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.

Wednesday, September 19, 2018

What Does FIRE mean?

The hugely popular term FIRE stands for Financial Independence, Retire Early. There are countless articles and blogs devoted to the FIRE movement. But what does FIRE mean? The answer is different from what many would guess.

Financial Independence

Let’s start with the FI part of FIRE: are those who say they’ve FIREd financially independent? Here’s my definition:

You are financially independent if you have enough money or other assets to cover the costs of living the life you want for the rest of your life without having to earn more money along the way. You can be financially independent if you depend on truly passive income such as dividends, capital gains, interest, or a business you own but where you don’t work. However, there should be sufficient margin in your assets and passive income to cover possible market crashes or increased spending needs with reasonably high probability.

Based on this definition, few people who have FIREd are financially independent. Some still depend on a spouse who works. Other work part-time, or they work full-time at something they like much better than their former job. Others stripped down their spending drastically to make their spending match the income their assets produce. This doesn’t preclude being financially independent if their assets have some margin and their spending level is sustainable. Unfortunately, ultra-low spending that you can handle in your 30s may not be sustainable in your 60s or 70s, even after adjusting for inflation.


Next, let’s look at retirement. People have many definition of retirement. Mine depends on how much of your time you spend earning income. So, if you’ve quit your full-time job and now spend a few hours a week making some money on the side, I’d say you’re “mostly retired.” Working full-time on a blog to earn income makes you “not retired.” There’s a whole continuum from not retired to fully retired. Based on this definition, few of those who have FIREd are fully retired. Most aren’t even half-retired because of how much they work.

So, what does FIRE actually mean?

The most broadly applicable definition of FIRE I can come up with is it has come to mean quitting the job you hate. I can relate to this. The older I get, the less interested I am in doing what other people want me to do. Those who have FIREd have found a way to get by without working at the soul-destroying job they came to hate.

If they’re not financially independent or retired, were they wrong to FIRE?

Not at all. It’s perfectly sensible to pursue happiness. Why work at a job you hate until you reach true financial independence if it’s possible to get along fine doing something else? If you do quit the job you hate at a young age, why is it important to be fully retired?

The main problem with FIRE is that it is completely misnamed. As long as FIRE enthusiasts call themselves financially independent and retired, critics won’t go away. I don’t have a better name, though. It’s hard to beat the marketing power of screaming FIRE, even if the words making up this acronym apply very poorly.

My case

I guess I FIREd a little over a year ago. I didn’t hate my job, and I did wait until I was solidly financially independent. I was tempted to leave earlier, but I knew I could never get a job at the same pay again if my skills got stale for 5 or 10 years. By age 70, I doubt I could get a job at one-quarter of what I used to make. So, I stayed with my job until I have a large safety margin of financial independence.

Whether or not I’m retired is debatable. I don’t blog for money; it’s a hobby I enjoy. My blog’s income is now solidly in the 3-figure range. I’ve discussed consulting work a few times in the past year, but haven’t done any work yet. I don’t see any point in deciding now whether I will ever work again. I’ll do what I want when the time comes.

I wish all those who have FIREd well. I worry about some who count on maintaining ultra-low spending for the rest of their lives. Expenses have a way of creeping up as you age. That said, I’m a supporter of finding a way to get away from work you don’t like.

Tuesday, September 18, 2018

Interest Tax Deduction when Borrowing to Invest

Last week’s article on Smith Manoeuvre risk sparked reader RS to ask the following thoughtful (lightly-edited) question:

Have a mortgage and have non-registered investments (mostly in XIC) that can cover a significant portion of my outstanding mortgage. Wondering if it will make sense to pay off the mortgage using non-registered investments and take a HELOC and buy the same (or similar to avoid attribution) assets. I will be in the same position as I am now, but now I will be able to write off interest (which will be about 25% more in HELOC). My marginal rate is 50%, so I guess it might be advantageous. I will also need to factor in any capital gains taxes (25% of gains) that I will incur now against the savings. But this thinking sounds too simplistic. Not sure if I am missing something here.

I don’t think you’re missing much. Given that you have had a mortgage at the same time as building non-registered investments, it would have been better to have set things up to make your interest tax-deductible from the beginning. But that’s water under the bridge now.

If we take it as given that you will maintain your leverage, then whether to proceed with the change depends on the numbers. You can project a likely outcome over whatever period of time you plan to maintain your leverage, calculate your costs and savings in each scenario, and choose a winner. I’m guessing the numbers will favour making the change to make your interest tax-deductible, but I’d have to see all the numbers to be sure.

Keep in mind that CRA has a number of requirements you have to meet before they will allow you to deduct interest costs. Be sure you understand them before you proceed.

The purpose of my original article was to make people think about whether they want to leverage their stock investments at all. So, in addition to possibly making the change you’re contemplating, you should consider whether to just pay off your mortgage to reduce risk and not get a HELOC.

Whether this lower-risk scenario makes sense can’t be determined by running numbers on most likely scenarios. You choose to de-risk based on the possibility of a very bad scenario. Would a crash in stock prices, house prices, and widespread layoffs leave you devastated, or would you be okay? This is the right way to think about the level of risk you take on.

My personal choice years ago was to pay off my mortgage before I started building non-registered investments. Only you can decide how much risk you want to take on.

Friday, September 14, 2018

Short Takes: Pain of Spending, Condos, and more

Here are my posts for the past two weeks:

Avoiding the Stock Market

Where Retirement Income Plans Fall Down

10 Ways to Stay Broke Forever

Smith Manoeuvre Risk Assessment

Here are some short takes and some weekend reading:

Joe Pinsker has a very interesting article about lowering spending by increasing the pain of spending. In the end, I’m suspicious that making yourself feel pain about all spending isn’t sustainable. Somehow we need to feel fine about sensible spending and feel pain for dumb spending.

Condo Essentials has a list of signs that will allow you to spot a bad condo before you buy it. I’m not a big fan of buying overpriced condos, but you should at least check for these problems before diving in.

Canadian Couch Potato compares bond ETFs to GICs for retirees.

Big Cajun Man explains why you might want to open an RESP for your disabled child instead of using an RDSP only.

Boomer and Echo review Larry Bates’ new book, Beat the Bank: The Canadian Guide to Simply Successful Investing.

Thursday, September 13, 2018

Smith Manoeuvre Risk Assessment

The Smith Manoeuvre is a tax-efficient way to borrow against your home to invest more in stocks. This increases your potential returns, but also increases risk. Periodically, it makes sense to evaluate whether you can handle the potential downside.

It’s clear that if you can follow the Smith Manoeuvre plan through to near retirement without collapsing it at a bad time, you’ll end up with more money than if you hadn’t borrowed to invest. The important question is how likely you are to be forced to sell stocks to pay your debts at a bad time.

It’s easy to decide you’re safe without really considering the risks. I find that employees, particularly in the private sector, underestimate the odds of getting laid off. Most of the time, they’ll say it can’t happen. But it can. You can lose your job, stocks can fall, real estate prices can fall, and all 3 can happen at once.

In fact, a single event could trigger all 3 bad outcomes. Anything that could cause stocks to drop 30% could easily cause sky-high Canadian real estate prices to drop significantly as well. The resulting pressure on businesses could lead to layoffs. This isn’t a prediction; it’s just one possible outcome out of many. This raises the following question.

Could you keep your financial plan going if the total value of your house and stocks dropped below your total debt at the same time as you’re unemployed for a few months followed by employment at a lower salary?

A gut feel isn’t really an answer to this question. A real answer comes from looking at numbers, including your essential spending, available cash, and the amount of reduced cash flow.

