Thursday, September 19, 2019

STANDUP to the Financial Services Industry

John J. De Goey doesn’t mince words in his book STANDUP to the Financial Services Industry. He says you should be “protecting yourself from well-intentioned but oblivious advisors.” In addition to pointing out the current problems with financial advice, he paints a picture of what it should be. He also offers an extensive list of questions to ask your financial advisor. Although parts of the book appear hastily written, the main message comes through loud and clear: we pay too much for advice that is often based on “facts” that have been proven untrue.

Critics of financial advisors often paint them as villains, but De Goey says “Advisors might be better seen as unwitting accomplice intermediaries between some sophisticated corporations and trusting Canadian consumers.” So, your advisor may not be a bad person, but he or she works for people who know Canadians are getting a raw deal.

While there is reasonable debate about the value of financial advice, there is little doubt that mutual fund managers add far less value than they cost. The mutual fund “manufacturers pretend to reliably add value, and the advisors pretend to be able to reliably identify the ones who do so.”

De Goey says that advisors who want to do a better job for their clients by using cheaper products get gagged. IIROC Rule 29.7 (1) f) says that advisors can’t publish material that “is detrimental to the interests of the public, the Corporation or its Dealer Members.” This rule is applied liberally to suppress publications that criticise expensive mutual funds.

The author sees parallels between the financial services industry and the tobacco industry decades ago. The message that tobacco is harmful was suppressed in ways similar to the way that criticism of expensive investments is suppressed today.

“Currently, many advisors and clients presume that high product cost is immaterial,” and “most clients don’t understand how or how much advisors are paid.”

Advisors cling to easily refuted narratives like “Embedded compensation doesn’t cause advisor bias,” “active management consistently adds value,” “I’m a good fund picker,” and “I’m a good market timer.” This makes them “card-carrying and founding members of the fictional Society of Cognitive Dissonance.”

There were quite a few parts of the book that were harder to parse than they should be. I’ll point out three mistakes that aren’t too hard to fix, but a few other parts were harder to follow.

“It is not four times as much work to deal with one $1 million client as it is to deal with four clients with $250,000 each.” One instance of “four” needs to go.

“Someone ought to run a test to see what advisors would recommend if they had to choose between active mutual funds that pay an embedded commission and passive funds that do not.” This is the status quo. He meant to test a new scenario where the commissions are attached to the passive products. The purpose was to show that although many advisors express a belief in active management, they actually just follow commissions.

“What percent of actively managed funds survive to celebrate a 10-year anniversary?” “See if you can get your advisor to hazard a guess. Most will say something like 15% or 20%. The actual number is closer to 40%.” This initial question should be what fraction of funds don’t make it to 10 years.

In one section, De Goey gives some quotes he’s heard from advisors. One quote is “They don’t have any debt except for a mortgage and some student loans.” His amusing reply: “I’m a vegan except for bacon-wrapped steak.”

In conclusion, this book gives a valuable insider view of what’s wrong in the financial services industry. I recommend it to anyone who has a financial advisor, and especially to financial advisors themselves.

Monday, September 16, 2019

More Buyers than Sellers

We often hear that stock prices rise because there are more buyers than sellers. Critics like to mock this way of thinking by saying that in every trade, there is a buyer and a seller, so there can never be more buyers than sellers. I think this is just being argumentative.

At a given moment there can be more traders interested in buying a stock than selling that stock. This causes the price to rise so that more traders are enticed to sell and some potential traders are discouraged from buying. This continues until buying and selling interest gets back into balance.

So, we can give the full long-winded explanation, or we can just say “buyers outnumbered sellers.” I can understand if some people don’t like the short form, but that doesn’t make the people who use it wrong. Critics can accuse them of being unclear, but calling them wrong is just being argumentative.

If we want to be even more precise, we shouldn’t be counting just buyers and sellers, but weighting them by the number of shares they trade. This all works in reverse when stock prices drop because “sellers outnumber buyers.”

A valid criticism is that this “explanation” for stock price movements is vacant. Sometimes people say “buyers outnumbered sellers” just trying to sound smart. Whenever stock prices begin to rise, it’s because there is more buying interest than selling interest at the current price.

Even when I disagree with people, I prefer to clarify what they mean rather than nitpicking at the words they choose. Clearly, I’ll never make it as a politician.

Friday, September 13, 2019

Short Takes: Financial Literacy, Swap ETFs, and more

Here are my posts for the past two weeks:

Eliminating Mandatory Minimum RRIF Withdrawals

Currency Exchange at BMO InvestorLine

Ancient Teachings on Earned vs. Inherited Wealth

Here are some short takes and some weekend reading:

Preet Banerjee argues that if current methods of teaching financial literacy aren’t working well, we should be trying to improve them rather than abandon them. I agree. He started the article with a clever quote: “‘I’m glad school taught me the Pythagorean theorem instead of how to do my taxes. It’s come in really handy this Pythagorean theorem season’ - @CollegeStudent on Twitter.” Much of what I learned when doing my taxes the first time isn’t relevant to me today. This is one of the challenges with teaching financial literacy: what lessons will remain relevant for decades as banks and retailers adapt their methods of undermining our attempts to manage money well? Ironically, it’s the math I learned in school that earned me a good living and gave me the tools to make good financial choices. So, I’m glad school taught me the Pythagorean Theorem rather than how to do my taxes.

Canadian Couch Potato explains how Horizons Swap ETFs are affected by the federal government’s draft legislation and what Horizons is doing to preserve their tax-efficient structure. He also explains how the recent changes to TD’s e-series mutual funds are good for investors. More good news is that these e-series funds are now accessible through online brokerages.

Aaron Hector describes some ideas for keeping part of your OAS payments even if your income is above the OAS clawback ceiling.

Big Cajun Man reports that tuition in Ontario actually dropped over the past year according to Stats Canada.

Friday, September 6, 2019

Ancient Teachings on Earned vs. Inherited Wealth

“I see that you are indifferent about money, which is a characteristic rather of those who have inherited their fortunes than of those who have acquired them; the makers of fortunes have a second love of money as a creation of their own, resembling the affections of authors for their own poems, or of parents for their children, besides that natural love of it for the sake of use and profit which is common to them and all men. And hence, they are very bad company, for they can talk of nothing but the praises of wealth.” – Socrates, Plato’s Republic

Ouch. That hit close to home for me. I built my own savings rather than inheriting it. I see my savings as my own creation, and I probably talk about money more than many in my life would like.

I tend to like hearing the old proverb, “shirtsleeves to shirtsleeves in three generations,” because it sets the builders of wealth ahead of those who inherit and squander wealth. But Socrates sees this very differently. He prefers those with inherited wealth because they’re willing to talk about things other than money.

I never thought of it in these terms before, but it seems likely that those who built their own wealth prefer the company of others who’ve done the same, and those who inherited money prefer the company of others who have inherited money.

Fortunately, I have a few hobbies not related to money.

Wednesday, September 4, 2019

Currency Exchange at BMO InvestorLine

Every so often I’m forced to change the way I convert large sums between Canadian and U.S. dollars at BMO InvestorLine. The basic method I use stays the same, but some of the details change as InvestorLine responds differently. The method I use saves a lot of money compared to using the InvestorLine foreign exchange system.

Banks and brokerages hide fees in their currency exchange rates. To see the 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 in RRSPs and cash accounts, 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 three 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. A second possibility is that these people manage to get InvestorLine to flatten their accounts on the correct day, although I can’t get them to do this anymore. The third possible explanation is that interest doesn’t appear until the 21st of the month, and some people just might not notice the charge.

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. Calling them on settlement day and ask them to flatten my account used to work, but doesn’t any longer. So, I’m reduced to waiting until they charge me interest and asking them to reverse it. This has worked every time so far.

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 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 sale 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, preferably in a span of a few minutes.

4. Set a Calendar reminder for 2 business days after the 21st of the month to check if I was charged interest. So far, I’ve been charged interest for one business day every time, even though I have no short position. InvestorLine has one-day delays between certain actions and when they take effect or become visible in my account. This appears to be the explanation for the interest charge. If you make the trades within a few days of the 21st of the month, the interest charge may not appear until a month later. I’ve had InvestorLine representatives insist that their system automatically flattens accounts without false interest charges, but I’ve been charged interest more than a dozen times.

5. 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 nonsensical response every time I do this, but they have always reversed the charge.

6. 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.

