Friday, May 7, 2021

Short Takes: Leverage Losses, Financial Advice, and more

Speculation that we’re in a bubble is growing.  I don’t know how to identify bubbles while they’re happening, so the most I can say right now is that the prices of stocks, bonds, and real estate are high.  But let’s suppose for the moment that all three assets are in a bubble.  What are we to do with this information?  Maybe one or more of these assets will crash.  But what if they keep rising for quite a while longer before this crash happens?  What if the economy booms and we grow our way out of the bubble without a crash?  There’s no guarantee that selling assets and waiting for a crash will work out well.  Because I don’t know what’s going to happen, I’m sticking with my investment plan.  The only change I’ve made is to lower my expectations of future investment returns.  So, I haven’t changed the way I invest, but I haven't grown my spending as much as my portfolio’s growth dictates in case future returns disappoint.

I managed only one post in the past two weeks:


The “Explore” Part of a Portfolio

Here are some short takes and some weekend reading:

John Robertson
tells a deeply personal story about personal loss and financial loss due to leverage.  When it comes to investing with borrowed money, everyone is a genius until suddenly they’re not.

Ben Felix (video) explains what is and is not good financial advice.  He says that investing is largely a solved problem, but goes on to explain the ways that people need help.  He makes an excellent case that most people could benefit from an advisor who does a good job providing this help.  I have little doubt that he is able to do a good job in his practice.  However, after listening to many financial advisors of different types, including those who work with high net worth clients, I have my doubts that most of these advisors perform Ben’s list of tasks well.

Jason Heath answers a question about making spousal RRSP contributions in your 70s.

Monday, April 26, 2021

The “Explore” Part of a Portfolio

Many people advocate having a portfolio made up of mostly a core of low cost index funds along with a small “explore” part for taking concentrated risks on favourite investments.  This can work well enough if you’re realistic about it, but most investors cross the line to self-delusion.

Ben Carlson does a good job justifying the existence of explore-type investments in his article The Case for Having a Fun Portfolio.  After all, people are entitled to spend their money however they want.  Not every expenditure has to be part of a logical long-term plan.  We can buy a beer, or a motorcycle, or some favourite stock if we want.  So what if the long-term expectation is that the explore part of people’s portfolios will underperform indexes.

All the logic makes sense up to this point.  But just about every stock-picker I know can’t resist taking this a step further.  “Besides, the stock I picked is going to do great.”  In their hearts, they know their stock picks are going to outperform.  Past results don’t seem to deter them.  They wouldn’t bother with the explore part of their portfolios if they truly believed they would lose money over a lifetime of picking stocks.  All the evidence says that professional investors today set good relative prices so that individual investors who choose their own stocks are essentially making random picks.  The odds are against the small guy, but hope springs eternal.  I prefer to find hope in other pursuits.

Friday, April 23, 2021

Short Takes: Estimating Future Returns, Leveraged Blow-Up, and more

The email delivery of my blog posts is run through Feedburner, and Google has announced that they’re dropping this email service in September.  So, if my posts are to still get out to email subscribers, I’ll need to find some other way.  My first attempt to find a replacement came up empty.  Suggestions for an easy solution are welcome.

I managed only one post in the past two weeks:

If Simplicity in Investing is Good, Why is My Portfolio Complicated?

Here are some short takes and some weekend reading:

The Rational Reminder Podcast takes an interesting look at how to estimate future stock returns.  What they’re trying to do is harder than what I did.  I didn’t concern myself with what would happen in the near future.  I just used a conservative estimate of corporate earnings growth, and presumed that the market price-to-earnings ratio would decline to more typical levels by the time I get to be 100 years old.

Bill Hwang’s huge personal loss with his Archegos family office doesn’t seem very relevant to personal finance, but it does serve as a reminder of the dangers of leverage (borrowing to invest).  Warren Buffett says “Never risk what you have and need for what we don't have and don't need.”

Big Cajun Man reports on changes to the disability tax credit in the latest federal budget.

Wednesday, April 21, 2021

If Simplicity in Investing is Good, Why is My Portfolio Complicated?

My recent article on A Life-Long Do-It-Yourself Investing Plan describes a way to make investing uncomplicated while keeping costs to a reasonable level.  Reader reactions were very positive, but some of the questions I received are worth discussing.

“You’re advocating simple investing, but your own portfolio is complex.”


That’s true.  If the all-in-one exchange-traded fund VEQT had existed back when I was switching to index investing, I might have used it for all my stocks.  Unfortunately, it wasn’t around back then, and I settled on a mix of 4 stock ETFs.  In trade for this complexity, I estimate that I save approximately 0.29% per year in MERs and foreign withholding tax (FWT) compared to owning only VEQT.

As it happens, I’m well suited to building a spreadsheet to manage my portfolio, including automating rebalancing and following asset location rules.  Even so, if I were starting out today with no spreadsheet, I might forgo the savings and just buy VEQT for all my stocks.  However, given that I’ve already done the work to decide on a set of rules and have automated them all, I’m happy to save the 0.29% each year.

Much of my writing on portfolio details over the years has been aimed at investors like myself.  If you enjoyed your high school math classes, then maybe you have the temperament to manage a more complex portfolio.  However, I’m confident that the vast majority of people would be happier with something simpler.  It’s not just about a trade-off between effort and savings; there are many ways to mess up a complex portfolio.  You could end up doing a pile of work and saving nothing, or worse.

“Can I see a version of your spreadsheet with your personal details removed?”