If your answer is that you couldn’t survive a scenario like this without selling stocks or your house to make payments on your debt, then you should consider reducing your leverage now (which is just a fancy way of saying you should sell some stocks now to pay off some debt while stock prices are high).

If your answer to this question is that you’d be fine in this scenario, or at least you could come out of it with minimal damage, then good for you. If your answer is that such a bad scenario can’t happen, then I wish you luck because it did happen in the U.S. in 2009.

Tuesday, September 11, 2018

10 Ways to Stay Broke Forever

One starting point for improving your personal finances is to look at what doesn’t work. This is the approach Laura J. McDonald and Susan L. Misner take in their book 10 Ways to Stay Broke Forever. The authors offer many suggestions for changing negative spending habits, but the book also contains a number of parts that make me question the authors’ numeracy.

Financial education “tends to be technical, overly complex and written in obscure, jargon-filled prose. As a result, it often fails to reach the very people for whom it is designed.” This book is quite easy to read. However, some attempts to lighten the subject matter seem forced, such as starting an explanation of liquid assets with “This always makes us think of the bottle of PatrĂ³n Gold tequila stashed in our freezer.”

Positive aspects of the book include discussions about cars. Rather than leasing, if you save up before you need a car “you could go buy that sweet ride outright, with cash.” Another section has some creative ideas for carless alternatives.

If we’re having financial troubles, the authors recommend a “personal finance reboot” to “shift us from a bad pattern into a better one.” One step is to “Check your bank balance online every day to gain awareness of your cash flow levels at all times.” Another is to “Give the plastic a rest and use cold hard cash for awhile.”

On dining out, some tips for saving money include having “a long, leisurely weekday brunch or lunch rather than a dinner,” and “eat dinner at home and then head [out] for dessert and a glass of wine.”

One piece of advice I don’t agree with is to “Buy instead of rent” your home. Too many young people are digging themselves big holes and would be better off renting until home prices are more affordable.

In one baffling section, the authors steer readers to investing “with your friendly neighbourhood bank.” “The personal financial representatives at the bank are trained to help beginner savers and investors understand their options through the use of plain language and straightforward advice.” Either that or they’re heavily-pressured salespeople steering their customers into ridiculously expensive mutual funds.

There were several parts of the book that had me questioning the authors’ numeracy. They claim that Total Debt Service Ratio (TDSR) is also known as “Debt-to-Income Ratio.” It isn’t. TDSR is the payments you have to make on your debt divided by your income, not debt divided by income. Typically, to get a mortgage, your TDSR must be below about 40%. Knowing this “it might shock and appall you to learn that the average Canadian household’s debt-to-income ratio is a whopping 163 per cent. So, yeah, this is a problem.” Because these are different measures, comparing the 40% TDSR limit to the 163% debt-to-income ratio is meaningless.

A survey “found that 61 per cent of Canadians believe they have less debt than the average Canadian. Since that is statistically impossible, it seems we might have just found our common national characteristic: debt denial.” It’s not statistically impossible. In fact, their next paragraph includes “the average credit card debt is $3277.33. Forty-one per cent of Canadians have credit card debt of more than $3,000.” So, 59% have credit card debt under $3000, and even more have credit card debt under the average amount ($3277.33). It’s important to understand the difference between average and median.

In a list of the components of the purchase prices of a car, the first entry was “Price of your car ÷ monthly payments.” This formula gives some number of months, which obviously isn’t part of the purchase price of a car. Perhaps they meant “payments times number of months.” It’s bad enough that someone wrote this, but apparently all the book’s proofreaders either didn’t see it was wrong or just glossed over anything that looked mathematical.

A “BMO report found that 43 per cent of Canadians sometimes spend more in a month than they earn.” That sounds bad until you try to figure out what it means. I sometimes spend more in a month than I earn. Over the years, I’ve paid for a pool, a deck, new windows, new flooring, a new fence, and other big-ticket items. In each case I spent more that month than I earned. I’m willing to bet that 43% should actually be over 99%. So what was this statistic actually measuring? Your guess is as good as mine.

These innumeracy problems may not affect the bulk of the book that is intended to give people practical ideas for breaking out of self-destructive spending patterns. However, when I see authors get things like this so wrong, it makes me doubt other parts of the book. Many things I already knew, but how much trust should I put in the parts I didn’t already know? I can’t recommend this book.

Thursday, September 6, 2018

Where Retirement Income Plans Fall Down

Whether you use the 4% rule for retirement income or some bucketing strategy variant such as my cushioned retirement investing, a fatal flaw lurks, threatening to undermine any sensible plan. This flaw is the number one reason why it makes sense to be conservative with the percentage of your assets you plan to spend each year.

I saw a good example of the problem when I helped a retired family member with her finances. I worked out a safe withdrawal amount each month and set up her portfolio to transfer this amount into her chequing account each month.

Within a year, she needed to make a large withdrawal from her savings. The reason doesn’t matter. It could have been for a car, a grown child who needed money, or something else. The problem was that she wanted to have her cake and eat it too. She wanted a steady income from her savings and to be able to dip into her savings when necessary. The problem is you can’t do both safely.

I don’t think the rest of us are much different. We can understand that we can’t double-dip, but faced with a problem that can be solved with money, it’s easy to decide that just this one time, it’ll be okay. Except that it will happen again and again. It seems that huge pots of money are irresistible.

So, when you’re reading about the latest ideas on how to spend 5%, 6%, or even 7% of your nest egg each year, keep in mind that such aggressive plans allow no room for special “one-time” lump sums. High withdrawal rates already increase the risk of running out of money; adding extra withdrawals makes financial ruin a near certainty. It’s better to have less aggressive monthly withdrawals and admit that occasional needs for lump sums are a possibility.

Tuesday, September 4, 2018

Avoiding the Stock Market

I used to think that the main factors that kept people from investing in the stock market were volatility and risk. However, a recent conversation with someone I’ll call Jim taught me that the difficulty of finding decent advice is a barrier as well.

Jim runs a successful small business in a rural area. He is at retirement age now and has turned over most of the business operations to his sons. He’d prefer to retire fully, but he still works enough out of his home to draw a minimum wage salary.

Jim’s retirement plan consists of continuing to work at his business and occasionally severing parts of his land to sell. He has some assets in an RRSP, but he’s not sure how much to trust the income he can draw from it. He had his RRSP at one of the big banks for many years, but his results were poor. Recently, he took a recommendation for another advisor who turned out to work for an insurance company. So, now Jim’s in expensive segregated funds, not that he’d heard of “segregated funds” before our conversation.

Jim is savvy enough in the ways of the world to understand that he hasn’t been treated well when it comes to his savings. But he can’t figure out what would be better. At least he understands that he must be paying fees somehow. He asked his new advisor what he pays in fees. The advisor deflected the question several times until Jim finally demanded to know what he pays. The advisor relented and told him. So, now Jim has confirmation that his savings have a huge leak that will severely reduce his retirement income.

If I were in Jim’s place, I’d just sell off the business and the land I don’t need, stop working, and invest the proceeds in mostly stocks. However, that’s because I know how to invest with total costs less than 0.2% per year. Jim’s alternative strategy of selling land in pieces and continuing to work makes sense given that he hasn’t figured out how to get a fair shake with his investments.

This story makes me wonder how many people out there choose investments like real estate or a business because it’s a world they understand. They avoid stocks not because they don’t believe in their long-term growth prospects, but because they understand their own limitations in figuring out how to get decent investment advice.