Tuesday, September 3, 2019

Eliminating Mandatory Minimum RRIF Withdrawals

Every so often we see calls for the government to eliminate mandatory minimum RRIF withdrawals. Ted Rechtshaffen writes this “win-win change would be cheered by seniors and likely lead to higher taxes in the long run.” He fails to mention the tax-planning strategies it opens up for wealthy seniors.

Under current rules, Canadians have to turn their RRSPs into RRIFs and make minimum withdrawals by age 71. These withdrawals are taxed as regular income. Wealthier Canadians who don’t need this income tend not to like having to make these minimum withdrawals.

Here are a few ideas for tax planning if the government eliminates mandatory minimum withdrawals.

Marrying a much younger spouse

Normally, when you die, all your remaining RRIF/RRSP assets become taxable income. An exception is that you can pass these assets to a spouse’s RRIF without any tax consequences. Currently, this tends to happen after a RRIF has been depleted by mandatory minimum withdrawals. Without these withdrawals, a full lifetime of RRSP savings could be passed to a spouse. If that spouse is young, tax deferral could continue for decades.

Taking this idea further, suppose an old man and old woman with comparable-sized RRIFs enter into marriages of convenience. The man marries the woman’s daughter, and the woman marries the man’s son. After the man and woman die, they have effectively passed their RRIF assets to their children to benefit from another generation of tax-free growth.

You may question whether anyone would go to such lengths, but keep in mind that there may be millions of dollars at stake. Do we really want a tax system that rewards this type of tax planning?

Reducing OAS clawbacks

Consider a senior who needs RRIF income to maintain her lifestyle but her income is high enough that her OAS payments get clawed back either partially or completely. She may be able to alternate between years of high and low RRIF withdrawals to reduce the combined tax plus OAS clawbacks she pays.

Income smoothing

Seniors with highly variable income could smooth their income by not taking RRIF withdrawals in high income years and taking large RRIF withdrawals in low income years.


Eliminating mandatory minimum RRIF withdrawals would do little to help typical Canadians, but opens the door for more tax-planning opportunities for wealthier seniors. I see little societal value in making this change. I’m neither for nor against reducing taxes. But it should be done in a simple way, not by allowing complex strategies to work.

I doubt we’ll see an end to calls for this change from estate planners. In addition to benefiting the wealthy, it gives estate planners more tools to make themselves valuable to their clients.

Friday, August 30, 2019

Short Takes: ETF Deep Dive, E-Series Changes, and more

Here are my posts for the past two weeks:

From Here to Financial Happiness

Reader Question: Should I Draw Down My RRIF?

Here are some short takes and some weekend reading:

Canadian Couch Potato does a deep dive into how ETFs work in possibly his last podcast. He also defended cap-weighted index investing against a flawed argument and cleared up a misconception about the fees in asset-allocation ETFs. Unfortunately, he undermined his credibility somewhat with a reference to Dalbar’s nonsensical calculation of investor underperformance. Dalbar likes to say they just have a minor disagreement with their critics about the minutiae of their calculation methodology. The truth is that if you buy some units of a 10-year old mutual fund, Dalbar docks your performance for having missed out on the previous decade of returns.

John Robertson reports that changes are coming to TD’s e-series index mutual funds. I’m wondering whether this change will generate any capital gains for non-registered investors.

Scott Ronalds explains why Steadyhand is unlikely to buy into any upcoming IPOs, no matter how excited other investors get.

Monday, August 26, 2019

Reader Question: Should I Draw Down My RRIF?

Long-time reader, AT, asked the following question (edited to remove personal details):

I’m a single 67-year old living in Alberta. A CGA friend suggests I start drawing extra lump sums from my RRIF to reduce the amount of tax my estate will pay when I die. I'd like a second opinion before I start the withdrawals.

Here are the relevant financial details:
  • RRIF/LIF total assets of about $800,000 with total regular monthly withdrawals of $3780 (before tax)
  • Total of CPP and OAS is $1641 per month (before tax)
  • Part-time work brings in $10,000 to $15,000 annually (assume $12,500 in this analysis)
  • Only $8000 in TFSAs (lots of remaining room)

To start with, I’m not a CGA, and I may be missing pertinent details about AT’s situation. So, the following is for information purposes only. It’s not advice.

AT’s total income works out to $77,552. Coincidentally, this is just slightly below the 2019 OAS clawback threshold of $77,580. So, any extra RRIF withdrawal larger than $28 would trigger a 15% clawback of AT’s OAS payments. This clawback would apply to about the first $50,900 of RRIF withdrawals after which all of the OAS would be gone.

AT’s income puts him in the 30.5% marginal tax bracket in Alberta. Adding the 15% OAS clawback brings this up to 40.925% (note that there is no tax on the clawed back amount as pointed out by reader Farly). The top marginal tax rate in Alberta is 48% on income over $314,928. So, the most AT can save on the first part of his withdrawals would be 7.075%, assuming he ends up in the top marginal rate upon death.

This 7.075% savings is based on the assumption that the assets AT takes out of his RRIF get taxed and the after-tax amount goes into his TFSA to be invested the same way his RRIF assets are invested. Any money that goes into a non-registered account would cause even more taxes; a transfer to a TFSA is the best-case scenario.

Calculating the amount AT could save gets complicated by the fact that withdrawing more puts him into higher marginal tax brackets, but then the OAS clawback goes away. The following chart shows how much AT saves vs. the size of the extra RRIF withdrawal.

At first, AT is saving at 7.075%, but then the Alberta marginal tax rate jumps to 36% and he saves less. Things turn around after the OAS clawback runs out.

The total savings look worthwhile for large withdrawals, but remember that these tax savings are conditional on moving the after-tax proceeds to a TFSA. Assuming AT has about $56,000 worth of TFSA room available, withdrawing an extra $96,700 from the RRIF would give $56,000 after tax to fill the TFSA. The tax savings for this size of extra RRIF withdrawal are only about $5700. But AT couldn’t do this again next year because he wouldn’t have TFSA room available.

What about investing the after-tax RRIF withdrawal in a non-registered account? This would generate annual dividend taxes and capital gains taxes at death. I haven’t run the numbers, but I think these taxes would more than swallow up the savings shown in the chart above.

So, the most AT can save is $5700 at the cost of using up all his TFSA room. Depending on his spending level into the future, it’s possible he’d want to use some of that TFSA room. Overall, there seems to be minimal benefit to making any extra RRIF withdrawals.

One thing that could change this situation is if AT stops working. This would give him some room to make a modest RRIF withdrawal without triggering the OAS clawback.

I’d be pleased to get feedback from AT’s CGA friend. It’s certainly possible there are more moving parts here than I’m aware of. If not, then I don’t see much point in AT making any extra RRIF withdrawals.

Friday, August 23, 2019

From Here to Financial Happiness

Reading Jonathan Clements’ book From Here to Financial Happiness is like having a chat with a wise financial advisor. He covers 77 personal finance topics, most in just a page or two. While it’s aimed at Americans, almost all its lessons are relevant to Canadians.

Much of what matters in personal finance is making decisions that help you get what you want out of life. Clements covers these topics as well as the usual advice to spend less than you earn and avoid debt. One example is the third lesson where he asks the reader to “dream a little” and list the things you’d do if money were no object. Later the reader is led through the steps to make some of these dreams a reality. It isn’t until the end of the book that we get into picking investments.

This book is wide-ranging and resists any further attempt to summarize it. So, I’ll use the rest of this review to point out a few parts that caught my attention; they aren’t meant to be a representative sample of the contents.

“You could carry a credit card balance – or you could toss dollar bills out the window. Same thing.” The difference in Canada is that throwing our loonies around might hurt somebody.

Financial blogs are filled with debates about which debts to pay off first. Clements suggests a compromise. “Focus on paying off the debt with the highest interest rate.” “If you have loans that are almost paid off – accelerate payments on these debts ... [to] improve your cash flow.”

Clements lists a dozen investment products and strategies to avoid, and then lists several others that almost made the list. Basically, you should avoid investing in anything that seems to remotest bit exciting.

“Why do many families fail to save? ... often they simply can’t, because they have boxed themselves in with a litany of monthly fixed costs, everything from mortgage payments to insurance premiums to recurring fees for phone, internet, cable, music streaming, and more.”

Clements includes self-reflection as one of the attributes you need to be able to save money. When we’re young, we think buying things will make us happy. We learn the hard way that we’re wrong about this and we look for happiness elsewhere.

Many people think they’ve wasted money if they buy insurance they end up not needing. This is the wrong way to think about insurance. “At its heart, insurance is about pooling risk.” “Those who suffer misfortune receive money from the pool. The rest of us pay our premiums and get nothing in return, which is what we want, because it’s a sign that life is good.” “Because insurance will – we hope – be a money loser, we want to purchase only the policies that are absolutely necessary.” You don’t need insurance for any risks you can handle on your own.

