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 (https://www.michaeljamesonmoney.com/2017/09/straight-talk-on-your-money.html).

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.

Thursday, May 10, 2018

Does Loss Aversion Exist?

We’ve long been told that we feel losses more than we feel gains; that losing $1000 will make us more unhappy than winning $1000 will make us happy. Many experiments point to the existence of loss aversion, although recent experimental results have caused skeptical researchers to question its existence or at least claim that loss aversion is more complex than we first thought.

Nassim Taleb criticizes the ideas of risk aversion and loss aversion differently from the sceptical researchers. In his book, Skin in the Game, Taleb says “I believe that risk aversion does not exist: what we observe is, simply, a residual of ergodicity. People are, simply, trying to avoid financial suicide and take a certain attitude to tail risks.”

Taleb also says “Rationality is the avoidance of systemic ruin.” He rejects the idea that we are loss averse; we are simply avoiding things that could lead to financial ruin, death, or other permanent loss. “In a strategy that entails [a possibility of] ruin, benefits never offset risks of ruin.”

So, let’s apply these ideas to a simple experiment. We offer a subject, Stan, a chance to toss a fair coin to either lose $100 or win $200 on the coin’s outcome. Suppose Stan rejects the offer. What are his possible reasons?
  1. Humans are wired with simple heuristics for avoiding ruin, and this offer triggered one of Stan’s avoidance heuristics.
  2. Stan doesn’t believe the coin is fair.
  3. Stan doesn’t believe he’ll be paid if he wins.
  4. Stan has a moral objection to gambling or some other reason that gambling even once has high cost, such as having a gambling addiction.
  5. Stan has other financial risks in his life that combine to make a $100 loss potentially very painful right now.
  6. Stan is so poor that the cost of a $100 loss is greater than the gain of a $200 win.
Suppose Stan is then offered the same coin toss to lose $100 or win $300 and he accepts. Suppose further that he had no idea rejecting the first offer would bring a more lucrative offer. This eliminates reasons 2, 3, 4, and 5 above for rejecting the first offer. Reason 6 affects so few people (in the first world) that we can safely assume it doesn’t apply to Stan. This leaves reason 1, mental heuristics for avoiding ruin.

Whether we call this “risk aversion,” “loss aversion,” or something else, it’s clear that the vast majority of subjects who reject a 100/200 coin toss but would accept a 100/300 coin toss are making mistake in the 100/200 case. Even though mental heuristics for avoiding ruin serve us well and served our ancestors well, Stan applied them in this case to reject a beneficial opportunity.

Taleb doesn’t like labeling Stan “irrational,” but no matter what label we choose, he made a choice against his own interests. This doesn’t mean that Stan isn’t well-served on the whole by his mental heuristics for avoiding ruin; it’s just that they didn’t serve him well in this case.

The cost of this mistake is quite low (less than $50), but similar mistakes have much higher costs. One example is portfolio allocation. Many people live in poverty in old age because of a lifetime of avoiding any investment riskier than bank deposits. It’s certainly possible to achieve better returns on savings without incurring the risk of ruin.

Friday, May 4, 2018

Money = Human Work

We often hear people say “money isn’t everything” or “it’s just money.” There are times when this is a healthy attitude to have, but more often it’s not the right way to think about money.

Money represents human work. With money you can get other people to do work for you, such as making houses, food, clothing, cars, and computers. If we change the familiar sayings to “human work isn’t everything” or “it’s just human work,” they don’t ring nearly as true.

Few of us would want to get by entirely on our own, living in the wild, finding our own food, and making our own clothes. We buy the work of others in just about every aspect of our existence.

There are those who make their lives worse by spending less than they should. But more often the person who says “money isn’t everything” works to get an income and gives too much of it away in foolish ways.

We shouldn’t focus on money to the point of worship. But we shouldn’t think that money is somehow separate from real life either. Human work matters, so money matters.

Friday, April 27, 2018

Short Takes: Delaying CPP, Credit Card Mix-up, and more

I wrote only one post in the past two weeks, but I think it’s important:


Here are some short takes and some weekend reading:

Fred Vettese explains why delaying taking CPP until age 70 is the right choice for most people. I’m able to spend more in early retirement today because of my plan to delay taking CPP and OAS until I’m 70. But I’ve had little success explaining this to others.

Big Cajun Man found a way to get his daughter to pay off his credit card. He tells the story a little differently.

Preet Banerjee interviews Melissa Agnes about company crisis management.

Robb Engen at Boomer and Echo explains his mortgage renewal strategy.

Tuesday, April 17, 2018


The technology used to create Bitcoin comes from the field I used to work in professionally. I’ve followed Bitcoin from its obscure beginnings to its recent bubble-like rise. After fielding so many questions about cryptocurrencies, it’s about time I organized my thoughts about Bitcoin as an investment and as a currency.

To understand Bitcoin, you don’t have to understand the technology behind it. The big problem anyone can see with digital money is that after you spend it you still have a copy of it, so you can spend it again. Much of the effort in creating digital money centers on preventing this double-spending. Bitcoin does this with some clever cryptography and computer protocols called blockchain.

Another feature of Bitcoin is that more money gets created over time. Those who do enough calculation with their computers get more Bitcoins. This is called mining, and is intended to roughly mimic mining for gold.

Bitcoin as an investment

Before Bitcoin’s meteoric rise, the few people who’d heard of Bitcoin understood that it is a currency, and is intended to be used like money. Now most people have heard of Bitcoin, and they tend to think of it as an investment. Some in the financial world suggest that cryptocurrencies should be considered an asset class. This is nuts.

It makes no more sense to invest in Bitcoins than it does to invest in Somali shillings, Indian rupees, or British pounds. The typical person should think of these things as currencies, not investments. The fact that the Bitcoin exchange rate is so volatile should make us stay away, not dive in.

Bitcoin as a currency

The digital and cryptographic nature of Bitcoin sets it apart from more familiar currencies like dollars. But this doesn’t really capture the important difference. After all, most transfers of dollars are digital and use cryptography.

