 3,000 steps to my day (and saving $50 per month in parking fees!).

My new walking routine got me up to an average of 7,000 steps per day, but still not close to my goal. Then, following my wife’s lead, I got into running three to four times per week. The extra activity helped me reach my goal – not every day, but on average throughout the week. Funny enough, I still find motivation from my activity tracker as it nudges me to reach and surpass my daily move goals.

The hyper-attention and daily nudges helped me get my butt in gear and become a healthier person.

Curbing my Screen Time

Similarly, Apple sends iPhone users a new weekly report called Screen Time that shows how much time you spend on your phone. You’ll see which apps you use most often, how many times per day you pick up your phone, how many notifications you receive per day and from which application.

The report can be an eye opener if you’re into mindless scrolling through social networking sites like Facebook, Twitter, and Instagram. Twitter is the biggest attention sucker for me. Hey, it’s where I get my news!

I also get a lot of notifications and can conclude from the report that I receive about 30-40 emails per day from work. Not cool. Because of those notifications I tend to pick up my phone 65-70 times per day to either check my email, respond to a text, or check Twitter.

The week the Screen Time report first came out I spent six hours per day on my phone. I’ve got that down to less than four hours per day and try to design rules around curbing my screen time. That means turning off unnecessary notifications and keeping my phone in another room when I go to bed.

Again, these nudges had a positive effect on drawing my attention to a negative behaviour and making a conscious effort to curb it.

Negative Stock Market Attention

Back when I was a stock-picker I obsessively checked my portfolio, and read every market headline. I scoured the internet for news about my individual stock holdings and searched for analyst opinions (only the ones that confirmed my own opinion, of course).

But just like in the previous two examples, all this attention and information made me want to act. My oil stocks were getting killed and I wanted to get out. Sobeys made a mess of its Safeway acquisition and I wanted to get out. The general market would fall by 5-10 per cent and I felt like I needed to do something – like contribute more money than I had planned, or hold off on adding new money until things “settled down.”

Stock market plunge

Nudges worked against me. I’d get email alerts when Fortis or Great West Life missed their earnings targets. What should I do with this information?

The Globe and Mail app would send helpful push notifications like, “markets plunge on European/China/Russia fears,” or,“Dow posts worst day ever.” A smart investor is supposed to act on this, right? Shift their portfolio to safer assets? Buy gold?!?

Don’t just do something, stand there!

I switched to indexing four years ago with a simple two-ETF portfolio of global and domestic stocks. Now that I own thousands of companies I no longer pay attention to the fortunes of one or two. I find myself paying less attention to market headlines in general.

I make my monthly contributions automatic and only check my portfolio when the cash balance is large enough to make a trade. I figured instead of tinkering with my portfolio daily and reacting to news I’d be better off taking a two-decade nap and letting compounding do its thing.

I make my monthly contributions automatic and only check my portfolio when the cash balance is large enough to make a trade. I figured instead of tinkering with my portfolio daily and reacting to news I’d be better off taking a two-decade nap and letting compounding do its thing.

Related: How and when to rebalance your portfolio

Your long-term investing plan has no time for daily market noise. Yes, we may be entering a bear market. Or it’s just a run-of-the-mill market correction. Nobody knows for sure.

We do know that yesterday [late December] the Dow and S&P 500 had historic gains. If you happened to act on your fears and exit the market, thinking it was on its way to a 40-50 per cent meltdown, you missed out on that important rally. In fact, many of the largest one-day gains occur during down markets.

Final thoughts

Technology can help bring attention to a negative behaviour and turn it into a positive outcome. But those nudges and alerts can also work against you.

When it comes to investing often the best course of action is to do nothing and stick to your plan. Daily gyrations smooth out over a period of several months, and over several years the trajectory of the stock market tends to point up and to the right.

Many so-called experts question the value of robo-advisors during a downturn such as this, saying that investors would be better off with a human advisor. But from what I’ve heard during tumultuous times, the robos send helpful nudges via text and email explaining what is happening and why fluctuations in the market are part of a normal investing experience.

For investors that can be calming reassurance in the face of negative headlines screaming for your attention.

In addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on on Dec. 27, 2018 and is republished here with his permission.

Is Renting throwing away money?

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Most people tackle the rent vs. buy problem incorrectly by framing it as the cost of monthly rent versus the cost of a monthly mortgage payment. The argument goes something like, “if your monthly rent costs as much as a mortgage payment on the same or similar property, then it’s a no-brainer to buy the home and build equity rather than flushing your rent money down the drain.”

Others argue that a better comparison looks at the true cost of home ownership, which not only includes the mortgage payment but also things like property taxes, insurance, and maintenance.

