Friday, August 16, 2019

Short Takes: Dalbar and Millennial Investors

I managed only one post in the past two weeks:

Irrational Exuberance (

Here are some short takes and some weekend reading:

Cameron Passmore and Benjamin Felix discuss mortgage rates, REITs, and investor performance in mutual funds and variable annuities. Their podcasts are consistently entertaining and informative. In this podcast, it was the discussion of Dalbar’s studies that caught my attention. Dalbar regularly reports that individual investors underperform the mutual funds they invest in by wide margins because of behavioural errors. The gaps are usually so wide as to make them unbelievable. It turns out that their figures are nonsense, but few people in financial advisory positions seem to examine them closely, presumably because the message that people need help with their investments is welcome. I’ve discussed the problem with Dalbar’s “methodology” in detail before. Here is an attempt at a brief explanation: If you put some money into a 10-year old mutual fund, you’re automatically an idiot for having missed out on the previous decade of returns. No matter how long you leave that money in the fund untouched, those missed returns will contribute to Dalbar’s calculated investor underperformance.

Robb Engen at Boomer and Echo discussed a recent Dalbar report. Mutual fund investor returns do lag index returns, in part because of high mutual fund fees. Dalbar’s numbers are not a useful measure of investors’ poor market timing.

Tom Bradley at Steadyhand has some solid advice for millennial investors. I certainly hope my sons avoid the mistakes I’ve made.

Wednesday, August 14, 2019

Irrational Exuberance

It’s been 19 years since Robert Shiller wrote Irrational Exuberance at the peak of the dot-com stock boom. I decided to give it a read to see if it teaches any enduring lessons.

Don’t be fooled by the title into thinking this is a book full of entertaining stories about investor excesses. It’s largely an academic work that lulled me to sleep more than once. It takes a deep look at what defines a stock market bubble and what factors led to the then current high stock price levels.

As an example of the author’s “playfulness,” he described Dilbert as a comic strip “which dwells on petty labor-management conflicts in the new era economy.”

The discussion throughout the book is very thoughtful and thorough, but like much of macroeconomics, it’s hard to say anything definitive. If we raise interest rates, it might help, or might hurt; it’s hard to tell.

A few of the book’s details caught my attention. At the time, inflation-indexed bonds paid 4% above inflation. I’d love to be able to buy such bonds today. Current yields are much lower.

The author claimed that Y2K bug worries proved “groundless.” It’s true that the media and Y2K consultants played up the potential risks, but we had few problems as we reached the year 2000 because of the tremendous effort that went into fixing the bugs. Calling the Y2K fears groundless is like saying concerns about a crumbling bridge proved groundless after the bridge was replaced.

Shiller calls for Social Security benefits to be indexed by per capita national income rather than by the Consumer Price Index (CPI). This is an interesting idea. It would allow seniors to keep up with the average standard of living rather than allow them to keep buying the same basket of goods. However, this might put even more pressure on Social Security as baby boomers age.

At the end of the book Shiller offers some recommendations. People should diversify away from heavy stock allocations. He calls for the creation of new markets such as single-family-homes futures and S&P 500 dividend futures. He believes such markets would allow people to sensibly hedge some of their risks.

I suspect this book would be mainly valuable to someone looking for a head start in gathering ideas for an academic study of the current bull market.

Friday, August 2, 2019

Short Takes: Employer Matching, Lattes, and more

Here are my posts for the past two weeks:

How High are Rents Today?

Canadian ETFs vs. U.S. ETFs

Trusts, Whether You Want Them or Not

Cut Your Losses Short

Here are some short takes and some weekend reading:

Preet Banerjee says that taking advantage of employer matching in savings plans is free money and deserves to be in the list of personal financial commandments such as avoid credit card debt. I agree, but it pays to look at the difference between costs in the employer savings plan and the costs in your personal portfolio ( In extreme cases where employer plans have very high costs, the employer match can get eaten up in fees over time.

Robb Engen at Boomer and Echo says we should stop asking $3 questions and start asking $30,000 questions. By this he means focusing your attempts to build wealth on the big dollar amounts in your life. Robb is in the camp who says to go ahead and buy your lattes. However, a latte habit isn’t really a $3 question if you spend $100/month. I think in dollars per year. So, lattes in this example amount to $1200 annually. For comparison, reroofing my house costs about $500 per year. This isn’t to say that buying lattes is a bad idea for everyone. Just see it for what it is – a thousand-dollar question.

Fintech Impact interviews Preet Banerjee about his MoneyGaps tool to help financial advisors provide better planning services for their clients. One of the interesting topics covered in this fast-moving podcast is the free GIS calculator MoneyGaps is working on. This is a complex area where few financial advisors have any useful knowledge.