Bitcoin isn’t backed by any particular government. No such backing is necessary. The U.S. government backs U.S. dollars, and it can impose rules about how dollars are used. If a bank doesn’t play by the rules, the U.S. government could cut that bank out of the dollar system. There is no easy way for the U.S. government or any government to regulate Bitcoin.

One thing governments do with their currencies is demand that electronic transfers not be anonymous. A certain amount of anonymous transfer is possible with physical cash, but this is limited. For the most part, if governments want to trace large money flows, they can do so.

Bill Gates recently said that cryptocurrencies are being used for illegal activities and that governments’ “ability to find money laundering and tax evasion and terrorist funding is a good thing.”

I agree with Gates as long as governments are stable and serve their populations reasonably well. However, Bitcoin could play a role in limiting the power of a government out of control. For example, if all electronic transfers get heavily taxed, Bitcoin is a workaround for the people. So, one use for Bitcoin is as a safety valve if a government stops serving the people. Each of us can decide for ourselves whether we think this is likely enough to justify owning some Bitcoins or other cryptocurrencies.

Other cryptocurrencies

There are some technical objections to Bitcoin. The main one is that it’s gobbling up computer processing power and electrical power. Other cryptocurrencies were created to solve some of Bitcoin’s problems. There is no consensus on which cryptocurrency is best. Even if some other cryptocurrency comes into widespread use, there’s no guarantee that is has even been created yet. This makes speculating in cryptocurrency challenging at best.

Many organizations are creating their own cryptocurrencies. However, these currencies are designed with an important difference. The organizations are maintaining control over their cryptocurrencies. So, they may seem similar to Bitcoin, but they’re not. They’re more like travel miles or loyalty points. Expect the controlling organizations to devalue these cryptocurrencies whenever it’s profitable to do so.

Abbreviating “Cryptocurrency”

For some reason, “cryptocurrency” is often abbreviated as “crypto”. I don’t expect this to stop any time soon, but it makes little sense. Just about everything we do online involves cryptography, including online transfers of dollars. The “crypto” abbreviation makes about as much sense as shortening “blueberries” to “blue”.


Cryptocurrencies are not an asset class you have to pay any attention to. For now, few of us have any real need to use Bitcoin as a currency, and that’s likely to stay true unless our governments run amok.

Friday, April 13, 2018

Short Takes: Wealth Expo, Large Insurance Payouts, and more

Here are my posts for the past two weeks:

The Power of Saving More

Informed Financial Choices

The Couple Who Made Millions Beating Lotteries

Updated Currency Exchange Method at BMO InvestorLine

Here are some short takes and some weekend reading:

Kerry Taylor went to a wealth expo so you don’t have to. Her description and comments on the event are hilarious.

Darryl Singer says “when an insurance company receives a claim, their first reaction is to reject it. They may reject it a second and a third time, too.” He paints a picture of an industry doing battle with its customers whenever they made a substantial claim. Singer is a personal injury lawyer, so he comes at this from a certain point of view, but I’ve never hear any other point of view on this subject. I’d like to know what fraction of claims get denied and how this varies with claim size and insurance company. Without this type of information, it’s impossible to know if you’re really covered if you get sued over a car accident or if your house burns down.

Andrew Coyne shares some clear thinking on carbon taxes.

John Robertson makes an excellent point about a benefit of Vanguard Canada’s new all-in-one ETFs. He also compares them to other investment approaches based on cost and hassle-freeness.

Big Cajun Man discusses the downside of refinancing. It seems like a good idea to reduce the interest rate on your debt, but serial refinancers just run their credit cards up again.

Robb Engen at Boomer and Echo describes how he would handle his portfolio in retirement. It resembles the approach I’m taking right now. A key feature is the mechanical approach that minimizes acting on hunches about the best time to sell stocks.

The Blunt Bean Counter looks at some of the problems that can result from duplicating investments, including inadequate diversification and tax inefficiency.

Wednesday, April 11, 2018

Updated Currency Exchange Method at BMO InvestorLine

I recently changed the procedure I use to convert large sums between Canadian and U.S. dollars at BMO InvestorLine. The method I use saves a lot of money compared to using the InvestorLine foreign exchange system. The latest change I made eliminated an annoying interest charge that I had to ask to be reversed.

Most people don’t realize how expensive it can be to exchange currency. The extra charge banks and brokerages add gets hidden in the exchange rate. To see this extra charge, start by taking a sum in Canadian dollars, say C$10,000, and finding out how many U.S. dollars you can get. Then see what this U.S. amount would get going back to Canadian dollars.

Many people might guess they’d get their original C$10,000 back, but they’d be wrong. In a recent test I did at BMO InvestorLine, I’d get back C$9754, for a loss of C$246 in two currency exchanges. That’s $123 per exchange. Starting with C$100,000, the cost worked out to $464 per exchange. I use a method called “Norbert’s Gambit” to reduce these costs to about C$25 and C$50, respectively.

Norbert’s Gambit begins with finding a stock that trades with low spread in both Canada and the U.S. One such stock is Royal Bank (ticker: RY in both countries). To go from Canadian dollars to U.S. dollars, I start by buying RY in Canada with the Canadian dollars. Then I sell the RY in the U.S. to get U.S. dollars. Two days later when the trades settle, I’ve completed my currency exchange. To go from U.S. dollars to Canadian dollars, I do the reverse: buy RY in the U.S., and then sell RY in Canada.

As always, there are details that can trip you up. One detail is that even though I never sell stock I don’t own, InvestorLine doesn’t record it this way. If I’m going from Canadian to U.S. dollars, I end up with a positive number of RY shares in the Canadian side of my account and a negative number of RY shares in the U.S. side.

InvestorLine automatically “flattens” my account to get rid of the positive and negative numbers of RY shares, but always one business day late. Then they charge me interest on the phantom short sale. I’ve done this a dozen or more times, and I get charged 21% annualized for the day (or 3 days if it runs over a weekend). For a C$100,000 exchange, this is about US$40 interest per day. InvestorLine has reversed this interest charge every time after I ask them to, but having to ask is annoying.

