Monthly Archives: June 2015

Self-Publishing in Canada – Anderson

The self-publishing market is coming of age and there.s a good selection of conventionally published books and self-published ‘how-to’ titles. The Naked Author by Baverstock was reviewed here. Although it had the ‘across the pond’ perspective (she.s based out of the UK), 95% of the information transfers over. As the title suggests, Self-Publishing In Canada: A Complete Guide to Designing, Printing and Selling Your Book by Suzanne Anderson is much closer to home. In fact, Anderson is based out of Duncan, BC, which is 45 minutes north of Victoria. Here.s how the book looks:

Self-Publishing In Canada COVER

A no-nonsence approach to cover illustration.

As diligent readers have come to expect, here.s the back blurb:

DO YOU DREAM OF BEING A PUBLISHED AUTHOR? It is hard to get a book published the traditional way. Today more writers are turning to self-publishing to get their books into the hands of readers quickly. They are also taking control over their book and making money with the first book they sell. Self Publishing in Canada makes the process easy to understand as you are guided step-by-step to publishing your own book. This new edition gives current information for today’s self-publisher to help you get started right away.

The power words with which prospective readers are lured in are: ‘quickly’, ‘control’, and ‘making money’: Anderson has identified the motivations which drive authors to self-publish. By mentioning them on the back blurb, she sells the book to prospective authors. ‘Step-by-step’ is a nice power word as well: the process of self-publishing must appear to aspiring writers like a maze–after all, if it were so easy, why would the behemoth of the publishing industry exist?

Below the back blurb are recommendations from Anderson.s peers (other successful self-published authors) and a reminder to any doubters that this is the book you want: ‘The first edition was the winner of a Writer’s Digest International Self-Published book award’. Good work!

Anderson.s ‘About the Author’ also appears on the back cover:

Suzanne Anderson is an author, publisher and book coach. She is considered to be Canada’s foremost expert in self-publishing. Visit her website at www.selfpublishing.ca

The ‘About the Author’ is a convenient spot to put a website address.

The book itself is as advertised. It covers everything from conception to writing, and from writing to editing and marketing. It is laid out in a series of chapters that flows like a timeline: the beginning chapters covers the gestative aspects of writing and the latter chapters describe how the author sets up the self-publishing business: marketing, incorporation, invoicing, and so on. Anderson writes in a a deliberate, no-nonsense style. She focuses on the structure of the items that she discusses. So ‘book design’ would be broken down into front cover, prelims, text, and back matter. Each of these structures is in turn reduced into finer structures. So ‘back matter’ gets split into: appendix, index, glossary, and bibliography. The analytic approach breaks down the units of the self-publishing experience into manageable pieces.

I Love Checklists

The best thing about Anderson.s book is the checklist at the end. It takes the kernel of the whole book and condenses it into a two page checklist. Here.s how it looks:

Anderson Checklist #1

Anderson Checklist #2

What a terrific idea! Each row on the checklist corresponds to a section in the book. So as the reader goes through the book, decisions can be made as to how far to plan ahead. And once more and more rows are ticked off, you know that the project is getting closer to the happy day!

Dead Man’s Hand Newsflash

Artist extraordinaire SB has been busy in Photoshop composing the Dead Man’s Hand. Last week the discussion was on how to increase the sense of space in the rough draft and how to increase the sense that something unexpected was about to happen. To diligent readers jumping aboard the story now, the Dead Man’s Hand is the cover illustration for my upcoming title Paying Melpomene’s Price. The dead man’s hand is a poker hand (pair aces on eights) which stands in as a visual analogue of the unexpected because that.s the hand Wild Bill Hickok held when he was unexpectedly shot! It.s a fitting illustration because one of the central themes explored in Paying Melpomene’s Price is the disproportionately large effect the unexpected can have on the best laid plans of mice and men. Here.s the sketch before the brainstorming session:

Dead Man’s Hand BEFORE

Bringing the Dead Man’s Hand Together

A good start! We wanted to do a couple of things to make it even better: 1) focus more attention onto the poker hand, 2) increase the sense of space, and 3) make it more obvious that something really bad is going to go down.

So the construction crew came in and busted down the bookshelf on the right wall, a table was added in the back right corner to suggest that the space extends to the right, a barstool was placed in the front left corner also to suggest that the space extends towards the viewer, the table was flipped 90 degrees, the staff door moved and left open (to generate space receding into the distance, and the sleepy husky was moved further into the background.

Results

Here.s how it looks now:

Dead Man’s Hand AFTER

Here are the details:

Bartender

Wild Bill Hickok

Go Ahead, Make My Day

Poker Player #1

Poker Player #2

Poker Player #3

Server

The changes look bang on! The gambler on the right holding his hand in a protective gesture really adds to the suspense. The space is nice too as it allows the eye to wander around. Moving the dog to the back also concentrates the action in the front and makes the action more concentrated, as the dog is having a snooze.

What.s Next

At some point, the Dead Man’s Hand is going to get transferred from Photoshop into a real watercolour painting. The creative team.s going to get together for another session in the next few days and talk about the gambler on the left and the bartender. Originally the gambler on the left was cast as the ‘cool’ guy, but contextually, it might work better for him to express some form of surprise. Same with the bartender. The only character not looking surprised is the ‘make my day’ barstool guy. But with the scowl, it sort of works even better for the overall tension of the piece: it give it more of an ominous edge.

There you have it! I hope the Dead Man’s Hand is coming together to your satisfaction! Until next time, I.m Edwin Wong and I have been Doing Melpomene’s Work.

Making a Business Card

After the embarrassing incident on the Galloping Goose, it.s high time to make a business card! For assiduous readers who haven.t read the post, here.s how it went down: I met two ladies at a cafe along the Galloping Goose. We exchanged stories on the self-publishing experience (one of them had published a book on caring for her husband through MS). They were also interested in tragic art theory (the other lady was perhaps an academic: she had met Joseph Campbell of The Hero with a Thousand Faces fame). Familiar with the business card swapping routing from the days at Bayside Mechanical, I instinctively reached for my business card so that they could look up the blog. While there were still Bayside Mechanical ‘Project Manager’ cards in my wallet (now collectible!), I didn.t have any for my new occupation. So I had to borrow a pen from the barista and scrawl ‘melpomeneswork.com’ in my decidedly less than stellar penmanship on a scrap of paper. To be honest, everything is so much typing these days, I.m not sure if I still remember how to write, or even print! The incident stuck in my head as a fail: not professional. Even if I.m a semi-hobo, one must take pride in what one does.