However, as PWL Capital’s Ben Felix pointed out in the latest Rational Reminder podcast, neither argument paints a truly fair comparison of rent vs. buy. What you need to look at, he explains, is the total unrecoverable costsin each scenario.

For example, a monthly rent payment is a total unrecoverable cost: an expense that does nothing to improve the renter’s net worth. A mortgage payment, on the other hand, only has partial unrecoverable costs: the interest paid on the mortgage. The other portion reduces your mortgage amount and therefore increases your net worth.

A winning point for home ownership, right? Not so fast.

We need to add up all of those additional costs that a home owner bears (property taxes, insurance, maintenance), plus any upfront money spent on a down payment, land transfer tax, title insurance, home inspection, etc. to close on the home.

There’s also an opportunity cost on the down payment and other closing costs. That money could have been invested instead of put towards buying a home.

Rent vs. Buy: Let’s Do The Math

Let’s look at an example of a renter in Toronto who’s paying $2,000 a month to rent a 575-square foot condo. The same condo is listed for $449,000.

To purchase the condo our renter would need to put down 5 per cent, or $23,450, plus add another $17,062 to the mortgage due to CMHC insurance (required on all mortgages with down payments of less than 20 percent), for a total mortgage amount of $443,612.

Our upfront costs are not done, however, as we need to add in land transfer taxes of $10,910, lawyers fees of $1,000, title insurance of $449, plus a home inspection for $500.

Total upfront costs = $36,309. The opportunity cost of this amount in 25 years at 6 per cent a year = $155,834.

Now let’s look at the unrecoverable monthly costs. The mortgage is amortized over 25 years and has an interest rate of 3.50 per cent. The monthly mortgage payment is $2,215. Of that payment, $1,200 goes towards interest and $1,015 goes towards paying down the mortgage principal.

Then we have property taxes coming in at $375 per month, and we’ll also add the difference between home insurance and tenant insurance, which is $40 per month. We also need to add expected maintenance costs, which we’ll estimate at 1 per cent of the property value per year, or $375 per month.

Total unrecoverable monthly costs (interest, plus property tax, plus insurance, plus maintenance) = $1,990

The unrecoverable costs for the renter and homeowner are nearly identical. The total monthly payment for the homeowner, including property taxes, insurance, and maintenance, is $3,005. Just $1,015 of that is building equity in the home. So, back to the rent vs. buy argument.

Rent and Invest the Difference

We have to assume our renter has an extra $1,015 available in their cash flow each month to invest. What are the expected returns for a 60/40 balanced investment portfolio over 25 years: maybe 6 per cent? Continue Reading…

8 habits that are killing your Retirement dreams

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A growing number of Canadians plan on working longer because they haven’t saved enough for retirement. We see it at a macro-level; Canadian households owe a record $1.69 in debt for every dollar of disposable income, meanwhile the personal savings rate in Canada stands at a paltry 3.4 per cent.

There are plenty of reasons why we owe too much and save too little. The economy stinks, people get laid off, and salary increases are few and far between.

That said we’re often our own worst enemy when it comes to taking care of our finances. Here are eight bad habits that are killing your retirement dreams:

1.) You don’t watch your spending

It’s tough to stop a money leak when you have no clue where your money is going. Small daily purchases do add up (latte factor, anyone?), but these spending categories can bust your budget much faster – big grocery bills, dining out too frequently, filling your closet full of new clothes, one-click online shopping, and expensive hobbies, to name a few.

The solution: Write down everything you spend for three months. I guarantee you’ll have an ‘a-ha’ moment at best, and at worst discover something useful about your spending habits that you’d be willing to change.

The goal of course is to spend less than you earn. It’s one of the major tenets of personal finance.

2.) You want the newest ‘everything’

Fashion and décor trends change, technology constantly evolves. Staying ahead of the curve means shelling out big bucks for the latest and greatest products. The problem is your capacity to buy new things will never keep up with the pace of innovation and change. It’s an endless cycle.

The solution: Wait. Early adopters pay a hefty premium to be first. Look no further than televisions, where the latest innovations can initially go for between $5,000 and $10,000: 10 times what they’ll cost in a year or two.

The bigger issue is the psychological need to always have the latest gadget or be at the cutting edge. Ask yourself whom are you trying to impress.

3.) You have the constant need to upgrade

Fewer than half of all iPhone users hang onto their smartphones until they stop working or become obsolete. Most want to upgrade as soon as their provider allows it: usually every two years. A small percentage upgrades every year whenever a new model is released.

While spending a few hundred dollars on a new phone every other year might not hinder your retirement plans, it could be a symptom of a bigger problem. The constant need to upgrade your technology, your car, and even your home can be a big drain on your finances.