Some people report that they don’t see these interest charges. I can think of two explanations. One is that InvestorLine doesn’t charge less than $5 interest per month in margin and cash accounts. So, smaller exchanges might not generate more than $5 interest. Another possibility is that these people manage to get InvestorLine to flatten their accounts on the correct day.

I used to send messages to InvestorLine on their internal message system asking them to flatten my account on settlement day, but this never worked. Now, I call them on settlement day and ask them to flatten my account. This seems to work.

Below is the detailed set of steps I follow going from a Canadian to U.S. dollars. Just substitute “U.S.” for “Canada” and vice-versa for how I convert currency in the other direction. I offer no guarantee that my method will work for you, because your accounts may be set up differently from mine and InvestorLine changes their systems periodically.

1. Check that the next two trading days are the same in the U.S. and Canada. It takes two days for trades to settle. If a holiday closes stock markets in only one country during that time, my trades would settle on different days. I don’t proceed further unless all settlement will all happen on the same day. If the settlement date is different in the U.S. and Canada, this can cause a short position and lead to an interest charge that I can’t get reversed.

2. Buy RY stock in Canada. If the Canadian dollars are coming from the sale of some Canadian ETF, I make that trade immediately before buying RY stock; there’s no need to wait for the first trade to settle. The amount of RY stock I buy doesn’t have to exactly match the proceeds from the first sale. I can buy more RY if my account was already holding some Canadian dollars, or I can buy less RY if I want my account to be left with some Canadian dollars. I make sure to account for trading commissions because the cash level InvestorLine shows doesn’t deduct commissions until two days later when the trades settle. I make sure the trades in step 2 all take place on a Canadian exchange and in Canadian dollars.

3. Sell RY stock in the U.S. This should be the same number of shares of RY as I purchased in step 2. If I’m planning to use the resulting U.S. dollars to buy a U.S.-listed ETF, I make that trade immediately after selling the RY stock; there’s no need to wait until the RY trade settles. Once again, I make sure to account for trading commissions. I make sure the trades in step 3 all take place on a U.S. exchange and in U.S. dollars. Note that I place all the trades in steps 2 and 3 on the same day.

4. On settlement day two business days later, I call InvestorLine and ask them to “flatten” my account. “Flattening” means moving RY shares from the Canadian side of my account to the U.S. side of my account to cancel the negative number of RY shares. For some reason, InvestorLine representatives insist that I don’t need to request account flattening because their system does it automatically. I tell them that I get charged interest every time because the system is a day late. They insist this isn’t true, even though it’s happened to me more than a dozen times.

5. Set a Calendar reminder 45 days later to check if I was charged interest. InvestorLine has one-day delays between certain actions and when they take effect or become visible in my account. If the flattening is done either early or late, one side of my account will seem to have a short position. Just in case the account flattening didn’t happen exactly on settlement day, I check if I was charged interest. However, it can take a long time for spurious interest charges to appear because they show up on the 21st of the month.

6. If interest was charged for the so-called short position, send a message asking that the spurious interest charge be removed. I get a different response every time I do this, but they have always reversed the charge.

7. If interest was charged, set another calendar reminder 5 business days later to confirm that the interest charge was removed. The interest charge has always been removed for me, but in theory, I might have to do another round of messaging and checking whether the problem is fixed.

Because I’ve included so much detail, this may look like a lot of work, but it isn’t too bad at all. It’s definitely worth it to me to save hundreds of dollars.

Monday, April 9, 2018

A Couple Who Made Millions Beating Lotteries

We all know that lotteries are a loser’s game that taxes the poor, but Jerry and Marge Selbee made millions of dollars playing lotteries in Michigan and Massachusetts. Jason Fagone tells their story in the entertaining article Jerry and Marge Go Large. I think Fagone and some of the players in this story let state authorities off the hook for badly-designed lotteries.

The key to how the Selbees made money is the “roll down” feature of the lotteries they played. When the top prize is large enough and nobody wins it, some lotteries roll down the money for this prize into lesser prizes. So, if nobody matches all 6 out of 6 numbers, those who match fewer numbers get bigger prizes.

The Selbees were able to predict when a roll down was likely to cause the lottery to pay out more than it took in. By buying tickets at these times they had an expectation of making money. So, they weren’t cheating. They were playing the lottery the way it was intended to be played. There was nothing special about the way they picked their numbers; they were just random picks. What set the Selbees apart from most other players was that they were selective about when they played, and they bought massive numbers of tickets.

After the story broke that the Selbees and other groups made millions this way, the Massachusetts inspector general conducted an investigation. “There was no evidence, wrote the inspector general, that the game had harmed anyone—not the small players, and not the taxpayers. … The large groups had bought some $40 million in tickets, $16 million of which was revenue for the state.”

This conclusion is based on bad accounting. On average, across all players, 40% of lottery ticket prices became revenue for the state. But, this is very different from saying the state made 40% on every ticket sale. In truth, regular players contributed more than 40%, and the savvy players took revenue away from the state.

Fagone paraphrased a Reuters article as saying “Cash WinFall [the lottery’s name] was possibly more fair than other lottery games, because it attracted rich players as well as poor ones. Instead of taxing only the poor, it taxed the rich too.” This is a ridiculous conclusion. How can we reasonably conclude that the lottery taxed those who played with an expectation of winning?

In reality, regular lottery players have reason to be upset. The state designed a lottery badly allowing some players to pocket millions of dollars contributed by the regular players. I don’t blame the clever players for making their money. Blame lies with the states that offered badly-designed lotteries.

Thursday, April 5, 2018

Informed Financial Choices

Morgan Housel wrote a thoughtful article titled How to Talk to People About Money that I highly recommend reading. He makes the case that not everyone’s financial goal is to get richer. Many people just want to maximize the chances they can keep living the way they’re living.