Melpomene’s Work Business Card

It was that afternoon on the wonderful bike ride back home that I resolved: ‘Come hell or high water I shall have a business card once again!’ (the ‘shall’ instead of ‘will’ to accentuate the determination). Could the Bayside Mechanical card be recycled? Maybe scrawl out ‘Project Manager’ and write … hmmm … ‘Hobo’? Or ‘Writer’? What is it that I do these days anyway? It.s probably not something in the normal lexicon of terms. And the Bayside card seemed too businesslike, since, well, it.s a business card. Here.s what it looks like:

Edwin Wong Bayside Business Card

There were also vintage T.W. Wong’s Family Holding Company (from grandfather.s name, Tung-Wo Wong) that could be modified. It had a nice graphic on it too:

Edwin Wong T.W. Wong’s Family Holding Co Business Card

This one had been modelled after the Bayside business card. While the graphic took away the strictly business appeal of the Bayside card, the same problem remained: the occupation (whatever that is) that I.m in is not really part of the business world anymore. The card needed to capture the ‘artsy’ or even the ‘non-business’ side of things.

The boat image that.s incorporated into the ‘T’ of ‘TWW’ could have been retained. There.s plenty of images of Dionysus on a boat with the mast as a vine and grape leaves hanging off the sails. Since Dionysus is the god of the theatre (comedy and tragedy arose from his dithyramb), the image could anchor the association between the card and Melpomene’s work.

But on further thought, this seemed too cliche.

Time for a Google ‘Best Business Card’ Search

Google had lots and lots of samples of high quality business cards. Here.s one that looked promising:

Estudio Triciclo Business Card

What a great card! EA hit the nail on the head when she described it as a combination between ‘mug shot’ and ‘library card’. Looking at other cards, the trend is to have an image of the cardholder. But since it.s not like I.m famous, that would serve little point, e.g. ‘Is that … the Edwin Wong on the card?’ is not happening. It.d be cool to have an image on the card though to make it memorable. And those are the strengths of the Studio Triciclo business card: 1) it has an image, 2) image is memorable because it.s ‘anonymous’, like the part of the face you see under a venetian mask, 3) no address (not really required anymore), and 4) awesome retro typewriter font adds to the memorability.

To make this happen, talented photographer MR has snapped some shots. Here.s what they look like:

Edwin Wong Business Card #1

Edwin Wong Business Card #2

Which one to go with?–maybe one of each! And this weekend will get together with graphic designer extraordinaire EA to put it together. Here.s the layout thus far:

Business Card Layout

Not sure if diligent readers can make it out in the sketch, but under ‘occupation’ I am listed as ‘doing Melpomene’s work’. That is perfect: not ‘writer’ nor ‘project manager’ but simply ‘doing Melpomene’s work’–that is absolutely perfect because, well, it gets the idea right: it.s sort of ‘in between’ real occupations but an occupation nonetheless.

And then the reverse side? Well, it.d be a shame to leave it blank! Years (decades, actually) ago LH painted really captivating image of a falling dude. It.s a really memorable. Since tragedy can be construed as a fall, why not use him as the mascot? The goal is to take the colour out and have him as a line image on the reverse side. Here it is:

LH.s Falling Man

BTW it.s upside down, but the fall looks more dramatic this way with the one arm reaching back up to the heights from which he tumbled down.

Until next time, I.m Edwin Wong and Doing Melpomene’s Work will seem so much more professional once the business card come out. Like a kid on Christmas Eve I can.t wait!

Passive Income Part Six – FAQ and Philosophy

Well, this it it, the final post in the Passive Income series! To recap, here are the talking points leading up to the grand finale:

Passive Income Part One discussed what investing can and can.t do for you

Passive Income Part Two illustrated the importance of keeping costs low

Passive Income Part Three gave three sample portfolios based on your attitude towards risk

Passive Income Part Four surveyed types of investment accounts and how to open them

Passive Income Part Five showed you how to trade

In Part Six, I.ll answer some frequently asked questions and lay bare thoughts on how the market works.

FAQ #1 I opted for a 70:30 equity/bond asset allocation. What do I do with subsequent deposits?

Congratulations, that.s the same equity/bond asset allocation that I use. My parents’ portfolios (since they.re more risk averse) are set to 35:65 in favour of bonds. If you.ve decided that a 70:30 equity/bond asset allocation is right for you, top off future investments to maintain a 70:30 equity/bond asset allocation. And if you need to sell (hopefully never), sell whatever.s gone up the most to maintain the preselected ratio. This process is called rebalancing. It forces you to buy low and sell high. And it takes the emotion out of it.

FAQ #2 The news is saying bonds are going to get thumped when interest rates rise. Why should I hold bonds?

Bonds are the ballast in your portfolio. When you batten down the hatches and they don.t hold (e.g. 1987 Black Monday, 1999 tech bubble, and 2008 Great Recession) you.ll be glad you had them. No one knows for a certainty when the next stock market collapse will happen. You don.t hear of many (if any) people who make a living short selling stock market catastrophes: the reason is that, well, unknown events are unpredictable! And by the way, the ‘experts’ have been saying interest rates will rise since 2010. They.ve been wrong five years running. I.m sure they.ll be right one year but even a broken clock gets the time right twice a day.

FAQ #3 I heard that there are dividend or low-volatility based ETFs that outperform the traditional market-cap based ETFs

The vehicle for Canadian stocks I recommended was the BMO S&P/TSX Capped Composite Index ETF. It has a MER, or combined expenses, of 0.09% a year. I bet these other ‘smart beta’ products cost five or six times more, with MERs ranging from 0.6% up to 1%. Even if they.re better, they have to overcome their higher costs. Different investment types will, over time, either outperform the broad market. But nothing can outperform the market forever, since if it does so, it simply becomes the market. So you.re safe with going with a traditional market-cap based ETF such as ZCN. VCN from Vanguard Canada is also a good choice.

