Friday, May 19, 2023

Short Takes: InvestorLine’s HISAs, 24-Hour Trading, and more

I recently moved some cash into BMO InvestorLine’s high-interest savings accounts (HISAs) that are structured as mutual funds.  Their designations are BMT104, BMT109, and BMT114, and they purportedly pay 4.35% annual interest (which they can change whenever they like).  However, the way they report the monthly interest payments is so baffling that I wasn’t able to sort it out in my first 15 minutes of trying.  A further complication is the following text in the HISA description: “The Bank may pay, monthly or quarterly, compensation to your Dealer at an annual rate of up to 0.25% of the daily closing balance in the BMO HISA.”  I couldn’t find any evidence of such a charge, but I haven’t been invested for a full quarter, and I can’t yet say that such a charge isn’t buried somehow in the confusing reporting.  I have more digging to do before I can recommend these HISAs.

Here are some short takes and some weekend reading:

Preet Banerjee explains the dangers of Robinhood’s new 24-hour stock trading.  “If you don’t know the difference between market orders and limit orders, you’ll lose your shirt in extended hours trading.”

Justin Bender compares the all-equity exchange-traded funds XEQT and VEQT.

Friday, May 5, 2023

Short Takes: Loosening up on Spending, What Advisors Know, and more

My most recent post is:

Finding a Financial Advisor

Here are some short takes and some weekend reading:

Mr. Money Mustache has decided that he has become too frugal and needs to loosen up.  He’s not alone.  I know many people who spend way below their means, although they are greatly outnumbered by overspenders.  I’ve been told by high-end financial advisors that a high proportion of their clients are underspenders, but that’s an extreme example of survivorship bias.  Underspenders need to learn to spend a little in ways that will make them and others they care about happy.  Sadly, because people tend to embrace arguments they already believe, Mr. Money Mustache’s article is likely to resonate with overspenders more than it reaches underspenders.  Given the reach of his blog hopefully he’ll help a few people with these ideas.

Tom Bradley
explains the many things that nobody knows, but people think financial advisors do know.  He goes on to explain the things that financial advisors should know.  If you have at least $500k invested, you have a chance of finding an advisor who meets Bradley’s standards.  If you have much less, your chances are very low.

The Blunt Bean Counter explains the importance of tracking and documenting the adjusted cost base of an inheritance.  There is a lot of money at stake in capital gains taxes, but not right away, which makes people complacent.  Unfortunately, by the time you’re in a battle with CRA over a 5- or 6-figure sum in extra taxes, it may be too late to find the necessary documentation.

Friday, April 7, 2023

Finding a Financial Advisor

After reading yet another article on how to find a good financial advisor, I was struck by how useless the advice is for most people.  The problem is that how you should proceed depends on your income and net worth.  There is no one-size-fits-all solution.

Let’s consider a couple of examples to illustrate what I mean.

Case 1:
  Meet Amy.  She’s in her 30s, earns $65,000 per year, and has $10,000 saved.  She’s learned that how she invests can make a big difference in how much money she will have saved by the time she retires.  She knows she needs good advice and would like to find a financial advisor.  She’s also read that it’s best to find a fiduciary.

How should Amy proceed?  To start, Amy should get some hockey equipment to protect her body from all the doors that will slam in her face.  She is nowhere close to the type of client fiduciaries want.

Case 2:
Susan is in her early 60s, earns $800,000 per year, and has $10 million saved.  She is looking for other options than her big bank’s wealth services arm.

Susan should hire a bodyguard to protect her from the onslaught of financial advisors fighting their way to the front of the line to pitch their services to her.

The main takeaway here is if you’re looking for advice on how to find a good financial advisor, ignore advice where you can’t tell if it’s intended for those at your level of income or net worth.

Friday, March 24, 2023

Short Takes: Empty Return Promises, Asset Allocation ETFs, and more

I came across yet another case of a furious investor whose advisor had promised a minimum return, but the portfolio lost money.  There is a lot wrong with this picture.  On the client side, they often believe that advisors have some meaningful level of control over returns and that advisors can somehow steer around bear markets, which is nonsense.  Advisors can choose a risk level.  The only way to guarantee a (low) return is to take little or no risk.  On the advisor side, I can only assume that many advisors are under so much pressure to land clients that they make promises they know they can’t keep unless they get lucky.  All the while, the management above these advisors know full well what is going on.