He likens financial advice to medical advice where doctors lay out your options clearly and let you decide what medical intervention you want. Just as people want a say in their medical treatment, they want a say in their goals when investing their money. Financial advisors are trained to examine their clients’ risk tolerance and other factors, but a better model may be to lay out the possible outcomes of different investment approaches and let people decide for themselves what they want.

There is an important caveat here, though. In medicine, there is the concept of informed consent. Doctors need to explain medical procedures and the possible outcomes to their patients in a way they can understand. If financial advisors are going to lay out choices for their clients, they need to explain the probabilities of various outcomes in a way their clients can understand. This is a challenge.

For example, an advisor might tell a 60-year old woman that her nest egg could buy an annuity that pays $2500 per month for the rest of her life. If she seeks safety, she might like the sound of this. What she might not understand is that 3% inflation would leave her with only $1384 per month buying power when she’s 80. If those two decades include 5 years of 10% inflation, then her buying power drops to $996 per month at age 80. She might not like this so much if she is properly informed.

In principle, I agree that financial advisors should not make all investment choices for their clients, just as doctors shouldn’t make all medical choices for their patients. However, I think financial advisors have a tough job in getting informed consent. It’s very difficult to get people to understand the range of possible long-term outcomes from different investment approaches. And just doing what people say they want is very different from helping them make informed choices.

Tuesday, April 3, 2018

The Power of Saving More

The title of this article is a play on a working paper from the National Bureau of Economic Research called The Power of Working Longer. This paper languishes behind a paywall, but the Wall Street Journal interviewed one of the authors, Professor Sita Nataraj Slavov, and this interview is at least temporarily accessible.

One quote from Slavov:
“We found that a 56-year-old would only need to work about a month longer to earn the equivalent of saving an additional 1% of their salary for 10 years.”
I find it funny that it takes a “study” to draw this conclusion. If you save 1% for 10 years, that’s like saving 10% of a year’s pay, or about 1.2 months’ pay. If you invest the money for a return that exceeds the growth in your pay, your savings will grow to a little more than 1.2 month’s pay. So, it shouldn’t be at all surprising that you can get the same benefit by working a little over a month longer.

I guess the message is that we shouldn’t stress too much about not saving enough because we can always make up for it by working longer. But many of us aren’t shorting our savings by only 1% per year for only 10 years. Many will have to work a decade longer to make up for inadequate savings, if their employers will have them. The alternative is a lower standard of living in retirement.

For those of us who have little trouble saving money, reversing this study’s conclusion is more encouraging: to arrive at financial independence sooner, all you have to do is save a little more.

I’m not against the idea of people working longer to make up for a savings shortfall. If working longer is realistic for you, then this option can be a sensible plan. Savers like me prefer to think of higher savings leading to the option to retire sooner.

Friday, March 30, 2018

Short Takes: Bank Misdeeds, Investing Simply, and more

I got some good news for this blog: https encrypted connections are now working. Presumably, this means Google will stop punishing me in its page-ranking system. Time will tell.

Here are my posts for the past two weeks:

Replies to Emails I Usually Ignore

Worry-Free Money

Self-Interest or Bleeding Heart

Here are some short takes and some weekend reading:

Rob Carrick has an excellent take on banks, how we should view them, and their influence on financial literacy efforts.

Canadian Couch Potato interviews author John Robertson to discuss his book The Value of Simple. John is very knowledgeable about the complexities you can run into with the mechanics of investing in different ways. Trying to minimize these headaches is important.

BDO Canada has a good summary of the 2018 Ontario Budget. This BDO web page has a link at the bottom to a pdf of the entire report.

John Robertson takes on the false analogy that handling your own taxes and investments is like trying to perform your own root canal. I particularly liked the part where he says that some aspects of taxes and investing are more like brushing teeth than doing a root canal.

The Irrelevant Investor looks at a list of investment options offered in his friend’s retirement plan and says “I wouldn’t wish this lineup on my worst enemy.” Sadly, this list of options is better than the one I had to choose from at my former employer. Costs are much higher in Canada.

The Blunt Bean Counter discusses the types of CRA information requests he is seeing for corporate and individual tax filers.

Robb Engen at Boomer and Echo analyzed some of his readers’ portfolios and found investment fees to be a big problem.

Wednesday, March 28, 2018

Self-Interest or Bleeding Heart?

I don’t mind if the banks mistreat their customers because it just means I’ll get bigger dividends.
I’ve heard comments like this from several people over the past decade. With stories swirling about bank employees up-selling customers on accounts and loans they don’t need and steering customers to expensive investment products, some bank investors just cheer on fatter dividends.

In the short run, letting the banks do as they please may well make investors richer. But I’m doubtful that this is a good idea for the long run, even for people focused solely on self-interest. I’ll argue that you don’t need to have a bleeding heart to want better behaviour from banks.

This issue is part of the larger trend toward bigger disparities in incomes and wealth. If these disparities keep growing, the masses will continue to call for (and vote for) higher taxes on the rich. To date, higher taxes have applied to incomes, but a day may come when we start applying direct taxes on levels of wealth. I wouldn’t want to see this happen, but too much wealth concentration could bring it on.

So, even those whose concern is self-interest have reason to want to limit income and wealth concentration. We need to balance giving a decent life to the weakest in society and maintaining the incentive to work. We may disagree on the correct balance point, but it is certainly possible to go too far either way.

We do reasonably well with this balance in Canada. We don’t need to live in gated communities to keep the poor out, and we can walk around in most parts of the country without fearing getting mugged. I’m nervous in countries with desperately poor people knowing that the modest amount of cash in my pocket makes me a target. This includes some parts of the U.S. I’d rather see the weakest in Canada have enough that desperation doesn’t drive them to steal from me.

There is definitely such thing as too much wealth sharing, but there can be too little as well. A problem we have now in Canada is that we’re getting some of the worst of both worlds. Our total tax burden is quite high, and this frustrates taxpayers. But a huge fraction of this tax money is being soaked up by public-sector unions that protect vast numbers of unnecessary jobs. This limits the amount of tax money that can go to the needy which frustrates advocates for people with mental and physical problems.