Friday, August 31, 2018

Short Takes: Predictions of Doom, Zero Fees, and more

I found my blog in a searchable list of over 2000 personal finance blogs. Apparently, I’m number 112 in Canada. I assume this is for several reasons. I don’t know how to set the blog up properly for viewing on phones. I’m not on Facebook. I use too many numbers and charts. The writing level is too high. Sometimes I take unpopular positions if I think the common wisdom is wrong. I don’t know much about SEO. I don’t fix broken links often enough. I have no idea why my Google PageRank got dropped to zero. I’m unwilling to pay anyone to fix some of these things. No doubt others could add to this list. I appreciate all my readers who fight through these problems and give me a reason to keep blogging.

I managed only one post in the past two weeks:

Seniors Staying in their Homes

I was pickier than usual recently. Here are a couple of articles worth reading this weekend:

Shawn Langlois has a funny chart overlaying predictions of economic doom on top of a steadily rising S&P 500 chart.

Dan Bortolotti points out that while zero-fee investing will save you a few bucks, it won’t make you a better investor.

Thursday, August 30, 2018

Seniors Staying in Their Homes

Rob Carrick says realtors and family members should stop pushing seniors to sell their homes. He portrays both groups as greedily seeking money. No doubt there are family members out there looking to get access to an early inheritance, but there’s no shortage of delusional seniors who won’t move but haven’t been able to properly maintain their homes in years and whose ability to care for themselves is in doubt.

As it happens, my wife and I have been living through a period where four seniors in the family are having difficulty managing in their homes. In one case there was no sign of dementia, but she wouldn’t leave a rural home even after requiring 24-hour nursing care at a cost that would have drained her savings in a couple of months.

In two other cases, dementia is an issue, but they insist on staying in a home they can’t maintain without constant help from overworked family. In a fourth case, she is already in an apartment, but often can’t even open her front door. We found another apartment that offers more indoor activities and varying levels of help, but, you guessed it, she won’t go.

It’s not that all seniors refuse to accept an obvious reality. My grandmother comes to mind. She made a decision in her young life that she and her husband couldn’t manage a farm any more. Later she decided the two of them had to leave their home for an apartment. She voluntarily gave up driving, and finally moved in with her daughter when they couldn’t handle being alone any more.

The internet rewards writers who offer strong opinions like “stop pushing seniors to sell their homes.” But how many times can you call 911 for a senior who was injured in yet another fall before you feel you must try to convince them to move to somewhere more suitable?

Elder financial abuse is a big problem, but seniors staying in homes they can no longer maintain or even get around safely in is also a problem. Each case is different, and no one answer works everywhere.

Friday, August 17, 2018

Short Takes: Asset Location, Adulting, and more

Here are my posts for the past two weeks:

Powerless Employees

The Year of Less

Here are some short takes and some weekend reading:

Justin Bender pulls his asset location rules together in an excellent post where he goes through an example of allocating your money across a TFSA, RRSP, and a taxable account. The calculations may seem complex, but I use a spreadsheet that does them automatically for me. That way, I only have to figure it all out once. Justin is right that DIY investors may do well to just keep the same allocation within each account for simplicity, but if you’re paying someone else to manage your money, you should expect them to get post-tax asset location decisions right.

Potato says that doing what you think adults are supposed to do is “cargo cult adulting.” It’s better to decide for yourself what being an adult means. I liked his example of some young people thinking they have to own a house before having kids. It’s true that I owned a house before having my kids, but my parents didn’t. In some decades, real estate is expensive, and in others it’s cheap. There’s nothing wrong with renting if you’re socking away some of the money you’re saving not having to pay for house repairs, property taxes, and other costs.

Big Cajun Man looks back at how a layoff from a decade ago hurt at the time but worked out well in the end.

Boomer and Echo describe the differences between group RESPs and self-directed RESPs. The better choice is obvious, but only after you understand how these plans work.

Thursday, August 16, 2018

The Year of Less

I don’t have to look far into my circle of family and friends to find compulsive shopping. This isn’t a problem I understand very well myself; I don’t like shopping and have many excuses for why I haven’t replaced old clothing. In her book The Year of Less, Cait Flanders gives us insight into shopping addiction as well as addictions to alcohol, other drugs, food, and television. Fortunately, she also describes her path away from the pain that drives these addictions.

The centerpiece of Flanders’ solution to her addictions was a self-imposed yearlong shopping ban. Her rules were quite strict. For example, she banned herself from shopping for take-out coffee, clothes, shoes, accessories, books, magazines, candles, furniture, and electronics. She did allow herself to replace things that she needed but had worn out.

During this yearlong shopping ban, she also got rid of most of her stuff. Her goal was to reduce her belongings to just the things she really used. This is one aspect of her journey that I can identify with—having too much stuff. I don’t buy much, but I keep too many old things.

“There were really only two categories I could see: the stuff I used, and the stuff I wanted the ideal version of myself to use.” This “aspirational” category of buying includes things like intellectual books and skinny clothes.

Her shopping ban included eating better and eliminating alcohol, other drugs, and cable TV. So the hard work she did to stick to these rules took care of her other addictions.

One particularly interesting aspect of this shopping ban was that Flanders didn’t restrict her travel. Although she did save significant amounts of money, that wasn’t her main goal. She wanted to make her life better. Her path to a better life included thoughtful purchasing, eliminating bingeing, and enjoying the benefits of travel.

“The toughest part of not being allowed to buy anything new wasn’t that I couldn’t buy anything new—it was having to physically confront my triggers and change my reaction to them.” It seems that Flanders’ self-destructive behaviour was an attempt to alleviate pain rather than a desire to consume.

The author’s friends tried to draw her back into her old life of consumption. “They told me I ‘deserved’ it. ‘You work so hard!’ they said. ‘And you live only once!’ I hated the acronym for that truism: YOLO. I’d watched too many friends swipe their credit cards and go deep into debt on that rationale.”

The book closes with some advice for anyone considering their own shopping ban. However, she doesn’t advise readers to follow her path too closely. Spend some time thinking about “the reason you want to take on a challenge such as this in the first place.”

This book is a much more interesting read than your typical book about finances. Flanders tells a compelling personal story in a way that keeps the pages turning. It gave me some insight into the reasons behind the otherwise baffling self-destructive behaviour I see in people I care about.

Tuesday, August 14, 2018

Powerless Employees

I’m used to bank branch employees having almost no power to overrule procedures enforced by their computer systems. Even branch managers can do little to override computer rules other than send requests to centralized bank departments. A recent stay at a Comfort Inn in Laval showed me that this way of running a business has made it to at least some of the hotel industry.

We wanted to stay at the same hotel as others who were attending the same event as we were. We booked online and chose to pay extra to get a king-sized bed instead of a queen-sized bed. When we arrived, they said they had no rooms available with a king-sized bed. This isn’t too surprising. I’ve encountered this at even some high-end hotels when they juggle reservations trying to keep as many rooms booked as possible.

What happened next surprised me. I accepted their apology for not having the room we booked, and I asked that they reduce our room rate to the queen-sized bed rate we were offered online. But the desk attendant said she couldn’t. She said the best she could do was leave a note for a more senior employee to look at it the next day.

The next day we spoke to the more senior employee who said she couldn’t reduce the room rate either; the system just wouldn’t let her. Her tone of finality was designed to make us slink away and accept the fact that we’d pay an inflated price for an inferior room.

Not being the meek sort in such circumstances, I insisted that if she couldn’t fix this, she should call someone who could. She said she couldn’t call because this wasn’t an emergency. After the exchange became a little tenser, she insisted the best she could do was send someone an email, but promised she’d fix it.

