November 30, 2008

Fearing The Wrong Risks (With Examples)

Things that'll knock you down you don't even see coming --- Bruce Springsteen

Last week, I was looking at webcams. The warranties run two years (Logitech) or three years (Microsoft). That's good. I expect gadgets to have a warranty of at least a year. The cashier still suggested I buy an extended warranty. The cost isn't much, but I've got a bigger issue: protecting data.

I make daily automated backups on external hard drives but these copies are at home too. Years of valuable information could disappear by fire or theft. In contrast, a defective webcam would be a minor, inexpensive inconvenience.

According to the Harvard Business Review, we worry about the wrong risks by
  1. focusing on the recent and near term
  2. spending too much protecting against the wrong risks
Smoking reduces lifespans by about 5 years. Flying reduces lifespans by a day. Yet smokers worry about flying and continue smoking (in the few remaining designated areas). We worry about minuscule levels of pesticides on veggies but ignore the carcinogens from grilling burgers over charcoal.

We're irrational. According to David Myers, four fears influence our misguided intuition:
  1. we fear what our ancestors feared
  2. we fear what we can't control
  3. we fear what's immediate
  4. we fear what's most readily available in our memories
Inherited Fears
All of us are born with a set of instinctive fears --- of falling, of the dark, of lobsters, of falling on lobsters in the dark, or speaking before a Rotary Club, and of the words "Some Assembly Required." ---- Dave Barry
We no longer live in the wild, but we fear spiders, lizards and snakes. Combined, those creatures kill one American a month.

Out Of Control
If everything seems under control, you're just not going fast enough.
--- Mario Andretti
We fear food preservatives which we can't do much about. So we pay extra for organic products. However, we gladly ski and drive faster than conditions warrant (especially with all-wheel-drive).

The Immediate
Fear is an emotion indispensable for survival --- Hannah Arendt
We ignore the long term effects of a poor diet or lack of exercise because nothing bad happens now. This is the buy now/pay later mindset. We worry about flying especially at takeoff and landing. Here are other examples
  • strokes take twice as many lives as accidents
  • diabetes takes four times as many lives as homicides
The Memorable
What sticks in our mind and colors our judgment is our own vivid experience.
--- David Myers, Intuition
I recall reading that drowning causes more deaths than fire. Yet fires make the TV news and probably cause more fear.

Thanks to Jaws, we are afraid of shark attacks. In the last century, less than 70 deaths have been reported worldwide.

Lack of fear can be idiotic. Alligators look inert when sunning themselves on land. While on a bus tour bus of the wilds of Florida, we saw a family on the side of the road snapping photos of an alligator mere metres away. Our driver stopped and honked until the foolish foursome got back into their car. Who knows what they did after we left.


November 23, 2008

New Seth Godin - Tribes - Hear It For Free

One's mind, once stretched by a new idea, never regains its original dimensions.

The mind, once expanded to the dimension of larger ideas, never returns to its original size.
--- Oliver Wendell Holmes

I discovered Seth Godin through my friend Peter McGarvey over at Sparkplug a couple of years ago. I've since listened to most of his audiobooks and acted on numerous ideas since we share a similar perspective.

Seth keeps doing new things. You can listen to him read his entire new book free from Audible but you'll need to setup an account, install the Audible player and put up with copy protection. Since I listen to books on MP3 CDs in my car, that's a problem. Nonetheless, I went through the hoops and started listening. I later found you can get unprotected MP3 or AAC versions too. So I finished listening in my car.

Seth Do?
What does Seth do? He helps you think in fresh ways. And become remarkable (worth talking about). Best of all, he teaches us to farm, rather than rely on him for fresh produce.

How can Seth give away an entire book for free? Because we pay him with attention and by spreading his message. Book sales probably increase too.

Low Expectations
Someone's knocking at the door.
Somebody's ringing the bell.
Do me a favor, open the door and let 'em in.
--- Paul McCartney, Let 'Em In
I benefited from the insights and encouragement in Seth's previous book, The Dip, which explains when to quit and when to keep going (see my thoughts).

