Monday, December 23, 2019

Stress Test

It’s widely believed that the U.S. government bailed out the bankers who caused the financial crisis just over a decade ago and left the American people to suffer. President Obama’s secretary of the Treasury, Timothy F. Geithner, defends his team’s actions in his book Stress Test: Reflections on Financial Crises. What makes the book so believable are his admissions of mistakes and how uncertain they were about the correct actions to take throughout the crisis. However, he is very clear that protecting banks was a necessary evil to avoid cascading failures that would have led to meltdown in the greater economy. There was a very real possibility of a depression and massive unemployment. “Our only priority was limiting damage to ordinary Americans and people around the world.”

We’re familiar with the anger over bailing out the bankers who caused the problems in the first place, but less well known is the anger banks had for the government. “Conventional wisdom holds that we abandoned Main Street to protect Wall Street—except on Wall Street, where conventional wisdom holds that President Obama is a radical socialist consumed with hatred for moneymakers. The financial reform law that he wrote and pushed through a bitterly divided Congress after the crisis, the most sweeping overhaul of financial rules since the Depression, is widely viewed as too weak, except in the financial world, where it is described as an existential threat.”

Given the perception that bank bailouts cost taxpayers trillions of dollars, the truth is surprising. “In early 2009, the IMF estimated the U.S. government would end up spending nearly $2 trillion rescuing the financial system. In fact, the U.S. government’s crisis response not only prevented the collapse of the financial system and helped revive the broader economy, but as of the end of 2013 it was projected to generate about $166 billion in positive returns for taxpayers.”

The ratings agencies played an important role in creating the financial mess. “The AAA label ended up being very misleading. The ratings agencies were not exceedingly competent. Their ratings typically lagged cycles in finance, staying too optimistic too long. Since the issuers rather than the purchasers of securities paid them, they had some incentive to give generous ratings that kept issuers happy.”

The government was often criticized for not being tougher on the banks. However, being too tough on one bank would have caused more runs on other banks. By signaling that the government would back the banks, investors would be in less of a panic to get their money out. “A lot of firms that didn’t deserve saving still needed to be saved.”

“We provided extraordinary support to the financial system in general and some very poorly managed financial firms in particular. We didn’t do it to help their executives buy fancier mansions and sleeker jets. We did it because there was no other way to prevent a financial calamity from crushing the broader economy. When financial systems stop working, credit freezes, savings evaporate, and demand for goods and services disappears, which leads to layoffs and poverty and pain.”

As someone who spent much of his time in government trying to get out of politics, Geithner has little incentive to play politics with his account of the financial crisis. This is an important factor in making this book a good read. Warren Buffett says “Tim’s book will forever be the definitive work on what causes financial panics and what must be done to stem them when they occur.”

Friday, December 20, 2019

Short Takes: Bank Profits Edition

It’s gift-buying season. Each year, more of my Christmas shopping shifts online. It’s still tough to come up with good ideas for presents, but at least I don’t wander aimlessly in malls much anymore.

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand says that the profits Canadian banks earn from their individual customers (all of us) is the highest in the world. This reminds me of a scene from Wolf of Wall Street where Canadians are on the phone and DiCaprio plays the banks.

Ryan Krueger explains how we lose huge amounts of money in everyday banking.

Robb Engen at Boomer and Echo gives an overview of his financial life for the past decade. He definitely worked harder than I did during the 2010s. After quitting his day job, that’s going to change.

Preet Banerjee explains new research showing that people tend to pay down debts by “balance matching,” which has none of the benefits of the debt avalanche method (pay highest interest first) or the debt snowball method (pay smallest debt first).

Friday, December 6, 2019

Short Takes: Illusory Wealth, Tax-Loss Selling, and more

Here are my posts for the past two weeks:

Useless Activity

The Most Important Thing

Am I Fixing a Mistake or Making an Active Decision?

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand gives three potential sources of illusory wealth in the markets today. Along with his thoughtful commentary, he uses the great terms “bezzle” and “psychic wealth.”

Justin Bender goes into detail about tax-loss selling strategies. This stuff can get tricky. Fortunately, it’s only relevant in taxable accounts. Even people with million-dollar portfolios often don’t have enough in their taxable accounts to bother with tax-loss selling.

