Friday, March 16, 2018

Short Takes: Financial Advisor Knowledge, EI, and more

I managed only one post in the past two weeks, but it’s of significance to me:

Why I Retired

Here are some short takes and some weekend reading:

Robb Engen at Boomer and Echo gives the results from a study showing that financial advisors who give poor advice to their clients tend to act on this advice in their own portfolios. This suggests they don’t know that their advice is bad. This makes sense. I expect that most advisors’ financial knowledge is limited to whatever they learn from their employers’ training and sales materials.

Gail Vaz-Oxlade says our Employment Insurance (EI) system is broken. She has a number of examples of people encountering senseless denials and delays. This reminds me of working for a large company that had periodic “travel freezes.” This just meant it was harder to get approval for travel, but not harder in any sensible way. You just got hit with a time-consuming process and arbitrary rejections that had nothing to do with the merits of the travel. I’m not surprised to learn that EI does similar things. It’s hard work to reject only those who deserve to be rejected. It’s much easier to reduce costs by making arbitrary rejections.

Luke Alexander has some useful tips for air travelers. One concerns how airlines manipulate you using information about past searches for flights.

A Wealth of Common Sense tells the story of people who gamed lotteries for millions in profits. This is a case of government lottery designers failing miserably. I’d like to think that some lottery executive lost his job over the mistakes, but that’s probably too much to hope for.

Tom Bradley at Steadyhand reminds us that the important battle over mutual fund trailers rages on. We need to bring the costs of investing out into the open where investors can see them. In another interesting article, Tom explains that low interest rates and high debt can’t last forever. His assessment of the timing of higher rates: “Slow moving train wreck.”

Big Cajun Man explains the ins and outs of RDSP grants.

Preet Banerjee interviews Cait Flanders, author of the book The Year of Less.

Monday, March 12, 2018

Why I Retired

Although I’m younger than the typical retiree, I retired about 8 months ago. It may seem obvious why someone would want to retire, but I’ve been reflecting on what caused me to take the plunge when I did. There were a number of factors that influenced my decision.

1. Adequate savings

I wouldn’t have retired if I didn’t have enough savings. The thought of running out of money makes me conservative about my savings. But my best effort at analyzing my future spending and investment returns shows I have more than enough buffer. Even my wife seems (mostly) convinced we’ll be okay.

2. Autonomy

I’ve never been very good at doing what others want me to do instead of working on whatever interests me at the moment. As I age, my desire for autonomy has been increasing. My employer gave me tremendous freedom to work on just about anything that might help the company. Even so, work chafed me when I wanted to do other things.

3. Taxes

I’m not asking anyone to feel sorry for me that I had a good income and had to pay high taxes. However, I needed to make a decision for myself and my family, not for others. It was disheartening to see part of my income get more than half taxed away. This was most directly visible with bonus payments where I could see that the after-tax amount less than half of the pre-tax amount.

However, taxes on my working income weren’t the only factor. Because my RRSP and TFSA are full, I was adding to non-registered savings. So, I faced significant annual taxes on non-registered investment gains. It began to feel futile to continue earning and saving. Again, I don’t expect any sympathy, but you have to expect me to act in more own interests. I judged the after-tax benefit I’d get from more savings to be not worth the effort.

I tried taking a month at a time off work without pay, reasoning that I’d be eliminating the most heavily taxed part of my income. But in the end I decided to extend that to a full 12 months each year. There’s a good chance I’ll pay less income tax over the rest of my life than I paid in 2017, adjusting for inflation.

4. Wealth Taxes

Currently in Canada, we tend not to tax wealth. We tax incomes at the federal and provincial levels, and have sales taxes on consumption. The main exception to this lack of wealth taxes is property taxes on real estate. However, this could change. Thomas Piketty called for a huge expansion of wealth taxes in his book Capital in the Twenty-First Century. British Columbia recently expanded property taxes on homes worth over $3 million. This is a small start, but it could easily be just the beginning of the spread of wealth taxes.

I hope we don’t see expanding wealth taxes from spendthrift governments thirsty for more cash, but it’s hard to say this is an unlikely outcome. If this does happen, then any further saving I do would become completely futile.

5. Changes at work

My employer made some major changes to the company’s structure and the types of business they would seek. The management team had some big winners and big losers. While these changes didn’t affect me much, they created a natural breakpoint for me. This made it easier to bow out without feeling like I was abandoning my company.


In a less charitable moment, my wife might summarize all this as “lazy.” There’s probably some truth to this, but this is my blog and I get to put these reasons into my own context.