As you become wealthier, you may cut back on many types of insurance. But “it should make you more anxious to get umbrella-liability insurance. Why? Your growing wealth may make you a more attractive target for the litigious.”

“Basements are badly curated museums dedicated to the purchases we regret but can’t yet bring ourselves to trash.”

“Tempted to sell stocks and buy rental real estate? Remember, stocks don’t call at 2 a.m. complaining that the toilet’s clogged.”

“Want to hurt your happiness? Buy a big house involving lots of upkeep and a long commute.”

“There are those who think they’re investment geniuses – and then there are those smart enough to index.”

Clements says contributing to a work savings plan that has an employer matching contribution is a higher priority than paying off credit cards. Funding the U.S. equivalent to a self-directed RRSP comes next. But he says to pay down your mortgage before buying any bonds.

“If your brokerage firm or mutual fund company provides cost basis information, there is no reason to keep anything but the latest statement.” I find that cost basis information from brokerages is often wrong. I prefer to keep electronic copies of old statements just in case I need them when filing taxes.

“A fatter bank account won’t necessarily make us happier, but an empty one will likely make us miserable.”

Overall, I found this book a useful check on the state of my personal finances. Younger readers will find it a good guide to creating the future they want, and older readers will find it helpful to see what they’ve overlooked. It will definitely make you think about your life.

Friday, August 16, 2019

Short Takes: Dalbar and Millennial Investors

I managed only one post in the past two weeks:

Irrational Exuberance (

Here are some short takes and some weekend reading:

Cameron Passmore and Benjamin Felix discuss mortgage rates, REITs, and investor performance in mutual funds and variable annuities. Their podcasts are consistently entertaining and informative. In this podcast, it was the discussion of Dalbar’s studies that caught my attention. Dalbar regularly reports that individual investors underperform the mutual funds they invest in by wide margins because of behavioural errors. The gaps are usually so wide as to make them unbelievable. It turns out that their figures are nonsense, but few people in financial advisory positions seem to examine them closely, presumably because the message that people need help with their investments is welcome. I’ve discussed the problem with Dalbar’s “methodology” in detail before. Here is an attempt at a brief explanation: If you put some money into a 10-year old mutual fund, you’re automatically an idiot for having missed out on the previous decade of returns. No matter how long you leave that money in the fund untouched, those missed returns will contribute to Dalbar’s calculated investor underperformance.

Robb Engen at Boomer and Echo discussed a recent Dalbar report. Mutual fund investor returns do lag index returns, in part because of high mutual fund fees. Dalbar’s numbers are not a useful measure of investors’ poor market timing.

Tom Bradley at Steadyhand has some solid advice for millennial investors. I certainly hope my sons avoid the mistakes I’ve made.

Wednesday, August 14, 2019

Irrational Exuberance

It’s been 19 years since Robert Shiller wrote Irrational Exuberance at the peak of the dot-com stock boom. I decided to give it a read to see if it teaches any enduring lessons.

Don’t be fooled by the title into thinking this is a book full of entertaining stories about investor excesses. It’s largely an academic work that lulled me to sleep more than once. It takes a deep look at what defines a stock market bubble and what factors led to the then current high stock price levels.

As an example of the author’s “playfulness,” he described Dilbert as a comic strip “which dwells on petty labor-management conflicts in the new era economy.”

The discussion throughout the book is very thoughtful and thorough, but like much of macroeconomics, it’s hard to say anything definitive. If we raise interest rates, it might help, or might hurt; it’s hard to tell.

A few of the book’s details caught my attention. At the time, inflation-indexed bonds paid 4% above inflation. I’d love to be able to buy such bonds today. Current yields are much lower.

The author claimed that Y2K bug worries proved “groundless.” It’s true that the media and Y2K consultants played up the potential risks, but we had few problems as we reached the year 2000 because of the tremendous effort that went into fixing the bugs. Calling the Y2K fears groundless is like saying concerns about a crumbling bridge proved groundless after the bridge was replaced.

Shiller calls for Social Security benefits to be indexed by per capita national income rather than by the Consumer Price Index (CPI). This is an interesting idea. It would allow seniors to keep up with the average standard of living rather than allow them to keep buying the same basket of goods. However, this might put even more pressure on Social Security as baby boomers age.

At the end of the book Shiller offers some recommendations. People should diversify away from heavy stock allocations. He calls for the creation of new markets such as single-family-homes futures and S&P 500 dividend futures. He believes such markets would allow people to sensibly hedge some of their risks.

I suspect this book would be mainly valuable to someone looking for a head start in gathering ideas for an academic study of the current bull market.

Friday, August 2, 2019

Short Takes: Employer Matching, Lattes, and more

Here are my posts for the past two weeks:

How High are Rents Today?

Canadian ETFs vs. U.S. ETFs

Trusts, Whether You Want Them or Not

Cut Your Losses Short

Here are some short takes and some weekend reading:

Preet Banerjee says that taking advantage of employer matching in savings plans is free money and deserves to be in the list of personal financial commandments such as avoid credit card debt. I agree, but it pays to look at the difference between costs in the employer savings plan and the costs in your personal portfolio ( In extreme cases where employer plans have very high costs, the employer match can get eaten up in fees over time.

Robb Engen at Boomer and Echo says we should stop asking $3 questions and start asking $30,000 questions. By this he means focusing your attempts to build wealth on the big dollar amounts in your life. Robb is in the camp who says to go ahead and buy your lattes. However, a latte habit isn’t really a $3 question if you spend $100/month. I think in dollars per year. So, lattes in this example amount to $1200 annually. For comparison, reroofing my house costs about $500 per year. This isn’t to say that buying lattes is a bad idea for everyone. Just see it for what it is – a thousand-dollar question.

Fintech Impact interviews Preet Banerjee about his MoneyGaps tool to help financial advisors provide better planning services for their clients. One of the interesting topics covered in this fast-moving podcast is the free GIS calculator MoneyGaps is working on. This is a complex area where few financial advisors have any useful knowledge.

Gary Mishuris tells the interesting story of a young equity analyst uncovering a fraud. If you get to the part where the fraud is revealed but struggle a little to make sense of it, you should definitely question your ability to pick your own stocks.

Thursday, August 1, 2019

Cut Your Losses Short

Common advice for stock pickers is to “cut your losses short.” Investors have a tendency to hang onto loser stocks hoping to get their money back, but the experts say that’s a mistake. I have an example from my stock-picking days to illustrate this idea. I bought shares in some sort of fruit company and ended up losing money.

Back in October 2000, I bought 3000 shares at US$20.54. They went down initially, and then bounced around in a range. I didn’t want to sell for a loss and held them. By July 2003, I’d had enough and sold them for US$19.51 each, a loss of just over US$3000.

The problem isn’t just the lost money; I also lost time. If I’d sold this turkey sooner, I could have found a better stock to put my money in.

Thankfully, I didn’t keep holding to lose even more money and time. What if I were still holing this stock? A quick search tells me this stock now sells for ... wait ... that can’t be right. There were stock splits too. Those shares would now be worth US$8.9 million! I’m going to be sick.

That’s right – I used to own 3000 shares of Apple. After splits that’s 42,000 shares today, trading at US$213.04 as I write this. But I sold 16 years ago. Woulda, coulda, shoulda.

So, maybe this is a bad example for the advice to cut your losses short. Maybe never selling is a better idea. However, that didn’t work out very well for the Nortel shares I used to have.

Maybe most of us have little idea what we’re doing when we try to pick stocks. Maybe we’re no match for the army of investment professionals around the globe, most of whom can’t even beat the market by enough to cover their expenses.

The larger takeaway here is that most of the stock-picking advice you’ll find in the world will just get you in trouble. I’ve put my money on owning all the stocks instead of trying to pick the right ones.

Wednesday, July 31, 2019

Trusts, Whether You Want Them or Not

Most of us have heard of wealthy families setting up trusts. We have a vague idea that they’re set up to reduce taxes or provide a controlled income to young beneficiaries. Income taxes on trusts can get complex. But people who set up trusts know what they’re getting into and are usually prepared to pay an accountant. However, as I found out, there’s a type of trust that comes into existence automatically.

When a person dies, their executor must file a final tax return by tax-filing season the next year (or 6 months after death, whichever is later). However, this final tax return only applies to income that arrived before or at the person’s death. There are many easy-to-understand websites that explain these tax rules and basic tax-preparation software can handle these returns.