Gary Mishuris tells the interesting story of a young equity analyst uncovering a fraud. If you get to the part where the fraud is revealed but struggle a little to make sense of it, you should definitely question your ability to pick your own stocks.

Thursday, August 1, 2019

Cut Your Losses Short

Common advice for stock pickers is to “cut your losses short.” Investors have a tendency to hang onto loser stocks hoping to get their money back, but the experts say that’s a mistake. I have an example from my stock-picking days to illustrate this idea. I bought shares in some sort of fruit company and ended up losing money.

Back in October 2000, I bought 3000 shares at US$20.54. They went down initially, and then bounced around in a range. I didn’t want to sell for a loss and held them. By July 2003, I’d had enough and sold them for US$19.51 each, a loss of just over US$3000.

The problem isn’t just the lost money; I also lost time. If I’d sold this turkey sooner, I could have found a better stock to put my money in.

Thankfully, I didn’t keep holding to lose even more money and time. What if I were still holing this stock? A quick search tells me this stock now sells for ... wait ... that can’t be right. There were stock splits too. Those shares would now be worth US$8.9 million! I’m going to be sick.

That’s right – I used to own 3000 shares of Apple. After splits that’s 42,000 shares today, trading at US$213.04 as I write this. But I sold 16 years ago. Woulda, coulda, shoulda.

So, maybe this is a bad example for the advice to cut your losses short. Maybe never selling is a better idea. However, that didn’t work out very well for the Nortel shares I used to have.

Maybe most of us have little idea what we’re doing when we try to pick stocks. Maybe we’re no match for the army of investment professionals around the globe, most of whom can’t even beat the market by enough to cover their expenses.

The larger takeaway here is that most of the stock-picking advice you’ll find in the world will just get you in trouble. I’ve put my money on owning all the stocks instead of trying to pick the right ones.

Wednesday, July 31, 2019

Trusts, Whether You Want Them or Not

Most of us have heard of wealthy families setting up trusts. We have a vague idea that they’re set up to reduce taxes or provide a controlled income to young beneficiaries. Income taxes on trusts can get complex. But people who set up trusts know what they’re getting into and are usually prepared to pay an accountant. However, as I found out, there’s a type of trust that comes into existence automatically.

When a person dies, their executor must file a final tax return by tax-filing season the next year (or 6 months after death, whichever is later). However, this final tax return only applies to income that arrived before or at the person’s death. There are many easy-to-understand websites that explain these tax rules and basic tax-preparation software can handle these returns.

But what about the income that comes after death? If there is no surviving spouse, it takes a while to distribute assets to beneficiaries. In the meantime, RRSPs, RRIFs, TFSAs, houses, and other assets can produce interest, dividends, and capital gains. Even in the simplest cases, there is usually a $2500 cheque from CPP to cover part of the burial expenses. Someone has to pay taxes on this income.

This is where the trust comes in. After death, the assets in the estate are considered to form a trust. In some cases the executor can get away with having beneficiaries declare the estate’s trust income, but the most tax-efficient way to declare this income is usually with a T3 Trust Income Tax and Information Return.

This is where I ended up after reading dozens of articles on the subject. My sense that it couldn’t possibly be this complicated turned out to be wrong. My late aunt’s estate had 3 slips for a total of $2540 of income. This had me filling out a form with a dozen questions including

“If the trust is a deemed resident trust, is the trust an ‘electing trust’ as defined in section 94?”

“Does the trust qualify as a public trust or public investment trust that has to post information about the trust on the CDS Innovations Inc. web site under section 204.1 of the Income Tax Regulations?”

My aunt’s very simple situation got lumped in with very complex trust arrangements. I filled out the T3 trust return (by hand!) as best I could but got a couple of things wrong. The biggest mistake was filing late. Trusts have only 90 days from year end (end of March) to file. So, this T3 trust return was due a month before the final return.

In the end my mistakes cost a total of $35 in interest and a late-filing penalty. I consider this cost a bargain if it means I’m done with acting as executor. But I have to wonder why this process has to be so difficult.

The most difficult part for me was determining if the T3 trust return was really the correct return to file. CRA’s guide for preparing returns for deceased persons describes returns for rights or things, a partner or proprietor, and income from a graduated rate estate. For a while, I thought I needed to file a return for rights and things. I’d have to rate this guide from CRA “unhelpful” for someone holding 3 little slips.

Surely winding up an average Canadian’s affairs can be simpler while extracting the same tax revenues. It shouldn’t be necessary to hire an accountant to file T3 trust returns for people who just have a few tax slips.