FAQ #4 I hear that stock markets are high right now. Should I wait to invest?

Who knows? To me, the best time to invest is when you.ve got money. I.m constantly in an ‘all-in’ position. That is to say, if I have money, and the stock market is at an all-time high, I invest. And if the stock market is plunging to new lows every day, I invest. Basically, I have my asset-allocation of 70% stocks and 30% bonds and I invest to maintain that ratio. It doesn.t really concern me too much what.s going on in the news. If the market is at all time highs, my new investments are going to be more expensive. But my existing investments will be worth more. If stock markets are hitting new lows, I.m happy that my new investments are bought ‘on sale’. Ignore the noise; maintain your asset allocation.

FAQ #5 Why should I listen to you?

I have a no nonsense approach focussed on keeping costs low. The theory of asset-allocation and broad market based index investing is backed by modern portfolio theory and the efficient market hypothesis. Modern portfolio theory basically says not to look at your individual holdings, but to look at the risk profile of your portfolio as a whole: the name of the game isn.t to make the biggest returns, but to have a responsible asset-allocation that is commensurate with the amount of risk you.re happy with. The efficient market hypothesis basically says that it.s no use trying to time investments. The price of a stock or a bond is set by the aggregate intelligence of all market participants. If you think it.s under- or over-valued, you.re making a bet against the whole market. Unless you have access to classified information (which you shouldn.t) no one else has seen, you can.t do better than the market and will likely do worse. Furthermore, the investment philosophy presented keeps transactions to a minimum. And what is more, no continuing research into this or that stock is necessary, freeing you to to what you want to do with your time.

FAQ #6 How did you get started?

I talked my folks into opening my first brokerage account when I got my first job at age 14. It was a tough sell since to my dad the stock market = gambling. The first investment was the Cundill Value Fund, an mutual fund overseen by Peter Cundill, a legendary value investor. It was after getting this that I learned that superior past performance does not necessarily translate into superior future performance.

As my investments grew (mainly from me putting more money into them from the dishwashing job), I sought the advice of expert financial advisors at RBC. They steered me into gold and tech stocks. When BRE-X collapsed in 1997 and the tech bubble blew in 1999, I started to get the feeling that the experts were not so expert after all. They.re just salespeople. The experience turned me off investments for many years. In fact, though I didn.t sell them, I no longer looked at them.

In 2005 while working on my masters at Brown University, I happened to take a look at my fallow portfolio. It had grown. But I hadn.t been doing anything. It occurred to me that maybe it was by not doing anything that was the key to success. I did some more research and discovered the efficient market hypothesis and index investing.

Instead of writing my thesis, I read books such as Malkiel.s Random Walk Down Wall Street. This was my investing renaissance: with portfolio theory, index funds, and the efficient market hypothesis, I could see how to invest in a way in which I understood and that I was perfectly comfortable with.

The big test was the stock collapse in 2008. Some of the indexes (S&P 500 and emerging markets) collapsed by 50% or more. I stuck with the asset allocation and kept plowing hard earned money into what was dropping the most. By 2012 or so it had payed off: a lot of the hard hit indexes more than doubled from their lows.

FAQ #7 Is there something I can read to learn more?

Absolutely! An excellent beginner.s book written in a story-telling style by the Princeton Economist Burton Malkiel is how I started. A Random Walk Down Wall Street is a great read and one of the few books I.ve read and re-read with pleasure. It.s now in it.s eleventh edition. Read it! It.s in the library too, if you want to keep costs low!

Random Walk Down Wall Street

So there you have it! This concludes the Passive Income series of posts. Until next time, I.m Edwin Wong and I am Doing Melpomene’s Work.

Passive Income Part Five – Trading

This is the fifth and penultimate post on investing for passive income. Now that you know all about investing, costs, risk, and have opened an account, it.s now time to go live: trading.

Trading – Finding a Stock’s Ticker

Each stock or ETF (exchange traded fund) has a unique ticker that identifies it. A ticker is a three letter combination. In a previous post, it was suggested a portfolio could be built out of two ETFs: one holding a basket of stocks and one holding a basket of bonds. The bond ETF is Vanguard.s Canada Aggregate Bond Index ETF. If you click the link, it takes you to Vanguard.s site and you can see that the three letter combination which identifies it is called VAB. The stock ETF is BMO.s S&P/TSX Capped Composite ETF. Clicking the link takes you to the Bank of Montreal.s site which identifies the stock.s ticker as ZCN. Remember VAB and ZCN.

Trading – Placing the Buy Order

We.re almost at your first trade! Log in to you account. You should see in one of the sidebar items the option to place orders. In TDDI it looks like this and you want to select ‘Stocks’ under ‘Order Entry’:

TDDI Sidebar

In Questrade you simply search for a stock by punching it.s three letter ticker into the little box. I.ve added .to to the end of vab to let Questrade know that vab trades on the Toronto exchange. Once the search is complete, there.s the option to ‘buy’ with the green button on the bottom:

Questrade Search

The next step is to place the order. With TDDI after you select ‘Stocks’ below ‘Order Entry’, the following menu pops up:

TDDI Order Entry

In ‘Action’, select ‘Buy’. In quantity, enter in how many shares you want. Put the ticker symbol ZCN into the ‘Symbol’ field and select ‘Canada’ as the market. Unlike Questrade, you don.t enter in the .to after the ticker. Hit ‘Get Quote’ and it will give you the quote for what the bid and the ask prices are. The bid is what the market will give you if you sell. The ask is what the market will sell to you for if you.re buying. The spread is the difference between the bid and ask prices and represents the compensation the market makers get to provide liquidity. Here.s how it looks once everything.s filled in:

TDDI Order Entry Filled Out

Notice under ‘Price’ that the order is set up as a buy order with a ‘Limit Price’. Always use limit prices when placing orders. A limit order instructs the brokerage that this is the maximum you are willing to pay. I usually set the limit price at the ask price. So, in this example, the ask price is $20.11 (which says the market will sell to you at $20.11) and I.ve set the limit (the maximum I.m willing to pay) at $20.11. If you do a market order (i.e. no limit), the order has a very small chance of filling above the current ask price (i.e. you pay more than you expect).

