Friday, April 29, 2016

Safe Stocks

In recent months I’ve encountered more investors than usual who see Canadian big bank stocks as safe investments. I guess the most recent one was one too many for me. I don’t believe that there is such thing as a safe stock, and as stable as Canadian banks have been, this applies to their stocks as well.

Investors in Canadian banks have been rewarded with decades of stable dividends and fairly consistently rising stock prices. This may continue or it may not. The pressure of new online banks that don’t have the costs of physical branches may bite deeply into big bank profits. This isn’t a prediction. It’s just one possible future. I don’t know what will happen to big bank share prices or dividends.

Investing substantially all of your investments in two or three bank stocks may feel safe, but it isn’t. I’m not saying to avoid bank stocks entirely. Approximately 7% of my portfolio is invested in Canadian big bank stocks indirectly through Vanguard’s exchange-traded fund VCN. But this is a far cry from investing 80% or more of your portfolio in banks.

Diversification is your friend. Many investors feel safe invested in big bank stocks, but they aren’t really safe.

Wednesday, April 27, 2016

A Financial Product I’d Like to See

When I retire I’d like to be able to invest in a fund holding a low-cost index of the world’s stocks that addresses longevity risk. The idea is that it would be like a low-cost annuity based on stock returns rather than bond returns.

The easiest way to describe this idea is first as a simple tontine structure. Imagine a large number of 65-year old women each placing $100,000 into a fund and the money gets invested in a low-cost index of the world’s stocks. Each month the fund sells some fraction of the shares and divides the money among the surviving women.

The dollar value of shares the fund sells would be chosen based on expected stock market returns and mortality expectations. The payouts would be calculated so that if these expectations turn out exactly right, then the monthly payments would rise exactly with inflation. However, the actual monthly payments would be based on actual stock returns and the actual number of surviving women. No money would go to the estates of women who die; this is the trade-off to get higher payments while still alive.

In a real fund of this type, we’d actually open the fund up to different deposit amounts, different ages, men, and couples. We could even introduce the option of payments to an estate after an early death (in exchange for lower payments while alive). We’d need to have actuarial rules to choose fair payout levels. We’d also need rules for how to adjust payment levels if longevity statistics change over time.

Another possible approach to this type of product is to have an insurance company take on the longevity risk rather than having a tontine structure based on actual mortality. The insurance company would essentially promise to deliver a certain number of shares (or more likely the cash value of the shares) each month. The payment levels would be determined by stock market returns and expected mortality statistics (actual mortality numbers would not affect payments).

All these details can be worked out by people skilled at actuarial math. The main thing I want is to get investment returns based on stock investments along with the higher payments that come from eliminating longevity risk.

I wouldn’t put all my money in such an investment, but I would put in a substantial amount when I retire. I’d then maintain a cash cushion to deal with stock market volatility, and I’d keep some fraction of my portfolio to manage on my own. I might also buy a standard simple annuity to serve as a bond-like version of this type of new investment.

Saturday, April 23, 2016

Short Takes: Self-Driving Cars, Mortgage Complaints, and more

Here are my posts for the past two weeks:

Phishing for Phools

How Much Do You Have to Learn to be a Good Investor?

Replies to Emails I usually Ignore

4 Reasons to Pay Cash for Cars

Here are some short takes and some weekend reading:

Mr. Money Mustache describes his cross-country road trip in a Tesla that drove itself. He also takes a look at how this technology will transform our world.

Canadian Mortgage Trends explains the top three complaints people have about their mortgages.

Larry Swedroe has a sensible take on annuities. My only criticism is that he should give more emphasis to annuities with built-in payment increases such as 2% per year. This isn’t guaranteed to protect you against high inflation, but it’s a lot better than no increase at all.

Glenn shares an interesting list of life insurance sales closing techniques that he doesn’t use himself.

Canadian Couch Potato offers some clear thinking about target date funds.

Big Cajun Man has some ideas for tricking yourself into saving some money.

Potato looks at the risks and rewards of the “hot potato” investing strategy. It’s not for me but it does illustrate how tempting such strategies can look.

Boomer and Echo give a detailed example of one way to draw an income from your savings in retirement.

My Own Advisor asks what your car says about you. To me cars are nothing more than a form of transportation that say nothing about me or anyone else.

Wednesday, April 20, 2016

4 Reasons to Pay Cash for Cars

I’ve long advocated paying cash for cars. This idea is completely foreign to many, but the advantages are compelling.

You’ll buy a more reasonably-priced car

It’s harder to hand over cash you’ve saved than it is to agree to future payments. Car salespeople are experts at spinning the numbers to steer you into a lease with payments that seem low. But you’re still giving away a huge pile of money when you total up the payments and future penalties. It’s much easier to understand what you’re really paying when save up for a car. And you’re much more likely to make a reasonable choice of car instead of burying yourself in debt.

Get a better deal

Buying a car is stressful and the salespeople have information advantages over you. When you’re paying cash, there are fewer ways to trick you. Car loans can seem cheap, but the reality of paying for many years may not be in the front of your mind. Things get worse with leases if the contract has clauses that will very likely have you paying penalties when you return the car.

0% financing doesn’t exist

We love to get things for free. But when a dealership offers either 0% financing or cash back, that’s an admission that the financing is not 0%. If there is no cash back alternative to the 0% financing, the car’s advertised price is still inflated. The truth is that the financing rate will be higher than your mortgage rate, but that won’t be obvious at all as your head swims in numbers.

Get off the debt treadmill

If you save up to buy a car you avoid debt. Once you’ve bought the car you can start saving a little each month towards your next car. Instead of being on a negative debt treadmill, possibly owing more than your car is worth, you get into a positive pattern. It feels good not to have car payment obligations.

Monday, April 18, 2016

Replies to Emails I Usually Ignore

The best part about running this blog is the feedback I get from readers. Learning about finances has definitely been a two-way street. However, I get a lot of less useful messages that I usually ignore. Today I respond to a few of them.

Dear Grant,

I just had a thought about your stock analyzer. Right now you want me to use my blog to help you sell access to it. But I think you can make much more money another way. Just hear me out. Suppose you just take your own money and invest it based on your stock analyzer’s recommendations? As you say, you can “make 5 to 15% in stock returns every month.” I know it’s a big departure from your current strategy, but it sounds way easier than trying to sign a bunch of people up to use it for a few dollars each. Enjoy your soon to be abundant wealth.

You’re welcome,



Dear Mat,

I would love to publish your ad disguised as “an article about trading financial derivatives.” Unfortunately, it doesn’t quite fit the theme of my blog. If I ever start up a blog about the fastest way to get rid of money, I’ll contact you.




Dear George,

Thank you for the one-week stock market forecast. I decided to wait until the week was over to see if you were right. Looking past all the double-talk taking both sides, your forecast did have somewhat of a coherent prediction, but it turned out to be all wrong. It’s enough to undermine my faith in forecasters.