We need the functions our various levels of government provide, but we overpay for them by a wide margin. Saving money doesn’t require that we eliminate any government programs. It would be a matter of identifying jobs that don’t make any meaningful contribution. However, efforts along these lines are likely to be resisted fiercely.

In effect, one of the biggest charities funded by taxpayers is all the public sector workers whose jobs shouldn’t exist. Not that I blame the workers themselves. You can’t blame people for taking jobs offered to them. They do what the system expects of them even if some of their output serves no useful purpose.

It’s in our self-interest to set a sensible minimum standard of living for Canadians paid for by taxpayers, but this goal is undermined every time we grow the public sector payroll and divert tax money away from needy Canadians and into more salaries. Allowing Canada’s largest businesses to abuse their customers undermines this goal as well. Even wealthy investors have a long-term interest in treating the poor reasonably.

Monday, March 26, 2018

Worry-Free Money

People do a lot of worrying about money whether they are doing well financially or not. The truth is that most people just don’t know if they’re on the right financial track. Certified financial planner Shannon Lee Simmons offers solutions to this problem in her book, Worry-Free Money. I think her methods could help many people feel more in control of their finances.

“If you don’t know what you can and cannot actually afford, every purchase feels terrifying.” It must be difficult to feel vaguely guilty every time you spend even small amounts of money. I’ve seen this guilt in some of my extended family members.

Simmons is adamant that budgeting “is not the answer. Budgeting makes you feel truly broke, which leads to overspending, under-saving and general anxiety about the future.” Despite her repeated criticisms of budgeting, her approach looks superficially a lot like budgeting. But there are important differences.

We all have moments when we abandon our usual spending rules. Simmons calls these “F*ck It Moments,” and says they are actually a big source of overspending. Attempting to stick to overly-restrictive budgets causes many such moments. “Trying to live frugally is the problem. Instead of helping us to gain control of our finances and our lives, it perpetuates the guilt around spending on anything that makes us happy. Guilt inevitably leads to frustration and hopelessness. Eventually you simply give up.”

Another cause of overspending is the “Inadequacy Influence.” Sometimes we see spending money as a solution to not feeling good enough in some way. Her remedy is to compile a “Life checklist” of the things important to you. This then helps you recognize potential spending that isn’t on the checklist, and recognize that your temptation to spend is likely due to some feeling of inadequacy. Social media can be a big contributor to feeling inadequate.

Simmons’ replacement for budgeting involves identifying fixed expenses, contributions to meaningful savings, and contributions to short-term savings. Money in these categories is automatically moved to a separate chequing account. Whatever is left over is “spending money” in a different chequing account. This left over spending money has a “hard limit” each pay period. If you run out, you have to wait until your next pay period, but the important things in the first three categories remain safely handled.

“By isolating the amount of money you can spend to zero in your Spending account each pay period, you don’t have to guess about affordability anymore.” The basic idea is that spending money doesn’t have to be tracked or budgeted as long as the important things are squared away.

To avoid getting into trouble with credit cards, Simmons recommends that you “transfer the money from your Spending account to that credit card every night.” This may seem onerous, but it’s much easier than trying to dig out of credit card debt.

When her clients have problems with overspending, she has them rate their spending on a 1-5 scale from unhappy spending to happy spending. The goal then is to reduce spending that doesn’t make you happy. This part involves analyzing where your spending money goes, which resembles budgeting. But it’s more of an infrequent analysis of spending than it is a month-to-month budgeting exercise.

The book contains many interesting examples of people in different financial and life circumstances. Each example contains lots of detail about people’s lives and finances. Simmons offers rules of thumb for limits to different types of spending expressed as a percentage of take-home pay. One nitpick is when she says a change reduces a person’s spending money by 10%, she actually means it went down by 10 percentage points. For someone taking home $5000/month and having $2000 in spending money (40%), a 10% drop in spending money is $200, and a 10 percentage-point drop is $500.

To avoid feeling pressure to spend money for social reasons, Simmons recommends talking about money with friends and family. She says they’re much less likely to try to force you to participate in something if you’re honest about it just not fitting into your spending plan. She even offers 5 steps on “Hot to Say No without Guilt.”

In one example about a man fixing his finances after a divorce, the author concludes that “taking money from his retirement account didn’t make sense because much of it would be taxed at a higher rate than the interest he was paying on his credit card.” There are good reasons not to touch retirement savings, but comparing a tax percentage to a credit card interest percentage makes no sense at all. You might as well decide to buy a car instead of a house because the car has more tires than the house has bedrooms.

If you’re considering moving in with other retirees after you retire to save money, Simmons says you should “have noise rules in place, ... set up a shared household repair fund, address what happens if someone wants to move out or passes away, and get a lawyer involved to put it all in writing.”

Referring to a couple who had eliminated their car loans, line of credit balance, and credit card balances, but still had a mortgage, Simmons wrote “and best of all, they were debt-free.” I find it strange that some people don’t count a mortgage as debt. It’s certainly different from other types of debt, but it’s still debt. I’m disappointed to see a certified financial planner thinking this way.

Overall, I found Simmons’ approach to managing personal finances interesting and potentially helpful for many people. If I were trying to help family members or friends devise a plan to spend within their means, I’d use this book as a guide to a realistic plan.

Monday, March 19, 2018

Replies to Emails I Usually Ignore

I get a lot of great feedback from my readers. I get other email as well. Here is another installment of replies to emails I usually ignore.

Dear Mike, Leah, Kathy, Samantha, Nate, Thomas, Julia, Brent, Ray, and many others,

Thanks you for sending unsolicited advertorials related to your employers. I suggest you try a little harder to disguise this “content” as news. I particularly enjoyed your repeated impatient follow-up emails demanding some sort of reply. Here is my reply. I’ve got a bunch of worthless old household items for sale. I demand that you head to my house immediately and overpay me for them.