25 shares at $20.11 is going to cost $502.75. Make sure you.ve got the funds. Oh, and TDDI will charge you $9.99 to execute the trade so you need available $512.74. Because trades cost money, generally, on TDDI I.ll wait until there.s $2000 or so before I do a trade. Other people wait till they have 4 or even 10k to do a trade. It.s a matter of personal preference but you want to minimize your expenses.

Double check everything and then hit ‘Buy’. There you go, that.s trading on TDDI! It seems like a lot of steps but it.s an easy process.

Turning now to the trading sequence for Questrade. If you hit ‘Buy’ on the little green button once you.ve found your stock, a menu pops up:

Questrade Filled In Order Entry

This time we.re using VAB. Since the ask is at $25.56, we.re going to place a limit order at the ask price of $25.63. Quantity is 100 so this trade will cost you $2563.00. Trading ETFs is free on Questrade (this is one of the reasons why it.s nice to have a Questrade account). But they do ding you a little bit to ‘remove liquidity’. The charge is 0.0035 cents per share. So this trade will cost you a whopping 35 cents! So make sure you have $2563.35 in your account. Review everything and then hit ‘Send Order’. In half a second, it will send confirmation that your order has been routed and that.s it.s filled. That.s it! Isn.t trading easy as 1-2-3?

Next up will be a final post with some investment FAQs and my investment philosophy. Until next time, I.m Edwin Wong and writing this blog has been a happy diversion from writing the final chapter in the endless saga of Doing Melpomene’s Work.

Passive Income Part Four – Accounts

Back by popular demand!–here.s Part Four and accounts are the next item on the table. But since I can.t remember the topics in parts one to three, it might be a good idea for a refresher before starting! Here.s the road we took: Part One covered why investing is handy and what to expect. Part Two focussed on costs, costs, and costs. Part Three introduced the idea of risk and how an easy to construct portfolio with a bond and an equity component could be tailor fit to suit an investor.s risk profile. Next up are the different types of accounts.

Accounts: TFSA, RRSP (or RSP), and Non-Registered

There.s three different types of accounts. Think of accounts as empty baskets or shopping carts into which you can put your investments. Just as baskets or carts have different qualities (they can be made of metal or wood; some you carry and others have wheels, etc.,) the three different types of accounts have different attributes from a tax perspective:

TFSAs (Tax Free Savings Accounts) are accounts where you can put your after-tax income. Your investments grow tax free inside the account, hence it.s name. When money is taken out of the account, it is not declared as income and you are not taxed.

RRSPs or RSPs (Registered Retirement Savings Plans) are accounts where you can put your pre-tax income (pre-tax since when you file taxes in March the CRA sends you back whatever taxes you paid on the amount that was contributed to the RSP). Your investments grow tax free inside the account. When the money is taken out, it is declared as income and you are taxed.

Think of TFSAs and RSPs are mirror images of one another. If the tax bracket in your working and retirement years doesn.t change, they are the same in terms of the savings because in the TFSA you are taxed on the money before you put it in (therefore you put in less) but you are not taxed when you take it out. In the RSP, you aren.t taxed on the money before you put it in (therefore you have more to put in) but you are taxed when you take it out.

Non-Registered accounts are simply investment accounts held outside tax shelters such as TFSAs and RRSPs. You put your after-tax income into these accounts. Growth in investments in non-registered accounts are classified as dividends or capital gains and are taxed, but at preferential rates. Some basic record keeping is necessary to work out gains and losses when doing taxes. Although there are more tax considerations and record keeping with non-registered accounts, they are incredibly flexible.

If you.re starting out, the best option is either a TFSA or a RSP. They.re tax shelters and there.s less record keeping involved. If you expect to be making the same or more income during retirement (it happens, believe it or not), go with a TFSA. If you.re not sure, start out with a TFSA. TFSAs are simpler in terms of taking money in and out. If you.re certain you.re going to be making quite a bit less during retirement, consider starting off with a RSP: this way when you put your money into the RSP, you get a lot of your taxes back (because you.re in a high tax bracket) but when you.re withdrawing from your RSP, you.ll be taxed minimally (because you.re in a low tax bracket).

Yes, I know, investing is a workout because it forces you to think about the future! As Yogi Berra once said, ‘Predictions are hard, especially when they concern the future’!

If you.re not sure what to do, start out with a TFSA and you.ll do just fine.

How to Open an Account

So you.ve decided to open up a TFSA. Very good! How do you do this? Well, there.s a couple of options. What you want is a ‘Self-directed TFSA’ account. Self-directed means that you.re in control: you.re not going through a financial advisor (who will offer value added services by directing you to their high cost products). Self-directed is the way to go

The big 5 banks all have brokerage divisions:

1. TD.s brokerage is called TDDI (TD Direct Investing)

2. RBC.s is called RBC Direct Investing

3. Scotia has Scotia iTRADE

4. BMO has BMO Investorline

5. CIBC calls theirs CIBC Investor.s Edge

It might make sense to have the self-directed TFSA with the same institution where you do your banking. You can link it with your chequing account and make deposits or withdrawals quickly and easily. The other option which give you lower cost trades is to go with an independent brokerage such as Questrade. They have lower commissions. To fund the account, you use the bill pay feature at your bank and select Questrade as a payee. You pay them as you would a hydro or a phone bill. When you set up the account, you send Questrade a void cheque so that when you do withdrawals, Questrade will do an electronic funds transfer directly into your bank chequings account. Easy. I have investment accounts at TDDI (because I bank there) and Questrade (to take advantage of low commissions).

Most of the banks allow you to do the application online. Questrade has a handy online application as well: for the ID and void cheque portions, you simply upload photos. It.ll take a few hours to get things set up.