Taking the events to this point at face value, the employees were powerless to make any meaningful decisions themselves. It could have been just an elaborate show put on to get us to go away, but I’m inclined to think they really couldn’t do anything on their own.

Within a couple of hours, I got a call offering a 25% discount as compensation for not getting the king-sized bed we booked. I accepted this without further complaint. The morning we left, our bill showed a 25% reduction for only one of the two nights. Nice.

The final price after the partial 25% discount roughly matched what we would have paid if we had booked a room with a queen-sized bed. I chose not to complain any further, but I found the whole affair pointlessly unpleasant. The desk attendant should have been able to adjust the room rate in a case where it was so obviously justified. I won’t be in a hurry to stay at a Comfort Inn again.

Update: My wife received an email from Comfort Inn inviting her to fill out a survey, so she did.  She included a description of our experience.  She got a response with an apology and a promise to extend the 25% discount to the second night's stay.  That takes the edge off our unhappiness somewhat, but reaffirms my sense that front-line staff have too little power to handle routine situations sensibly.

Friday, August 3, 2018

Short Takes: Asset Location, Border Seizure, and more

I managed only one post in the past two weeks:

Serving as an executor

Here are some short takes and some weekend reading:

Justin Bender analyzes asset location decisions between a TFSA and taxable accounts. These types of decisions are very easy to get wrong. Justin approaches these analyses in the right way.

CBC tells a cautionary story about trying to send money to someone in the U.S. and having it seized at the border. The few times I’ve sent large amounts to another country, I did it by wire transfer rather than sending bank drafts.

Canadian Couch Potato explains that short- and long-term interest rates don’t always move together. This is why bond funds haven’t been hurt much so far by rising short-term interest rates.

A Wealth of Common Sense has interesting definitions of 3 levels of wealth based on your attitudes about spending. I’d say I’m just shy of level 2.

Robb Engen at Boomer and Echo makes some excellent points about why you can’t count on today’s strongest-looking stocks to perform well in the future. He then plays the stock-picking game anyway and picks a stock he thinks will be good for 25 years. He’s careful to say he’ll stick to indexing, but I suspect most of the commenters who weighed in with their own picks are betting their money on those guesses. My own pick for best stocks to own for the next 25 years is all of them.

Potato reviews the book Worry-Free Money. I reviewed this book as well.

Thursday, August 2, 2018

Serving as an Executor

I haven’t been writing much lately because I’m serving as executor for an estate. If you’re considering serving as an executor, try to be realistic about how much work is involved. So far, I’ve found that everything is at least 5 times more work and takes 10 times longer than I expected.

Even with the advantages of no longer working full time and having had a year or so to prepare, I’ve felt overwhelmed at times. The seemingly simple task of finding contact information for the beneficiaries took me a week and several calls to wrong numbers in Europe.

I also have the advantage that the biggest beneficiaries get along well. But even so, we don’t see eye-to-eye on the best way to sell the largest asset, a home. Lesser assets like furniture, crystal, silver, and art cause more work than strife. It takes time to figure out how to sell these items for more than just pennies on the dollar in an estate sale.

This experience has made me more determined than ever to do what I can to make this process easier for my sons. I give away or throw away things I don’t need. When original copies aren’t needed, I scan records instead of keeping paper copies. What records I keep are well organized. As I age and I become more concerned with passing on certain prized possessions than keeping them, I intend to find worthy recipients myself and give them away while I’m still alive. If my financial assets grow far out of proportion to what I need, I’ll give away some money while I’m still alive.

Being an executor for a family member’s estate is an honour. But know that you’ll have a lot of work to do, and you’ll be in the middle of some difficult conflicts.

Friday, July 20, 2018

Short Takes: Benjamin Graham, Bankruptcy, and more

I managed only one post in the past two weeks, a book review:

The Best Investment Writing

Here are some short takes and some weekend reading:

Jason Zweig explains how many of Benjamin Graham’s brilliant insights are still very relevant today. This includes one case where birds do better than people in a probability-based test.

Doug Hoyes explains why bankruptcy is a business decision and is not morally wrong.

Canadian Couch Potato interviews Rob Carrick in a wide-ranging interview. One topic they cover is whether we should blame DIY investors for paying trailing commissions on the mutual funds they buy from discount brokers who offer no advice. The two sides of this debate aren’t really disagreeing with each other. Why can’t the DIY investors be wrong for not learning enough, and the discount brokers be wrong for charging for a service they don’t provide? Of course, blame is pointless. I think we’re getting the right outcome with the rule that discount brokers must stop selling funds with embedded trailing commissions. I’d only take issue with someone whose blame of DIY investors for lacking knowledge goes so far that they’re not in favour of this new rule.

Boomer and Echo explain the fine print in the big banks’ seemingly generous offers for switching bank accounts.

Monday, July 16, 2018

The Best Investment Writing

When I saw a book called The Best Investment Writing, edited by Meb Faber, I couldn’t resist reading it. The book contains about 30 well-written articles, mainly on topics related to active investing. As an index investor who has given up trying to beat the market, this book served as a test of whether I might change my mind. I didn’t.

There are too many articles to comment on all of them, so I’ll just pick out a few parts I find interesting or feel the need to comment on.

Jason Zweig discussed how markets have become more efficient: “If you’re applying the tools that worked so well in the inefficient markets of the past to the efficient markets of today, you are wasting your time and energy.” That’s the conclusion I came to several years ago.

Gary Antonacci gets many people looking to tap into his 40 years of investment experience. I found one typical question and answer both wise and funny:

Question: I just looked at my account, and it is down. What should I do?
Response: Stop looking at your account.

Todd Tresidder says that “if you’re 55 and just starting to build for retirement, then beware of investment advice pushing you toward passive investments like paper assets. Your situation may require the leverage only available in business and real estate to allow you to make up for the late start and still achieve your financial goals.” This sounds like terrible advice to me. It’s better to accept a modest future than to swing for the fences and risk ending up with less than nothing.

Aswath Damodaran says that before answering the question of whether stock markets are too high, “you should consider where you would put your money instead.” Just because the expected return on stocks is low due to high valuations doesn’t mean that bonds or other assets have higher expected returns.

Jason Hsu and John West say that “A preference for complexity is almost hardwired into investors, their agents, and managers because the intuition is that a complicated investment landscape requires a complex solution: a complex strategy also supports a higher fee from both agents and managers.” Simplicity is better.

Charlie Bilello argues that nobody is really a passive investor. For you to be a passive investor “requires a lump sum investment into the market portfolio on the day you are born and only sold on the day you die.” I find this about as useful as saying a person isn’t thin because he or she weighs more than zero pounds. Owning a house, rebalancing your portfolio, and investing new savings do not disqualify you from being a passive investor. I see this reasoning frequently from those who make their livings from active investing. Perhaps this black-and-white reasoning is meant to persuade index investors that since they’re already getting their feet wet with active investing, they might as well dive in.

This book is useful for anyone looking for a diverse set of well-written discussions of investing topics. It didn’t change my mind about sticking to index investing, but it’s a good idea to venture outside your circle of like-minded friends.

Friday, July 6, 2018

Short Takes: Asset Location, Vanguard’s new Canadian Mutual Funds, and more

I managed only one post in the past two weeks about a “zero-interest” loan with high “fees”:

0% Interest

Here are some short takes and some weekend reading:

Justin Bender and Jason Heath disagree on whether to hold stocks in your RRSP or taxable account. Properly accounting for taxes, Justin is right; stocks are better in your RRSP.