But what about the income that comes after death? If there is no surviving spouse, it takes a while to distribute assets to beneficiaries. In the meantime, RRSPs, RRIFs, TFSAs, houses, and other assets can produce interest, dividends, and capital gains. Even in the simplest cases, there is usually a $2500 cheque from CPP to cover part of the burial expenses. Someone has to pay taxes on this income.

This is where the trust comes in. After death, the assets in the estate are considered to form a trust. In some cases the executor can get away with having beneficiaries declare the estate’s trust income, but the most tax-efficient way to declare this income is usually with a T3 Trust Income Tax and Information Return.

This is where I ended up after reading dozens of articles on the subject. My sense that it couldn’t possibly be this complicated turned out to be wrong. My late aunt’s estate had 3 slips for a total of $2540 of income. This had me filling out a form with a dozen questions including

“If the trust is a deemed resident trust, is the trust an ‘electing trust’ as defined in section 94?”

“Does the trust qualify as a public trust or public investment trust that has to post information about the trust on the CDS Innovations Inc. web site under section 204.1 of the Income Tax Regulations?”

My aunt’s very simple situation got lumped in with very complex trust arrangements. I filled out the T3 trust return (by hand!) as best I could but got a couple of things wrong. The biggest mistake was filing late. Trusts have only 90 days from year end (end of March) to file. So, this T3 trust return was due a month before the final return.

In the end my mistakes cost a total of $35 in interest and a late-filing penalty. I consider this cost a bargain if it means I’m done with acting as executor. But I have to wonder why this process has to be so difficult.

The most difficult part for me was determining if the T3 trust return was really the correct return to file. CRA’s guide for preparing returns for deceased persons describes returns for rights or things, a partner or proprietor, and income from a graduated rate estate. For a while, I thought I needed to file a return for rights and things. I’d have to rate this guide from CRA “unhelpful” for someone holding 3 little slips.

Surely winding up an average Canadian’s affairs can be simpler while extracting the same tax revenues. It shouldn’t be necessary to hire an accountant to file T3 trust returns for people who just have a few tax slips.

Thursday, July 25, 2019

Canadian ETFs vs. U.S. ETFs

When it comes to investing, we should keep things as simple as possible. But we should also keep costs as low as possible. These two goals are at odds when it comes to choosing between Canadian and U.S. exchange-traded funds (ETFs). However, there is a good compromise solution.

First of all, when we say an ETF is Canadian, we’re not referring to the investments it holds. For example, a Canadian ETF might hold U.S. or foreign stocks. Canadian ETFs trade in Canadian dollars and are sold in Canada. Similarly, U.S. ETFs trade in U.S. dollars and are sold in the U.S. Canadians can buy U.S. ETFs through Canadian discount brokers but must trade them in U.S. dollars.

Vanguard Canada offers “asset allocation ETFs” that simplify investing greatly. One such ETF has the ticker VEQT. This ETF holds a mix of Canadian, U.S., and foreign stocks in fixed percentages, and Vanguard handles the rebalancing within VEQT to maintain these fixed percentages. An investor who likes this mix of global stocks could buy VEQT for his or her entire portfolio without having to worry about currency exchanges. It’s hard to imagine a simpler approach to investing.

Investors who prefer to own bonds as well as stocks can choose another asset-allocation ETFs offered by Vanguard Canada, BlackRock Canada, or BMO. But the idea remains the same: we own just the one ETF across our entire portfolios. For the rest of this article we’ll focus on VEQT, but the ideas can be used for any other asset-allocation ETF.

Why would anyone want to own a set of U.S. ETFs instead of just holding VEQT? Cost. It’s more work to own U.S. ETFs and trade them in U.S. dollars, but their costs are much lower. To see how much lower, we need to find a mix of U.S. ETFs that closely approximates the investments within VEQT. Readers not interested in the gory details of finding this mix of U.S. ETFs can skip the end of the upcoming subsection.

VEQT Breakdown

Inside VEQT is a set of other Vanguard Canada ETFs. As of the end of 2018, here was the breakdown:

  • 39.7% VUN (U.S. stocks)
  • 30.1% VCN (Canadian stocks)
  • 22.8% VIU (foreign stocks in the developed world)
  • 7.4% VEE (emerging market stocks)

Digging into each of these ETFs, we find that VUN just holds the U.S. ETF VTI, and VEE just holds the U.S. ETF VWO. Things are a little more complicated for VIU. The U.S. ETF VEA is very similar to VIU, except that VEA is 8.7% Canadian stocks. So, we can think of VEA as 91.3% VIU and 8.7% VCN.

Sparing readers further calculation details, here is a mix of ETFs with the same holdings as VEQT:

  • 27.9% VCN (Canadian ETF holding Canadian stocks)
  • 39.7% VTI (U.S. ETF holding U.S. stocks)
  • 25.0% VEA (U.S. ETF holding non-U.S. stocks in the developed world)
  • 7.4% VWO (U.S. ETF holding emerging market stocks)

Cost Difference

To decide whether to go with a very simple portfolio of just VEQT or the more complex mix of 4 ETFs, we need to know how much money the more complex approach saves. There are four main factors to consider in this cost comparison: management expense ratio (MER), unrecoverable foreign withholding taxes (FWT) on dividends, trading costs, and currency conversion costs.

Foreign withholding taxes on dividends are likely the least familiar cost for most investors. When we own U.S. or foreign stocks, the U.S. or foreign country may withhold a percentage of dividends which we may or may not get credit for when we file our taxes in Canada. This area can get complex. Fortunately, Justin Bender has a very handy Foreign Withholding Tax calculator that provides most of this information as of the end of 2018.

For VEQT, MER+FWT is 0.495% when held in a TFSA or RRSP, or 0.271% when held in a taxable account. Why the difference? When we file our income taxes, we get credit for paying dividend taxes to a foreign government if the investment is in a taxable account, but we don’t get this credit in a TFSA or RRSP.

For the mix of VCN and the 3 U.S. ETFs, the blended MER+FWT depends on what type of accounts hold the various ETFs. If we keep the U.S. ETFs out of our TFSAs, the blended MER+FWT is 0.132%. This is much cheaper than VEQT for two main reasons. The first is that the MERs of U.S. ETFs are lower than those of Canadian ETFs. The second relates to tax treaties between Canada and the U.S. When Canadians hold U.S. investments in an RRSP, the U.S. does not impose withholding taxes on dividends. However, when we own VEQT in an RRSP, there is an extra layer of ownership and we get charged the U.S. taxes on dividends.

For an investor who has no investments in taxable accounts, the difference in MER+FWT between VEQT and the mix of 4 ETFs is 0.36% per year. However, owning 4 ETFs, 3 of which trade in U.S. dollars leads to currency conversion costs and higher trading costs (when adding new money, rebalancing, and when withdrawing in retirement). Assuming an investor who uses Norbert’s Gambit to keep currency conversion costs down, the extra trading and currency conversion could easily cost $200 per year. This makes the 4-ETF approach cheaper than owning just VEQT by $200 less than 0.36% of the portfolio size.

For an investor with a $50,000 portfolio, owning just VEQT is actually cheaper by $20 per year. At $100,000, the annual savings of owning the mix of 4 ETFs is $160, hardly enough to be worth the added trouble. However, an investor with a million dollar portfolio would save $3400 per year with the 4-ETF approach.

Some might be tempted to say that once you’re a millionaire, why worry about a lousy $3400 per year? Well, if we assume a 4% withdrawal rate at the start of retirement, that million dollars gives only $3300 to spend each month. Sticking with VEQT would cost a full month’s spending every year.

A Compromise

It seems that if we want to avoid wasting a big chunk of our available spending in retirement, we have little choice but to own some U.S. ETFs and handle all the extra trading, rebalancing, and currency conversions. However, there is a compromise.

Why not just start with only VEQT and worry about splitting into 4 ETFs later? For young investors starting from nothing, it could take years to get to a portfolio of, say, $200,000 when the cost savings of the 4-ETF approach start to become worth the trouble.

Even after we sell all the VEQT to buy VCN, VTI, VEA, and VWO, we could still buy VEQT with any new money we add in the future. We could limit the trouble of dealing with 4 ETFs to very infrequent mass switches of $200,000 or more.

Although world stocks tend to move up and down together, it’s possible that our 4 ETFs could get out of balance once in a while. In most cases, it would be possible to rebalance without any currency conversions. We could adjust the level of VCN by trading between VEQT and VCN. We could adjust the levels of the 3 U.S. ETFs by trading among them using just U.S. dollars.


