Friday, October 12, 2018

Short Takes: Killing Mutual Fund Reforms, Taxing the Rich, and more

Here are my posts for the past two weeks:

Managing a GIC Ladder in Retirement

More Money for Beer and Textbooks

My House vs. My Stocks

Here are some short takes and some weekend reading:

Gordon Pape takes Doug Ford and Vic Fedeli, Ontario’s Finance Minister, to task for “dumping cold water” on Canadian Securities Administrators’ mutual fund reforms “that would significantly benefit investors.” This position “flies in the face of everything the Premier claims he stands for.”

The C.D. Howe Institute reports that the 4% increase in the top federal income tax rate didn’t produce the hoped-for $3 billion increase in tax revenues. Instead it resulted in a slight decrease in combined federal/provincial tax revenues. My own retirement made a small contribution to reducing tax revenues in the future.

Canadian Couch Potato interviews Larry Bates who is trying hard to explain to Canadians just how much of their investment gains are getting consumed in fees. Check out his “T-REX Score” calculator (

Preet Banerjee interviews Ben Rabidoux for an interesting discussion of real estate across Canada from the points of view of both owners and renters.

Robb Engen at Boomer and Echo answers questions from a reader considering borrowing money to invest. Robb does his best to offer the alternative of not borrowing, but just investing available cash from income. However, I’ve never had much success in talking people out of using leverage to buy stocks.

Wednesday, October 10, 2018

My House vs. My Stocks

My wife and I bought our house in mid-1993. We’re at the young end of the baby boom, but we bought our house when we were fairly young. As a result, we’ve lived through the huge run up in house prices older boomers have enjoyed. In 25 years, the price of our house has gone up about 160%. So, how has this compared to our investment portfolio?

Well, in that same period of time, our portfolio has had a cumulative return of 1030%. That might seem to end the comparison, but real estate is typically a leveraged investment. We paid off our home quickly, so we didn’t get much advantage from the leverage. But what if we had used leverage?

The average discounted mortgage rate over that period was about 5%. Suppose we had put 10% down and made payments on a 5% mortgage for 25 years. The Internal Rate of Return (IRR) on our investment works out to 5.8% per year or a cumulative return over the 25 years of 307%.

It might be tempting to add in a return from not having to pay rent, but it’s doubtful that the rent on a comparable house would have been more than we’ve paid in property taxes, insurance, maintenance, repairs, and upgrades.

We figured out early that it didn’t make sense to pay high mutual fund fees on our investments. If we had paid an extra 2% each year, our cumulative investment return would have been 580% instead of 1030%. This brings the 307% real estate return closer, but our investment portfolio still wins.

What’s the point of all this? Even though we owned a home during one of the best periods in history for real estate, our other investments performed better. There may be some people whose homes outperformed stocks, but far fewer than most would guess. When we think about our homes being worth a couple hundred thousand dollars more than we paid, it’s easy to forget about the costs of ownership and the long period of time it took to get that return.

Looking forward, real estate can continue to appreciate, but certainly not at the same pace it did for baby boomers. For now, young people are better off financially renting rather than owning. This is true even if they choose to rent a single-family dwelling rather than an apartment. To get full advantage of the lower cost of renting, they need to sock away some of their monthly savings to invest.

Tuesday, October 9, 2018

More Money for Beer and Textbooks

When I headed off to university, I was pretty naive about money. It’s safe to say that this is true of most kids starting post-secondary education. There are lots of ways to get yourself into financial trouble at school. This is where Kyle Prevost and Justin Bouchard come in with their book More Money for Beer and Textbooks. These authors offer Canadian students and their parents solid information that I wish I had back when I was in school.

This book isn’t purely about finances. Just because one choice is more expensive than another doesn’t necessarily make it a bad choice. The authors discuss cost differences and weigh them against other advantages and disadvantages.

They start with how much school will cost and the relative costs of being on and off campus. They also offer a number of tips on finding one or more of the scholarships and bursaries available, many of which never even have one student apply. You’re not likely to find many other books that even devote a section to partying on a budget.

Other sections include RESPs, student loans, summer jobs and part-time work, cars, credit cards, saving on textbooks, and choosing in-demand careers. Throughout, the writing style is clear and (mostly) fun. No matter how hard you try, the details of RESPs may be important, but they’re not fun.

There’s not much negative to say about this book. They made a joke about unclaimed scholarships that made a reference to taxes on lottery winnings, but Canada doesn’t tax lottery winnings. A few details about tax credits have changed since this book was printed in 2013.

The authors don’t pull any punches in their discussion of banks: “many parents are extremely confused about how any sort of registered plan is used, because bank employees and investment advisers make a lot of money on this confusion.”