Nearly three in 10 homeowners get the urge to move every five years, and 14 per cent actually want to move every year.

The solution: The same buy-and-hold approach that you take with your investments can also apply to your major purchases. The Globe and Mail’s Rob Carrick suggests a 10-year rule for homeowners to combat the odds of a housing crash and to save on transaction fees. Continue Reading…

Is every day a Saturday in Retirement?

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Is every day a Saturday in retirement? That’s what behavioural scientists Dan Ariely and Aline Holzwarth claimed in a recent study about retirement income. The premise being that when you’re no longer working 40 hours a week (or more) all of a sudden you have 40 hours a week available to spend money. Every day is like Saturday. Not to mention, many of the things your employer used to pay for, such as coffee, a smart-phone, or gym membership, now falls on you.

The study’s conclusion? Retirees should expect to spend as much as 130 per cent of their preretirement income after they retire. Yikes!

That flies in the face of typical retirement planning advice, which pegs the income replacement rate at around 70 per cent of your preretirement income. A lot of expenses should disappear when you reach retirement age. Hopefully your kids have left home, and your mortgage is paid off. You’ll no longer have payroll deductions for income taxes, CPP, and EI. Say goodbye to the long, soul-crushing commute, along with the expensive business attire.

Because of these reasons (and others) some retirement experts, like Fred Vettese, even champion a much lower retirement income target of 50 per cent of your income.

On the flip side, in this article about money myths, financial advisor Kurt Rosentreter seems to concur with the Ariely / Holzwarth study:

All the old retirement planning textbooks said you could expect to live off less than your working income (e.g. 70 per cent). The reality of what we are seeing in the trenches doing this work everyday is that there are three phases: Age 60 to 70 where we are seeing as high as 110 per cent of pre-retirement spending; age 75 to age 85, where costs can drop to 80 per cent after the first spouse death; and costs in the final phase of age 85 onward that can be lower or higher depending on health care.

This study resonated with me because one of my biggest fears about retirement is that I’ll overspend and completely blow my carefully planned budget.

Overspending is one of the biggest Retirement fears

Why is that a fear?

We do spend more money on the weekend. That’s when we do our shopping, our leisure activities, and when we go out for dinner. Weekends can be expensive!

Continue Reading…

The (Renewed) Case for GICs

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**This is a sponsored post written by me [Robb Engen] on behalf of EQ Bank. However, as always, all opinions are my own.

A guaranteed investment certificate (GIC) is unlikely to spark an exciting dinner party conversation but when stock markets are reeling, like they were earlier this year, investors often seek safe havens to wait out the storm. Cash is king for those who don’t have the stomach to watch their portfolio plunge in value, and GICs at least offer the promise of a modest return.

Back in February 2009, when the global financial crisis had just about reached rock-bottom, 30-year-old me was scrambling to meet the RRSP deadline and bought a five-year GIC. It was a costly mistake in hindsight. The Toronto Stock Exchange surged ahead for the next five years, earning annual returns of 9.52 per cent, while my five-year GIC earned an average annual return of 2.75 per cent.

Instead of turning my $7,000 contribution into nearly $10,000, I only had $7,800 to show for my decision. At the time, though, I thought the GIC was a smart move because I had to make a quick decision on what to do with my contribution, and the stock market still looked downright nasty.

Why invest in GICs?

The truth is there’s nothing wrong with stashing your savings inside the comfort of a GIC. Here are four times when it makes good sense to put your money in GICs:

1.) When your entire portfolio is sitting in cash, waiting for “the right time” to get into the market

If you’re the type of investor who can’t ignore the doom-and-gloom economic headlines, and who’s convinced that a market meltdown is always imminent, maybe the stock market isn’t right for you.

Having your retirement savings constantly sitting in cash and earning nothing is like sitting on the fence and being paralyzed to move for fear of making the wrong decision at the wrong time.

A GIC ladder, which might involve purchasing equal amounts of one, two, three, four, and five-year terms, will maximize your risk-free returns and still give you the option of dipping your toes in the market each year when one of the terms comes due.

2.) When your investing strategy boils down to chasing last year’s winning stocks or mutual funds

If you’re the type of investor who’s constantly looking for the latest fad, you might be falling victim to the behaviour gap – the difference between investment returns and investor returns.

Consider that, according to DALBAR, from 1986 to 2016 the S&P 500 Index averaged 10.16   a year, but the average equity fund investor earned just 3.98   a year.

When you think about our poor investor behaviour, coupled with sky-high mutual fund fees (at least, here in Canada), those investors who just can’t help themselves might be better off parking their savings in the best five-year GIC and earning a guaranteed return. Continue Reading…