Whether to go with the simplicity of an asset allocation ETF or the lower cost of U.S. ETFs doesn’t have to be an all-or-nothing decision. A careful compromise of waiting until the total amount of VEQT reaches a chosen threshold can get us most of the simplicity along with most of the cost savings.

Tuesday, July 23, 2019

How High are Rents Today?

We hear a lot about how tough it is for young people to afford sky-high rents today. However, many of the articles I read measure affordability of renting for a single person of modest income. When I was young, few young people could afford rent on their own. Most rented rooms in a house or went in with one or two others to cover rent. This left me wondering if rents really are tougher to afford than when I was young.

The last time I rented was decades ago, but I still remember what I paid. Using the CPP maximum pensionable earnings as a proxy for the rise of wages, the townhouse I rented years ago with my wife should cost $1180 per month today. But, a nearly identical place currently rents for $1760 per month.

This is just a single example, but it appears to be typical of rents across my city. Renting now takes about a 50% bigger bite out of wages than it did when I was young.

So, to the baby boomers who remember how hard it was to make rent decades ago and who might doubt that it’s harder now: yes, young people have it tougher today when it comes to rent.

Friday, July 19, 2019

Short Takes: Investing Simplicity, Behavioural Bias Blind Spots, and more

I managed one post in the past two weeks:

Estimating the Value of 0% Financing

Here are some short takes and some weekend reading:

Robb Engen at Boomer and Echo looks at the range of investment options from the point of view of doing it the easy way or the hard way. He finds the right balance of costs and convenience with owning one of Vanguard Canada’s all-in-one portfolio exchange-traded funds with the ticker VEQT. He avoids the troubles and potential mistakes that come with owning U.S.-listed ETFs. However, there is a middle ground. One can own a base of VCN and U.S.-listed ETFs along with some VEQT so that most rebalancing doesn’t require currency exchanges. This approach is still more complex than just owning VEQT, but eliminating most currency exchanges reduces complexity and the possibility of errors significantly. The benefit of this compromise approach is lower costs than just owning VEQT.

Canadian Couch Potato talks to Dr. Stephen Wendel, Head of Behavioural Science at Morningstar, about how we see behavioural biases in others but not ourselves.

Big Cajun Man encountered two-factor security for his banking login, but the security didn’t work out too well. Perhaps this bank is just doing a trial run.

Thursday, July 11, 2019

Estimating the Value of 0% Financing

I recently helped a family member buy a new car. She was paying cash for the car, so we had to estimate the value of the 0% financing offered to figure out a sensible price to pay for the car.

The key factors that matter for estimating the value of low financing interest rates are duration and interest rate reduction. For example, suppose financing is offered for 4 years at a rate that is 4% below a competitive interest rate. This is a total of 4x4%=16%. However, if the car will be paid off over 4 years, the average balance owing will be close to half the price of the car. So, the value of the financing is about 8%.

For this example, you can reduce the car’s MSRP by 8% as a starting point for a cash sale negotiation. This is equivalent to paying the full MSRP and taking the financing. From there you can negotiate down from the adjusted MSRP.

It was interesting to talk to multiple dealerships and take this approach. A couple just pretended they didn’t know what I was talking about. They played it initially like they never heard of financing having a cash value. The place we eventually bought the car from immediately applied a cash-back figure that represented the value of low-interest financing.

A complicating factor was that I made a mistake initially with valuing the financing. I forgot about the average balance owing being only half the price of the car. So, I initially thought the financing was twice as valuable as it really was.

In the end, the price we got appeared to be better than indicated by the somewhat confusing report we downloaded from unhaggle. It’s always hard to know if you got a good or bad deal on a car, and I’m always left feeling uneasy for a while.

I don’t have much advice for most aspects of buying a car, but there are three things I’m confident about. One is how to value low-interest financing, the second is that it’s best to buy from Phil Edmonston’s Lemon-Aid guide recommended vehicle list, and the third is that it’s best to avoid debt and pay cash for cars.

Friday, July 5, 2019

Short Takes: Paying in Home Currency, Rent vs. Own, and more

Here are my posts for the past two weeks:

Switch: How to Change Things When Change is Hard

How Fast Will Your Portfolio Shrink in Retirement?

Here are some short takes and some weekend reading:

Preet Banerjee explains why you should never accept a foreign merchant’s offer to let you pay in your home currency.

Benjamin Felix compares renting to owning a home in terms of unrecoverable costs.

Big Cajun Man can probably hear the circus music after completing another round with CRA. They’ve accepted both halves of his documentation, but not both at the same time.

Tuesday, July 2, 2019

How Fast Will Your Portfolio Shrink in Retirement?

Once you’re halfway through retirement, you’d expect about half your savings to be gone, right? This turns out this is very wrong when we don’t adjust for inflation. The return your portfolio generates causes your savings to hold steady for a while and then fall off a cliff.

I read the following quote in the second edition of Victory Lap Retirement:

“A recent Employee Benefit Research Institute study found that people in the U.S. who retired with more than $500,000 in savings still had, on average, 88 percent of it left eighteen years after retirement.”

Frederick Vettese provided further detail. This 88% figure is the median rather than the average.

This statistic was used as proof that retirees aren’t spending enough. After all, if you planned on a 35-year retirement, half the money should be gone after 18 years, right? Not even close. Below is a chart of portfolio size based on the following assumptions.

- annual portfolio return of 2% above inflation
- annual withdrawals of 4% of the starting portfolio size, rising with inflation each year
- inflation of 2.12% (the average U.S. inflation from 2001 to 2018)

So, to be on track for a 35-year retirement, your remaining portfolio 18 years into retirement should be 83% of your starting portfolio size. This is a far cry from an intuitive guess that about half the money should be left.

Still, the earlier quote said the average retiree who started with at least half a million dollars had 88% of their money left 18 years into retirement. Further, thanks to a reader named Dave who found the original EBRI study online, we know that the 88% figure is inflation-adjusted.

Here is an inflation-adjusted version of the chart above:

So, 18 years into retirement in this scenario, you’d have 57% of your money left after adjusting for inflation. But the median U.S. retiree who started retirement with at least half a million dollars has 88% of the money left after adjusting for inflation. This is so high it would seem that retirees are severely underspending in retirement.

However, we have to look at the definition of retirement used in the study:

Definition of Retirement: A primary worker is identified for each household. For couples, the spouse with higher Social Security earnings is the assigned primary worker as he/she has higher average lifetime earnings. Self-reported retirement (month and year) for the primary worker in 2014 (latest survey) is used as the retirement (month and year) for the household.

So, even if the lower income spouse still works, the couple is retired. Also, because retirement is “self-reported,” we need to consider post-retirement working income. Most people who leave an office job, but make some money part-time doing a different type of work, consider themselves retired. Another significant source of money coming in is inheritances.

All these sources of post-retirement income cause retirees to draw less from their savings in early retirement to allow larger withdrawals later when they stop earning side income. This is true even for retirees who seek the largest steady inflation-adjusted spending level they can get throughout retirement.

Another factor that increases median savings levels is that some retirees have savings is in the millions and have no intention of spending all their money. Many retirees intend to leave a legacy.

If we account for the intention to leave legacies and the fact that many retirees continue to earn some income in the early phase of retirement, the gap between actual inflation-adjusted savings 18 years into retirement (median of 88%) and recommended level (57%) would shrink. How much it would shrink is hard to guess without further data on post-retirement incomes and intentions concerning legacies.

However, median figures hide the range of outcomes. You can drown in a river whose average depth is only 4 feet. These statistics include a very large number of U.S. retirees who are overspending and will run out of money. The EBRI study says that of retirees who started with at least half a million dollars, 18 years later 12% have less than one-fifth of their money left, and 32% have less than half. These retirees are at risk of running out of money before they run out of life.

The Victory Lap Retirement book and Vettese’s article promote the idea that retirees aren’t spending enough. In fact, there is a group who don’t spend enough, and another group who spend too much. We need to find a way to direct different messages to these two groups. Unfortunately, it’s the overspending group that is most likely to take comfort from books and articles claiming that retirees don’t spend enough.

Thursday, June 27, 2019

Switch: How to Change Things When Change is Hard

In my quest to better understand how to help people manage their money better, I followed a reader’s recommendation to try a psychology book by Chip Heath and Dan Heath called Switch: How to Change Things When Change is Hard. They explain how human nature makes change difficult, and they offer techniques for overcoming these difficulties.

