Thursday, February 26, 2015

TurboTax Giveaway

For many years now I’ve been using the downloaded Standard version of TurboTax to file my income taxes. I have three codes for online versions of TurboTax to give away to my readers. These codes are good for any one of Standard, Home and Business, or Premier versions.

I had intended to prepare my 2014 taxes and write a review, but I’m still waiting for so many tax slips that this is not feasible. I can say that TurboTax has worked very well for me in the past, although I prefer the downloaded version over the online version.

To enter the TurboTax online code giveaway:

Just send an email with the following things:
– Subject: TurboTax Giveaway
– Answer to the following skill-testing question: (4 x 7) + 3 – 1
– Use the email address listed at the “Contact” link (For those who are reading my feed, you’ll have to click through to my web site to get the email address.)

Another benefit of going to my site when reading a post is to see the comments other readers leave on that post. All entries received before noon Eastern Time on Thursday, March 5th will be considered for the draw. I will make a random draw without favouring any particular entries. I reserve the right to eliminate entries that I judge to be outside the spirit of the contest. Good luck!

Wednesday, February 25, 2015

Are Wealthy Canadians Double-Taxed?

Jonathan Chevreau waded into the current debate on TFSAs and made a case in favour of Tax-Free Savings Accounts. While others debate whether TFSAs allow the wealthy to shelter too much income from taxes, Chevreau’s main argument is that “TFSAs merely eliminate double and triple taxation.” This just isn’t true.

Chevreau goes on to explain “When you invest in non-registered or taxable accounts, not only does the capital you invest come after being subject to income tax, but all dividends, interest and capital gains generated from that capital will be further taxed each and every year.”

This so-called double and triple taxation is actually the first-time taxation of new income in taxable accounts. Your original capital is not taxed again. When your already-taxed money earns interest or dividends, only the new income gets taxed, not the original capital.

When you sell an investment, you only pay capital gains taxes on the growth in value, not the original principal. Once again, it is only the new gains that are taxed. In fact, only 50% of the new capital gains get taxed. So, wealthy Canadians are not only free from double taxation, but they pay no taxes at all on a significant portion of their returns.

An argument that actually makes some sense, but Chevreau didn’t make, is that when you view your finances after accounting for inflation, the parts of capital gains that are just keeping up with inflation do get double-taxed, in a sense. However, the 50% capital gains tax exemption more than remedies this problem.

I’m not in any hurry to pay more tax than I have to. I’m in a position to benefit greatly if TFSA limits get raised. But we shouldn’t try to justify giving more tax breaks to the wealthy with a bogus argument about double taxation.

Monday, February 23, 2015

How to Persuade People They’re Wrong about Monty Hall

The famous Monty Hall problem has been analyzed in great detail, but those new to it still get the answer wrong, even some professional mathematicians. I’ve had several arguments about it, but I’ve found only one way to convince people of the correct answer: offer to bet.

Here’s a version of the Monty Hall problem:
You’re on a game show. There are three doors. You’re told there is a car behind one door and a goat behind each of the other two doors. You’re asked to pick the door you think has the car. After you choose, the game show host, Monty Hall, opens one of the other doors to reveal a goat. Monty then asks you if you want to stick with your door or whether you want to switch to the other unopened door. Should you switch?
To make things more precise, here’s some additional information: before the game began, Monty intended to open a door you didn’t pick to show a goat (no matter what door you chose), and he intended to offer you a chance to switch.

It’s well known that the probability of winning the car is one-third if you don’t switch and two-thirds if you do switch. However, a great many people feel certain that the odds are 50-50 either way. The challenge is to convince them they’re wrong. The only way I’ve ever had success, particularly when the argument has an audience, is to offer to bet.

Suppose that Frank believes the odds are 50-50 and wants to bet with me. To simulate the game, we appoint a neutral party to play the role of Monty. Monty rolls a fair die where he can see it but nobody else can see it. The outcomes 1 and 2 mean the car is behind the first door, 3 and 4 the second door, and 5 and 6 the third. I let Frank pick a door. Then Monty tosses a fair coin (whose outcome only he can see) to choose which other door to open. The coin toss is only needed when Frank chose the correct door, but Monty tosses the coin every time to avoid revealing information. Then Monty reveals the die to show us whether Frank picked the right door.

If Frank is right about the odds, he will have the correct door half the time. If I’m right, Frank will have the correct door one-third of the time. Based on Frank’s 50-50 odds, it would be fair to bet $2 on each play. Based on one-third and two-thirds, it would be fair for Frank to pay me $2 when he has the wrong door and for me to pay Frank $4 when he has the right door. To split the difference, we make it so that I win $2 when Frank has the wrong door, and I lose $3 when Frank has the right door. This way, both Frank and I believe we’ll make money over time.

The goal with all this talk of betting isn’t to make any money. I’ve found that people like Frank start to have doubts when real money gets involved and they begin to think. They slowly realize that they only win if their original door choice matches the roll of the die, which will happen one-third of the time.