Boomer and Echo report that Vanguard is entering the Canadian mutual fund market with 4 funds whose MERs are below 0.5% per year. It seems likely that Vanguard will do more to help Canadian investors than the Canadian Securities Administrators (CSA).

Tom Bradley at Steadyhand says the Canadian Securities Administrators’ failure to ban embedded commissions in their recent reforms caused “A bad day for the Canadian investor.”

The Blunt Bean Counter shares his experience and advice on giving money to your adult children or your parents. Don’t miss part 2 where he covers the reasons for money requests: need, seed, and greed.

Big Cajun Man sees a lot of FUD in financial markets.

Tuesday, July 3, 2018

0% Interest

Does a 0% interest loan sound too good to be true? You can get a 12-24 month installment loan from Brim Financial, and they claim to charge 0% interest. Not many borrowers will truly believe the cost is zero, but few will guess how expensive these loans really are.

Brim replaces “interest” with “fees”. There is a one-time installment fee of 7% of the loan amount that you have to pay in the first month. Then there is a 0.475% monthly processing fee. This fee is based on the original loan amount, not the declining balance owed.

Suppose you borrow $1200 for 12 months. The monthly payments before fees are $100. In the first moth, you pay the 7% installment fee ($84 in this example). You also pay a monthly processing fee of $5.70. In total, you pay $189.70 in the first month, and $105.70 for the remaining 11 months. The internal rate of return works out to 2.00% per month, and this compounds to $26.9% per year.

So, these carefully crafted loan terms combine 0% interest with a one-time 7% fee and an ongoing 0.475% fee to create a debt that costs 26.9% a year. That’s impressive ... and nauseating. Even those who read the fine print about fees are likely to think they’re paying a rate below 10%.

If you go for the two-year option, the cost compounds to 19.4% per year. That’s not much better, and you have to suffer through the payments for an extra year.

If this type of loan advertising is legal and remains legal, then it’s open season on borrowers.

Friday, June 22, 2018

Short Takes: Asset Location, Placebo Effect, and more

Yesterday, regulators went about 10% of the way to eliminating investment industry practices that silently drain money from Canadians’ retirement savings. Maybe in a few years they’ll put a stop to another 10%. Here are my posts for the past two weeks:

The Power of Passive Investing

Blockchain and Cryptocurrency News

Exploiting Innumeracy

Here are some short takes and some weekend reading:

Justin Bender explains that “it’s your post-tax asset allocation that determines your ending portfolio value.” As I explained in a post on Asset Location Errors, there are many people who get asset location decisions wrong because they mix up pre-tax asset allocation and post-tax asset allocation. Justin does an excellent job of explaining these issues in detail with clear examples.

Scott Alexander reports on a research finding that the placebo effect seems to be just mean reversion. There seem to be a great many “results” that owe their existence to poor use of statistics.

Canadian Couch Potato interviews Ben Rabidoux who has a sensible take on real estate as an investment. CCP also discusses how hedge fund returns don’t live up to their reputation, and explains the danger of having some initial success with stock-picking.

Big Cajun Man lists his 5 best investments. The last one might help me with my sore back.

Thursday, June 21, 2018

Exploiting Innumeracy

It’s not news that governments and businesses take advantage of those who can’t or won’t do basic math. A good example is lotteries. Another recent example comes from a regulator of massage therapists, called the College of Massage Therapists of Ontario (CMTO). To justify a large increase in fees, CMTO is counting on its massage therapists being innumerate.

Annual fees for massage therapists will be going from $598 to $785, a 31% increase. In their announcement of the rising fees, the first part of CMTO’s justification is as follows.

“CMTO has not raised fees much beyond inflation in almost a decade (since 2009), while the size of our registrant base has increased by more than 40 percent.”

Most people’s eyes glaze over at the sight of numbers, but it pays to think a little. Let’s pull this statement apart. If “CMTO has not raised fees much beyond inflation in almost a decade (since 2009),” you can guess what happened in 2009. CMTO increased registration fees by 29%, which is more than a decade of inflation.

The next part is the most troubling: “while the size of our registrant base has increased by more than 40 percent.” If you don’t think much about this, it seems to make sense that you need more money to regulate more massage therapists. However, the fees are paid by an increasing number of therapists. So, even if CMTO never increased fees at all, they’d still be getting 40% more money. The 31% increase from $598 to $785 per year is on top of any increase in the number of registrants.

Here is a rewrite of the quote above removing the spin:

“Despite fee increases over the past decade that total more than double inflation, CMTO is now raising registration fees by 31% to $785 per year.”

The truth is that as the number of registrants increases, an efficient organization could have used economies of scale to control the fees paid by each registrant. But it’s not surprising that CMTO is looking for a big fee increase. C. Northcote Parkinson explained the nature of administration decades ago.

Tuesday, June 12, 2018

Blockchain and Cryptocurrency News

I’ve received 10 blockchain and cryptocurrency announcements in just the past week. To save you time, I’ve summarized them here. I’m guessing the PR firms sending the announcements might quibble with my summaries.

  1. A market for investments you should never own now plans to use blockchain to track share ownership.
  2. You can buy a service that mines cryptocurrencies for you. Try to guess whether they price the service above or below the value of the mined coins.
  3. Another cryptocurrency exchange is opening. Hopefully, it won’t get hacked like the others.
  4. Another cryptocurrency is available.
  5. Cryptocurrencies are getting hacked.
  6. There’s another cryptocurrency app.
  7. And another app.
  8. Cryptocurrency “experts” are eager to get their messages published.
  9. Bitcoin could go to $30,000 soon. Of course, it probably won’t.
  10. “Experts” predict huge increases in cryptocurrency values. Of course, they might go down instead.

Monday, June 11, 2018

The Power of Passive Investing

“Passive investing is power investing.” This line from Richard Ferri’s book The Power of Passive Investing: More Wealth with Less Work is proof that he’s far better at persuading people to use index investing than I am. Who wouldn’t want to be a power investor?

Ferri goes through the academic evidence and makes the case for passive investing to individual investors, charities and personal trusts, pension funds, and advisors. The typical individual investor will get the central ideas of this book, but it’s mainly aimed at much more knowledgeable investors.

Ferri takes dead aim at the “utter failure of active managers to deliver on their promises of market beating results while enriching themselves with fees extracted from investors who entrust money to them.”

“A fund that tracks an index may charge only 0.2 percent in annual fees compared to an active fund with the same investment objective, which may charge 1.2 percent per year.” Over 25 years, these costs grow to 4.9% and 26%, respectively. But Ferri is focused on U.S. funds. In Canada, we often pay about 2.5% per year (46% over 25 years).

Ferri estimates that “tactical asset allocation errors cost investors about 1 percent per year.” Doesn’t this mean there is someone on the other side of these trades making money at tactical asset allocation? Perhaps not depending on exactly how this cost is measured. I find I’m often left with questions about exactly how some statistics are calculated.

One section of the book quotes results from DALBAR on the eye-popping gaps between mutual fund time-weighted returns and the money-weighted returns of actual investors. I’ve written before about how DALBAR’s measure of investor underperformance is wrong. Fortunately, the rest of the evidence in this book supporting passive investing doesn’t depend on DALBAR’s results.

Ferri has some counter-intuitive advice for you: “Avoid strategies that promise to deliver excess returns and you will earn higher returns.” Investing is an area where trying harder can make things worse.

As for finding a talented active manager to handle your money, why would someone capable of beating the market need your money? “If an active manager were talented, chances are you’ve never heard of him or her, and if you did, you’d never be able to hire them.”