I’ve started to make a public version of my spreadsheet several times.  Each time I despair at how hard it is to make such a spreadsheet generic enough to be widely useful, and simple enough to be understandable.  So, I doubt I will ever complete this task.

This may be rationalizing, but I’m not sure I’d really be helping my readers if I made a version of my spreadsheet available.  Maybe being willing and able to do the work of creating your own investing spreadsheet is a necessary condition for success at managing a more complex portfolio.

“You’ve got me thinking I should change my portfolio to match the simple portfolio you described.”

The biggest potential problem with making such a change is capital gains taxes.  If you have investments in a non-registered (taxable) account, you may have to realize capital gains to make a change.  Think carefully about adding a tax burden when making such a change.

If you’ve got a complex portfolio, it might make sense to simplify it, at least in your TFSAs and RRSPs/RRIFs.  However, if you already have a simple portfolio using one of the all-in-one ETFs that include bonds, the benefits of switching may be small.  The prospects for long-term bonds aren’t great right now, but your exposure to potential losses may be fairly low.  It pays to do some calculations before jumping on the latest investing idea.

If you’re already running a fairly simple low-cost portfolio successfully, there may be no reason to change.  If you want to change your portfolio because it will give substantial benefits, then go ahead.  But if you find your reason is an emotional need to seek perfection, then I suggest giving yourself permission to have a portfolio that isn’t quite perfect.  In my own portfolio, I sometimes have some fixed income in the wrong account because it was just easier to do it that way when I rebalanced.  The financial cost of doing this is trivial, and I’m not seeking perfection.

“There are other good ways to keep investing simple.”

That’s true.  I laid out one good way for someone to start an investment portfolio and then maintain it simply for a lifetime.  There are other ways, including many differences in the details.  Maybe you want an 80/20 all-in-one ETF, or you plan to buy an annuity with 25% of your portfolio when you retire.  We can debate the merits of these choices, but at a higher level, they just represent small differences.  The important things to focus on are simplicity, low costs, and avoiding mistakes.

Friday, April 9, 2021

Short Takes: Investing Simply, Income Tax Issues, and more

A big oversight of mine is that I never subscribed to my own email feed.  Like someone who donates to a charity to feel good about themselves without ever checking if the charity is doing good work, I made my articles available for free by email without ever checking whether the service was working well.  Fortunately, my wife subscribed and told me that sometimes there’s a day delay before an email arrives.  I’ve been working on fixing this.  I’ve now subscribed myself and noticed that the font was kind of small.  So I made it a little bigger.  Hopefully, with some periodic monitoring, I can make the experience better for everyone.

Here are my posts for the past two weeks:

Buy Now Pay Later Apps

Safety-First Retirement Planning

A Life-Long Do-It-Yourself Investing Plan

The Value of Monte Carlo Retirement Analysis

The Dumb Things Smart People Do With Their Money

Here are some short takes and some weekend reading:

Robb Engen makes a strong case for DIY investors to use a single asset-allocation ETF over more complex mixes of ETFs like Justin Bender’s Plaid Portfolio, Ben Felix’s Five Factor Model Portfolio, or my mix of VCN, VTI, VBR, and VXUS.  He’s right that few investors will manage these more complex portfolios successfully.  Complexity builds quickly when you’re managing multiple ETFs over RRSPs, TFSAs, and taxable accounts.  For my portfolio, I estimate my MER and foreign withholding tax (FWT) savings compared to just using VEQT for stocks is currently 0.29% per year.  This isn’t trivial, but you don’t have to mess up the plan much to lose these savings and more.  If I had to manage my portfolio by hand instead of having it automated in an elaborate  spreadsheet, I would gladly trade 0.29% per year for the simplicity of VEQT.  I recommend VEQT to my sons and other family and friends who ask.

The Blunt Bean Counter
is out with his list of common tax issues for the 2020 taxation year.

My Own Advisor makes a weak case that active investors shouldn’t bother benchmarking their portfolios.  I made a decision a while back to read fewer articles related to stock picking, but I still read some.  The main reasons not to benchmark your portfolio are 1) to avoid getting the bad news that your stock picks are losing to the market, and 2) to avoid the work required to figure out your portfolio’s return and to pick a benchmark.  Properly done, benchmarking begins with choosing in advance a mix of passive investments that roughly matches the allocations of your active portfolio.  Then at the end of the year, you can compare your portfolio’s return to that of your benchmark to see over the years whether your active picks are any good.  Most active investors don’t even know their portfolio’s return, so they’d be glad to hear that they don’t need to benchmark.  The few who do calculate their annual returns often find that their skills don’t look very good over the long term compared to a reasonable benchmark, and these investors are even happier to hear that they don’t need to benchmark.  My Own Advisor points to problems with finding a benchmark that matches your goals.  This isn’t actually very hard, but it usually requires blending a few indexes.  The key is to pick this mix in advance so you’re not tempted to choose a mix after the fact that makes your active portfolio look better.  My Own Advisor points to benchmarking being a lagging indicator.  However, the goal isn’t to go back in time and change your investments; it’s to find out whether you should keep picking your own stocks or abandon a losing effort.  It may be disappointing to find your efforts over a decade have lost you money, but it’s better to know the truth.  My Own Advisor suggests focusing on your life, health, and other more important things than benchmarking.  This advice applies much better to reclaiming the time you put into stock picking and just living your life while passive investments do their thing.  People are free to do as they wish with their money, including picking their own stocks and not checking their performance, but it’s not good to advise others to follow this path.