I had been thinking about retiring for some time, but the changes at work were what sparked me to pull the trigger. I wouldn’t have considered retiring if I wasn’t confident I had enough savings. Taxes weren’t a dominant consideration, but even if I wanted to save more to be able to afford a more extravagant lifestyle, incomes taxes and possible wealth taxes make this difficult anyway. I have more than enough things I want to do to fill my days, and I now have the autonomy to do what I want.

Friday, March 2, 2018

Short Takes: Buffett’s Bet, Closet Indexers, and more

Here are my posts for the past two weeks:

Foreign Withholding Taxes on New Vanguard ETFs

Measuring Returns in Different Currencies. I’m guessing this article bounced off most people, including any investment professionals who read it. The way we measure relative returns between countries if often wrong.

Here are some short takes and some weekend reading:

Ahmed Kabil has an interesting article on Warren Buffett’s bet against hedge funds as well as other types of long-duration bets.

Tom Bradley predicts a lean future for closet indexers, a term referring to mutual funds that charge fees as though they invest actively but are actually very close to being index funds. In Canada, such funds collectively hold hundreds of billions of dollars.

Ellen Roseman explains how vendors can get your new credit card information when you get an updated card.

Tom Spears goes through the things CRA auditors look for as red flags.

Robb Engen at Boomer and Echo wrote an interesting “annual letter to householders” modeled after Warren Buffett’s letter to shareholders.

The Blunt Bean Counter explains that there are only a few weeks left to set up a precribed rate loan to a family member at 1%/year.

Big Cajun Man has a thought that should be scary to some: “all debts must be paid.”

Tuesday, February 20, 2018

Measuring Returns in Different Currencies

Thinking about returns of stocks in different countries and in different currencies can get confusing. If Canadian stocks rise (in Canadian dollars) and U.S. stocks rise more (in U.S. dollars), almost everyone would agree that U.S. stocks performed better, even if the Canadian dollar rose by enough to make up the difference. This way of thinking makes no sense to me.

Suppose that in a particular year, Canadian stocks rise 10% when measured the usual way in Canadian dollars. In the same year, U.S. stocks rise 15.5% when measured in U.S. dollars. But the Canadian dollar rises 5% during the year. Most would agree that U.S. stocks had superior returns.

However, let’s look at this from a few points of view, starting with a Canadian investor who thinks in Canadian dollars. The Canadian stocks case is easy: a 10% gain. Now let’s consider the case of a C$10,000 investment in U.S. stocks with the Canadian dollar at 80 cents U.S. The investment is US$8000 and it rises by 15.5% to US$9240. But Canadian dollars rose 5% to 84 cents U.S. This converts to C$11,000 for a gain of 10% measured in Canadian dollars.

So, from the point of view of a Canadian investor, stocks in Canada and the U.S. performed the same, a 10% gain. If we go through the same exercise for a U.S. investor, the gain for Canadian and U.S. stocks will both be 15.5% measured in U.S. dollars. The same will be true for investors in any other country. Everyone in the world will see Canadian and U.S. stocks giving the same performance. So how can it make any sense to decide that U.S. stocks performed better?

This scenario was created to give the same returns for Canadian and U.S. stocks, but we get similar outcomes in other cases. If a Canadian investor sees Canadian stocks perform 5% better than U.S. stocks, then U.S. investors and all other investors in the world will see the same 5% better performance for Canadian stocks over U.S. stocks.

People think that stock returns measured by the country’s own currency are somehow the “actual return”. But this way of thinking is misleading. Returns are always relative. If every investor in the world sees Canadian and U.S. stocks as performing equally well in a particular year, how can it make any sense at all to decide that U.S. stocks performed better? The answer is that it doesn’t make sense.

Saturday, February 17, 2018

Foreign Withholding Taxes on New Vanguard ETFs

When Canadians own foreign stocks, taxes on the dividends are often withheld by the foreign country. This can apply with U.S. stocks as well. This is a complex area. The amount of taxes silently withheld and whether you can effectively recover them depends on the country and the type of account you have.

Yesterday, I said I wanted to know the foreign withholding tax drag on the new Vanguard Canada ETFs. Justin Bender has done the analysis. He has a pdf with the foreign withholding tax details for RRSP and TFSA accounts, as well as an article discussing other aspects of Vanguard’s new ETFs.

In a personal note, Justin goes on to explain “The withholding tax drag in a taxable account is only about 0.01% to 0.02% for the three ETFs.” Thanks, Justin.