Dear George, Adam, Melissa, Ronnie, Ryan, and others,

Thank for offering your crypto expertise or to put me in touch with a crypto expert. As it happens, this is an area I understand well. Your analysis is mostly irrelevant or wrong. Perhaps you should stick to guessing why the Dow went up or down today.




Dear LinkedIn,

Thank you for sending the same list of potential people to connect with every week for a year. Yes, I know these people. No, I don’t need to link to them. Thanks as well for keeping me up-to-date on the work anniversaries of hundreds of people. I never cared about my own work anniversary, and for most of these people, I don’t care about their birthdays, but for some reason I need to stay on top of their work anniversaries.



Friday, March 16, 2018

Short Takes: Financial Advisor Knowledge, EI, and more

I managed only one post in the past two weeks, but it’s of significance to me:

Why I Retired

Here are some short takes and some weekend reading:

Robb Engen at Boomer and Echo gives the results from a study showing that financial advisors who give poor advice to their clients tend to act on this advice in their own portfolios. This suggests they don’t know that their advice is bad. This makes sense. I expect that most advisors’ financial knowledge is limited to whatever they learn from their employers’ training and sales materials.

Gail Vaz-Oxlade says our Employment Insurance (EI) system is broken. She has a number of examples of people encountering senseless denials and delays. This reminds me of working for a large company that had periodic “travel freezes.” This just meant it was harder to get approval for travel, but not harder in any sensible way. You just got hit with a time-consuming process and arbitrary rejections that had nothing to do with the merits of the travel. I’m not surprised to learn that EI does similar things. It’s hard work to reject only those who deserve to be rejected. It’s much easier to reduce costs by making arbitrary rejections.

Luke Alexander has some useful tips for air travelers. One concerns how airlines manipulate you using information about past searches for flights.

A Wealth of Common Sense tells the story of people who gamed lotteries for millions in profits. This is a case of government lottery designers failing miserably. I’d like to think that some lottery executive lost his job over the mistakes, but that’s probably too much to hope for.

Tom Bradley at Steadyhand reminds us that the important battle over mutual fund trailers rages on. We need to bring the costs of investing out into the open where investors can see them. In another interesting article, Tom explains that low interest rates and high debt can’t last forever. His assessment of the timing of higher rates: “Slow moving train wreck.”

Big Cajun Man explains the ins and outs of RDSP grants.

Preet Banerjee interviews Cait Flanders, author of the book The Year of Less.

Monday, March 12, 2018

Why I Retired

Although I’m younger than the typical retiree, I retired about 8 months ago. It may seem obvious why someone would want to retire, but I’ve been reflecting on what caused me to take the plunge when I did. There were a number of factors that influenced my decision.

1. Adequate savings

I wouldn’t have retired if I didn’t have enough savings. The thought of running out of money makes me conservative about my savings. But my best effort at analyzing my future spending and investment returns shows I have more than enough buffer. Even my wife seems (mostly) convinced we’ll be okay.

2. Autonomy

I’ve never been very good at doing what others want me to do instead of working on whatever interests me at the moment. As I age, my desire for autonomy has been increasing. My employer gave me tremendous freedom to work on just about anything that might help the company. Even so, work chafed me when I wanted to do other things.

3. Taxes

I’m not asking anyone to feel sorry for me that I had a good income and had to pay high taxes. However, I needed to make a decision for myself and my family, not for others. It was disheartening to see part of my income get more than half taxed away. This was most directly visible with bonus payments where I could see that the after-tax amount less than half of the pre-tax amount.

However, taxes on my working income weren’t the only factor. Because my RRSP and TFSA are full, I was adding to non-registered savings. So, I faced significant annual taxes on non-registered investment gains. It began to feel futile to continue earning and saving. Again, I don’t expect any sympathy, but you have to expect me to act in more own interests. I judged the after-tax benefit I’d get from more savings to be not worth the effort.

I tried taking a month at a time off work without pay, reasoning that I’d be eliminating the most heavily taxed part of my income. But in the end I decided to extend that to a full 12 months each year. There’s a good chance I’ll pay less income tax over the rest of my life than I paid in 2017, adjusting for inflation.

4. Wealth Taxes

Currently in Canada, we tend not to tax wealth. We tax incomes at the federal and provincial levels, and have sales taxes on consumption. The main exception to this lack of wealth taxes is property taxes on real estate. However, this could change. Thomas Piketty called for a huge expansion of wealth taxes in his book Capital in the Twenty-First Century. British Columbia recently expanded property taxes on homes worth over $3 million. This is a small start, but it could easily be just the beginning of the spread of wealth taxes.

I hope we don’t see expanding wealth taxes from spendthrift governments thirsty for more cash, but it’s hard to say this is an unlikely outcome. If this does happen, then any further saving I do would become completely futile.

5. Changes at work

My employer made some major changes to the company’s structure and the types of business they would seek. The management team had some big winners and big losers. While these changes didn’t affect me much, they created a natural breakpoint for me. This made it easier to bow out without feeling like I was abandoning my company.


In a less charitable moment, my wife might summarize all this as “lazy.” There’s probably some truth to this, but this is my blog and I get to put these reasons into my own context.

I had been thinking about retiring for some time, but the changes at work were what sparked me to pull the trigger. I wouldn’t have considered retiring if I wasn’t confident I had enough savings. Taxes weren’t a dominant consideration, but even if I wanted to save more to be able to afford a more extravagant lifestyle, incomes taxes and possible wealth taxes make this difficult anyway. I have more than enough things I want to do to fill my days, and I now have the autonomy to do what I want.

Friday, March 2, 2018

Short Takes: Buffett’s Bet, Closet Indexers, and more

Here are my posts for the past two weeks:

Foreign Withholding Taxes on New Vanguard ETFs

Measuring Returns in Different Currencies. I’m guessing this article bounced off most people, including any investment professionals who read it. The way we measure relative returns between countries if often wrong.

Here are some short takes and some weekend reading:

Ahmed Kabil has an interesting article on Warren Buffett’s bet against hedge funds as well as other types of long-duration bets.

