A 5 year retrospective: a conversation with Canadian Capitalist and Preet Banerjee
I am pleased to be joined by Preet from www.wheredoesallmymoneygo.com and Ram from www.canadiancapitalist.com in my second last post. Ram and Preet were gracious enough to take time from their busy schedules to convene a round-table with me to discuss the last five years and talk about the next 5. For easy reference, Ram is “CC, Preet is “PB” and I am “TMW”. Just one warning- this is a very long post. Enjoy!
TMW: Five years flies when you are having fun. During that time, I had the great privilege of having people read my blog and the great privilege of interacting with other bloggers such as the both of you; we are such a walking stereotype- Canadian personal finance bloggers are so polite to one another! For all three of us, we begun blogging pre credit crisis and lived mostly to tell tales of our survival. What do you think are the largest changes you have seen in the last 5 years?
PB: I will start first. Near the top of that list would be the impact and growth of social media. Certainly there has been an explosion of personal finance blogs (I can’t keep up with even the new Canadian ones, let alone globally), but there have been a few that have been around longer than 5 years. I’m just coming up to 5 years of blogging in July, and I know Ram was blogging years before that. We’ve all seen some blogs come and go and many have evolved. I change my blog’s theme once a year and I’m getting the itch again, although it will be less drastic this round.
Beyond the personal blogs, professional corporate blogs have taken off as well. Most of them are “me too” blogs with little value, but some companies get it and are doing great things.
Then there’s twitter. Perhaps I’m biased as an active twitter user, but clearly it’s a force to be reckoned with on many fronts. There are hedge funds that aggregate sentiment from twitter to drive investment strategies. “Regular” news is dissected to a new level by various market participants opining in 140 characters or less and it lets you peer into the minds of people you normally would not have access to. But it’s also helped disseminate good financial sense and opinions to new audiences as well. What I find really interesting is to see who other people follow. It’s quite surprising sometimes.
CC: I’m going to concur with Preet on this one. When I started out, there were basically no Canadian financial blogs. Today, there are thousands and thousands covering every niche of the financial world. Facebook and Twitter have come out of nowhere to dominate the social media space. Even traditional media has jumped onto the social media bandwagon in a major way. The comments section of the news media is a place for lively (and often nasty) discussions.
TMW: Technology is a double edged sword. It has made out lives easier in so many ways. It is so much easier to track things using websites and apps. But here’s my concern about it. Technology also has allowed us to segregate ourselves and only hear content we want to here. For example, to Preet’s story, the twitter user base is tiny as a percentage of the general population but hedge funds are now driving investment strategies from hashtags? Is there not a sampling bias underlining that strategy which sows the seeds of its own destruction?
PB: I just want to point out I listed that as an example of how twitter is being used, not that I condone it!
CC: That’s the downside of social media. A good example is Covestor, that allows members to follow and presumably duplicate the trading activity of “investing leaders”. How crazy is that?
TMW: I wonder if Bernie Madoff started his, ahem, fund today how Covestor would tell its subscribers to duplicate his strategies! I am going to go a slightly but related change from the both of you. The internet is “paid” for by advertising. What this has done, and someone much smarter than me has articulated this, is ingrained in our mind that everything is for sale. Quite simply, we live in a sales society where sales and marketing has an inordinate influence on our lives. Just look at the concept of “personal branding”. If that isn’t a concept taken straight from the marketing department to your door, then I don’t know what is.
CC- name one good thing that has happened to the personal finance space in the last 5 years and one bad thing.
CC: The introduction of Tax-Free Savings Accounts (TFSAs) is far and away the best thing to have happened to Canadians in the past five years. What’s not to love about TFSAs? Investments held within these accounts are sheltered from tax. No taxes are levied on withdrawals. Even better, withdrawals are added to the contribution room of future years. And the icing on the cake: withdrawals will not affect income-tested Government benefits such as Old Age Security payments. I think that fifty years from now, we’ll look back at the 2000s and think fondly of the birth of TFSAs.