The book begins with the observation that “Your brain isn’t of one mind.” Kahneman called the two parts of our minds System 1 and System 2, but the Heaths prefer a different analogy: “our emotional side is an Elephant and our rational side is the Rider.” Making changes requires getting the Elephant and Rider in agreement.

We can see the tension with a personal matter such as getting out of debt. The Rider might want spend less, but the Elephant would rather go out to eat than cook. You might think that we’d only have to deal with people’s rational sides to make changes at an organizational level, but you have to appeal to people’s Elephants if you want anyone to care enough to change their behaviour. Even executives need to care about a new idea at an emotional level to move on it.

A common theme in the book is that “What looks like resistance is often a lack of clarity.” When you’re trying to get people to change their behaviour, it’s vital to be crystal clear about what they should do. Any confusion makes it easy to just slip back into familiar old patterns.

Another common theme is the “Fundamental Attribution Error.” We have a tendency “to attribute people’s behavior to the way they are rather than to the situation they are in.” We tend to declare change impossible because of people’s natures when the right prodding can lead to big changes.

Only small parts of the book are directly relevant to financial matters. In one section, the authors are positive about the “Debt Snowball Method.” This is where you pay off small debts first rather than going after the debts with the highest interest rate. The reason is a matter of motivation. Being able to cross a debt off a list provides motivation to keep going. Paying off $200 of a $5000 credit card debt leaves us at risk of giving up.

There are nine steps the authors offer for making a “switch.” Here are four of them.
  • Rather than focus on problems, look for bright spots and encourage more of what is going right.
  • Script very specific changes rather than thinking about the big picture.
  • Find a way to make people feel strongly about the needed change.
  • Shrink the change to a first step that isn’t daunting.

The authors tell compelling stories, and their writing is page-turning. My first reaction is that the book’s methods must work well, but I can’t be sure because I haven’t tried to use them yet. I think the book is worth reading because it gives readers a different way to think about motivating change in themselves and others.

Friday, June 21, 2019

Short Takes: CPP Active Management, Portfolio Rebalancing, and more

Here are my posts for the past two weeks:

Should CPP Exist?

Credit Card Hopelessness

Living Debt-Free

Here are some short takes and some weekend reading:

Andrew Coyne explains the active vs. passive management issue for the Canada Pension Plan. He also digs into discrepancies in the claimed recent outperformance.

Canadian Couch Potato explains why it’s not necessary or desirable to rebalance your portfolio more than once per year. This advice is for those who rebalance based on time. I prefer threshold rebalancing, which is rebalancing whenever my portfolio is sufficiently far from its target percentage allocations. This is really only recommended if you can automate the process. It doesn’t make sense to do all the necessary calculations every day just in case you hit a threshold. I have my portfolio spreadsheet set up to send me an email when it’s time to rebalance, so I never have to look at it.

Tom Bradley at Steadyhand reminds us to focus on what really counts in investing. Hint: it’s not the short term.

The MoneySaver Podcast interviews Dan Bortolotti, the Canadian Couch Potato. They discuss passive index investing, ETFs, Robo-Advisors, and getting started investing.

Frederick Vettese shows in one example scenario that deferring CPP to age 70 is better than buying one of the new Advanced Life Deferred Annuities (ALDAs).

The Blunt Bean Counter explains the rules for the pension income tax credit.

Friday, June 14, 2019

Living Debt-Free

Through a combination of good luck and good habits, I’ve never had a problem staying out of debt. I’ve had to work at understanding what causes others to have debt problems. This is where Shannon Lee Simmons’ book Living Debt-Free has helped me. She lays out a wide range of debt management plans that take into account human nature and the underlying reasons why people have trouble with debt. The book contains a great many stories of people Simmons helped out of debt. These stories illustrate her points well and made the book an entertaining read.

Without thinking too deeply, we might believe that making someone feel shame about being in debt would drive them to cut their spending and pay off their debts. Simmons says the opposite is true. People need to feel good about some of the choices they’ve made to generate the sustained enthusiasm necessary to spend a few years digging out of debt.

“The stronger the negative emotions connected to your debt, the more likely you are to fail at your debt-repayment plan. You’d think it would be the opposite, but it’s not.”

If you’re in debt and don’t have a handle on your finances, “It’s likely that you feel guilty or afraid when you spend money. You never really know when spending is okay or when it’s going to lead to more debt you can’t pay off.”

An interesting part of the book it the idea of “tripwires.” Simmons suggests that you examine your spending over a few months and identify all the purchases you now regret. She then wants you to look for a pattern among these purchases. Possible examples are overspending on vacations, buying things your children don’t need, or fear of missing out. She wants you to identify your tripwires so you can catch yourself before making a purchase you’ll regret later.

Simmons doesn’t believe in scaring people with how much interest they’re paying. “The problem is that using scare tactics as the sole motivating factor almost always leads to failure over the long run.” She prefers to have you find your “touchstone,” which is the non-financial reason you have for wanting to get out of debt. She offers a list of questions to answer to help identify your touchstone. Keeping your reason for wanting to get out of debt front and center in your mind will help you maintain your motivation.

The book contains a series of steps for analyzing your spending, setting a realistic spending level, and calculating your “magic amount,” which is the amount of your income you can put towards debt each month.

Simmons stresses the importance of being realistic about how much you need to spend. If you choose a spending target that’s too low, you’re just setting yourself up for failure. “People give up on their Debt Game Plan if the plan doesn’t feel doable. I’ve seen it again and again.”

“If you’re in a situation where your Magic Amount is zero and you need to reduce expenses, try to reduce Fixed Expenses first, before reducing your Spending Money.”

Simmons has specific recommendations for how to set up your bank accounts. It’s aimed at having a separate chequing account to isolate the money you can spend each month however you wish. This gives you “permission to spend that money to zero without worrying that you’re using money earmarked for bills or savings.” If you want pizza and the account has money in it, you can have the pizza. “No guilt, no shame, no worries. No debt.”

Some minor not-so-good parts of the book

There are a few references to Astrology. Perhaps these are just meant to keep the book light and fun, but they are a red flag for me. I had a family member who believed in Astrology, and she made important decisions about her life and relationships taking into account Astrological nonsense. These few references to Astrology undermined my confidence in the author.

In Simmons’ own story of digging herself out of debt, she planned to withdraw $13,000 from her RRSP and “Once I paid the tax penalty, I’d have $9,100 left.” I know many people mistakenly think of the withholding tax on RRSP withdrawals as a “penalty,” but as a CFP, Simmons should know better.

After cleaning out her RRSP, “That was it. All of my savings, gone. Poof!” It’s common for people to think of their savings and debts separately, but the RRSP withdrawal was just recognition that it had already been spent slowly over time.

The interest rate on payday loans “can be as high as 60 percent.” Try 390%, and that’s before compounding. The compounded interest rate on payday loans is about 3600%!

When you’re in a position of needing to sell investments to pay off debt, Simmons says “you don’t want to sell if you’re in a loss position.” This isn’t good logic. It’s a bad idea to sell something just because it went down, but if you need the money to pay off debt, it shouldn’t matter whether the investments are trading higher or lower than your purchase price.

In a strategy Simmons calls “Stack and Swap,” it can be a good idea to pay certain debts off first to eliminate their minimum payments to free up cash flow. She says to “pay off the [debt with the] lowest amount owing,” but this isn’t right. It’s the ratio of minimum payment to debt that matters. If the lowest debt is $1000 on a credit card with a $30 minimum payment, paying it off won’t free up much cash flow. The targeted loan has to have high payments relative to the debt amount for “Stack and Swap” to work.

In a story about a person named Lee with tax troubles, the difference between $500 and $325 is calculated as $125.


Overall, I found this book both entertaining and illuminating. While I don’t have debt troubles myself, I’m glad to get better insight into how to help others who do have debts. The book has some parts I didn’t like, but they weren’t central to the main themes.

Wednesday, June 12, 2019

Credit Card Hopelessness

We’ve all seen the block of text on our credit cards that says how long it will take to pay off the debt if we just make minimum payments. I suspect this disclosure doesn’t make a positive difference.

Here’s the text that appears on my latest credit card statement:

“At your current rates of interest, if you only make your Minimum Payment by its due date each month, it will take approximately 35 year(s) and 10 month(s) to repay the account balance shown on this statement.”

35 years is a depressingly long time for it to take to get out of debt. And this is for a balance of only a little over $4200. It gets longer for larger balances. I calculate that my minimum payment should be a little over $70, but it’s only $10, which doesn’t even cover interest. Perhaps as long as I keep paying my bill in full every month, my minimum payment stays at $10 so I won’t realize that the interest is actually about $70 per month.

