Monday, February 21, 2011

Personal Rate of Return

I'm reading an interesting book by David Trahair called Smoke & Mirrors: Financial Myths That Will Ruin Your Retirement Dreams. Even with all the financial reading I've done, I'm learning quite a bit. Anyone who has a financial adviser paid by commission or one working at a bank needs to read this book.

One of the first things I was interested to read was that I can calculate my personal rate of return on my investments using Excel! It has a nifty formula called XIRR. You plug in all your dates of investments and their cost and then the existing value of your portfolio on this date. It spits out your annualized rate of return over that period. I decided to take this on.

I'm currently doing an analysis of what approach is better. The one he espouses in his book, or the one we're currently following. Currently we invest in RRSPs and put extra money on our mortgage. Kind of a compromise. He recommends not putting any money into RRSPs until ALL your debt is paid down, including mortgage. The argument is that paying down debt is a guaranteed rate of return. So I'm doing what I always do in these cases and running complicated financial projections on Excel that will take me close to 2 hours, probably just to find out I don't want to change what I'm doing. Why do I do this to myself? Is there a disease label for people who overanalyze everything?

Anywho, I was delighted to calculate my personal rates of return. It was a pleasant surprise given the hammering our funds took last year.

In my RRSP, since about 3.5 years ago, we have an annualized rate of return of 6.5%. My portfolio is 37.5% Canadian, 25% International, 25% Fixed Income, and 12.5% US. Comparing that rate of return to a similar portfolio made up of the indexes shows that I'm handily beating the index which sits at a 3-year annualized return of 0.54%. Since my portfolio is constructed entirely of TD e-series Index Funds most of that difference is likely due to dollar-cost averaging. We kept investing the same amount even when the market was in the dumps.

Other rates of return:
Sarah's Spousal RRSP: 3.0%; not as great but dragged down by early mistakes
Sarah's Personal RRSP (invested way back when we were students and had some extra money around): 1.3% That's the value you get from banks my friends.

Sacha:15.5%. Wow. He benefited from us starting this right when the market was at its lowest. Not on purpose, just lucky.

Kees: 16.79% Again. Wow. Sure shows the value of timing considering the asset allocation in my fund and the boys RESPs is the exact same.

Oh, and just for funsies, of the 1003 mutual funds GlobeFund lists as Global Equity Balanced (that is, roughly similar portfolio allocation to me), only 3 bested me on 3-year annualized return. And of those 3 none of them had Canadian assets. Of the funds with Canadian assets, NOT ONE returned higher than me. And I'm not even getting paid to do this. Nor should I. It's really not that hard. That's the thing that makes me sick about the investment industry. A bunch of people getting paid too much to take too much from you and turn it into too little.

Do yourself a favor. Pick up this book and use it as your starting point to educate yourself about personal finance and investing. Yes it will take some time but you'll save yourself a bundle. At the very least, find a fee-only financial planner. Ditch your banker.

Friday, February 18, 2011

Are we that dense?

I was sad to read on Tuesday that the Edmonton city centre airport is essentially dead. I never gave it much thought until my wife and I were airlifted from 500km north of Edmonton to the Royal Alexandra Hospital so she could be treated for late pregnancy complications. The trip would have been close to an hour longer had we landed at the International. Same can be said for when her and our premature daughter were transferred to Grande Prairie. Instead, the driving time to and from the hospital was a mere 5 minutes.

As much as this disappointed me, I was happy to see that Edmonton city council is at least going to do something progressive with the land and reverse the pattern of development over the last 15 years that has seen Edmonton sprawl to absurd proportions. The development will see 30000 housing units built INSIDE the existing city. High density development is more ecologically sensitive and leads to more livable cities. Unfortunately, if planning principles aren't changed this will be a one-off rarity. Why is it that 75 years after the Greater London Regional Planning Committee legislated a greenbelt around London, North American municipalities, with few exceptions, have still not figured out the benefits of this arrangement?

The Metropolitan Green Belt allowed the purchase of land around Greater London that would be restricted to commercial and residential development. As such, the area of Greater London has been perpetually restricted to 1623 square kilometres. The demarcation is easily seen in the path of the M25 ring highway around the metropolis.
The area is officially referred to as the Greater London Urban Area. It has a population of roughly 8.5 million individuals and a population density of 5240 people per square kilometer. If Edmonton had the same population density it could fit 3.6 million people. Now some of you might cringe at that number. But consider the inefficient manner in which resources are used when individuals are spread out as much as they are in Edmonton. Before I elucidate some of the benefits of higher urban population density, let's consider other major urban areas in Canada. You will see that a dispersed populace is by no means ordained in Canada's cities.

1. Toronto
3972/km sq.
2. Montreal
4439/km sq
3. Calgary
1360/km sq
4. Ottawa
2207/km sq
5. Mississauga
2545/km sq
6. Winnipeg
1365/km sq
7. Vancouver
5335/km sq

The most densely populated city in Canada is Vancouver and it has a population density similar to that of London. According to Mercer's Quality of Living Index that ranks world cities by their livability, Vancouver is tops in Canada. It also received the honor of Most Livable City in the World by The Economist. The other highly ranked cities in Canada are Ottawa, Toronto, and Montreal, all falling in the top 25 on the Mercer Index. (As an aside, Toronto is a bit of an outlier. Although it may be livable, it's unfettered sprawl has led to the destruction of some of the best agricultural land in Canada. Had we planned ahead, Toronto could have come to rival London as one of the world's great cities.)