If you.re wondering whether to go with one of the big 5 banks or an independent brokerage, I.d suggest Questrade because of their low fees. It.s easy to set up the account online and it.s easy to use bill pay on your regular bank account to fund it. Withdrawals with electronic funds transfers are also a piece of cake.

So there you have it! Accounts demystified! I think we.ll do two more instalments of the ‘Passive Income’ series before returning to regularly scheduled programming. A primer on how to buy and sell once the account is opened is coming your way. And for the final instalment, maybe a brief FAQ with some words on how my investment philosophy came to be what it is today.

Until next time I.m Edwin Wong and it.s through the passive income stream that I.m able to be Doing Melpomene’s Work. And assiduous readers who have been reading are well on their way as well!

Passive Income Part Three – Risk

Passive Income Part Two – Costs ended on a cliffhanger: it addressed why costs are important, but did not get to how costs can be controlled. It.s actually easy: find low cost investment vehicles. To find the right low cost investment vehicles and put them together in a portfolio, an understanding of risk is useful.

What is Risk?

Some say risk is a four letter word. Others say it is the danger of loss. To some risk is that more things can happen than will happen. An economist will say the technical definition which is that risk is the portfolio’s standard deviation. Standard deviation quantifies the variance in annual profits and losses. Economists like it because it can be expressed as a number and being a number, can fit into their equations. It.s hard to quantify ‘shit happens’! The economists’ definition, however, is at odds with how the word is commonly used to express ‘danger of loss’. A portfolio whose returns varies from -1% to -2% each year by their reckoning is less risky than a portfolio whose returns varies between +5 to + 15% each year because the variance in the returns of the first portfolio is smaller. According to the common usage, the first portfolio is clearly ‘riskier’ because it is losing money each year!

For today, however, risk is your tolerance to loss and gain. The more risk tolerant you are, the greater chance you are willing to stomach big losses so that in other years you will have big gains. The less risk tolerant you are, the more you prefer small gains in good years so that losses in bad years are also smaller. This principle works because risk is related to return: the more risk you are willing to take on, the greater your return should be because you are exposed to greater danger. Think of different occupations. A linesman (those guys who connect power lines carrying tens of thousands of volts) makes more money than, say, a deli attendant at a supermarket. That.s because the most dangerous thing in the supermarket is the meat cutter or an irate customer. The linesman takes on more risk and should be compensated for taking risk. It.s the same in the stock market.

So decide whether you.re low risk, medium risk, or high risk investor. There.s actually no way to really figure out until you.re invested (and feel the thrill of making money and the dejection of losing money) so just go ahead and decide. Remember what you decide as we.ll come back to it in a second. Here.s some images to help assiduous readers make their selection.

If you require helmet, reflective gear, and lights to feel safe riding a bike, consider yourself low risk:

Bike Safety Nerd – Low Risk

If you will go for the piece of cheese provided you have safety apparatus, consider yourself medium risk:

Safety Mouse – Medium Risk

If you do vehicle repairs A-Team style, consider yourself high risk:

Road Repair – High Risk

Classes of Investments

There.s two major classes of investments: stocks and bonds. With stocks, you are a shareholder in the company. You are a part owner, in other words. With bonds, you lend your money to a company. They will pay you back what you lent them plus a little something extra for your trouble. The nice thing with stocks and bonds is that they.re uncorrelated. That is to say, they do not move in tandem. If one.s going up, the other.s going down. Or if one.s going up, the other.s treading water or not going up quite as much.

Now guess which is riskier? If you guessed stocks, then you.d be right. They also return more than bonds (most of the time). But they are also more volatile. That.s why you also need bonds in your portfolio. Think of them as a ballast. When the storm.s brewing and you.re battening down the hatches, bonds are your best friend, not that diamond mine in Botswana.

Now, since there are two classes of investments and when one zigs the other zags, it seems a good idea to have bits of both in the investment portfolio. Stocks are the engines that drive the portfolio.s growth during good years and bonds are the ballast that help you through the storm. How do we figure out how much of each?

Do you remember what type of investor you are from the previous section? If you.re the safety cyclist, a good starting point is a portfolio of 60% stocks and 40% bonds. If you.re the hungry mouse who will go for the cheese after putting on the necessary safety gear, a good starting point is 70% stocks and 30% bonds. If you.ll trust a 2×4 to hold up your truck while doing repairs underneath it, then a good starting point is 80% stocks and 20% bonds.

Wasn.t that easy?

Investment Vehicles

Which bonds and which stocks to I buy? That.s easy: buy them all! There are these investment products out there called exchange-traded funds or ETFs. They.re exchange-traded because they trade on the TSX (the stock market). They.re funds because they.re baskets of many individual holdings which together represent the total market. For bonds, I.d recommend Vanguard Canadian Aggregate Bond Index ETF. It has a MER (management expense ratio) of 0.19%. For something that holds around 600 different issues of bonds, it.s dirt cheap. Of it.s 600 or so issues, about three-quarters of its holdings are backed by the Canadian government (federal, provincial, and municipal) or government related entities. The remaining one-quarter are issued by companies, mainly investment grade banks and insurance companies.

For stocks, I.d recommend BMO Capped Composite Index ETF. It has a MER (management expense ratio) of roughly 0.1%. I say roughly because they just lowered it and their site frustratingly publishes the ‘Maximum Annual Management Fee’ (which is slightly less than the MER which includes trading costs and other things). I wish everyone would just publish the MER to make comparisons easier. This ETF holds around 230 of the largest companies in Canada: Royal Bank, Manulife, CNR, Valeant Pharmaceuticals, Blackberry, you name it, it.s in there.

In the following blogs I.ll discuss how to buy the bond ETF and the stock ETF. Once you.re set up, it.s a few keystrokes and clicks of the mouse. It.s that easy.

In today.s segment, I discussed risk and how knowing your risk tolerance helps you to put together a portfolio. I also recommended two investment vehicles: one for bonds and one for stocks. Notice how low their costs are: fractions of a percent. In Passive Income Part Two, the average cost of a mutual fund was flagged at 2.42%. The cost of a DIY portfolio with my two recommendation is in the neighbourhood of 0.15%. That is to say, by reading this blog, you save 94% off the posted retail price!