Tom Bradley predicts a lean future for closet indexers, a term referring to mutual funds that charge fees as though they invest actively but are actually very close to being index funds. In Canada, such funds collectively hold hundreds of billions of dollars.

Ellen Roseman explains how vendors can get your new credit card information when you get an updated card.

Tom Spears goes through the things CRA auditors look for as red flags.

Robb Engen at Boomer and Echo wrote an interesting “annual letter to householders” modeled after Warren Buffett’s letter to shareholders.

The Blunt Bean Counter explains that there are only a few weeks left to set up a precribed rate loan to a family member at 1%/year.

Big Cajun Man has a thought that should be scary to some: “all debts must be paid.”

Tuesday, February 20, 2018

Measuring Returns in Different Currencies

Thinking about returns of stocks in different countries and in different currencies can get confusing. If Canadian stocks rise (in Canadian dollars) and U.S. stocks rise more (in U.S. dollars), almost everyone would agree that U.S. stocks performed better, even if the Canadian dollar rose by enough to make up the difference. This way of thinking makes no sense to me.

Suppose that in a particular year, Canadian stocks rise 10% when measured the usual way in Canadian dollars. In the same year, U.S. stocks rise 15.5% when measured in U.S. dollars. But the Canadian dollar rises 5% during the year. Most would agree that U.S. stocks had superior returns.

However, let’s look at this from a few points of view, starting with a Canadian investor who thinks in Canadian dollars. The Canadian stocks case is easy: a 10% gain. Now let’s consider the case of a C$10,000 investment in U.S. stocks with the Canadian dollar at 80 cents U.S. The investment is US$8000 and it rises by 15.5% to US$9240. But Canadian dollars rose 5% to 84 cents U.S. This converts to C$11,000 for a gain of 10% measured in Canadian dollars.

So, from the point of view of a Canadian investor, stocks in Canada and the U.S. performed the same, a 10% gain. If we go through the same exercise for a U.S. investor, the gain for Canadian and U.S. stocks will both be 15.5% measured in U.S. dollars. The same will be true for investors in any other country. Everyone in the world will see Canadian and U.S. stocks giving the same performance. So how can it make any sense to decide that U.S. stocks performed better?

This scenario was created to give the same returns for Canadian and U.S. stocks, but we get similar outcomes in other cases. If a Canadian investor sees Canadian stocks perform 5% better than U.S. stocks, then U.S. investors and all other investors in the world will see the same 5% better performance for Canadian stocks over U.S. stocks.

People think that stock returns measured by the country’s own currency are somehow the “actual return”. But this way of thinking is misleading. Returns are always relative. If every investor in the world sees Canadian and U.S. stocks as performing equally well in a particular year, how can it make any sense at all to decide that U.S. stocks performed better? The answer is that it doesn’t make sense.

Saturday, February 17, 2018

Foreign Withholding Taxes on New Vanguard ETFs

When Canadians own foreign stocks, taxes on the dividends are often withheld by the foreign country. This can apply with U.S. stocks as well. This is a complex area. The amount of taxes silently withheld and whether you can effectively recover them depends on the country and the type of account you have.

Yesterday, I said I wanted to know the foreign withholding tax drag on the new Vanguard Canada ETFs. Justin Bender has done the analysis. He has a pdf with the foreign withholding tax details for RRSP and TFSA accounts, as well as an article discussing other aspects of Vanguard’s new ETFs.

In a personal note, Justin goes on to explain “The withholding tax drag in a taxable account is only about 0.01% to 0.02% for the three ETFs.” Thanks, Justin.

Friday, February 16, 2018

Short Takes: New Vanguard ETFs, Worrying about Stocks, and more

My only post in the last two weeks was about TFSA advice:

Puzzling TFSA Advice

Here are some short takes and some weekend reading:

Canadian Couch Potato reviews Vanguard’s new one-fund solutions. They look like excellent single ETF solutions for DIY investors. One thing I’d like to see is an analysis of foreign withholding taxes to help DIY investors make informed tradeoffs between cost and simplicity.

John Robertson has an interesting message for those very nervous about the recent stock market decline.

Big Cajun Man coins a new term for exploiting the elderly with slimy sales practices.

Robb Engen at Boomer and Echo explains that the recent big drop in stocks may have been a record when measured in points, but is far from a record in the sense that matters. Unfortunately, it is mostly media types who hype such “record” drops, and their desperation for headlines will keep them from understanding Robb’s message. Remember the Upton Sinclair quote: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”

The Blunt Bean Counter has a guest expert explaining laws related to powers of attorney for personal care and medical assistance.

Monday, February 5, 2018

Puzzling TFSA Advice

I often see advice related to TFSAs and RRSPs that is strange or just plain wrong. I hate to pick on Gail Vaz-Oxlade, but her recent article giving TFSA advice was spot-on except for one puzzling part I didn’t agree with:

You can hold any investment you can buy for your RRSP inside your TFSA, including stocks, bonds, GIC, and mutual funds. But you should probably stick with interest-bearing investments.

Why? Well since all the capital gains inside [a] TFSA [are] tax free, it also means any capital loss can’t be claimed [to] offset your other capital gains.

To start with, your mix of investments in cash, bonds, and stocks should be based on personal factors that have nothing to do with the tax properties of various types of accounts. Because few people use up all of their RRSP and TFSA room, all of their savings outside of a chequing account should be in either RRSPs or TFSAs.

If your asset mix includes $50,000 in cash, perhaps as emergency savings, and you have no savings in non-registered accounts, then by all means keep the $50,000 in a TFSA. But don’t bias your asset mix to extra cash just to avoid investing in stocks in a TFSA. More cash in your TFSA should mean less cash or cash-equivalents in your RRSP.

If you’re in the enviable position of having used all your RRSP and TFSA room, you get to decide what part of your savings should go in a non-registered account. Suppose your asset mix includes at least $50,000 cash and $50,000 in the Canadian stock exchange-traded fund VCN. The question is which to hold in your TFSA and which to hold in a non-registered account.