If you look at all the highest ranked cities in the world it appears the relationship is not straightforward, but more U-shaped. That is, there seems to be a sweet spot and it runs right around the 3500-6000 people per square kilometer. Obviously you'd reach a certain point at which you just couldn't fit any more bodies in an area without damaging living conditions. But there is certainly an argument to be made for more densely populated metropolises.

Before considering the advantages of this approach though we must fairly consider some of the advantages of urban sprawl as it has been practiced in the Edmonton-Calgary corridor and many other urban areas in North America. If it weren't advantageous for at least someone, it never would have been implemented. It does indeed lead to lower land and real estate prices, making housing more affordable. London has some of the most pricey real estate in the world. It does reduce traffic congestion significantly and leaves more space for wide open green areas within cities. Finally, it opens more land for development, thus encouraging investment and economic growth.

However, all of this comes with a lot of baggage and this baggage weighs down the argument in favor of concentration, not sprawl. First off, consider that suburbanization is essentially unsustainable in that it relies on a bygone era of cheap energy. Sure, energy still seems relatively inexpensive, but it won't last. Consider the recent leak from Saudi Arabia that their oil reserves are in reality 40% less than has been officially reported for many years. And a new report in The Guardian shows that it is not just turmoil in the Middle East and North Africa driving oil prices higher these days, but more chronic systemic factors. But, even if it were sustainable, would it be a good idea? Not really.

Suburbanization and sprawl cost money. A lot of money. Spreading municipal services over such a large area is costly. Public transportation is near impossible to develop efficiently. Sure, traffic congestion goes down, but travel time is higher given the increased distance. And since everyone is almost 100% reliant on their automobiles for travel, carbon emissions are much higher.

And let's talk about real estate. Sure, it is awfully nice that sprawl can keep property prices low. But look at the lifestyles this has spawned. Since houses were so "affordable" in the 2000s out in the suburbs, everyone and his dog bought one. But they needed a car to get to the job in the city that helped them pay for their house. Add up the mortgage and the car payment and all the gas commuting back and forth, and you already have one heck of an expensive lifestyle. Where did that lead us? The housing crash. Now you have crumbling suburbs in Florida and even the degradation of the uber-planned Disney community of Celebration. Maybe highly priced real estate isn't such a bad thing.

With London's restriction of sprawl, it now has some of the highest priced commercial real estate in the world. Finite land means development is forced inward and, just the same, supply is limited. As demand rises but supply remains the same, prices rise in step. Consider One Hyde Park, an upscale development built overlooking the iconic Hyde Park in London. Actually, to call it upscale is an understatement. Four penthouses have already been sold at 135 million pounds each ($216 million) and the average price per square foot of living space is 6000 pounds ($9600), making it some of the highest priced real estate in the world.

I remember talking to a gentleman at the London Symphony Orchestra. He was about our age at the time and he was talking about the high prices of housing within London proper. He lived on the south end of the city, within the confines of the Green Belt. Because of it's relative distance from the City of London (the financial district) and high priced buroughs like Westminster (the touristy area), Kensington and Chelsea, and Hammersmith and Fulham, the area had more affordable housing. But even if it were at the very edge of the city boundaries, it'd be only 20 kilometers from the City. Consider a southern borough named Merton, at the end of the Tube line. Just a little shorter than Edmonton city centre to St. Albert. The difference being? You can hop on the tube in Merton and be in the heart of the City of London in 30 minutes, even in the heart of rush hour. Check the Tube site. I'm not lying. Try getting from St. Albert to Edmonton City Hall in 30 minutes during rush hour. And you won't be able to read on the way either.

I spent a week visiting London, which is certainly not a long enough time to form a full impression of the city, but I can tell you, if I had to choose between it and Edmonton, I'd pick London. If my family were only a 30 minute drive away, that is. But even between Edmonton and Vancouver, I'd go with the latter. Densely populated, well planned cities like Vancouver, London, and Paris, have a certain je ne sais quoi, a certain energy that you can't explain but feel every moment you're there. Edmonton could have that if we plan it right.

I sincerely hope Edmonton city council is signaling a new direction for urban planning in the city I called home for many years. If so, it would be a sea change for urban development in the Canadian prairies, and could pull Edmonton far out in front of Calgary in terms of an attractive place to live. If not, it's going to come back to bite them many years from now when the era of cheap energy ends.

(Of course, this is all very rich coming from a guy who chose to settle down in a town of 7000 people with a population density of 254/km sq.)

Your average meal

Some estimates suggest that your average restaurant dish contains twice as many calories as should be consumed in one sitting. After writing my previous post on Boston Pizza's misleading nutritional guide, I decided to sit down with it and determine how much I used to consume when I ate there.