This time I didn't expect much because of what happened during the summer. Seth launched a closed website with a weird spelling: At present, the tribe (or "triiibe", as they call themselves) has voted to keep everyone else out, except by invitation. I didn't join because I prefer open environments. Even if everyone can join, everyone won't. Those that do may not participate. You can still end up with a small group this way.

Had Seth exhausted his ideas and become conventional?

Out of Ideas?
Tribes, has the subtitle "We Need You To Lead Us". Don't worry. This is not a conventional book about leadership, management and employees. We can all be leaders if we choose. Tribes has many good ideas --- new, revisited and remixed.

A tribe interconnects a leader, a group and an idea. Here are examples: coworkers, soldiers, The Sopranos, Grateful Dead fans, the United Way, a church, readers of this blog, ...

Do You Connect With Seth?
Seth isn't for everyone and does not want to be (see the woodpecker quote). If you've never listened to him before (even if you've read his books), get the free unabridged audio of Tribes. He does not sound like a professional book reader and the book starts off slow. Stick with it for 30 minutes and you'll see whether his ideas touch you. I'm betting you'll like his.

Feel free to share your thoughts.


November 15, 2008

What Happened on Take Our Kids To Work Day?

Take Our Kids To Work Day is an an opportunity for grade nine students to see what their parents do. This year, my son Jeevan accompanied me in anticipation of what he called a "businessman's lunch". I planned a (slightly better than) typical day. 

I wanted Jeevan to see elite life insurance advisors with revenue of at least $1 million. Since there are many in downtown Toronto, I tried to arrange a presentation for in a prestigious office tower like Brookfield Place, First Canadian Place or Scotia Plaza. The timing didn't work out.

9:00am Left Home (Etobicoke)
We were both nicely dressed with shiny shoes. I normally arrange meetings after most of the morning traffic has passed. This saves travel time.

9:45am Meeting An Advisor (Markham)
We arrived on time to meet an advisor who asked for help with "10-8" Leveraging, which uses life insurance to magnify the benefits of financial leveraging while shrinking the risks. We were then meeting his client.

The advisor arrive late for no good reason --- around 10am. This is very rare. During our meeting, he kept jumping between topics. He also kept answering his phone, which is rude. That's not how you treat an invited guest. I avoid advisors who behave like that. I focus on advisors who apply the four habits of highly referrable people

My son got a gift which he better not use: a wine bottle opener.

11:40am Meeting A Client (Markham)
Although scheduled for 11 am, the client arrived 40 minutes late He brought his accountant. As discussions began, the client kept checking messages on his Blackberry. However, he became more engaged within a few minutes. Both he and the accountant asked thoughtful questions. They had seen proposals for 10-8 leveraging before. 

Although questions remained, we left around 12:10pm to keep on schedule. In the car, Jeevan said that he followed most of the discussions. He asked what "YRT" meant. It's short for Yearly Renewable Term, a type of insurance scale in which rates increase every year to mirror mortality rates. To minimize the costs, the death benefit decreases each year to the minimum that Canada Revenue Agency requires for tax-exempt status. Who would want this? Wealthy clients who want to maximize tax-sheltered growth by minimizing insurance charges. Typical deposits are $100,000 to $500,000 a year for three to five years. 

1:00pm Lunch With An Advisor (Oakville)
Where can you get root beer in bottles?

Most leading insurance advisors are in their late 50s or older. They prefer wine over root beer. I wanted Jeevan to see there are successful younger advisors too. So we had lunch with an advisor under age 30 who is part of a very successful team (mainly selling "10-8" leveraging). We all had root beer in bottles. 

3:30pm Harry Rosen (Mississauga)
We made a pit stop between appointments. Two of my Italian suits needed unusual repairs: one has a broken zipper (which I didn't notice until I was in Sudbury just before a group presentation) and the other has lining that came apart at the seams in a sleeve. This proves that things go wrong regardless of price. While there, I bought an overcoat from the broken zipper company, the triumph of hope over experience. Do we ever learn?