Ferri believes that advisors cling to active management “because they believe it’s what their clients want.” But he says “Individuals who go to an advisor aren’t looking to beat the markets. They’re looking for prudent investment advice that’s appropriate for their needs.”

“When an inexperienced person visits an advisor for advice and councel [sic], it is the responsibility of the advisor to disclose how they are paid up front.” No advisor I ever worked with passed that test.

Overall, Ferri does a strong job of presenting evidence for the superiority of passive investing, but few investors would have the patience to go through it all. More likely, Ferri will persuade a group of more knowledgeable investors, and some of them will take a simplified message about passive investing to individual investors.

Friday, June 8, 2018

Short Takes: Public Service Pensions, Bad Investor Behaviour, and more

I wrote only one post in the past two weeks, but I think it’s worth reading for anyone who understands that investing is important but would rather think about almost anything else:

How My Sons Invest

Here are some short takes and some weekend reading:

The C.D. Howe Institute explains how public service pensions are much more expensive than the federal government claims. A side effect of this fact is that government employees contribute much less than half the cost of their pensions, even though the split is supposed to be 50/50. The full report in pdf form is written to be understood by non-specialists.

Frederick Vettese points out some serious problems with the Public Service Pension Plan and how it should be fixed.

Morgan Housel “describes 20 flaws, biases, and causes of bad behavior I’ve seen pop up often when people deal with money.” The ninth one is “Attachment to social proof in a field that demands contrarian thinking to achieve above-average results.” It’s true that you can’t beat the market by following the crowd. However, it’s possible for a large group of index investors to match the market by following each other.

Tom Bradley at Steadyhand previews the likely end to our long bull market in stocks. With markets setting new records daily, it’s hard to get people to think about whether their stock allocations are too high, but that’s what they should be doing. Right now, I’m set up to weather 5 years of poor stock returns without having to sell low. This feels dopey as I watch stocks continue climbing, but it’s important to know I’ll be fine no matter what happens in the markets.

Big Cajun Man reviews Doug Hoyes’ book Straight Talk on Your Money. I reviewed this book as well (

The Blunt Bean Counter tells us about the issues he’s been seeing with his clients’ Notices of Assessment (NOA). It seems that the NOA may say you owe money when you’ve already paid, and there have been issues with alimony claims.

Wednesday, June 6, 2018

How My Sons Invest

Rather than tell people how to invest and try to cover every need and circumstance, I’m going to describe my sons’ simple but powerful investment approach. Readers can decide for themselves how suitable this approach is for them.

My sons are young adults just a few years into investing some of their savings. Working on their investments isn’t in their top 100 favourite things to do.  They have a simple plan based on do-it-yourself low-cost index investing that will beat the vast majority of other investors over time. They may modify their plan as their lives change and their assets grow, but for now they’re following the ideas described here.

Time horizon

It seems obvious to say that they have very long investing time horizon, but that’s only true for part of their money. Not all of their plans are long-term. One of them is considering buying a car. The other earns less income in the winter and needs a cash buffer. Both need a buffer in their chequing accounts and emergency savings in their high-interest savings accounts.

They only invest money they expect not to need for at least five years. Of course, we can’t predict the future exactly, and they may need money sooner than they expect, but they do their best to predict how much cash they should hold for shorter-term needs.

Another thing we should all consider is our ability to stay invested through a market crash. I told my sons that it’s not just about how much money you’ll need over the next 5 years. Just imagine that the market is crashing and your hard-earned savings are shrinking. How much money do you need to have safe in a high-interest savings account to keep your nerve and leave your investments alone while you wait for markets to recover?

It’s one thing to know intellectually that a market crash is a good thing for young people so they can buy stocks cheaply. But it’s quite another to live through a crash and try to keep your nerve. A buffer of emergency savings is a great way to feel safer.

There are some who say that having cash savings earning low interest creates a pointless opportunity cost, and that you’d make more money investing it all. However, the cost of losing your nerve and selling during a market crash is so high that it’s worth it to pay the much lower cost of having some cash savings. Another thing to consider is that being able to sleep at night is very valuable.

Account type

It makes most sense to use tax-advantaged accounts where possible. In Canada, this generally means either TFSAs or RRSPs. My sons’ incomes are low enough for now that RRSP contributions would give them only modest tax refunds, so they’re better off investing in TFSAs initially.

Neither of them is threatening to use up all his TSFA room anytime soon, so until their incomes grow, they’re likely to keep investing exclusively in TFSAs.

Where to open an account

My sons chose to open their accounts at a discount brokerage that will suit their needs when their savings are much larger. Some commentators recommend that young people choose mutual funds such as TD’s e-Series or Tangerine funds. These are fine choices for small to medium-sized accounts. My sons decided not to create a future need to change financial institutions and learn a new way to invest. Their plan is so simple that they can handle investing at a discount brokerage from the beginning.

Although my sons planned to own exchange-traded funds (ETFs), they didn’t worry much about choosing a brokerage with free ETF trading. Their plan involved very infrequent trading. They focused more on brokerage features that will suit them when their accounts become large.

Asset allocation and ETF choices

My sons chose all-stock portfolios. Although stocks are more volatile than bonds in the short term, their volatilities over 20 years or longer is almost the same. But bonds have much lower expected returns, so the only reason to choose to own bonds for the long term is to control short-term volatility. This is an important reason for holding bonds for retirees who could be hurt by short-term volatility or for anyone who might panic and sell at a bad time. My sons chose to maintain adequate cash savings to handle short term needs and to help them control any sense of panic during a market crash.

They chose a simple portfolio of one-third Canadian stocks and two-thirds U.S. and foreign stocks. Based on the size of Canada’s economy, this mix is overweight in Canadian stocks. But their spending needs will be correlated with the fate of the Canadian economy, and it seems appropriate to be somewhat overweight in Canadian stocks.

Vanguard is an investor-owned fund company with investor-friendly policies. It’s not clear how this carries over from Vanguard U.S. to Vanguard Canada, but Vanguard seems a better bet than any for-profit fund company. So, my sons chose the following allocation:

1/3 VCN (a Vanguard ETF of Canadian stocks)
2/3 VXC (a Vanguard ETF of the world’s stocks excluding Canada)

It might seem that this portfolio is just too simple. But the truth is that as long as my sons stay the course, they will get higher returns than the vast majority of other investors who get drawn into more complex strategies.


The Management Expense Ratio (MER) of VCN is 0.06%/year. It has no other significant costs to investors. VXC’s MER is 0.27%/year. However, to this we must add foreign withholding taxes on dividends. Based on Vanguard Canada’s 2017 Annual Financial Statements, this adds about 0.30%/year for a total cost to VXC investors of about 0.57%/year. The total cost of the blended portfolio works out to 0.4%/year. Over 25 years, this adds up to almost 10% (see this explanation of how costs build over 25 years).

A 10% haircut over 25 years may seem hefty, and it is, but most investors who own mutual funds pay much more than this; they just don’t realize it. The truth is that until my sons’ portfolios become large, costs aren’t critical. They will have plenty of time to find lower-cost ways to own U.S. and foreign stocks once their portfolios grow larger and include RRSPs.


Over time, ETFs pay dividends, and people add new money to their portfolios. This creates a need to buy more ETF units. VCN and VXC will grow at different rates. While my sons’ portfolios are small to medium size, they will be able to maintain their desired 1/3, 2/3 ratios for VCN and VXC by buying more of whichever ETF is below its target allocation.

