Thanks to Rob Carrick for a mention in his best-of-the-web roundup of my post It’s Time that Renting Got a Little Respect . Here are this week’s posts including a chance to win a UFile giveaway: Reminiscences of a Stock Operator UFile Review and Giveaway Replying to Email Here are some short takes and some weekend reading: The Blunt Bean Counter has reached the last installment of his series on how much money you need to retire and offers some dollar amounts. In another good post from The Blunt Bean Counter , he explains the bizarre situation where Canadians who hold foreign stocks in their non-registered accounts at Canadian brokerages have to give detailed reports on a T1135 form. I’m all for catching tax cheats, but why such onerous reporting rules for stocks held within Canada by one of our big banks or other well-known brokerages? Financial Crooks encounters some major T5 hassles with a joint PC Financial account. If you can believe it, she was asked to wait a...

I get a lot of blog-related emails. Some of them are interesting questions and comments from readers. Generally I reply to these directly. Here I reply to three emails that I would normally ignore. Dear Christina, Thank you for your newsletter offer. If you know how to profit by anticipating the moves Janet Yellen will make as chair of the U.S. Federal Reserve, why don’t you just go ahead and make yourself wildly rich? I don’t understand why you would share this profitable insight with me. If your motives are altruistic and it’s not too much trouble, please use your knowledge to make a pile of money and send a share of it to me. Sincerely, Michael -------------------- Dear Natalie, Thank you for your offer to give me access to your data about ultra-wealthy investors. While it’s possible that behaving like wealthy people will help make me wealthy, it seems more likely to me that causation is the other way around: becoming wealthy is what leads to behaviours like con...

UFile has generously offered 6 activation codes for their online 2013 tax software to give away to my readers. I decided to go through the exercise of trying UFile’s online tax preparation to see how well it works in addition to giving away some codes. UFile’s online income tax preparation uses the interview method which means that they ask you a series of questions rather than just let you flail away at tax forms. In general, I find this much easier than using tax forms, but I invariably find that some complication or other in my tax situation forces me to look at the detailed tax forms a couple of times to check that all went well with the interview. The online version of UFile does not permit you to see the detailed forms that UFile calculates from your interview answers. I assume the reason for this is that they allow you to fill out your taxes without paying anything. It isn’t until you file your taxes that you might have to pay for an activation code. If they showed you ...

I was somewhat skeptical about a recommendation to read a century-old book about stock trading, but Reminiscences of a Stock Operator (annotated edition) by journalist Edwin Lefèvre is an entertaining and illuminating historical novel. The book is written in the first person about character Larry Livingston and is based mainly on the life of the great trader Jesse Livermore. The version of the book I read was greatly enhanced by journalist Jon D. Markman‘s extensive annotations explaining many terms unfamiliar today and giving many back stories to put Lefèvre’s writing into context. The main character makes a fortune and then loses it again several times over, each time gaining new insights into stock trading. The limited regulation of the time permitted extensive leverage and many attempts to corner markets. Common themes are manipulation of the investing public and back-stabbing among big traders. No doubt the many trading lessons woven into this story would have some usefuln...

I wrote another 3 posts this week: Telling Us What We Want to Hear about Our Retirement Magic Numbers The Double-Up GIC Double-Up GIC – the Catch Here are some short takes and some weekend reading: Canadian Couch Potato answers a reader question about how to find the optimal portfolio asset allocation percentages. Within reason, just about any allocation percentages can work out well if you stick to them. If you keep tinkering so that you’re a closet active investor, you may be headed for poor results. In another good post, Canadian Couch Potato shows how to work out the foreign withholding tax cost of ETFs holding foreign stocks. Fortunately, he works out all the details for many different ETFs. The Blunt Bean Counter has part 5 of his series on how much money you need to retire. My Own Advisor explains why he is keeping his 14-year old car. Big Cajun Man thinks that any income you have to declare on your taxes for bank account interest should be net of bank ...

The point of my Double-Up GIC was to illustrate the tricky rules used in market-linked GICs by taking these rules to the extreme. The advertising of market-linked GICs makes it seem like you have a guarantee to get your money back if stocks fall and can get the market return if stocks rise. This isn’t the case. Market-linked GICs have rules that significantly reduce the return you get if the stock market goes up. The catch with my Double-Up GIC is that each of the 560 linked stocks must go up during all 60 months for you to get your full 100% return. Any excess return for a stock in a month above 0.00206% is wasted, but any drop in a stock counts fully. Across all the stocks there are a total of 560*60=33,600 monthly returns. If all the negative returns compound to a 50% loss, then these losses will completely cancel all the capped positive returns. So, if one-eighth of the stocks show a loss of 1% or more in the first month, you’re already guaranteed to get only your princip...