TMW: Yes but the only problem with the TFSA is that contribution rates tend to be quite low- at least from what I have been told- and I actually think people are utilizing them improperly. With the interest rate so low, you undertake your high risk/high reward investing in the TFSA and your long-term prudent investing in your RRSP. Of course, this assumes people are fully maxing out their RRSP and TFSA. If not, save, save and save. What you purchase afterwards has a lower priority to making savings part of a daily finance habit.
CC: Your point about low interest rates is topical. The continuation of the low interest environment is, in my opinion, by far the worst thing to have happened to Canadians. On one hand, it is hurting savers, especially those who are retired and depend on earning a decent interest on their savings to fund their living expenses. In fact, after adjusting for inflation, the interest rate these days is barely positive and has remained so for many years now. On the other hand, low interest rates have resulted in higher prices for pretty much every asset class. This is most evident in the housing market. Younger Canadians have taken on massive amounts of debt to finance their first homes, which will crimp their savings capacity in the years ahead. Canadians who already owned a home have taken advantage of higher home prices by tapping into their home equity resulting in an explosion in secured lines of credit. One has to wonder what will happen to this party when interest rates normalize.
TMW: If there is one thing the credit crisis taught is that we have most likely not lived in “normal” for 15-20 years. Interest rates have been historically low since the 90’s. It is, as you point out, caused all sorts of unintended consequences. I am not sure when interest rates will normalize since the setting of interest rates is almost driven as much by politics than policy these days. Preet- one good and bad thing in the last 5 years.
PB: Both are easy: the growth in acceptance of index funds by investors and the industry is a positive. Going back to the social media angle, when your peers are recommending passive strategies and products, you are more likely to look into it and ask your own questions. While not quite the same as the Arab Spring, the transparency is starting to wake investors up to life beyond The Matrix of high fee funds and lackluster relationships between clients and advisors.
The one bad thing I’ll mention is linked. Sometimes a little information is a dangerous thing. People tend to focus too much on just the fee aspect. I’m all for transparency and pointing out the facts, but firing your advisor and saving 2% in fees is great so long as you can do all the things a good advisor can do – which may be as simple as being a stupidity brake (I’m stealing that from you) to as complex as full blown financial planning, retirement projecting, estate planning, etc. Very few people can really do it themselves. The fortitude required to stick to a plan is incredibly difficult. I often see people who’ve decided to become couch potatoes after 20 minutes of reading. It’s amazing how much you question yourself when things are going south, no matter how well you believed you could do it in theory.
The separation of investment planning and financial planning, and the transparency of fees versus having them embedded in products, is still in its infancy. We talk about it a lot on blogs and in the papers, but let’s be serious: that reaches a small audience. Most people don’t read the business section, and fewer people read investment focused blogs.
TMW: In partial defense of the fee aspect, although I agree with you, the old saying in law is “focus on the result and not the cost (and that will be $500 an hour please!).” If, OVER TIME, (super emphasis on the concept of “over time”), the results are not there, I do agree a focus on the fees is warranted.
What I get worried about though is in the world characterized by internet self-righteousness (would we write half the stuff people write on the internet if they had to say it publicly with their real name attached to it), we set the standard for advisors way too high. I love DIY investing but if the reason why you are being driven there is because your advisor had 1 bad year in 10 years of managing your money, and one somehow thinks they can be the perfect investor, then I worry about the outcome.
My bad is related to Preet’s comment about personal finance still being a niche interest (if you can call planning your life an “interest”). There is this continuing cultural shift away from self-dependency. Read enough news about pension shortfalls and it is apparent in some circles that personal finance is someone else’s problem. Culture is an intangible that influences how we think and act; the term “keeping up with the Jones” is really short-hand for being sweep up in societal norms and mores. It is important for readers to remember to recognize that in some instances it is ok to swim against the tide.