Stay tuned for Part Four of the Passive Income saga! Next time, the discussion will be on the burning question I.m sure all of you are asking: how do I open up an investing account? Well, that.s easy too!

Until next time, I.m Edwin Wong and investing has been how I was able to get out of the rat race to be Doing Melpomene’s Work. I hope others will be able to as well.

Passive Income Part Two – Costs

DIY Investing Keeps Costs Low

How much of an income stream can you expect from a well-balanced portfolio of investments? The industry consensus is 3-4% 3% if you.re young. 4% if you.re in your retirement years (65+). This was discussed in Passive Income Part One. The rationale is that the younger you are, the less you can draw down because you need the portfolio to weather down years. In my life, there seems to have been a stock market disaster every decade (1987 Black Monday, 1999 tech bubble, and 2008 Great Recession). It.s easier for the portfolio to bounce back from down years if it has more capital inside it. Everyone.s always worried about stock market disasters. But believe it or not to do absolutely nothing is the best course of action. More on this later. What I want to cover today is how important it is to keep costs low. The best way to keep costs low is to be a DIY investor.

…stop the presses… thank you to WordPress wizard MR for pointing out the advantages of RSS feeds from a reader.s perspective. On the sidebar there is now the all-powerful orange RSS icon. Diligent readers are encouraged to ‘Follow Us’ to receive all the latest! …now back to the regular scheduled programming …

Expenses Incurred in Non-Stock Investments

To give you an example of how important it is to keep costs low with stock market type investments, here are two examples of expenses from non-stock market investments. There.s all sort of examples I could have used, but since in Passive Income Part One I used an analogy comparing capital gains to the appreciation in the value of a house and dividends to the rental income stream, I.m going to used real estate examples.

Let.s say you own a piece of commercial real estate. It could be an office building, a restaurant, or a retail space. If you want a management company to find tenants for you, they will charge you based on the rent. Typically 3-5% of the yearly rent. So if your piece of commercial real estate generates $100,000 a year, you will pay them between $3000 – $5000 a year. Every year. It.s not just the first year the tenant signs the lease!

Okay. So with this piece of commercial real estate, you pocket $95,000 and the management company pockets $5000.

Let.s go on to the second example. Say you own some investment real estate. It doesn.t matter whether it.s a condo or a house. If you want a management company to find tenants for you, they will charge you based on rent. Typically 10% of the yearly rent. So if your house generates you $20,000 a year, you will pay them $2000 a year. Every year. It.s not just the first year they sign up the tenant.

You can see how this is really a good deal for management companies. If a management company succeeds in managing 10 residential properties, they make as much income as an owner who owns one house! The management company has put down zero capital and incurs none of the risks associated with the property (it burns down, depreciates, tenants don.t pay, and so on). On the other hand, the owner has to come up with the capital to buy the house and takes on all the risks of owning property!

Of all the real estate investors I know, they all manage their properties themselves. They keep costs low. Now, let.s return back to stock based investing.

What are the costs of investing in mutual funds or hiring a fee based advisor? A 2013 study found that the average MER (management expense ratio) of mutual funds in Canada is 2.42%:

Costs of Owning a Mutual Fund 2013

So with a $10,000 portfolio, it costs the investor $242 each year. For a $10,000 portfolio, fee based advisors charge 1% of AUM (assets under management, the scale slides down with larger portfolios). That works out to be $100 each year. At this point, most people (but not the diligent readers of this blog) would say, ‘That.s not a bad deal compared with the real estate examples where the management fees were 10% (residential) and 5% (commercial)’. There.s always a but. And here it is. But in the real estate examples, the fee came off as a percentage of the revenue or the rental stream, not the market value of the real estate holding itself. In the stock example, the fee comes off the total value of the portfolio. This makes a huge difference!

Put it this way. Do you recall the amount you can draw down from a well-balanced portfolio of stocks and bonds each year. It.s 3-4%. Let.s say you.re a young investor. You can draw down (spend) 3% each year. On a $10,000 portfolio, that.s $300 a year. If you.ve invested in mutual funds, $242 of that will go into paying management fees, leaving you $58 to spend. If you.ve invested with a fee-based advisor, $100 of that will go into paying management fees, leaving you $200 to spend.

In the residential real estate example, things look good for the management company because they only have to manage 10 houses to enjoy the same income as an owner of one house. And, in managing 10 houses, neither did they have to come up with the hard earned money to buy them nor are they exposed to any of the risks of owning houses (fire, flood, earthquake, etc.,). In the mutual fund example, the management company makes more money than the investor right off the bat ($242 vs. $58). In the fee-based advisor example, the management company enjoys the same income as an investor with a $10,000 portfolio once it manages 3 investors with $10,000 portfolios. The moral of the story is costs are critical!

DIY is the Answer

DIY is the way to control costs. It.s the same with anything. Take dining out. Dinner and a few drinks comes to $50. If I DIY, I can feed myself for a whole week for the price of one meal out.

The financial industry is a huge behemoth. Every year you hear banks have record earnings. Well, after the analysis, you can see how they.re able to enjoy record earnings each year. To me, the financial advisors at banks are first and foremost salespeople. In 2007, I offered to help my folks manage their investments. Originally, dad wanted to go stay with the financial advisors at his bank. He said how much return could he expect if I managed them. I said he could expect to spend about 4% each year and that this amount would be inflation adjusted (i.e. it would keep track of inflation). He said the bank was telling him they charged nothing for their advice and that he could draw down safely 7-10% each year. I told him that, well, that.s not possible. His response was that the bank people are experts and I was not. Well, actually what happened is that mom was getting tired of dealing with the bank people and the stress of investing was getting to her. I.m not sure, but I think it was her call to let me manage things.

At this time, a lot of my aunts and uncles trusted their money to the banks. They were spending 7-10% a year, and, on top of that, the banks were giving them free vacations each year for investing with them. If it.s too good to be true, it is too good to be true. Flash forward to 2015. My parents’ portfolios have grown. My aunts and uncles’ portfolios have been decimated. They were paying way too high fees at the banks and drawing down too much. By the time they noticed, it was too late. To me, that.s the funniest thing: you work so hard for your money and then hand it over for someone to manage without blinking an eye.

