Friday, October 22, 2021

Short Takes: Dividend Nonsense, Lingering Beliefs, and more

Recently, I saw another example of magical beliefs about dividends.  Nick Maggiulli makes the claim that the bulk of investor returns over time come from reinvested dividends.  In one 40-year example, the total return is 791% without reinvested dividends and 2417% with reinvested dividends.  Unsaid is that if you withdrew all price gains periodically (and thereby failed to reinvest them), the total return from just dividends would be far less than 791%.  

This isn’t hard to understand when you look at the situation clearly.  Suppose that over several decades dividends are responsible for doubling your investments twice, and capital gains are responsible for doubling your investments three times.  So, dividends alone would have given a 300% return, and capital gains alone would have given a 700% return.  But through the magic of compounding, reinvesting all returns gives five investment doublings, or a 3100% return.  

Dividend lovers like to compare the 3100% to the 700% and declare that the bulk of long-term returns come from dividends.  This is nonsense.  It would also be nonsense to compare the 3100% to the 300% and declare that the bulk of long-term gains come from capital gains.  The relative value of these two types of return is best viewed by looking at the doublings.  In this example, dividends are responsible for 40% of returns and capital gains 60%.  Clearly, both matter.

Here are some short takes and some weekend reading:

Morgan Housel
makes a strong case that our beliefs about the world can linger on while reality changes.  His best example is the changing demographics in China.  They are feeling the effects of their former one-child policy.

Doug Hoyes explains how people seeking debt relief with consumer proposals get scammed if they go to the wrong organization.

Justin Bender explains in detail how to track the Adjusted Cost Base (ACB) of asset allocation ETFs held in non-registered (taxable) accounts.

Robb Engen reviews Fred Vettese’s new book The Rule of 30.  Robb persuaded me to add this book to my reading list.

Friday, October 8, 2021

Short Takes: RRSP Withdrawals in Your 60s, Comparing Global Stock ETFs, and more

Here are my posts for the past two weeks:

Class Action Settlement with BMO

The Deficit Myth - Modern Monetary Theory

Here are some short takes and some weekend reading:

Jason Heath looks at reasons why it can make sense to withdraw from your RRSP in your 60s.  In my case, my simulations showed that it made sense to start withdrawing from my RRSPs shortly after retiring in my 50s.  This is true even though I have non-registered assets I could be living on right now.  The reason is that I’m best off spreading out the taxable income from RRSP withdrawals over many years.

Justin Bender compares the two main global except Canada stock ETFs: VXC and XAW.

Big Cajun Man is closing his TD mutual fund accounts after TD’s latest attempt to steer its customers away from its excellent e-series funds and toward their crappy high cost funds.

The Blunt Bean Counter
explains the implications of getting an inheritance.

Thursday, September 30, 2021

The Deficit Myth - Modern Monetary Theory

Before U.S. President Nixon abandoned the gold standard in 1971, anyone with U.S. dollars could exchange them for gold at a fixed price.  Now that the U.S. government (as well as other governments including Canada) can issue new money at will, we call it “fiat money.”  Stephanie Kelton, former chief economist on the U.S. Senate Budget Committee, claims that this ability to create money at will has profound implications that she explains in her book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.  Modern Monetary Theory is certainly a different way to think about government finances, but whether it really has profound implications is less clear.

Under the gold standard, government finances resembled a family’s finances.  To run a deficit, the government had to borrow.  However, today the government can just create new money.  Governments typically choose to issue bonds (treasuries) to cover deficit spending, but such bonds are really just a different kind of money conjured out of thin air.  The government could just create as many dollars as it needs, but it chooses to create bonds that pay some interest.

When we understand fiat money, we see that the government can’t go broke because it can create new money at will.  This means the government could wipe out the national debt in seconds, and U.S. Social Security (or CPP and OAS in Canada) can’t run out of money as long as the government chooses to keep paying these benefits.

