Short Takes: Market Timing, Salary Secrecy, and more

Being busy on a business trip, I only wrote one post this week:

Business Travel Personality

Here are my short takes for some weekend reading:

Tom Bradley at Steadyhand paints an accurate picture of the challenges involved in trying to get in and out of the market at the right times.

The Blunt Bean Counter answers the interesting question, “Should You Discuss Your Salary with Friends, Co-Workers or Family?”

Canadian Financial DIY reveals a simple test to see if you’re likely to manage your finances well into your retirement. Spoiler alert: it’s math-related.

Million Dollar Journey has some ideas for saving money on a Disney World vacation. Another idea might be to pass on Disney World and do something else.

Big Cajun Man has an interesting theory on how to avoid having his barbecue run out of propane in the middle of cooking dinner.

Business Travel Personality

In the middle of another business trip, I’m once again struck by how the expenses are so much different from what they are in my personal life. My personality begins to change too: “The marble in the lobby isn’t shiny enough.”

I’m part-way though a trip with only 3 full days of meetings that will cost over $5000. Yet, I manage to play golf down south for 8 days for less than one-quarter of this amount. I’m not thrilled about the strange blue light in my current hotel bathroom, but I happily endure far worse during a vacation.

I think this is more than just a case of having a different attitude when someone else is paying. I actually tried to keep the costs of this trip down, but now that the money is spent, I find myself demanding that my treatment reflect the costs.

An amusing side note: there is a big sign at the entrance to to hotel stairway that reads “Stairway Trap”. A little googling revealed that “Trap” translates from Dutch more or less as “step”, but I found it funny the first time I saw it. You’re not likely to trap anyone if you tell them about the trap.

Short Takes: Top Stocks Drive Indexes, Clueless Investors, and more

Here are my posts for this week:

Is a 15% Return High or Low?

Choosing the Right Index for Comparison

Real Estate Agent Contracts

Here are my short takes on some weekend reading:

Larry Swedroe explains how the majority of market returns come from a modest number of stocks.

Canadian Couch Potato asks whether investors surveyed by Franklin Templeton are as clueless as they seem. I agree that the majority who believe they can reach their financial goals without equities are mostly delusional. However, I wonder about the 52% who believe the market declined or stayed flat in 2012. It’s true that S&P/TSX Composite was up 7.2%, but perhaps these investors’ answers were influenced by expensive Canadian balanced funds in their portfolios. Many of these funds were close to flat for 2012.

Larry MacDonald reports a bear’s take on Warren Buffett’s Berkshire Hathaway.

Million Dollar Journey explains how to file your rental income taxes. Claiming all your expenses properly is a critical part of succeeding as a landlord.

Big Cajun Man saved hundreds on his car insurance by telling the insurance company his daughter was away at university.

The Blunt Bean Counter has a wild story about rental car troubles in the Caribbean.

My Own Advisor explains the details of how Canadians can get caught by U.S. estate taxes.

Preet Banerjee thinks CMHC needs changing.

Is a 15% Return High or Low?

Stingy Investor pointed to a set of slides from Fairfax Financial Holdings that began with the quote “We expect to compound our book value per share over the long term by 15% annually.” Averaging a 15% per year return on a stock sounds great right now, but not too long ago it would have seemed very low.

Back in the late 1990s as tech stocks boomed, expectation for stock returns were well above 15% per year. These expectations turned out to be hopelessly unrealistic, but back then many investors wouldn’t have given Fairfax a second look if the company was only shooting for 15% per year.

I find this a useful reminder of how the world and people’s expectations can change drastically. It’s hard to even imagine a world with double-digit interest rates, but they could easily come back again. It’s dangerous to make your plans expecting today’s conditions to persist indefinitely into the future.

Every time I’m tempted to mortgage my house for half a million dollars and invest the proceeds, I think back to my brother- and sister-in-law who at one time had a mortgage at over 20%. That stops me pretty quickly. I don’t really have any appetite for debt.

Choosing the Right Index for Comparison

Rob Carrick points to the RBC Canadian Dividend Fund as an example that “shows why we need to reform the way investors pay for funds and advice.” He makes a number of excellent points about the problem of hiding the cost of advice in mutual fund MERs in the form of trailing commissions. However, I take issue with his claim that because this fund has beaten the S&P/TSX composite index over the past 5 years it “has been such a consistently good money maker.”

The Canadian S&P composite index is not the right index for judging the RBC Canadian Dividend Fund. A more appropriate index would be the Dow Jones Canada Select Dividend Index. The iShares ETF based on this index, XDV, beat the RBC Canadian Dividend Fund by 1.1% per year for the past 5 years, which is very close to the difference in their MERs.

Another possible index for comparison is the S&P/TSX Canadian Dividend Aristocrats Index. The iShares ETF based on this index, CDZ, beat the RBC Canadian Dividend Fund by 1.5% per year for the past 5 years, which is a little more than the difference in their MERs.

What has made investors money over the past 5 years is the choice to invest in dividend stocks. Among ETFs and mutual funds that focus on Canadian dividend stocks, RBC’s fund has not distinguished itself. There is no reason to believe that dividend stock outperformance will continue. If it doesn’t, then the high MER on RBC’s fund will be less palatable.