4:00pm IFB Summit (Toronto Airport)
To end the day, we went to Independent Financial Brokers Summit to see the final speaker: Heath Slawner on the Power of Persuasion. This was based on the eye-opening work of Dr. Robert Cialdini, who I've seen twice. We all need reminding. I wrote about the six universal principles of infuence earlier. 

6:00pm Heading Home
Even though everyone was leaving the parking lot at once, we were on time for Take Our Kids Home For Dinner.

November 9, 2008


Many financial bloggers write about investing. Despite regular contact with investment advisors at different firms and access to other experts like fund managers, I keep my thoughts to myself. 

Months ago, a reporter for a major newspaper asked how I invested. I explained but my approach lacked pizazz. You can judge for yourself from the notes I prepared for the interview.

Actuaries measure and manage risk. I focus on financial risks. Here are the four "obvious" ones:
  1. living too long (longevity)
  2. dying too soon (mortality)
  3. getting sick (morbidity)
  4. getting disabled (disability)
A fifth risk often gets overlooked: overpaying taxes through ignorance or inertia (taxevity). Few realize how effective life insurance can be when properly structured.

Mainly mutual funds bought years ago. I use two investment advisors in London Ontario. I've never met them. I'd like to consolidate with one advisor in town but have not found the right person. Rather than investing more, we've focused on paying off our mortgage to increase cashflow for investing. On my own, I invest through universal life insurance, which allows tax-free growth like RRSPs (but without the restrictions on maximum deposits or forced withdrawals).

Start of Career
In 1984, I graduated from the actuarial science program at The University of Western Ontario. I worked at several major life insurance companies, starting with Metropolitan Life in Ottawa. I specialized in the design, manufacture and marketing of life & health insurance products. In mid-2005, I switched to a nontraditional actuarial role: helping advisors reduce the financial risks of their key clients. I donate time to help the general public by writing this blog. There is very little similar content online.

Start of Investing
My parents gave me a solid grounding in the importance of saving. As a child in the 1970s, I started putting money into a savings account and then GICs. My 14 year old son is following this pattern too. He likes compounding: your interest earns interest.

Thanks to scholarships, summer jobs and support from my parents, I graduated from university debt-free in 1984. I started working and making maximum RRSP contributions. I found an investment advisor by walking into an investment firm (a reverse cold call) and began investing nonregistered savings in mutual funds. As a novice, I didn't realize that loads were negotiable. I got charged a hefty 9% up front. I didn't know that investment advisors got hidden perks like cruises. I thought my advisor had the training and obligation to put my interests first. When I smartened up, I switched to my family's investment advisor in London, ON. This new fellow advised me to buy "can't lose" shares, options and warrants. And lost. By the late 1980s, I decided to stick with mutual funds.

Investment Strategies
Unclear. Over the years, I have known many experts: investors, investment advisors, fund managers, etc. I see many different approaches to investing. Each has merits but they conflict. No one knows what's going to happen. For example, we knew that gas prices could only go up (diminishing supply, insatiable worldwide demand) but now gas has dropped below 90 cents a litre again. 

Emotion leads to bad decisions.  We're reluctant to sell and buy at the "right" times. Yet we get excited about investments and agitated by blips in the returns. Many want to "get rich quick". At the 2007 Real Estate and Wealth Expo in Toronto, audience members were enticed to buy foolproof investing secrets for $995 or more. It is better to learn investment basics, sow seeds, nurture them and wait for the harvest.

Portfolio Returns
Unknown. I generally buy/hold but will make changes on the rare occasions where my investment advisor makes recommendations (one does, the other doesn't).

Stages Of Life
I've had a lifelong fear of outliving my savings during retirement. How horrible to have nothing left because we are living longer. What if an illness strikes or we need expensive long term care? A lifetime of savings can quickly disappear. How horrible. This fear of poverty --- the most basic of the six fears Napoleon Hill identified --- provides a strong incentive to save, spend prudently and increase earnings. 

Best Decision
Real estate. We changed our principal residence three times during down markets. We are close to paying off our mortgage. This would give a great sense of accomplishment ... unless we move again.