According to Kelton, it’s a myth that “deficits are evidence of overspending.”  In reality, it’s inflation that we should look to as evidence that governments are overspending.  When deciding what projects the government should take on, financial constraints and deficits aren’t the real concern; it’s resource constraints in the economy.  There have to be enough workers and other resources in the economy to do the work the government wants done.

Kelton explains that our real constraints come from trying to control inflation.  However, she doesn’t address these constraints in any more detail.  She lists many projects governments could take on, including providing jobs guarantees, providing health care, improving education, fixing infrastructure, and addressing global warming.  She says we can ignore deficits in these pursuits, but how do we know we won’t end up with high inflation?

Kelton needs to make a case that we can pursue ambitious programs without causing inflation, but she leaves this unaddressed.  If it turns out that inflation is closely linked to deficits (perhaps with time lags), then our current focus on controlling deficits would be little different from Modern Monetary Theory’s focus on inflation.  They would be saying the same thing with different words.  I suspect they’re not saying entirely the same thing, but the degree to which they differ is hard to say.

Modern Monetary Theory (MMT) calls for a federal jobs guarantee.  The idea is that any unemployed person should be able to get a job with the government at a rate of pay slightly below the lowest pay in the private sector.  I see some challenges.  How do you deal with people who want to be paid but don’t want to work much?  How do you deal with aspiring workers who have physical or mental problems that prevent them from getting much work done?  If you employ such people, how do you prevent others from pretending to have such problems?  How do you avoid corruption among those who run such programs (e.g., no-show jobs)?  How do you avoid having some young people give up on their education and take a guaranteed job?  Maybe none of these concerns is a show-stopper, but I’d be interested in seeing solutions.

The best parts of this book explained the implications of fiat money.  While many people understand that governments can just create new money, the full implications of this fact aren’t obvious.  However, it’s not clear to what extent MMT is really a new financial theory, and to what extent it’s just a different way to express conventional ideas.

Wednesday, September 29, 2021

Class Action Settlement with BMO

BMO was sued in a class action lawsuit for charging undisclosed fees on foreign exchange conversions in customers’ registered accounts between 2001 and 2011.  Customers of BMO Nesbitt Burns, BMO InvestorLine, and BMO Trust Company will get their share of the settlement before Oct. 8.

A decade ago I calculated that I had spent $7374 in currency exchange costs while trading U.S. stocks since I had opened trading accounts at BMO InvestorLine.  When I heard about the class action settlement with BMO, I figured I’d only get back a tiny fraction of this money.  However, my wife and I are pleased to be getting a total of $2051 plus $955 in interest.

It would be nice if BMO’s response to this lawsuit was to charge sensible foreign exchange fees, but they are much more likely to simply be more careful about meeting some legal standard of disclosure.  Unwitting customers will continue to rack up unreasonably high foreign exchange costs.

Friday, September 24, 2021

Short Takes: European Bank Customer Abuse, Opening a RRIF at Questrade, and more

The word “millionaire” is frequently used to mean a person who doesn’t have any financial concerns and whose wealth is much greater than what the rest of us have.  However, imagine a couple whose house is now worth $750,000, they have a $300,000 mortgage, they owe $50,000 on their cars, and one has a public service pension now worth $600,000.  On paper, this couple has a million dollars, but they are hardly rich, and they definitely still have financial worries.  It’s time to start using “decamillionaire” to mean a very wealthy person.  Maybe $5 million is enough, but we don’t have a common word for that level of wealth.

Here are my posts for the past two weeks:

Debunking a Bogus Stock Market Prediction

Wilful Blindness

Here are some short takes and some weekend reading:

Andrew Hallam
explains how European banks sell some horrific “investments” to unsuspecting consumers.  He also exposes the huge downside of index-linked investments that promise no down years.

Robb Engen at Boomer and Echo explains how to convert an RRSP to a RRIF at Questrade.

Big Cajun Man
thinks it’s important to teach your kids to be frugal at back-to-school time.  I agree.  Just because some people call student debt “good debt,” it’s still better to finish school with your debt smaller rather than larger.