Friday, April 28, 2017

Short Takes: Billionaire Spies and more

Here are my posts for the past two weeks:

The Stock Market Only Goes Up

Victory Lap Retirement

Here are some short takes and some weekend reading:

Preet Banerjee interviews investor, spy, billionaire, and holder of 11 honorary doctorates, Stephen Jarislowsky. As an added bonus, Preet uses his latest Drawing Conclusions video to show us what kind of income you need to be able to afford rents in various cities across Canada.

Canadian Couch Potato uses his latest podcast to answer questions about the role of bonds in today’s portfolios.

The Blunt Bean Counter reports from the tax-hell trenches about financial institutions sending incorrect capital gains reports to their clients.

Big Cajun Man reports on an unfortunate side-effect of the Federal Civil Service’s inability to pay its own workers properly. Workers are afraid to make any changes to their pay which means they’re avoiding automated charity donations.

Tuesday, April 25, 2017

Victory Lap Retirement

Mike Drak and Jonathan Chevreau argue that the traditional approach to retirement where you work full-time until some magic day where you fully stop working makes no sense. In their book Victory Lap Retirement, they say we should add another phase of life between full-time work and full-stop retirement where you work part-time doing something you find spiritually satisfying. Another strong theme of the book is trying to persuade readers to quit the job they’ve grown to hate.

Mixed in with the notion of a victory lap of part-time work is the idea of financial independence. It obviously takes some resources to be able to afford to quit full-time work. The authors suggest entering a victory lap after achieving financial independence, but their definition of this term differs from mine: “the point where your basic (non-discretionary) living expenses are covered by your passive (non-work) income.”

As a young adult, I lived very frugally. I know my wife and I could get by if we spent about half of what we spend now. That would be enough to cover our basic needs. But I don’t want to live that way. And I certainly didn’t consider myself financially independent when I had enough money to cover just basic needs for the rest of my life.

The working definition of financial independence that I use is having enough money to cover my current expenses (rising with inflation) until the end of a long life. This is quite different from only being able to cover basic expenses.

It seems far too easy for people who hate their jobs to use this definition of financial independence to justify quitting their jobs and entering their victory lap. Unfortunately, if they jump ship too early, this may be a victory lap spent scrambling to earn enough money to make life tolerable.

The authors encourage the reader to “Reduce your material needs and adopt a more frugal lifestyle.” This is great advice. However, don’t make the mistake of planning to be more frugal after you quit your job. The time to be frugal is during the entire time you’re working full-time. That way you’ll build more savings and make part-time work more realistic sooner. Failing that, at least live frugally for a few months before quitting your job to prove that you and your family can live on less.

In my opinion, the best part of the book is a short section called “The Trap.” It explains how you can start in an exciting job paying more than you need initially, and end up trapped in a job you grow to hate but can’t quit because you’ve become too dependent on a fat income. I’ve tried to explain this to young people to encourage them to save more money, but I’ve had little success. The authors do a much better job explaining this problem than I ever did.

The authors discuss many advantages of working longer including the claim that “Numerous studies have shown that mortality rates improve with an older retirement age.” However, every study of this type I’ve looked at has only shown correlation, not causation. It seems likely to me that sick people tend to retire younger or get laid off younger. That could be the entire explanation for why those who retire younger have poorer health outcomes. There may be no health advantage at all to working longer.

The authors offer seven “eternal truths” of financial independence. Six of these seven make a lot of sense. But “buy a home and pay it off as soon as possible” can end badly in Canadian real estate today. Prices in Vancouver and Toronto are sky-high and banks are willing to lend people more than 5 times their gross income. I’m not against home ownership, but the price has to be reasonable. Overstretching can leave you buried in debt for decades, and possibly lead to bankruptcy. If a home is too expensive, you are likely far better off renting a nice place and building long-term savings.

The authors write that once you own your home free and clear, “For the rest of your days, you’ll be able to live rent-free.” This is misleading. Homeowners pay for property taxes, upkeep, house insurance, and utilities. These can easily add up to nearly the cost of renting a house. Toss in the opportunity cost on the capital tied up in the house and renting can be a huge financial victory.

To be clear, I’m not against owning a home. I own a home. I do this because the extra cost is worth it to me, not because I’ve deluded myself that owning a home today is better financially than renting. There is no reason to believe that the huge real estate gains that baby boomers enjoyed over their lives will get replayed for millennials.

As further evidence that people should consider leaving the job they hate, the authors quote palliative care nurse Bronnie Ware, who explains that people on their deathbeds don’t wish they’d earned more money during their lives. However, I’ve had some relatives who have run out of money and wished they had more. It’s a terrible thing to outlive your money.

Before reading the book, I had assumed that both authors had reached financial independence (in the stronger sense of covering current spending levels indefinitely) before they left full-time work. However, Chevreau had “enough money in the bank to take an extended sabbatical ... and he was (and is) blessed by a wife who continued to work full-time. Mike’s situation was similar.”

I don’t want to be too critical here; this book contains a lot of useful information about how to have a happy retirement. But it also contains a strong element of “we did it and you can too.” It must be nice to be able to quit your job and follow your dreams while your spouse works. I’m not sure this qualifies the authors to encourage sole breadwinners to quit full-time work and trust that everything will turn out okay.

I think the notion of a victory lap has some merit, but make sure you’ll really be okay if your part-time income proves to be very modest. Not everyone does the type of work that lends itself to taking on a few clients part-time, and not everyone has a spouse continuing to work full-time. I think this book is worth a read, but be careful not to let your dream of a victory lap turn into a financial nightmare.