Few people truly understand how expensive cars are, but these authors get it. They go over the various costs and conclude “The truth is that owning a car is an absolute money pit.” That said, though, they go on to give practical advice for those who want a car despite the costs.

Despite the fact that both authors have liberal-arts degrees, they are quite blunt about the poor job prospects for new graduates with liberal-arts degrees. “Many scholars and post-secondary institutions believe that the goal of a liberal-arts education is simply to give people a well rounded education after high school. Many students believe that the goal of a liberal-arts education should be to provide them with the skills and credentials to succeed in the job market. There is a fundamental contradiction here.”

A problem with our education system is that “More and more [teachers] swam the liberal-arts streams to get there (go ahead and walk in to an elementary school and see how many teachers there have any math background at all).” Among other problems, this leads to “an overall deficit of enthusiasm and knowledge surrounding skilled labour in our academic system.”

I recommend this book to post-secondary students and their parents. It’s a wealth of knowledge about how schools work. It will answer important questions many students never would have thought to ask.

Friday, October 5, 2018

Managing a GIC Ladder in Retirement

The following good question about managing a GIC ladder during retirement came from AT in Calgary (edited for length and privacy):

I’m 100% FIREd and have no regrets about this. After working for 30+ years, I was just done. I spent the better part of a year learning about money, and your articles have been particularly helpful.

I have put 3 years into GICs (1,2,3) and the '1' comes due 2019 May 1. Assuming I stick with the 3 year model, do I roll that one into a new 3 year GIC and then continue as before?

That seems to make sense but here is my question that I can't quite wrap my head around. If I lock it in on May 1st, then what happens if the market crashes on May 2nd? Somewhere there has to be a cash cushion for that year unless I just have to bite the bullet and draw down my registered money. What do you think?

First of all, congratulations on retiring! I know I felt great about retiring to my personal projects rather than doing what other people wanted me to do. I’m glad you like the blog. I’ve learned a lot about finances writing it.

I’ll describe how I handle the cash and GICs part of my portfolio, and you can decide for yourself whether you want to apply it to your own portfolio. I began retirement with 5 years’ worth of spending in cash and GICs, and have the rest of my portfolio in stocks. One year of cash was in a High-Interest Savings Account (HISA) at EQ Bank paying 2.3% interest. The other 4 years were in GICs of duration 1, 2, 3, and 4 years. Note that I don’t have a 5-year GIC.

During my first year of retirement, I spent the cash in the HISA. At the end of that year, my 1-year GIC came due. Because nothing bad had happened in the stock market, I rolled the GIC cash into a new 4-year GIC, and sold stocks to refill the HISA. So, I started the year with 5 years of cash and GICs, but this dwindled to 4 years before I topped it up again.

Suppose the stock market had crashed so severely that I decided to reduce my annual spending. To make this more concrete, suppose my planned annual spending from my portfolio had dropped from $50,000 to $45,000. With $50,000 in cash and $150,000 in GICs, I would only have needed to sell $25,000 worth of stocks to get to 5 years’ worth of cash plus GICs. $45,000 would then have gone into my HISA, and I’d have bought a $30,000 4-year GIC.

There are plenty of minor complications in all this. One is reducing the amount in the HISA and GICs to account for dividends in non-registered accounts that you could spend instead of reinvesting. Another is that a buying a small GIC could lead to being short of cash in the future. This is easy enough to handle by just keeping a little extra cash in your HISA. Of course, you have to stay on top of your spending level. You can’t start spending more just because there’s extra cash in the HISA.

The important part of all this is that I always have enough cash in the HISA to maintain my planned spending level until the next GIC comes due. So, I’m never in a position of having to draw down my stocks during a short-term mid-year stock market crash.

So, AT, you can compare your approach to mine and decide whether there is anything you want to change. Good luck.

Friday, September 28, 2018

Short Takes: Dumb Ideas, Financial Crisis, and more

Here are my posts for the past two weeks:

Interest Tax Deduction When Borrowing to Invest

What Does FIRE Mean?

Here are some short takes and some weekend reading:

James Clear explains why we cling to dumb ideas.

Tom Bradley at Steadyhand draws five lessons from the financial crisis. My favourite: “In the depths of despair, I heard many investors say they no longer expected much from their stock portfolio. This couldn’t have been further from the truth.”

The Rational Reminder Podcast interviews Robb Engen who has sensible takes on a number of investment issues.

The Blunt Bean Counter has a lot of dealings with CRA on behalf of his clients, and he shares his recent experience with delays and CRA areas of focus for information requests.

Boomer and Echo dig into Vanguard and Horizons single-ETF solutions.