In my portfolio and my folks’ portfolios, I.ve kept costs down to not 1% and not even 0.5% but less than one-half of half a percent (~0.2%)! In the next blogs, I.ll let the cat out of the bag as to how this is possible. But to recap: in Passive Income Part One, I discussed why it.s important to invest and the things investing can and cannot do. In today.s blog, I discussed the importance of keeping an eye on costs. In Part Three, I.ll talk about how easy portfolio construction actually is.

Until next time, I.m Edwin Wong and I should be doing more of Melpomene’s work but talking about investing is too damned fun!

Bonus Quotes in Support of DIY:

‘Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who take the subway’. Warren Buffett commenting on the incongruity of taking advice from people who are less clever than you are just because they are the ‘experts’.

And here.s one by Fred Schwed Jr. asking the hard question on how much value brokers give to their clients:

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said, ‘Look, those are the bankers’ and brokers’ yachts’. ‘Where are the customers’ yachts?’ asked the naive visitor.

Passive Income Part One

Why Passive Income?

The question of passive income came up while driving along Dallas Road with talented business owner EA. We had been catching up. In the last few years, she.s been working hard to expand her startup company and now it.s taken off. In addition to graphic and web design (which she.s been doing since 2004), now her company also offers business writing consultation and creative coaching services. EA sure can write. I remember coming back to Victoria in 2007 and looking for a job with my crappy resume. She redid it and the phone started ringing right away.

While we were catching up, I mentioned that the income coming in from stocks and bonds was one of the reasons why I was able to switch over to Doing Melpomene’s Work full-time. She.d been thinking about setting up some investments to get the passive income stream started. I promised to share with her the tips I.ve picked up over years. Since investing interests me just about as much as theatre (they both revolve around risk and uncertainty), I thought I.d type out my thoughts into words on the blog. Hopefully other diligent readers will be able to benefit as well. To me, investing = empowering yourself to do what you want. If you spend money, it.s gone. If you invest money, the money works for you. The more money you have invested, the more time you have to do the things you want and love to do. It.s that simple. Sort of.

What You Can Expect (and not expect) from Investments

1. Do not expect to get rich from investments. If you want to get rich, startup your own company. Stocks and bonds are good places, however, to park your money. Bill Gates is a good example. He didn.t become the world.s richest person through stocks. He did it through starting up Microsoft. But once he had money, he put it to work in the stock market.

2. Do expect to be able to draw 3-4% income stream from your investments each year. If you.re younger, the number is closer to 3%. If you.re older, the number is closer to 4%. The reason that the drawdown ratio is less when you.re younger is because when you.re younger, your portfolio has to survive more down years. If the stock market experiences a couple of down years in a row (very likely over a long time horizon), the less you draw, the easier it recovers during the good years.

3. Do not expect big results right away. Investing is a long term thing. And it.s hard to think different about money. For every $1000 we invest, we are confronted with the opportunity cost of not being able to spend it (because it.s locked away in the investment). So we feel the pain of not having the vacation or not buying the big screen TV. So, if we can draw 3% each year from the investment, it means for each $1000, we can either have the satisfaction of $30/year every year or the satisfaction of the new big screen TV right now. The satisfaction of having the TV today seems better. I mean, really, what.s $30?–that.s a couple of cups of coffee and a Big Mac! But…

I.ve been investing for 25 years. All the consumer stuff I could have bought back then would likely be in the garbage today where it has zero, zilch, nada value. The money that I socked away still has value, and, since it has grown, has an even greater value today. So, yes, there.s an opportunity cost in investing. But think of how investing and the passive income stream can help you in the future. Future means at least 5 to 10 years from today.

A couple of years or so after I started out (over twenty years ago), I had been trying to spread the investing gospel to my friends. A lot of us were big spenders. I remember trying to talk about the merits of saving. One comment I.ll always remember. One night me and CM were chatting about how much the income stream was. When we worked it out, he said, ‘What!?! You saved all that so that you could get a squeegee each month?’. Undeterred, I stuck it out. And yes, the passive income stream produces much more than a squeegee each month now.

4. Do plan to gradually replace monthly expenses with your new passive income stream after you.ve been investing five or so years. Gradual is the key word. You.re not going to be able to replace the whole salary from the 9-5 job all at once. If you like coffee shop coffee and it costs you $50 a month, aim to save up enough to pay for all your coffees with the passive income stream (at a 3% drawdown rate you would need $20,000 invested).

5. Do realize that investing will change the way you look at money for the better. For example, if you realize that you have to invest $20,000 to be able to drink $50 of coffee shop coffee each month, you might just decide to trim expenses. Investing makes you aware of how valuable money actually is.

In fact, I don.t look at the face value of money anymore. The common way of looking at money is from the point of view of a spender. If someone had $100,000 dollars, he would likely think, ‘I.m rich, I could buy a Porsche 911 or that big yacht’. Money to average person = consumer goods. That.s the way we.ve been brought up in the consumer society. If I had $100,000 in my hand right now, I would look at it as an income stream of $3000 each year for the rest of my life. The $100,000 doesn.t really make me ‘richer’. But the $3000 income stream gives me more freedom to be doing whatever it is that I love doing. The investor.s perspective is different than the consumer perspective.

Different Things You Can Do in the Stock Market

There.s a lot of different ways to invest. You can play the stock market like a casino: go big or go home. Venture capital, micro-cap heart attack stocks. That.s not what I do. You can time the market: buy low and sell high. That.s harder than it seems. That.s not what I do. You can try your hand at momentum investing: buy the hot sector and ride it to the top! That sounds exciting but that.s not what I do. You can practise value investing: buying stocks on the fundamentals. If I were to do something besides what I.m doing, this would be it. But that.s not what I do. If you have connections, you can try insider trading. Like Gordon Gekko in the 1987 film Wall Street. But that.s not what I do, although if you gave me a sweet brickphone I just might try.