Here are my posts for the past four weeks:

Giving With a Warm Hand

The Case for Delaying OAS has Improved

Here are some short takes and some weekend reading:

Robb Engen at Boomer and Echo sings the praises of Vanguard Canada’s Asset Allocation ETFs.  Owning these ETFs is a great way to invest.  If only investors could focus on how many ETF units they own instead of the day-to-day price quote.

Squawkfox warns us about the downside of rewards programs.  “Canadians should be wary of loyalty programs — not enticed by them.”

New research shows that happiness increases for incomes up to $500,000 instead of only $75,000 as previously believed.  In this case, what I find interesting is how widespread the news of the $75,000 limit on happiness travelled.  Because most people make less than $75,000 per year, we tend to like the news that richer people aren’t happier, and news outlets make more money when they report news we like.  This is why I tend to be suspicious when a news story tells me something I’m happy to hear.

Justin Bender
explains foreign withholding taxes on emerging markets ETFs.

Thursday, March 16, 2023

The Case for Delaying OAS Payments has Improved

Canadians who collect Old Age Security (OAS) now get a 10% increase in benefits when they reach age 75.  The amount of the increase isn’t huge, but it’s better than nothing.  A side effect of this increase is that it makes delaying OAS benefits past age 65 a little more compelling.

The standard age for starting OAS benefits is 65, but you can delay them for up to 5 years in return for a 0.6% increase in benefits for each month you delay.  So, the maximum increase is 36% if you take OAS at 70.

A strategy some retirees use when it comes to the Canada Pension Plan (CPP) and OAS is to take them as early as possible and invest the money.  They hope to outperform the CPP and OAS increases they would get if they delayed starting their benefits.  In a previous post I looked at how well their investments would have to perform for this strategy to win.  Here I update the OAS analysis to take into account the 10% OAS increase at age 75.

This analysis is only relevant for those who have enough other income or savings to live on if they delay OAS.  Others with no significant savings and insufficient other income have little choice but to take OAS at 65.

OAS payments are indexed to price inflation, and the increases before you start collecting are also indexed to price inflation.  So, the returns that come from delaying OAS are “real” returns, meaning that they are above inflation.  An investment that earns a 5% real return when inflation is 3% has a nominal return of (1.05)(1.03)-1=8.15%.

In many ways, the OAS rules are much simpler than they are for CPP, but two things are more complex: the OAS clawback and OAS-linked benefits.  For those retirees fortunate enough to have high incomes, OAS is clawed back at the rate of 15% of income over a certain threshold.  This complicates the decision of when to take OAS.  Low-income retirees may be eligible for other benefits once they start collecting OAS.  These factors are outside the scope of my analysis here.

A One-Month Delay Example

Suppose you’re deciding whether to take OAS at age 65 or wait one more month.  For the one month delay, the OAS rules say you’d get an additional 0.6%.  So, for the cost of one missed payment, you’d get 0.6% more until you reach 75.  After that, you’d be getting 0.66% more.  

For a planning age of 100, the real return from this delay is a little over 7%.  So, your investments would have to average 7% plus inflation to keep up if you chose to take OAS right away and invest the money.

All the One-Month Delays

The following chart shows the real return of delaying OAS each month for a range of retirement planning ages, based on the assumption that the OAS clawback and delaying additional benefits don’t apply.  The returns are slightly higher than they were before CPP payments rose 10% at age 75.

The case for delaying OAS isn’t nearly as compelling as it is for delaying CPP.  However, those with a retirement planning age of 100 get real returns above 4% for delaying all the way to age 70.  I plan to wait until I’m 70 to take OAS.

For a retirement planning age of 90, delaying OAS to 68 or 69 makes sense.  However, those whose health is poor enough that they plan to age 80 or less should just take OAS at 65.