Canada’s big banks all offer various types of market-linked Guaranteed Investment Certificates (GICs). The idea is that your principal is 100% guaranteed, and if the stock market performs well enough you get higher returns than standard GICs pay. It’s like you can have your cake and eat it too. However, the returns usually have a fairly low cap. I decided to design my own market-linked GIC that I’d be happy to offer to the public if it weren’t for two things 1 . My Double-Up GIC would offer the potential for a 100% gain over 5 years. The big banks tend to offer much lower maximum returns. The interest paid would be linked to the Canadian TSX 60 stocks and the U.S. S&P 500 stocks. However, even if stocks crash, investors’ principal would be 100% protected and would be paid back after 5 years. Here is the detailed calculation of the interest payment. In each of the 60 months we start with that month’s compounded share of the potential 100% gain (1.162%). Then we take the...

Wouldn’t it be great if we didn’t need to save so much money to have a great retirement? Well, if you don’t look too closely, David Blanchett, Head of Research at Morningstar Investment Management, can help with his paper Estimating the True Cost of Retirement . Blanchett’s paper is very clearly written making it quite easy to follow his logic: 1. Most studies of safe retirement spending levels assume that spending increases by inflation each year (i.e., flat spending in real terms). 2. Thorough research of real spending data shows that retirees’ spending, on average, does not increase by the full amount of inflation each year. 3. A typical conclusion based on flat spending is that the maximum safe withdrawal rate is 4% at the start of retirement. 4. Using the actual spending curve for the age range 60-95, the safe withdrawal rate at the start of retirement is closer to 5%. Isn’t this great news? If you thought you needed $2 million to retire well, Blanchett says you only ...

I wrote 3 posts this week: Cushioned Retirement Investing Adjusting the 4% Rule for Portfolio Fees The Gap Between the Financial Advice You Need and What You Get You can follow me on Twitter ( @MJonMoney ). Here are some short takes and some weekend reading: Canadian Couch Potato thinks that robo-advisors are unlikely to come to Canada because the market isn’t big enough. However, on 2014 Jan. 15, David Chilton tweeted “Solid, unbiased, ultra-low-cost financial advice will be automated in user-friendly apps over the next few years. Will change everything.” I guess we’ll see what happens. The Blunt Bean Counter added two more instalments to his series on how much money you need to retire. See part 3 and part 4 . Where Does All My Money Go? has Preet’s latest podcast where he gets a teacher’s perspective on financial literacy in schools. Kyle Prevost makes some very candid remarks about teachers and their math abilities and financial skills. In another interesting ...

Most people need financial advice. You don’t need much experience explaining financial matters to people to see that most need help. However, this doesn’t mean we can make the logical leap to saying that people need the services of a typical financial advisor. There is a huge gap between the financial advice people need and what they get from the typical advisor. The typical financial advisor will choose investments for you (usually high-fee mutual funds) and handle the mechanics of opening accounts and investing your money. While people need some guidance to choose an appropriate asset allocation, the truth is that opening accounts and choosing investments isn’t all that difficult. One option is to take a risk-tolerance quiz and choose one of Canadian Couch Potato’s model portfolios . Here is a sample of the types of questions that people really need help with: 1. Should I invest in an RRSP, TFSA, RESP, or something else? 2. My advisor wants me to borrow to invest. Shoul...

The 4% rule for retirement spending comes from a 1994 paper by financial planner William Bengen called Determining Withdrawal Rates Using Historical Data . Bengen showed that portfolios with 50% to 75% U.S. stocks and the rest in intermediate-term treasuries would last for 30+ years with yearly inflation-adjusted withdrawals of 4% of the starting portfolio value. However, Bengen assumed that you don’t pay any investment fees. Here I replicate Bengen’s study and look at how fees affect the results. The retirement spending plan tested by Bengen differs from my ideas on Cushioned Retirement Investing in two main ways. With cushioning, you adapt your spending somewhat if investment returns severely disappoint, and the cushion leads to your portfolio volatility dropping through retirement. Bengen tested a strategy where you choose the withdrawal amount based on your portfolio size at the start of retirement. Once the withdrawal amount is set, you only adjust it for inflation. Benge...