The first time I had a serious argument about Monty Hall, I was a summer student who was too foolish to realize it’s a bad idea to make a senior engineer look foolish over trivial matters. The talk of betting ended the public argument with “Frank,” and I got a private admission a few hours later that he was wrong. I wasn’t very popular with Frank’s crowd the rest of that summer.

So, it’s probably a social mistake to argue about Monty Hall in the first place, but if you actually want to change someone’s mind, my experience has been that offering to bet on Monty Hall simulations is very effective.

Friday, February 20, 2015

Short Takes: Online Bill Confusion, Core and Explore, and more

Here are my posts for this week:

Currency Exchange with Norbert’s Gambit at BMO InvestorLine

An Indexer Answers Investing Questions

Here are some short takes and some weekend reading:

Big Cajun Man isn’t happy about the barrage of different types of bill notifications he faces now that most of his bills don’t arrive on paper. My wife and I deal with this by paying bills early and setting our own notifications. We find we can pay bills just twice a month on our own schedule. Many bills get paid well before the due date, but that’s fine with me.

Findependence Hub has some sensible thoughts on a “core and explore” approach to investing.

Preet Banerjee’s latest video explains how RRSP contributions reduce your income taxes.

Canadian Couch Potato reports that iShares is introducing some new ETFs for U.S. and foreign stocks with attractively low costs that may be of interest to Canadians.

My Own Advisor doesn’t buy the assertion that high taxes on RRSP income in retirement is a widespread problem.

Boomer and Echo debate the merits of buying new or used cars. To me, the more important question is whether you save up and pay cash or whether you borrow or (shudder) lease.

Wednesday, February 18, 2015

An Indexer Answers Investing Questions

The world of investing simplifies tremendously once you make the decision not to try to beat the markets. Complications melt away when you just try to take what the market offers at very low cost. A Wealth of Common Sense gave a long list of “underrated questions that most investors don’t bother asking themselves.” Here I answer them from my point of view of a DIY index investor. The list of questions is long, but my answers are short.

What if I’m wrong?

I don’t make bets based on hunches, so it’s hard to go too far wrong.

What are this person’s incentives for giving me advice?

I ignore forecasters. I listen to people with advice, but I don’t deviate from my current strategy of low-cost indexing, which is incompatible with most advice.

What are the all-in costs for my portfolio?

Expressed as percentages of my entire portfolio, MERs are 0.08%, my ETF trading commissions and spreads cost 0.02%, and foreign withholding taxes cost 0.10%. My U.S. ETFs don’t report their trading expense ratios, but I’m confident that this rounds to 0.00%. All-in costs are 0.20% per year, or about 5% over 25 years.

What’s my reason for making this purchase or sale?

Apart from occasional rebalancing, I buy when I have new savings to invest, and will sell when I need money. I make no trades based on market predictions.

Maybe I should give myself a few days before making this change to my portfolio?

If I was planning to change my strategy or change my asset allocation, this would make sense. But adding new money to my portfolio requires no cooling off period.

What’s my time horizon on this investment?

My time horizon is roughly my whole life. I plan to invest money until I need it to spend.

Does this strategy fit my personality or is it a case of a square peg in a round hole?

I’m quite comfortable with my strategy.

When will I sell this investment?

When I need the money to spend in less than 5 years.

Have I looked at both sides of this trade?

I just assume the investor on the other side of my trades knows more than I do about short-term prospects. I plan to hold for a very long time and am not concerned about the short term.

How will I react if the markets don’t cooperate with my thesis?

My only real thesis is that stock market tends to go up over the long term. I suppose my small cap value tilt could be called a thesis as well. If markets stop going up over the long term, the world is in trouble.

Am I saving enough money?

I’m currently saving more than 50% of my take-home pay. That’s more than enough.

Am I blaming others for this mistake instead of taking responsibility for my own actions?

I’m the only one to blame for the mistakes I made in the past playing my hunches.

How much will this change in my portfolio really affect my performance?

It’s been a long time since I made any portfolio changes other than adding new money or rebalancing.

What is my asset allocation including all of my investments?

Long-term savings are 30% Canadian stocks, 25% U.S. stocks, 20% U.S. small cap value stocks, and 25% international stocks. Short-term savings are in cash and GICs.

What’s my edge in these competitive markets?

Because I choose not to compete in the markets, I don’t need an edge. I suppose you could say I get edges from my low portfolio costs and ability to remain cool when market gets volatile.

What does the party on the other side of this trade know that I don’t?

I assume the parties on the other side of my trades know a lot more than I do. By holding assets for the long-term, I don’t need to worry much about being taken advantage of in the short term.

Am I listening to the right sources when taking financial advice?

I believe so. I tend to read books about long-term thinking rather than listen to pundits discuss short-term matters.

What’s my maximum pain threshold for losing money?

I don’t know for certain. I slept fine through the enormous stock market losses in 2008-2009. So, we’d have to face something much worse than this to make me flinch.