Superficially, the mandated disclosure with the depressing message of it taking decades to get out of debt seems like it should motivate people to pay more than the minimum payment. However, I suspect it often has the opposite effect. What’s the point in trying if you can’t get out of debt for decades? You might as well give up. I don’t believe these things, but I can understand if people become hopeless about their debts.

I have a suggestion for a different disclosure:

“The amount you have to pay monthly to clear this debt in
1 year is $391,
3 years is $157,
5 years is $112.”

This disclosure is more hopeful and more useful for credit card holders. I suspect this type of message is more likely to induce people to pay more than the minimum payment. We can only know for sure by how strongly banks and credit card companies oppose it.

Monday, June 10, 2019

Should CPP Exist?

When Canada Pension Plan (CPP) expansion was first being discussed, businesses didn’t like the prospect of making larger CPP contributions on behalf of their employees. Money managers and financial advisors weren’t happy either because of the likelihood of it reducing their assets under management. This led to many negative articles about CPP. Here I look at some criticisms of CPP.

CPP is a Ponzi scheme.

No, it isn’t. Detractors only call it a Ponzi scheme to try to make it seem fraudulent and likely to collapse. CPP did begin as a scheme where worker contributions were used to pay retired workers, but it is moving away from that model as it builds assets from new contributions. CPP is on very solid footing now and is set to make its promised payments for decades to come.

We should have more individual responsibility.

That sounds good in theory, but let’s look at how that would play out in practice. Suppose we eliminated CPP, OAS, GIS, and other programs that direct money to low-income retirees. This would likely prompt a few people still working to save more, but we’d still have a very large number of people who would spend all the money that gets into their hands. Once these people become unable to work for physical or mental reasons, they’d have no money for food, clothing, or shelter.

It might be tempting to say “too bad” at this point, but there’s no way we’d want to live in a world with hundreds of thousands of starving old people begging for food on the streets across Canada. A majority of us would demand that the government step in to help these people. This would soak up massive amounts of tax money. A much better idea is forced savings in the form of CPP contributions to reduce the burden on taxpayers.

CPP should be optional.

It’s true that not everyone needs to be forced to save money for their retirement. If we could identify just those who don’t need CPP and let them opt out, then making CPP optional would work well. But that’s not what would happen. Huge numbers of people who need CPP would opt out, and we’d be left with the same problem of massive numbers of starving old people. CPP only does its job properly when it’s mandatory.

CPP management is too costly.

I have some sympathy for this one. Those who actively manage CPP investments are soaking up billions of dollars. I’m skeptical that they will outperform by enough to justify their costs over the long run. One thing is certain, though; they will be able to produce reports that paint their performance in a positive light.

Now let’s compare CPP management to the alternative: allowing people to manage more of their own savings. The returns that we get collectively on our retirement accounts are dismal. Huge fees and poor market-timing decisions are widespread. The current costs of running CPP are a bargain by comparison. Any time we talk about running CPP more efficiently, it’s important to remember how badly most people manage their own investments.

CPP returns are too low.

CPP returns are higher than most people would get managing their own money. The usual analyses that show low CPP returns are quite biased. First, they usually take the example of someone who makes the maximum contribution every year and doesn’t need any of the dropout provisions. These dropouts mean that some of one worker’s CPP contributions become benefits for another worker. A slice of contributions get redistributed. That’s the way the system works. Those who don’t use dropouts get a somewhat lower return so that others get a higher return. I think of it as most of my CPP contributions are for me, and the rest are essentially a tax.

Another misleading part of many analyses is that they don’t mention that the investment returns they calculate are real, meaning they are above inflation. There is a big difference between 2% and inflation plus 2%. Canadians whose long-term returns are inflation plus 2% are doing quite well.

CPP will be bankrupt by the time Millennials retire.

No, it won’t. This is mostly used as a scare tactic to get people to save more for their retirement so that money managers and financial advisors can have more assets under management. The increases in CPP contribution rates from 1987 to 2003 have put CPP on a stable trajectory.


Canadians are far better off with CPP than without it. There is room to improve how CPP is run, but eliminating this program without a similar replacement would be a disaster.

Friday, June 7, 2019

Short Takes: Free Investment Dinner, Mutual Fund Costs, and more

Here are my posts for the past two weeks:

The Next Millionaire Next Door

Thinking in Bets

Here are some short takes and some weekend reading:

Rick Ferri describes his “free dinner and retirement discussion” as a warning to others. It would have been funny except that I kept thinking about retirees who buy in and get fleeced.

Preet Banerjee gives an introduction to mutual fund costs. If you’re thinking you don’t need to worry about this because your mutual funds don’t have any fees, you need to watch the video because you’re wrong.

John Robertson looks at potential future costs with all-in-one ETFs if you want to change your asset allocation in taxable accounts as you age. This isn’t much to worry about if your RRSPs hold as much as your taxable accounts, because you can make low-cost changes just within your RRSP to change the asset allocation of your entire portfolio.

Justin Bender explains that any tax inefficiency in holding Vanguard’s asset allocation ETFs in a taxable account comes from the bond holdings rather than equities.

Thursday, June 6, 2019

Thinking in Bets

The world is an uncertain place, and according to Annie Duke, author or Thinking in Bets, we’re better off accepting that we don’t know for certain what will happen than to keep trying to guess the future. It’s better to assign probabilities to different outcomes and adjust them as necessary rather than pick an outcome and doggedly defend that choice. Individually her ideas are familiar, but taken collectively, they amount to a rational truthseeking lifestyle.

Duke is best known as a highly successful poker player, and although this isn’t a poker book, she uses a number of vivid poker stories (and many non-poker stories) to illustrate her points. She says that “all decisions are bets” because your choices lead to gains or losses of money, time, and other things that matter.

One of Duke’s early points is that we need to avoid “resulting,” which is a poker term for judging a decision by how things worked out. Walking across a highway blindfolded isn’t a good idea, even if you don’t get hit by a car.

One interesting point is about how we form beliefs. We think we hear an idea, “think about it and vet it, determining whether it is true of false,” and then “form our belief.” In reality, when we hear something we tend to believe it to be true, and “Only sometimes, later, if we have the time or the inclination, we think about it and vet it, determining whether it is, in fact, true or false.”

“Our default is to believe that what we hear and read is true.” “It doesn’t take much for any of us to believe something. And once we believe it, protecting that belief guides how we treat further information relevant to that belief.”

“Fake news isn’t meant to change minds. As we know beliefs are hard to change. The potency of fake news is that it entrenches beliefs its intended audience already has, and then amplifies them.”

So what can we do about the way we form beliefs and harden them? Among poker players, an antidote is “wanna bet?” When someone challenges us to a bet based on our beliefs, it leads us to ask ourselves many good questions: “How I know this? Where did I get this information? Who did I get it from?”

Rather than relying on others to challenge us to bets to help weed out wrong beliefs, Duke suggests “Incorporating uncertainty into the way we think about our beliefs.” Instead of believing something is 100% true, we might admit we’re only 70% sure. This makes it easier to reduce this probability in the face of new evidence instead of rejecting the evidence and doggedly sticking to the original belief. “This shifts us away from treating information that disagrees with us as a threat, as something we have to defend against, making us better able to truthseek.”

We have a tendency to believe our good outcomes are the result of our skill, and bad outcomes are the result of bad luck. This interferes with learning to improve our skills. Duke’s “learning loop” depends critically on correctly identifying both good and bad luck. To develop skill we start with a belief, take some action that amounts to a bet on that belief, view the outcome, throw out the part of the outcome due to luck, and update our belief. If all bad outcomes are bad luck, then we won’t develop skill. Failing to recognize good luck impedes learning as well. I had extraordinary good luck investing in 1999, and it took me about a decade to see that I was better off with index investing.

Our thinking about luck can slow learning in another way. Our habit of being competitive with others and thinking them lucky when they succeed impedes our ability to learn from their successes and failures.

Duke suggests forming a group of friends or colleagues committed to truthseeking and “thinking in bets.” This helped her learn to play poker at a very high level, and she sees benefits in business and other activities. She sees the failure to truthseek as a reason why some groups fail. In my experience, another big reason for business failure is self-interest. If you need to keep your job, you agree with the boss, even when you think he or she is wrong. It’s a rare employee at any level who feels free to disagree with a company’s top management.