Friday, April 21, 2017

The Stock Market Only Goes Up

Here’s a chart of the S&P 500 total return for the past 8 years:

The only conclusion my lizard brain can draw is that the stock market only goes up. In Daniel Kahneman’s terms from his great book Thinking Fast and Slow (my review here), my brain’s “System 2” knows that the stock market may crash in the future, but my automatic “System 1” is sure the stock market will keep going up forever.

As my human capital dwindles, I get closer to the age where I should be shifting some of my portfolio into safer investments than stocks. I’ve done this by building up a cash reserve, but perhaps it’s not as big as it should be at this point. It’s very hard to shake the feeling that I’m losing out by not having this cash in stocks right now. My System 2 has determined that I should have some fixed-income investments just in case stocks begin a large drop. But my System 1 resisted hitting the sell button.

Younger investors have bigger concerns. Those who have been investing for 8 years or less can’t be certain they have the stomach for the risk level of their portfolios. A huge risk for investors is that they will lose their nerve in a market downturn and sell out near the worst possible time. It’s hard to know what you can handle unless you have lived through a crash of the type that we had in 2008-2009 and back when the dot-com bubble burst.

We can be sure that a market crash will come eventually, but I have no idea when it will arrive. It’s possible that today’s stock level is the lowest it will ever be in the future. It’s also possible that stocks will get cut in half from today’s level. Most likely, we’ll get something in between.

Don’t let your lizard brain blind you to the very real possibility that stock prices will drop significantly from today’s levels. Try to invest your money with a mindset somewhere between fear and euphoria.

Friday, April 14, 2017

Short Takes: Mortgage Rates and Credit Scores, Bond Confusion, and more

I was on vacation for most of the past two weeks and managed only one post about debt:

Managing Debt

Here are some short takes and some weekend reading:

Canadian Mortgage Trends explains recent changes to how your credit score affects your mortgage interest rate. It certainly makes sense to charge more when the risk of default is higher, but I’m not sure that credit scores are a very good measure or default risk. But maybe they’re the best we’ve got.

Canadian Couch Potato tries to clear up a common point of confusion about bonds: the fact that higher interest rates mean lower bond prices.

Where Does All My Money Go interviews Sandra Foster, an expert on personal finance and estate planning.

Big Cajun Man takes on the common misconception that a Tax-Free Savings Account can only hold cash like a regular savings account.

Boomer and Echo calls for an overhaul of the finance industry.

My Own Advisor considers the possibility of trying harder for financial independence and an earlier retirement.

Monday, April 3, 2017

Managing Debt

Debt is a big part of modern life. The high cost of university leads to student debt, and sky-high real estate has many Canadians in large mortgages. And that’s just the kinds of debt that most easily justified. Then we have the growing lines of credit and credit card balances that come from failing to save up for the cars, clothes, electronics, restaurant meals, and home upgrades we want.

Finance Blog Zone asked bloggers for their takes on how to manage debt. (Web crawlers think this article's address is broken but it seems to work:  I read through them all and found 7 of them that caught my eye either because I found the ideas interesting or because I disagreed. Here’s my take on their takes.

Brave New Life

Brave New Life says “College debt and a home mortgage are the only two acceptable debts. Ever.” And for emphasis: “No debt for cars.” There may be narrow circumstances when other forms of debt make sense, but this is an excellent starting position. Too often when I try to tell people that borrowing for a car is a bad idea, their reaction is “that’s great, but is it better to get a car loan or a lease?”

Andrew Hallam

Instead of the usual boring debt advice, Andrew Hallam does a great job of stirring emotions. “Declare war against [debt],” “Crush the debt with the smallest outstanding balance” to “frighten your other debts,” and “Then go after your next smallest debt and ruthlessly obliterate it.” He even suggests taping the carcasses to a cupboard for inspiration. Reading this almost made me wish I had a debt to kill.

Fitz Villafuerte

Fitz says “Focus on how to make more money, rather than wasting time in worrying about how to pay your debt.” Unfortunately, for people with debt-building personalities, earning more money just leads to ever-higher spending and more debt. For those with very low incomes, earning more money can be the right answer. But too many people blame their overspending on their supposedly inadequate incomes. There’s nothing wrong with trying to earn more money, but examining spending is necessary.

Celebrating Financial Freedom

Dr. Jason Cabler attacks the mindset of seeing debt as inevitable: “too many people believe that debt is just a normal part of life, but it doesn’t have to be.” Getting too comfortable with debt is a bad idea. It’s better to see debt-freeness as the normal life state.

Bert Martinez

“Money is an emotion. Debt is an emotion too. How you feel is more important than what you know.” I don’t know what this means or how it can help someone. It’s true that there are a lot of emotions tied up in money and debt, but that doesn’t help me understand Bert’s advice.

J. Money

J. Money says debt problems can be the result of habits. “The best thing that got my money straight was taking a 40 day ‘no spend’ challenge.” This changed his habits and “I didn’t realize how often I’d go shopping when I was bored!” This is some practical advice for people to try instead of just telling them to stop overspending.

Leslie O’Connor

“Don’t look at debt as ‘the enemy’ or ‘a disease’. It is just one small factor in your overall, long-term financial growth.” This works for people who handle their finances well. But for those with debt problems, telling them it’s not a big deal is terrible advice. Andrew Hallam’s advice to declare war is a much better idea.

To close, I’ll stick with something I wrote once before: Debt is a crushing burden that weighs down people’s lives and dreams.