Am I looking at the market value of my portfolio too often?

Probably, but I’ve been improving. I have a spreadsheet that computes many things including portfolio market value and rebalancing thresholds. It now sends me an email if I need to rebalance, so I’ve been more comfortable lately not looking at the spreadsheet for days at a time. Eventually, I hope this grows to weeks at a time.

Do I understand the risks and expected returns for this asset?

I do understand the risks of my ETFs and how these risks differ between the short term and the long term. I hope for compound average expected real stock returns of 4% per year over the long term. But, I’ll be fine financially if I get substantially less.

Could I explain my investment strategy in a 30 second elevator pitch?

Index investor. Maybe for the rest of the 30 seconds I’ll practice juggling.

Do I have a reasonable time frame in mind for my portfolio?

I think the rest of my life (and my wife’s life) is reasonable.

What is the underlying liquidity in this investment vehicle?

It’s hard to get too much more liquid than the four extremely popular ETFs I own (VCN in Canada and VTI, VBR, and VXUS in the U.S.).

What are the tax complications?

Tax complications are minimal for RRSPs and TFSAs. In my non-registered accounts I hold only VCN (because of the favourable dividend treatment in Canada) and VTI (because it has the lowest dividend yield of the other three ETFs). Overall, my taxes are quite simple.

Am I being patient or just stubborn?

This question seems more relevant to active investors holding on to a poorly-performing stock. In any case, index investing requires patience (absenteeism helps, too). I’ve got the patience, but I’ve not mastered being absent. I still pay too much attention to my portfolio.

Am I diversified enough?

It’s hard to be more diversified than owning just about every stock on the planet. Some will criticize the lack of bonds in my portfolio. The diversification benefit of bonds is minimal and is swamped by the fact that bonds’ expected returns are so much lower and expected stock returns. The main benefit of bonds is controlling short-term volatility. Over 20 years or more, there’s not much difference between historical stock and bond volatility.

What are the alternatives to this investment?

Again, this question seems more suited to active investors. I have choices of different index ETFs to cover the various asset classes. I’ve made my choice and have no current plans to change it.

Will my assets cover my future liabilities?

If I work for a little while longer, the answer is yes.

Do I understand the risks involved with this strategy?

My strategy is fairly simple. The main risks are that I’ll become either fearful or overconfident and deviate from my strategy. Other than that, multiple decades of poor stock returns world-wide could cause me problems. But I’m guessing this would be a sign of much bigger problems than whether I have enough money to travel 4 times per year.

What’s my investment philosophy?


Am I trying too hard?

I used to try too hard. Now I just take what the markets give me.

Does this person offering advice on TV have the same time horizon as I do?

I rarely listen to advice from talking heads on TV, so their time horizons don’t matter much to me.

Am I anchoring to current or past price points?

This is another question mainly for active investors. No, I don’t anchor to past price points.

Are this portfolio manager’s past results too good to be true?

I don’t invest with active portfolio managers, so their past results aren’t relevant to me.

Am I allowing my confirmation bias to cloud my judgement?

I managed to break out of my confirmation biases when I made the decision to abandon active stock picking. I’m sure I suffer from confirmation biases in some parts of my life, but it isn’t relevant to indexing.

Am I the sucker here?

Seems unlikely. I suppose some new government could simply confiscate or tax away my savings. Or maybe all index funds could be forced to include “investments” in some form of public spending.

Am I chasing past performance?

In a sense. I base my return expectations on roughly the past century of real stock returns less some margin for safety. But I don’t chase recent past outperformance.

Am I imagining that past market scenarios were easier than they really were at the time?

I know that we are all prone to 20/20 hindsight. However, this isn’t relevant to buy-and-hold index investors.

Is this data important or just interesting?

I can only assume that this question is relevant to those looking for an edge over the markets. I’m not seeking such an edge other than accepting short-term volatility in exchange for higher expected returns.

Am I working with a marketing firm or an investment firm?

I own Vanguard ETFs. Vanguard is definitely an investment firm.

How did I react during past periods of market turmoil?

I slept fine and didn’t sell during the tech crash and then again during the 2008-2009 financial crisis.

Do I really understand my appetite for risk?

My biggest test was the 2008-2009 financial crisis, and I didn’t have any trouble.

Am I practicing first or second level thinking?

I strive to use second-level thinking for most things in my life, but it isn’t necessary for index investing as long as I don’t stray toward making some active bets.

Does this person have my best interests in mind?

I assume most people don’t have my best interests in mind.

Can I stick with my process when things don’t go as planned in the future?

My plan allows for significant volatility of year-to-year returns. So, it would be difficult for things to work out differently from my plan. However, I believe I can stick to my process.

Am I anchoring to a bad investment or staying disciplined to a good process?

This is another question more relevant to active investors. Anchoring doesn’t seem to be a problem for index investing.

One thing that should have been clear reading through all these questions and answers is that index investing is a lot simpler than trying to beat the market in one way or another.