A young Duke was told “It’s all just one long poker game.” This is “a reminder to take the long view, especially when something big happened in the last half hour.” I make a similar point when I talk about “the 1000-foot view.” I get a lot of benefit from trying to keep things in perspective. Few outcomes that seem terrible in the moment are very important in the long run.

Another important idea in the book is that when we make a choice, there are several possible outcomes. In our financial lives, this way of thinking is critical. Just because a bet has a positive expectation doesn’t mean it’s a good idea. If one of the reasonably-likely outcomes would be devastating, we should make a smaller bet or not bet at all.

Overall, I enjoyed this book for its vivid explanations and the way it tied together many familiar ideas into an action plan. Duke offers a set of tools for overcoming some of our natural tendencies to keep believing things that are wrong. Even a small improvement in this area can pay large dividends in life.

Wednesday, May 29, 2019

The Next Millionaire Next Door

Back in 1996, the book The Millionaire Next Door was wildly successful. I recall enjoying it without thinking too critically about its messages. The latest follow-up book in this millionaire series is The Next Millionaire Next Door, written mainly by Sarah Stanley Fallaw, daughter of one of the earlier book’s authors, Thomas J. Stanley. I enjoyed this book as well, but mainly for the interesting personal stories of millionaires’ journeys.

The book is based on surveys of millionaires. As with the first book, this one attempts to use the collected data to draw conclusions about how people become wealthy. This presents a number of challenges. A big challenge is that the data is all self-reported. What people say is often very different from reality. For example, when asked about investment fees, “33% of [millionaires] paid zero.” But how many just don’t know they pay fees?

Among millionaires, “luck was rated among the least important success factors, while being well-disciplined was at the very top along with integrity.” Few successful people think they were just lucky, but lots of unsuccessful people believe they had bad luck.

In another example, “marketing tactics related to homeownership had little influence on millionaires in our study.” Even if marketing tactics were wildly successful, few people would ever admit to being influenced or even be aware they were influenced.

In a different study, “only 54% of Americans could manage a $400 emergency expense.” This statistic has been widely repeated, but it seems likely that the respondents were answering a different question: “Does the thought of an unexpected $400 expense sound scary?” It’s doubtful that more than half of Americans are really less than $400 from bankruptcy.

Another challenge with drawing conclusions from data about millionaires is survivorship bias. Looking at the traits and actions of millionaires tells you nothing about how many people with the same traits and actions and failed to become millionaires. Which traits and actions lead to wealth and which are irrelevant? It’s hard to know. Some actions such as “save lots of money” seem safe to say that they help with getting rich. Others are less clear.

No doubt the authors attempted to minimize survivorship bias, but it’s hard to tell how successful they were. One conclusion that “how we feel about ourselves and our abilities related to financial matters significantly impacts net worth” seems suspicious. I would guess that causation in the reverse direction would be strong. Getting rich, even by luck, makes us confident about our financial choices.

Another example of what looks like survivorship bias is “economically successful people demonstrate an uncanny ability to select the right occupation.” And lottery winners show an uncanny ability to buy the right ticket.

“To build and maintain wealth over time, it will be necessary for you to approach all financial management—spending, saving, generating revenue, investing—in a different, more disciplined approach than anyone else around you.” This makes sense; getting rich is a competition among people, because we can’t all be rich.

“Those who do not budget or account for annual consumption categories demonstrate a lack of respect for money.” This one puzzles me. Plenty of people just naturally spend little without agonizing over details. I’ve added up my past consumption, but never budgeted or worried about categories. I definitely have respect for money.

In this period of ever-rising real estate prices, it was refreshing to read that it is dangerous to purchase “a home that requires more than three times your annual income.” Buying too much house can be a financial ball and chain.

“Too many Americans may believe that by driving a new car they are emulating economically successful people. But only 16% of millionaires drive this year’s model motor vehicle.” Doesn’t that mean millionaires buy a new car roughly every 6 years? Seems like rich people do drive new cars.

Some great advice for a young person starting a new job: “invest [your] money because one day ‘you may decide you don’t [like your job] anymore. That money will give you the independence and, more importantly, options to choose, rather than to continue working. Money isn’t about being rich. Money is about giving you choices. You are young and may not be able to see this now, but someday you will.’”

An interesting statistic: “just under one-third of millionaires reports relying on a financial professionals to make investment-related decisions.” Financial advisors seek out wealthy people, but catch them less often than I would have guessed.

Overall, I enjoyed this book because it is filled with entertaining personal stories written by wealthy people. What’s much less clear is whether the book’s conclusions form a useful blueprint for seeking wealth.

Friday, May 24, 2019

Short Takes: Beliefs and Decision-Making, Fake News, and more

Here are my posts for the past two weeks:

Reader Question about Bucket Investing Plan in Retirement

Should You Withdraw the Commuted Value of Your Defined-Benefit Pension?

The Cost of Longevity Risk

Here are some short takes and some weekend reading:

Annie Duke gives a fascinating talk on how we form beliefs and make decisions. I hope understanding these issues will help me make better decisions in the future. However, the research seems to say I’ll have minimal success.

Julian Matthews explains why we’re susceptible to fake news and what we can do about it.

Robb Engen at Boomer and Echo has made the leap to one-ticket investing using Vanguard’s 100% stocks ETF (VEQT). A huge upside with this approach is its extreme simplicity. The downside for large RRSPs is U.S. foreign withholding taxes. By holding U.S. ETFs directly in my RRSP instead of VEQT, I estimate that I save a little over $500 per year for each $100,000 in my RRSP. To save this money, I have the joy of managing multiple ETFs and doing currency exchanges using Norbert’s Gambit. Whether this extra work is worth it depends on portfolio size.

Nick Maggiulli calls out some instances of financial pornography and explains why it’s not going away any time soon.

Ellen Roseman interviews Preet Banerjee to discuss his 5 simple personal finance rules. I enjoyed his story about how his first media exposure majorly pissed off his then employer. His new venture Money Gaps sounds like an interesting way to drive more solid financial advice to those with modest portfolios. Canadian Couch Potato also interviews Preet to discuss problems in the financial advice industry and what Preet is doing to help fix these problems.

Andrew Hallam points out what he believes is an active Ponzi scheme. The promises of no monthly losses and 30% annual returns are crazy.

Canadian Couch Potato explains what can happen when you trade stocks or ETFs close to their dividend dates. The consequences are generally minor, but sometimes moving your trade date by a day can give a small tax benefit.

Tuesday, May 21, 2019

The Cost of Longevity Risk

One valuable part of CPP, OAS, and defined-benefit pensions is that they keep paying you even if you live a long life. In more technical language, these pensions take care of longevity risk. When you have to manage your own investments, you’re forced to spend conservatively in retirement in case you live long. Here we consider example cases to illustrate the cost of longevity risk.

Shawna is 65 years old and is entitled to a $1000 per month pension, indexed to inflation, for the rest of her life. She is offered the choice of keeping this pension or withdrawing its commuted value to invest in her locked-in retirement account.

To keep this example simple, we’ll assume the pension plan expects Shawna to live 20 more years, and her commuted value is calculated with a discount rate of inflation plus 1.5%. The commuted value of her pension works out to $207,436. We’ll also assume Shawna won’t have to pay any income taxes immediately as she would have to if her commuted value was too much larger.

If Shawna takes the commuted value, she is then hoping to invest her lump sum well enough to all withdrawals of at least $1000 per month, rising with inflation, for the rest of her life. If she just assumes she’ll die at 85, she only needs to generate annual returns of inflation plus 1.5%.

However, Shawna is worried she might live past 85. To be safe, she plans to make the money last for 30 years. The question then is what return does she have to get to produce $1000 per month rising with inflation for 30 years? The answer is inflation plus 4.16%.

Even with an all-stock portfolio, there is significant risk that Shawna’s portfolio won’t produce this return, on average, for 30 years. Taking the commuted value leaves Shawna with a lot more risk than if she just takes the pension.

The situation changes for a younger person. Consider Carla who is 45 and is entitled to a $1000 per month pension, rising with inflation, starting at age 65 for the rest of her life. With the same assumptions as in Shawna’s case, Carla’s commuted value is $154,015.

To make her self-generated pension last for 30 years starting at age 65, Carla needs to generate investment returns of inflation plus 2.52%. This is more realistic than Shawna’s case. Carla is still taking some risk if she takes the commuted value, particularly if she is working with an expensive advisor. But with discipline and low-cost investments, Carla has a reasonable chance of generating more income than she would get with her pension.

It’s easy to get lost in the numbers when trying to decide whether to take a pension or withdraw its commuted value. Any analysis that leaves out longevity risk is flawed.