However, they don’t worry about their asset allocations being off by a few thousand dollars. For an initial deposit of $3000, it’s fine to just put it all in VXC instead of buying $1000 VCN and $2000 VXC. A second deposit of $2000 could go entirely into VCN. Each time they have enough cash to invest, they just buy VCN if it’s below 1/3 of the portfolio, or buy VXC if it’s below 2/3 of the portfolio. If they ever have a very large sum to invest, say above $5000, then they’d split it into two purchases with sizes that bring the portfolio to the target allocations of 1/3 and 2/3.

It’s conceivable that VCN and VXC could grow at such different rates that they wouldn’t be able to maintain their target allocations by just buying the ETF that is below its target allocation. But this is unlikely to happen until their portfolios grow significantly. If it did happen they might have to sell some of one ETF to buy the other to get back in balance.

They don’t worry about holding some cash in their accounts. They don’t reinvest each small dividend when it arrives. For those who don’t pay commissions on ETF purchases, it’s OK to invest small sums, but it isn’t necessary. My sons just set a threshold level and invest the cash whenever it exceeds the threshold. Their current threshold is about $1500.


This very simple plan will likely work well for my sons until their incomes grow to the point where it makes sense to open RRSP accounts. Very little else would need to change at that point, though.

They would just view their combined TFSA and RRSP as a single portfolio, and maintain their overall target allocation of 1/3 VCN and 2/3 VXC. Other subtleties like accounting for future income taxes on RRSP/RRIF withdrawals and reducing portfolio costs can wait until they’re closer to retirement.

Friday, May 25, 2018

Short Takes: Trailer Class Action, Bogle Responds, and more

Here are my posts for the past two weeks:

Skin in the Game

Asset Location Errors

Here are some short takes and some weekend reading:

Salman Ahmed at Steadyhand explains a proposed class action lawsuit against TD’s asset management division over trailing commissions. These fees are supposed to be for advice, but discount brokers aren’t allowed to offer advice.

John Bogle responds to critics.

Jason Heath explains the potential problems with taking “dad’s money now to avoid probate.”

Andrew Hallam compared Vanguard fund returns to those of Dimensional Fund Advisors and found that Vanguard had a slight edge.

Big Cajun Man’s daughter ran into the same problems he’s had with investing in TD e-Series funds. She thought she opened a TD Direct Investing account, but it was actually a TD Mutual Fund account.

The Blunt Bean Counter explains rules for capital gains and losses on a terminal tax return. I wasn’t aware of some of the choices an executor can make.

Robb Engen at Boomer and Echo says he’s still on track to reach financial freedom at age 45. For most people, I tend to be skeptical that at age 40 or earlier they can predict their spending needs and desires in their 60s and beyond. However, in this case, Robb has proven he can create non-trivial alternative streams of income, and he intends to keep them going after he gives up his full-time job. Most people would be happier spending an extra year in their regular job instead of scrambling ineffectively looking for some sort of part-time income. Robb is an exception.

Larry Swedroe takes some good investing lessons from poker player Annie Duke.

Robert McLister explains recent changes to mortgage rules that will help some borrowers get lower mortgage rates.

Wednesday, May 23, 2018

Asset Location Errors

Deciding how to split your stocks, bonds, and REITs across your RRSPs, TFSAs, and taxable accounts can be confusing. Even well-known authors and web sites such as Gordon Pape, Robert Brown, and 5iResearch make basic mistakes. The best way I know to prevent some fundamental mistakes is to think of your RRSP as partially belonging to the government. Recently, Canadian Couch Potato portrayed this way of thinking as not worth the complexity for a small additional return (see the sixth question here). I disagree. I think it prevents some larger mistakes.


5iResearch claims that you shouldn’t hold “High Growth Equity” in your RRSP, and that TFSAs are the best place for such assets. Their reasoning is that RRSP “gains withdrawn from the account are treated as ordinary income,” and that in TFSAs “Profits on the stock will not incur capital gains tax when realized, nor will there be tax on the appreciated capital when withdrawn from the account.” So, if you compare investing $10,000 in either your RRSP or TFSA in high growth equity, the TFSA will seem better, because you end up with more after-tax money.

This bad advice comes from failing to think of RRSP assets as partially belonging to the government. Suppose you’ll pay an average of 20% tax on all RRSP withdrawals. Then you should be comparing investing $8000 inside a TFSA to investing $10,000 inside an RRSP. In the case of high growth equity, the two investments will work out the same after tax, so there’s no reason to prefer one over the other.

Gordon Pape made a similar mistake in his book Tax-Free Savings Accounts – How TFSAs Can Make You Rich. He prefers to hold U.S. dividend-paying stocks in a TFSA where they will pay only a 15% dividend-withholding tax, instead of having to pay your full marginal rate in an RRSP.

When you understand that 20% of your RRSP belongs to the government, and you compare an $8000 TFSA investment to a $10,000 RRSP investment in U.S. dividend-paying stocks, you’ll come to the correct conclusion that the RRSP is the better place in this case.

Gordon Pape made another error of this type when he answered a question about whether to start withdrawing first from an RRSP or a TFSA. Once again, understanding that your RRSP is not all yours solves the problem.

In his book Wealthing Like Rabbits, Robert R. Brown made a mistake with some advice on whether low-income savers should put their savings in an RRSP or TFSA. Brown prefers RRSPs because “with RRSPs they get the tax savings now, when they are younger, lower income earners and they likely need it more.”

He is comparing equal-sized contributions to an RRSP or a TFSA, which is a mistake. For a 20% marginal tax rate, he should be comparing a $4000 TFSA contribution to a $5000 RRSP contribution. Assuming the low-income saver had $5000 available to save, both scenarios lead to being left with $1000 left, either immediately, or after getting a tax refund. If the low-income saver expects to have higher income in the future, the TFSA is actually the better choice right now.

Another type of mistake comes as we get closer to retirement. People try to calculate their “retirement magic number” based on the 4% rule or some other rule. To know when you have enough for retirement, you must take into account income taxes. This means reducing your RRSP assets by your expected tax rate and taking into account capital gains taxes in your taxable accounts.


It’s certainly more complex to take into account taxes on RRSP withdrawals when managing your portfolio. That’s why I have a spreadsheet that does all the calculations for me. Even when rebalancing my asset classes, the spreadsheet shows me how much to buy and sell in each type of account factoring in taxes. I worked these things out once, and now I don’t have to worry about it.

One simplification I made was to treat my RRSP withdrawals as having a fixed tax rate. It’s possible that if my investments do very well, I’ll pay a higher tax rate. It’s also possible that the government will change tax rates. But I think it’s better to use an estimated tax rate than to implicitly use a 0% rate that is surely wrong.

On the subject of taking into account RRSP taxes, Canadian Couch Potato (CCP) says “we don’t manage portfolios that way because it is hopelessly impractical.” This is an overstatement. It would be difficult to do this properly if you had to do it yourself with a calculator for every client, but anyone running a financial advice business should be able to invest in some software or spreadsheets to get this stuff right. I’ve done it for my own narrow set of requirements. It should be possible for a business to cover a wider range of scenarios correctly with some automated tools.

CCP goes on to say he suspects that trying to take into account RRSP taxes in portfolio allocations “will defeat most DIY investors.” This is likely true. I think DIY investors are better off automating their portfolio decisions as much as possible, but few do this. They make essentially active decisions frequently, and adding the complexity of tax calculations increases the odds of making mistakes.


CCP sees little benefit to factoring in RRSP taxes. “If you lost half of the value of your RRSP, would it make you feel better to know that 30% would have gone to taxes in retirement anyway? I doubt it.” He quotes John Robertson as saying “all these optimization games can bring is a few basis points of extra return,” and CCP concludes that “the added complexity is not worth it.”