Most of us believe that we should reduce the riskiness of our portfolios when we retire. However, there is little agreement on exactly how to do this. One common rule of thumb is to use your age as your percentage in bonds. However, such fixed rules just don’t take into account people’s unique circumstances. I prefer a technique I call Cushioned Retirement Investing to reduce risk. This technique is based on the simple principle that you shouldn’t invest money you’ll need in the next 5 years in risky investments. There is nothing magical about the 5-year threshold. More daring types may choose 3 years, and more conservative types may prefer 7 years. I’ll stick to the 5-year figure for this discussion. The main idea is that you keep any money you’ll need in the next 5 years out of the main part of your portfolio. Because the main part of your portfolio only holds funds that will be there for 5+ years, it can stick to your preferred asset allocation for your entire life. If...

I had another full week of posts. How much longer will I keep this up? Working Out Your Retirement Magic Number How Often Should You Buy Stocks with New Savings? It’s Still Not Rocket Science Abusing the 4% Rule You can follow me on Twitter now ( @MJonMoney ). Here are some short takes and some weekend reading: Freakonomics discusses a study on the effects of long work hours. Just about every high-tech company I’ve worked for celebrates employees who work long hours. I’ve long known that my own performance drops off badly if I try to work too many hours. It’s not just that I’m inefficient in hours 9 through 12 of a given day – I’m likely to be inefficient the entire next day as well. Adequate exercise, rest, and mental relaxation give me the time to reflect and “work smarter.” If I work too many hours, I’m very unlikely to see a better way of getting things done. However, any discussion of these facts at work just sounds to management ears like a lack of commitment...

The 4% rule says that it’s safe to start retirement drawing 4% of your portfolio in the first year and increasing the withdrawal amount by inflation each year. There are important caveats that come with this rule, but they seem to get lost in the retelling. The 4% rule originated with an excellent and very accessible 1994 paper by financial planner William Bengen called Determining Withdrawal Rates Using Historical Data . Bengen showed that portfolios with 50% to 75% U.S. stocks and the rest in intermediate-term treasuries would survive well with yearly withdrawals of 4% of the starting portfolio value. The idea is that once the withdrawal amount is set, you only adjust it for inflation; Bengen assumes that you don’t adjust your spending based on your portfolio’s returns.  This inflexible approach is how he calculated his safe initial spending percentage, but he was clear that a real retiree may choose to increase or decrease spending in the face of a portfolio that is decli...

In a follow-up to It’s Not Rocket Science , Tom Bradley at Steadyhand has another investment book out called It’s Still Not Rocket Science . Like the first book, this one is a collection of a few years of Bradley’s essays explaining investment topics clearly. Bradley’s style contrasts sharply with the usual message from the investment industry that investing is very difficult and that you’d better hand over your money before it blows up. Disclaimer: I did not receive any compensation from Steadyhand to write this review other than a free copy of the book. My relationship with them is limited to having met a few times and liking how they treat their clients. I’m a DIY indexer myself, but for those seeking advice, Steadyhand offers lower fees than most other options. Further, Steadyhand is actually trying to beat the index rather than charging high fees for just hugging the index. Here are a few ideas from the book that jumped out at me. Measuring Personal Returns Most do-i...

My son recently set up his first TFSA and has $450 per month flowing into it. His plan is to buy Vanguard Canada’s exchange-traded fund VCN with this money. Once his portfolio grows, he’ll consider adding other stock indexes and other asset classes. After the first deposit, he asked me a good question: “how often should I buy VCN?” He was clever enough to figure out that making a trade every month might be too expensive, but if he waits too many months between trades, he’s giving up potential growth. There must be some optimum number of months between trades. The following factors affect the optimum interval between trades: m – yearly new savings r – excess yearly return of stocks vs. cash c – stock-trading commission Bid-ask spreads are a real cost, but they don’t enter into consideration because they are the same over the course of time no matter how often you trade. From these values we can calculate T – threshold cash balance when you should trade to minimize ...

How much money do you need to save to retire? This is an important question that gets a lot of debate but few useful answers. We hear arguments over whether a million dollars is enough, as though there is a single number that applies to everyone. Here I offer an answer based on a proposed retirement spending strategy that takes into account your unique circumstances. Lately, I’ve been writing a fair bit about a proposed strategy for retirement spending in retirement ( first description , adding income smoothing , yearly spending percentages , experimental results using 100 years of investment returns ). The focus was on turning a lump-sum portfolio into an income stream for retirement. But we can turn this around and calculate how much you need to save to retire using this spending strategy. I added another page to the spreadsheet that computes the percentage of a portfolio that you can spend each year in retirement based on a set of inputs you supply. (To edit this spreadsh...