Friday, August 26, 2016

Short Takes: Insurability for Life Insurance, RESP Catch-22, and more

I only managed to write one post in the past two weeks, but it seems to have resonated with quite a few readers:

The Average Canadian Family’s Taxes

Here are some short takes and some weekend reading:

Life Insurance Canada explains one of the tactics an insurance company uses to make it hard to convert your life insurance at work to an individual policy (see the second case in the article). I’ve often said you can’t count on being able to maintain insurability with a group life insurance plan if you become ill.

Big Cajun Man explains the catch-22 of having to pay tuition before being able to withdraw from an RESP.

Larry Swedroe summarizes interesting research by Hersh Shefrin and Meir Statman into investors’ irrational preference for dividends. It turns out that there are several behavioural issues at play.

Million Dollar Journey answers a question from a reader whose financial position looks strong but contains substantial hidden risk.

Boomer and Echo reviews Fred Vettese’s book The Essential Retirement Guide: A Contrarian's Perspective. I reviewed this book as well.

My Own Advisor answers a reader’s question about how to build savings on a modest income.

Thursday, August 25, 2016

The Average Canadian Family’s Taxes

The Fraser Institute recently came out with a study of how the average Canadian family’s total tax bill hs changed from 1961 to 2015. The emotional impact of their conclusions exploits the fact that the “average” family is different from the “typical” family.

Before continuing with some criticism of this report, let me explain that I’m not on either extreme end of the often polarized debate on taxes. I’m no fan of government waste. Canada’s public sector does a poor job of removing employees who do their jobs poorly. This leads to an accumulations of poor employees and is demoralizing for strong public sector employees who must work alongside poor employees. All that said, I’m not a cheerleader for reducing all forms of public spending either.

When the Fraser Institute examines the “average” family’s income, they are adding up the incomes of all families and dividing by the number of families to get $80,593. If this figure sounds high, it’s likely because you are thinking of the “typical” or “median” family whose income is such that half of families make more and half make less. Most families make less than $80,593 per year, but smaller numbers of high income families drive up the average.

While the average family paid $34,154 in taxes in 2015, the typical family paid quite a bit less. The $34,154 figure is meant to inflame us, but it is mainly a reflection of the fact that people with high incomes pay a lot of tax. A more meaningful figure for most people would be how much the median family pays in taxes. Even more meaningful would be to give the taxes paid for each of several family income levels. That way you could look up your income and decide whether or not to be outraged by the total amount of tax you pay.

Another prominent conclusion of this report is that “The average Canadian family now spends more of its income on taxes (42.4%) than it does on basic necessities such as food, shelter, and clothing combined (37.6%).” We’re supposed to be angered by this fact, but there are two changes that led to taxes growing larger than the cost of necessities. One is that taxes rose, but the other is a positive thing: the cost of necessities has risen slower than our incomes since 1961.

I would be very happy to see Canada’s public sector become more efficient and consume less of our incomes through taxes, but the methods used in this report to make the case that taxes are high don’t sit well with me.

Friday, August 12, 2016

Short Takes: Skewering Market Pundits, Poor Market Timing, and more

Here are my posts for the past two weeks:

Do You Pay Investing Fees?

Is Your Allocation to Stocks Too High?

Here are some short takes and some weekend reading:

The Reformed Broker tears a strip off market pundits who make extreme predictions.

The Irrelevant Investor explains that the S&P 500 has gone up at 18.08% per year for the last 7.5 years, but investors in SPY (an S&P 500 index fund) earned only 11.82% because of poor market timing. Over the entire period, this is a difference of about a factor of 1.5 in invested assets, although the author is being somewhat misleading saying the difference is 115%. The article is very interesting despite this blemish.

My Own Advisor has decided on a goal of being financially independent by age 50. I’d say his plans look more reasonable than many early retirement enthusiasts. I’ve seen people hoping to retire in their 30s assuming their current spending level will not change in the future. Some margin for potentially higher future spending is needed. How can a 30-year old know how he’ll want to live at age 60?

Robb Engen has decided to push back his planned date of financial independence to age 45. I never had a target date for becoming financially independent; I just worked at it steadily. Each of us finds motivation in different ways.

Million Dollar Journey explains how he saves money on family vacations.

Wednesday, August 10, 2016

Do You Pay Investing Fees?

Now that phase 2 of the new Client Relationship Model (CRM2) is fully in effect, we have new possible answers to the question “do you pay investing fees?” Here is a list of possible answers to this question in roughly increasing order of investor knowledge, including two that are specific to the CRM2 changes.

No, there are no fees with my mutual funds.

Blissful ignorance.

No, the mutual fund company pays my advisor.

Not thinking it through. Why would the mutual fund company pay your advisor with anything but your own money?

My mutual funds used to be free, but my latest statement has a bunch of new fees.

Not realizing that the fees were always there.

Yes, but it’s just 2% or so.

Not understanding that the fees compound to big money. Might think that the 2% applies just to returns rather than the full amount of your savings every year.

Yes. I thought the fees were small, but my latest statement shows they’re much more than I thought.

Seeing the amount in dollars has much more meaning for most people than percentages. I’d like investors to see the dollar cost of the mutual fund’s entire MER, but showing advisor compensation is a start.

Yes, but you have to spend money to make money.

That’s an expression that applies in many areas, but not investing. All the evidence says that professional money managers very rarely earn excess returns that make up for all the costs investors pay.

Yes, but what choice is there but to pay the high fees?

Understands that fees are high, but isn’t aware of lower cost options.

Yes, but I keep fees to a minimum.

Has found a low cost approach. There are a number of possibilities here:
  • A low cost mutual fund company that offers some advice directly instead of paying commissions to advisors.
  • One of the new breed of advisors who keep costs low.
  • Robo-advisor.
  • Do-it-yourself approach.

I’ve encountered people at each point in this spectrum of answers. Are there any other common answers to this question about fees?

Tuesday, August 2, 2016

Is Your Allocation to Stocks Too High?

I recall many articles advising investors to reconsider their appetite for risk in the aftermath of the 2008-2009 stock market crash. However, today is a much better time to do this.

After the crash, “experts” said that while it’s foolish to sell stocks when they’re cheap, reducing your percentage stock allocation to a more comfortable level is smart. This is nonsense, of course. Selling low is dumb whether you have a smart-sounding reason or not.

It’s impossible to say exactly when stocks are too expensive or not, but it seems safe to say that they’re not very cheap right now. This makes now a good time to think about whether you’re taking on too much risk. Try to remember how you felt back in 2008-2009. How would you feel if that happened again?

Personally, I have no intention of reducing my allocation to stocks, but now is a much better time to do this than it was 7 years ago. Sadly, though, individual investors are more likely to decide to increase their allocation to stocks today than they were 7 years ago.