Gordon Gekko Brickphone

Well what do I do? Because the point is to create a passive income stream, I invest with income in mind. That is to say: find stocks or baskets of stocks that pay dividends. There.s two ways to make money in the stock market: capital gains or dividends. Capital gains result when the stock goes up in value. Dividends are the income that you receive because you are a part-owner of a profitable company.

A stock market is sort of like an investment property. If you buy a second house, it goes up in value, and you sell it, the proceeds from the sale is like a capital gain. If you buy a second house and you rent it, the rental income is like the dividend that a stock pays. Since I don.t really intent to sell, capital gains don.t really mean much to me. It.s like if you had a second house: would you really get it appraised every day? Or, if you.re after the income stream, would you just sit back and be content to collect the rent without worrying about daily fluctuations in your house.s price? My intent is not to sell, since I.m happy with my investments and if I were to sell, I.d just have to invest it into something else.

In this entry, I.ve discussed the benefits you can enjoy from having a passive income stream. Also, I.ve gone over some things to expect and not expect. This is no get rich quick scheme but a methodical lifelong process. Finally, I.ve touched upon my investment philosophy. Stay tuned for the next instalments where I.ll provide real life examples of how my DIY investments are set up. Costs are critical in investing and DIY is the way to go. And, believe it or not, DIY can be incredibly simple, empowering, and rewarding!

Until next time, I.m Edwin Wong, and these are some of the secrets of how I.m able to be Doing Melpomene’s Work.

Dead Man’s Hand Photo Shoot

It.s done! The Dead Man’s Hand photo shoot took place at the Cenote Lounge last Sunday. To all the assiduous readers, here.s a few photos and happy memories from the event. Although the Dead Man.s Hand is a spooky idea, the photo shoot was anything but!

Here.s me slaving away getting all the props together the night before:

Dead Man’s Hand Props

Because none of the roles were preassigned (except Wild Bill), I wrote up cue cards for all the different roles:

Dead Man’s Hand Action Cue Cards

Also had to make sure the dead man’s hand was in the deck of cards: pair aces on eights with the Queen of Clubs as the kicker card:

Dead Man’s Hand-The Cards

Here.s ‘Wild Bill’ holding the dead man’s hand:

Holding the Dead Man’s Hand

Clockwise from the right, here.s R, EA, OZ, and EW posing as poker players. The lighting is just perfect. No need for the special photography lamps. We had to hold still for expert photographer MR to get all the shots. From what I could understand, he would take a photo of the group and then follow up with individual shots of the gamblers’ expressions. As MR lines up the photos, artist SB provides feedback. The intent is for SB to create the watercolour painting from the photographs so the communication between photographer and artist is crucial.

Gambler Group #1

Clockwise from right here.s the second gambler group: MT, CK, LH, and EW. Having two gambler groups gives assiduous artist SB more options for the look she wants to achieve.

Gambler Group #2

Besides the gamblers, the illustration also calls for a server, bartender, and barstool customer. LH nails down the surprised expression in playing the server. Hollywood lost a bright talent when LH decided to go in a different direction!–

LH as Server

And in the final shot, Cenote co-owner S got into the action by playing himself (bartender). Perfect: he.s got a classic 90s punk ‘Open Up Your Mouth and Say SNFU’ shirt! Photographer MR also hands off the camera to SB so he can get into the action as well. Here he is with the bartender doing a damn fine Clint Eastwood impression. Make my day!–

S and MR as Bartender and Barstool Customer

We had allowed an hour and a half for the shoot. Actual time was closer to an hour. With the great team we had, things went quickly. Everyone is all smiles after the shoot wraps up. Here EA is helping me take down the food orders. I had originally started writing down everyone.s orders on the little notepad but boy it is really hard to write all those words on a wretched little square of paper! It turns out EA had been a waitress many years ago so I.m glad she offered a hand!

Relaxing Post Shoot

And of course since we are all full of smiles we took a group photo for the blog at the entrance of Cenote. Damn you guys look like stars!

Dead Man’s Hand Group Photo

THANK YOU to everyone for making this happen! To S, thank you for opening up Cenote early and letting us have access to the space. The tasty Cenote dogs sure hit the spot afterwards. I will have to incorporate them into my routine! To OZ and CR, thank you for making it down while 8 months pregnant and on move day as well! Can.t wait to hear the good news and to hear the name you guys decided on. To Ei: enjoy the cards, don.t worry I let your mom know the odds of pulling out the dead man’s hand is actually 1 in 2.5 million! Just make sure you shuffle well and you will do just fine! To C the Great, thank you for helping out on such short notice. Good luck on the Whitehorse adventure and I want to hear more about it before you guys take off! To LH, I.m sure glad you were able to come down–we.ve been discussing the idea of this shoot on our runs for such a long time that you know more about it than I do. It was terribly nervous for me on shoot day, but when I heard you explaining to the other folks the idea behind the shoot so well, it totally calmed me down! To R, thank you for taking part in the shoot and an even bigger thank you to sharing the secret of the Brazilian BBQ with us later on. You are the BBQ god and we will carry on the tradition of expert steak making! To MT, thank you for helping out at the shoot. Even though I.ve left the construction industry, that I can count on you means more to me than ever. It.s going to be time soon for us to catch a show again soon! To EA, thank you for agreeing to come out on short notice and sharing the mighty Jeep Wrangler story. Synchronicity, what more can I say!–while you were buying the Jeep I was blogging about old times. But let.s make a meaningful coincidence happen sooner this time!

And finally, none of this would have happened without the efforts of diligent photographer MR and artist SB. Kudos to them for taking on a challenging commission from an unknown patron. To capture all the flashing thoughts and feelings in that split second after being surprised but before the conscious mind grasps what is going on is a serious challenge. They are capturing the moment between states like the moment liquid is flashing into steam but is not yet steam. But from what I can see, if anyone.s going to be able to do it, it.s going to be MR and SB.

There you have it! Until next time, I.m Edwin Wong and because I held the dead man’s hand and lived to tell the tale, I will continue to be Doing Melpomene’s Work.

Doing Melpomene's Work

Writing on the Greatest Show on Earth