If these were the only benefits of taking into account RRSP taxes in asset allocation decisions and computing net worth, then I’d agree. But we need to avoid the bigger mistakes described above that are made by many including well-known figures in the financial world.

Note that I’m not talking about completely optimizing asset location decisions as discussed by John Robertson. He’s right that perfect optimization across all scenarios is very complex. However, each advisor or DIY investor uses some process to make “good enough” asset location decisions. Taking into account RRSP taxes with this good enough process adds only a modest amount of complexity to automated tools.

CCP says “For professionals managing portfolios for multiple clients [accounting for RRSP taxes] is close to impossible, and I am not aware of any firm that does so.” I don’t believe this is anywhere near impossible. All that is required is a one-time effort to include it in some automated tools. I think it’s about time for those selling financial advice to calculate portfolio allocations and net worth after subtracting estimated taxes.

Monday, May 14, 2018

Skin in the Game

We’ve heard that free advice is worth what you pay for it. In his latest book, Skin in the Game, Nassim Taleb takes this much further saying “do not pay attention to what people say, only to what they do, and how much of their necks they are putting on the line.” Most of his book is devoted to explaining the many contexts where the idea of skin in the game applies.

Like Taleb’s other books, this one is filled with many ideas worth thinking about along with many hurled insults at those he calls Intellectuals Yet Idiots (IYIs). There is even name-calling: “Hillary Monsanto-Malmaison, sometimes known as Hillary Clinton.” If Taleb’s accusations are accurate, then some of these people (but not all) deserve his insults and more, but they are tedious nonetheless. Despite all this, I’d rather read a book with a few good ideas and some unpleasant parts than read a pleasant book with nothing important to say.

I was unable to follow the logic of parts of the book, and some topics didn’t seem to have much connection to the concept of skin in the game. For the rest of this review, I’ll avoid these topics.

“Don’t tell me what you ‘think,’ just tell me what’s in your portfolio.” This is something I’ve tried to stick to on my blog when I discuss investing. I say how I invest, and explain why I avoid other investments, but I try to avoid recommending investments I don’t own myself. I’m suspicious of those who recommend investments they don’t own themselves.

Taleb extends this beyond just investing: “those who don’t take risks should never be involved in making decisions.” He doesn’t like it when government bureaucrats make decisions about wars or regulations when they have little to lose themselves. “Administrators everywhere on the planet, in all businesses and pursuits, and at all times in history, have been the plague.”

“The principal thing you can learn from a professor is how to be a professor—and the chief thing you can learn from a life coach or inspirational speaker is how to become a life coach or inspirational speaker.” He says the heroes of history weren’t library rats, but were “people of deeds [who] had to be endowed with the spirit of risk taking.”

“Beware of the person who gives advice, telling you that a certain action on your part is ‘good for you’ while it is also good for him, while the harm to you doesn’t directly affect him.” This applies in many areas, one of which is financial advice. Typically, advisors get a percentage of your assets, not a percentage of your gains and losses.

“Behavioral economics [fails] to give us any more information than orthodox economics (itself rather poor) on how to play the market or understand the economy, or generate policy.” I see behavioral economics having two purposes: a positive one to try to help people make better personal financial decisions, and a negative one to help retailers and other sales organizations better exploit their customers’ weaknesses.

Taleb criticizes Thomas Piketty’s book, Capital in the Twenty-First Century. On Picketty’s method of measuring inequality: “Static inequality is a snapshot view of inequality; it does not reflect what will happen to you in the course of your life.” For example, the 25-year old version of me had much lower income and assets than the recent version of me. Measured statically, inequality seems bigger than it really is.

Measures of income inequality are dominated by the wealthiest people (the “tail” of the wealth distribution). This tail is a “fat tail” and the standard mathematical tools used by economists assume thin tails.

I suspect that Piketty wouldn’t be overly concerned with these criticisms. Even if we correct the way inequality is measured, Piketty would likely still call for huge tax increases. I’ve written before what I think of these proposed taxes. Taleb says “Any form of control of the wealth process—typically instigated by bureaucrats—tends to lock people with privileges in their state of entitlement.” He would rather have inequality with turnover among the wealthiest.

“Academia has a tendency, when unchecked (from lack of skin in the game), to evolve into a ritualistic self-referential publishing game.” I’ve seen this happen in my own field to some extent. However, the best researchers don’t engage in publishing games; it’s the next tier down who do these things because are struggling for survival as researchers. A field or subfield faces problems when the best researchers abandon it to those most concerned with getting publications.

“Consider that a recent effort to replicate the hundred psychology papers in ‘prestigious’ journals of 2008 found that, out of a hundred, only thirty-nine replicated.” Because human nature was “available to the ancients,” “everything that holds in social science and psychology has to ... have an antecedent in the classics.” I agree that we should be skeptical of new findings, but I reject the idea that it’s impossible for us to learn something new about human nature.

“Executives are different from entrepreneurs and are supposed to look like actors.” I’ve certainly seen a lot of this in my business career. Whether an executive has genuine skill at running an organization effectively or not, he or she almost invariably acts the part.

I’ve often wondered about the apparent gap between grocery store prices and what farmers get paid. According to Taleb, “close to 80 to 85 percent of the cost of a tomato can be attributed to transportation, storage, and waste (unsold inventories), rather than the cost at the farmer level.”

There is a posh area a few kilometers from my home with huge houses on big lots. I see few people when I walk through the area on a sunny Saturday afternoon. The few children I see look lonely. Taleb observes “nobody today will come to console you for living in a mansion—few will realize that it is quite sad to be there on a Sunday evening.”

On “The Ethics of Disagreement,” Taleb says “You can criticize either what a person said or what a person meant.” I’ve certainly had my fill of critics who deliberately take statements out of context. Politics consists of little else.

The book contains criticism for the ideas of risk aversion and loss aversion. I write about this part of the book in a piece called Does Loss Aversion Exist?

On the subject of Genetically-Modified Organisms (GMOs), Taleb believes that by making sudden genetic changes rather than making gradual changes with conventional breeding, we risk creating an organism that grows out of control and destroys our ecosystem. He believes that no benefit we get from GMOs could outweigh this potential loss.

Overall, I’m glad I read this book. Some parts were tedious, but the few parts that made me think about a subject in a different way more than compensated.

Friday, May 11, 2018

Short Takes: Investment Returns, Minimizing Portfolio Taxes, and more

Here are my posts for the past two weeks:

Money = Human Work

Does Loss Aversion Exist?

Here are some short takes and some weekend reading:

Tom Bradley explains where investment returns really come from. The answer is different from what most people think.

John Robertson tackles the complexity of optimizing how you spread your bonds, Canadian stocks, and foreign stocks across your RRSPs, TFSAs, and non-registered accounts. In my experience, trying to come up with a set of rules to cover all possible situations is very difficult, but most individual cases are easy enough to sort out. For example, I know what tax rate I’ll likely be paying on RRSP/RRIF withdrawals, I own no bonds (I have a cash/GIC allocation instead), and I understand that my RRSP contents partially belong to the government (which eliminates certain behavioural errors). These facts greatly simplify the analysis to determine which accounts should hold each of the asset classes I own.

Canadian Couch Potato interviews Ben Carlson for an interesting discussion of the challenges investors face despite the wide array of low-cost choices we have today. As a bonus, you’ll get a clear and accurate skewering of technical analysis.

Boomer and Echo takes a look at how online mortgage brokers are changing the mortgage business.