When I used to eat out, I treated it as a one time indulgence, even if it happened once a week. So I would have an appetizer, main dish, and dessert. And if I didn't know better, I would still do that, as do many others. When I see other diners eat at restaurants, this is the behavior they demonstrate. And I suspect this is the eating pattern of most North Americans, 75% of whom eat out roughly once per week, if not more. So how many calories would I consume if I ordered what I WANT to order at Boston Pizza?

Cactus Cut Potatoes (shared with one other person)
415 calories
Buffalo Chicken Sandwich
910 calories
Side order of fries
250 calories
Chocolate Brownie Pudding with Ice Cream
570 calories

Total caloric consumption=2145 calories
More than 500 calories over my entire DAILY limit

Even just with the sandwich and fries I'd be almost at my daily limit

Now, in fairness to Boston Pizza, they do have some healthy choices, and they even label the caloric content of their Delicious Alternatives Menu right in the menu. Some of their moderate-calorie choices are even surprising, like the Baked Seven Cheese Ravioli that rings in at 470 calories. The real problem with their food is not the food itself, but the serving sizes.

I've watched my father-in-law polish off the Boston Smoky Mountain Spaghetti & Meatballs. It is an absurd amount of food. To be fair to him, he is chronically normal weight and can't seem to gain weight even if he tries. But most people aren't blessed that way. If they polished it off they'd consume 1800 calories. The average individuals daily caloric limit.

So, as with any other restaurant excursion, here are some rules to consider:

1. No appies and no desserts.
2. No alcoholic drinks or pop. Stick with water or coffee.
3. Have half of your main dish packed up right away.

Of course, that doesn't mean you can indulge on truly special occasions like your birthday or anniversary. But if you are looking at weight control or weight loss, it better not be too often. And for those of you who think you can exercise your way out of this one, think again.

If I ate what I wanted to, I would have consumed 1600 calories more than I intended. To burn that amount off with exercise that I enjoy, say, jogging, I would have to go for a 6 mph run for 2 hours. Good luck with that.

Weight a minute

I've given up on Weight Watchers new PointsPlus program. I was following it diligently for 3 weeks and did not lose a single pound. Whereas before on the Points program I would have lost 3-6 pounds based on past experience. So I went to LoseIt!, a free online weight and food tracking program that you can also buy as an App on iPhone or iPod Touch. It's very popular and works strictly on calorie tracking. I'm still going to attend WeightWatchers to weigh in, because I don't have to pay once I'm back below 165. But I plugged my Weight Watchers tracking into LoseIt! and even though the WW PointsPlus value was the same each day, it could swing as much as 500 calories up or down per day. That's a huge difference considering 3500 calories in excess puts on 1 pound.

However, I have run into an unexpected challenge. I'd been alerted to the issue of inaccurate caloric information on food labels and restaurant nutrition guides by Dr. Freedhoff over at Weighty Matters. I took my boys out to Boston Pizza today. I always ask for their nutrition guide because, quite frankly, they have some pretty grim menu items as far as calories are concerned.

I ordered the Delicious Alternatives Chopped Chicken Salad, and because I felt like them, a side order of fries. My calorie budget per day is 1620 kcal. Thus, I try to aim for about 500 cal per meal, leaving a bit of wiggle room. My choices, according to the nutrition guide, put me at 530 cals. Perfect.

When my fries came, I knew something was up. It was a full-size dinner plate heaped to the ceiling with fries. I promptly split the plate in half and had the other half packed up. When I got home I did a little experiment and weighed the fries.

The nutrition guide puts a side order of BP fries at 157g with 250 calories. Actual weight served to me? Almost 300 grams. Just under double the serving size listed in the guide. Had I not noticed how large the serving was, or not known any better, I would have unwillingly consumed 250 extra calories. Ouch.

I guess it's a good thing in a way because it means their food isn't 100% standardized and prepackaged. But it still makes keeping under a daily calorie budget a little tough.

Wednesday, February 16, 2011

Jeff Rubin's at it again

If you haven't read the book Why Your World is About to Get a Whole Lot Smaller, by Jeff Rubin, you should. Rubin is former chief economist with CIBC World Markets who correctly predicted triple digit oil prices in 2007-2008 and foresaw the ensuing deep recession and plummet to low double digit oil. He is a proponent of peak oil theory and provides ample evidence to support it. The true value of the book though is the prediction of what our world will look like when the economy catches up to the reality of world oil supply. Definitely food for thought for all of us who have an environmental footprint equivalent to 8 human beings and have been living lives propped up by cheap energy for so many years. One of the arguments against peak oil always comes from Saudi Arabia. Opponents argue that the Saudi kingdom has so much oil we won't hit a peak for a very long time. As has been predicted by Mr. Rubin and many other proponents of peak oil theory, turns out the numbers have been fabricated for quite some time. You could expect as much from a tightly controlled autocratic kingdom that relies on a global perception of freely flowing oil to maintain its economic clout. Check out the goods at Mr. Rubin's blog.

Exercising to lose weight? You're wasting your time

I'll just direct you to Dr. Yoni Freedhoff's comment on the matter over at Weighty Matters. Enjoy!