The best savings account I'm aware of pays 2.3% interest. VCN pays more than this in dividends, but dividends have preferred tax treatment in a non-registered account. Ignoring capital gains for the moment, paying taxes on 2.3% interest in a non-registered account isn't much different from paying taxes on the VCN dividends in a non-registered account.

The choice of which investment to hold in your TFSA comes down to the capital gains. Over a single year, VCN may be up or down, but over decades, it’s far more likely to be up than down. It’s better to get your capital gains tax-free than it is to worry about keeping your capital losses. If getting capital losses over the long term is likely, then you should re-evaluate the way you invest.

Friday, February 2, 2018

Short Takes: New Vanguard ETFs, Tied-Selling, and more

Here are my posts for the past two weeks:

The Incredible Shrinking Alpha

I’m Done with RRSPs

Your Complete Guide to Factor-Based Investing

Here are some short takes and some weekend reading:

Rob Carrick reports on new ETFs from Vanguard that contain both bonds and global stocks.

Big Cajun Man explains the regulations against tied selling by banks. They apply to such things as requiring you to get a chequing account with a bank in order to get a mortgage.

Robb Engen at Boomer and Echo discusses using annuities to create your own pension income. He says “I perked up when I saw the payout rates were between 5 and 7 percent of the initial deposit. Now, keep in mind, those rates won’t increase with inflation each year, but it’s still a healthy (and guaranteed) amount to receive for life. … why wouldn’t a relatively healthy 70-year-old male not want to turn $250,000 into annual income of $17,669.89?” He’s downplaying the devastating effects of inflation over many years. I’ve watched older family members struggle to get by as the buying power of unindexed pensions erode. People should really be looking at annuities with increasing payouts to counter the effects of inflation. The starting payouts are lower, but this gives a better idea of the annuity’s actual returns.

Monday, January 29, 2018

Your Complete Guide to Factor-Based Investing

If you’ve ever wondered whether you should be taking advantage of the historically above average returns of small stocks, value stocks, momentum stocks, and other types of market anomalies, Your Complete Guide to Factor-Based Investing, by Andrew Berkin and Larry Swedroe, is the book for you. It’s based entirely on “evidence from peer-reviewed academic journals,” and it helped me focus my thoughts on the degree to which I want to pursue factors.

The authors begin with a treatment of the seven factors they consider “worthy of investment”: market beta, size, value, momentum, profitability and quality, term, and carry. For each of these factors they discuss persistence, pervasiveness, robustness, whether they are investable given real world concerns such as trading costs, and whether there are logical explanations for the existence of above-average returns.

In the case of size and value factors, “While small-cap stocks as a whole have provided higher returns (the size premium), small-cap growth stocks have produced below-market returns.” This is the reason why I invest in the exchange-traded fund VBR; it contains only small value stocks.

Financial institutions “are momentum traders, while private households are instead contrarians taking the other side.” If this is representative of who makes money from momentum and who loses, the ever-shrinking role of private households as direct stock investors would seem to point to a reduced momentum premium in the future. But I’m not making any predictions.

“While momentum has offered investors the highest risk-adjusted return of all the factors we have discussed, it also has a ‘dark side’ – it has experienced the worst crashes.” That’s enough to scare me off momentum investing, particularly now that I’m retired.

The carry factor consists of assets that yield a high return if the asset’s price remains the same. One example is choosing to hold the currency of a country with high interest rates. “Carry can be like picking up nickels in front of a steam roller. It has been profitable of the long term, but one must be sure they can handle being run over every so often.” That leaves me out.

After going through the investable factors, the authors address what has happened after factors are published. “You need to be aware that the publication of research on anomalies does lead to increased cash flows from investors seeking to gain exposure to their premiums, which can then lead to lower future realized returns.”

Throughout the book, each factor always gave impressive-looking returns, but the section on implementing a diversified portfolio of factors gave a single example where using factors boosted market returns by 0.3% annually, and standard deviation dropped by 1.8%. This shows that those readers who don’t understand the math behind the analysis can be fooled by seemingly big factor returns.

The book contains ten appendices, including one on smart beta: “while there really is in fact such a thing as smart beta, much of it is nothing more than a marketing gimmick – a repackaging of well-known factors.” Other appendices explain why dividends are not a factor, and why other possible factors were rejected based on the authors’ criteria.

In an appendix discussing the default factor for corporate bonds, the authors point out that “Like many risky assets, high-yield debt does not have a normal return distribution.” This criticism extends to virtually all of the academic analysis this book is based on. Stock returns don’t follow the normal distribution, making discussions of volatility, Sharpe ratios, and the entire capital-asset pricing model (CAPM) suspect. It’s a lot to ask, but I’d like to see factor analysis using a pricing model built on a stable distribution that better follows the fait tails we actually see in stocks returns. No model is perfect, but the normal distribution underestimates the probability of extreme events by such a huge margin that it treats extreme events essentially as though they can’t happen at all, which is dangerous.

Some important information for factor investors didn’t appear until the seventh appendix. “If a portfolio already has exposure to market beta, size, and value, adding exposure to momentum cannot contribute that much more in the way of incremental returns.” So, each factor looks impressive on its own, but combined they are less than the sum of their parts. “When adding exposure to additional factors, you may also increase the turnover of the portfolio, raising trading costs and reducing tax efficiency.”

The final appendix lists mutual funds and exchange-traded funds that give access to the investable factors. Some of the funds have quite high expense ratios. This represents costs that you pay whether the factors deliver higher returns or not. If we add other fund costs such as trading costs to the expense ratios, and we eliminate funds whose costs are above, say, 0.25% per year, some factors no longer seem investable.

Overall, I found this book very helpful in understanding factor-based investing. However, it’s not for the casual reader. A decent grasp of CAPM is needed to follow the discussion well. I don’t know if I’ve chosen the right level of factor tilts for the stock portion of my portfolio (80% market beta and 20% small value), but I’ve made my peace with my choices.