Worst Decision
Trusting my first investment advisor to put my interests first. I deserved unbiased advice but got high fees and poor returns. My advisor got nice commissions and hidden incentives like cruises. Where's the sport in taking advantage of someone who know less?

Investment Hero
Probably Warren Buffett. He invests for the long term, skips fads, shares his insights and understands insurance. I favour passive over active, low MERs over high, indexes over mutual funds. 

Who can I really trust for investment principles? I have decided that's going to me and I am learning. I'm reading financial blogsand classic books like The Richest Man in Babylon. The general advice is 
  • pay yourself first: live on less than you earn
  • invest
  • never spend the invested money
  • harness the power of compound interest
My extension is to invest inside universal life where growth is tax-sheltered (like RRSPs) and savings are accessible tax-free using bank loans. We will take advantage of the Tax-Free Savings Account too. None of this is exciting but neither is a financial rollercoaster.


November 2, 2008

The Four Steps In Wealth Management

The way to wealth depends in just two words, industry and frugality. – Benjamin Franklin

There are four steps in wealth management
  1. Create wealth
  2. Grow wealth
  3. Preserve wealth
  4. Transfer wealth
Simple to say but hard to do. Reducing taxes and reducing risk helps in each step.

Create Wealth
Ability is a poor man's wealth. — John Wooden
To create wealth, you develop, apply and improve your unique skills by getting through what Seth Godin calls the dip. Easier to say but certainly doable. And well-worth doing.

What if your opportunity to create wealth gets stolen by
  • premature death
  • disability
  • a critical illness like a heart attack, cancer or stroke
Insurance maximizes your potential wealth in several ways.

Life insurance immunizes your heirs from your premature death by providing cash to repay debt such as a mortgage, cover living expenses for your family. Your business partners can use insurance on you to buy your shares so your heirs get cash and the partners get ownership of the company.

Disability insurance replaces income lost through disability. Some universal life (UL) insurance policies have a disability benefit which can pay out the cash value of your policy tax-free. You can also use the savings in permanent insurance as collateral for tax-free loans.

You can offset the financial losses from a severe illness with a critical illness insurance (see The Basics). This can take the form of a separate policy or an add-on your universal life.

Grow Wealth

The way to become rich is to put all your eggs in one basket and then watch that basket. – Andrew Carnegie
You invest your wealth to multiply your wealth. Compound returns do wonders, especially when tax-sheltered, yet most investors have
  • nonregistered investments with taxable growth
  • registered investments with temporary tax deferral until accessed
To improve results, you can reallocate a portion of your nonregistered investments into universal life. Why? For permanent or temporary tax deferral. Investment growth is tax sheltered as with an RRSP or the Tax-Free Savings Account (TFSA). But you're not limited by government-mandated maximum contributions, which are inadequate for the wealthy.

Preserve Wealth
It requires a great deal of boldness and a great deal of caution to make a great fortune, and when you have it, it requires ten times as much skill to keep it. – Ralph Waldo Emerson
To preserve your wealth, you want protection from taxes and creditors. With universal life insurance, your investment growth is tax-sheltered until withdrawn. You get permanent deferral if the growth is paid out as part of the tax-free death benefit.

You can get protection against your creditors by proper structuring (see the companion Riscario wiki).

Transfer Wealth
Never forget: the secret of creating riches for oneself is to create them for others. – Sir John Templeton
You can't take your wealth with you when you die. When you transfer your legacy, why not bypass taxes, creditors and public scrutiny. Your life insurance death benefit goes directly to your beneficiaries without passing through your estate or Will. This means
  • escape from the probate fees on your estate
  • protection from the claims of creditors, if properly structured
  • privacy, since your Will becomes a public document
The tax-free insurance proceeds can be used to offset the taxes and costs at death without burdening survivors or requiring the sale of assets like a family cottage. This leaves more of your wealth intact.

Wealth is not in making money, but in making the man while he is making the money. – John Wicker
There's more to wealth than financial rewards, but the financial rewards are nice too. All the best with your voyage.