As for a good thing, I have to agree with both of you. Choice in savings vehicles and products is good. But it is tempered by the fact you can have choice but if no one acts upon the choice, what good is such a choice?
Final question guys, if you had to write a farewell blog, what 3 things would you want your readers to take away from your experiences?
PB:First, I would want them to know that it truly was a two way experience. I’ve learned so much from many readers over time. I’ve loved every comment, good or bad, and every discussion and debate. After writing for the Globe and Mail, where there are plenty of trolls and personal attacks, it’s nice to know there are people who can debate without resorting to immature behaviour. That being said, I have pretty thick skin. I don’t get emotionally worked up about negative responses any more. At all. In fact, I kind of enjoy them in a funny little way. Especially the ones from uninformed industry participants who tend to make themselves look just as bad as the public perception of them. There are a lot of great industry participants, don’t get me wrong, but man alive there are too many incompetent ones.
TMW: yeah, sorry for calling you a “stupid head” on the Globe site the other day. Johnny123 is actually me. I admit it.
PB: Ah, so that was you all along. Ignore the Trojan I sent to your computer then.
As for #2, I hope it goes without saying, but our industry is in dire need of reform and I hope I’ve helped contribute to that conversation. I don’t know what the perfect answer is, and quite frankly there probably is no perfect answer, but a better answer? Absolutely. People are living longer, saving less, and governments and corporations want to download longevity risk away from themselves. Financial planning is more important than ever. Given that entry requirements to become a financial advisor are too low, I hope people realize that the onus is on them to educate themselves. I think our regular readers probably fit that bill already, so perhaps I’m singing to the choir but again, our audiences are relatively small. But while there is a lot of angst against the industry, much focused on the advisors, I think more should be focused on the lack of guidance to the industry. You know those disclaimers on the bottom of fund ads? The ones that say “Past performance doesn’t guarantee future performance”? Those should be the same font size as the big past performance numbers on the advertisement.
The last thing I would want readers to take away is that while the investing part is sexier, the planning part is more important. If you have dependants, you need life insurance to protect them in case you die. You need to protect your income with disability insurance in case you lose the ability to work. Even some benefits plans don’t have great DI coverage. Things like this can derail all your plans tomorrow, in a heartbeat. Investing is a long term endeavor. Planning looks at everything, budgeting, tax planning, retirement forecasting, risk mitigation, estate planning, and more. Most people look at this backwards.
CC: First, even though I write mostly about investing, it is secondary to establishing a savings habit and keeping it going. Savings isn’t sexy but it is the foundation for financial success. The key is finding a strategy that works. It may be as simple as setting aside a percentage of income and spending the rest. Or it may be slightly more involved as analyzing spending habits and finding ways to economize.
My second item would be similar to Preet’s third. It is about doing the simple things such as setting aside some funds to handle life’s inevitable emergencies, avoiding credit card debt, protecting our loved ones through insurance, taking advantage of “free money” such as employer match of RRSP contributions etc.
Third, we should try and invest our savings a little more wisely. Even if we invest through an advisor, we owe it to ourselves to make sure the right person is doing the job. And if we are a DIY investor, we owe it to ourselves to approach investing seriously and avoid serious financial setbacks.
TMW: I am going to cheat and say- tune in on April 30 for my last post. Gentlemen, it has been a pleasure being part of the same community as you. I wish I could have invited 10, 20, 50 more bloggers to chat but then this post would be 200,000 words long. I am constantly amazed by the ideas, depth of analysis and patience the both of you display on your blog. I want to thank the both of you on behalf of myself and most likely thousands of readers for continuing to write. I hope we can keep in touch. All the best to the both of you, your families and your blog. Thank you.
CC: And I want to thank you for your insightful posts for the past five years. Your blog will remain a source of reference for me personally. And, my best wishes to you in all your endeavors!
PB: Yes, it will be a bit of a sad day when TMW goes quiet. I’ve thoroughly enjoyed your unique perspective. You will be missed.