Dan Hallett says Bitcoin is for speculating, not investing. I agree (

Ellen Roseman says phone scams are on the rise.

Tuesday, December 3, 2019

Am I Fixing a Mistake or Making an Active Decision?

I recently discovered a mistake in my spreadsheet related to my fixed-income allocation during retirement. Fixing it will involve selling off a sizable chunk of stocks. But I think this may be more of an active portfolio decision than just fixing a mistake.

For years I’ve been striving to come up with mechanical decisions about how to handle my portfolio rather than making active decisions that amount to a form of market timing. One of my rules now that I’m retired is to maintain 5 years of after-tax spending money in fixed-incomes investments, including short-term government bonds, GICs, and savings accounts.

Poking through the spreadsheet that holds my mechanical rules, I noticed a problem with the 5 years of fixed income calculation. I didn’t factor in CPP and OAS pensions properly. I treated these pensions as though I’m receiving them spread out over my whole retirement instead of just getting them later in life. So, my 5 years figure is too low now and will be too high once I get into my 70s.

Fixing this on my spreadsheet immediately triggered a rule demanding that I sell off a big chunk of my stocks to boost my fixed income. So far, it just seems like simply correcting a mistake.

However, the reason I was looking at this part of my spreadsheet at all is because very high stock prices are starting to make me nervous. Because my fixed-income allocation amounts to a percentage of my portfolio size, the growth of my overall portfolio this year has triggered some shifts from stocks to fixed income, but I’ve been feeling like I want to shift even more out of stocks to protect against a possible stock market crash.

Ordinarily, I have these feelings and just ignore them with the help of my mechanical rules. But this time I have the perfect excuse to give in to my fears: an apparent spreadsheet error. However, it would be easy enough to defend the original calculation as sensible enough. I’m probably viewing this as an error because I really want to sell off some stocks.

In the end, I’ve decided to make the spreadsheet change and sell some stocks. But if I’m being honest with myself, I’m mainly doing it because of my possibly mistaken belief that the probability of a stock market crash has been increasing.

Monday, December 2, 2019

The Most Important Thing

It’s a compelling recommendation when Warren Buffett says “This is that rarity, a useful book.” He said this about The Most Important Thing: Uncommon Sense for the Thoughtful Investor, by cofounder of Oaktree Capital Management, Howard Marks. It turns out that “investor” in this book means active investor. The lessons on risk management and other topics are top-notch for those trying to beat the market, but passive investors won’t get much out of it.

One lesson for active investors is to seek out inefficient markets and be better than others at assessing value. This makes the S&P 500 a poor place to look for undervalued stocks.

Another lesson is that risk is the possibility of losing money, which is different from volatility. Risk comes mainly from high prices. Markets always seem riskier after they decline, but in reality, stocks are riskiest when their prices are highest.

To be a successful investor, it’s necessary to be skeptical. This means being skeptical of both too much optimism and too much pessimism.

While I don’t recommend active investing to anyone because very few investors have sufficient skill to expect to beat the market, anyone planning to pursue this path should learn the lessons taught by Marks in this book.

Friday, November 29, 2019

Useless Activity

A recommendation for a podcast caught my eye recently because it hinted that there was some interesting discussion of Nortel. It turned out that the Nortel discussion wasn’t interesting at all, but I did have a strong reaction to the rest of the podcast.

The three speakers went on for about an hour on a wide range of active investing topics, and all I could think was that I can’t believe I wasted a decade of my life on this crap.

It’s one thing to have a hobby that contributes to an otherwise balanced life, but it’s another to devote a huge proportion of your waking hours to such a societally useless pursuit. If these three guys had chosen to plant trees instead of pick stocks, the world would be a slightly better place. It would be fantastic if investors woke up and stopped paying huge amounts for portfolio management. This would eliminate the incentive for so many brilliant young minds to waste their lives on useless pursuits.

Friday, November 22, 2019

Short Takes: FIRE Values, RRIFs, and more

My only post in the past two weeks is a review of a book dedicated to Charlie Munger’s wisdom:

Poor Charlie’s Almanack

Here are some short takes and some weekend reading:

Mr. Money Mustache explains some of the values of the FIRE movement.

The Blunt Bean Counter explains the basics of RRIFs clearly. The most intriguing part of this guest post comes at the end: “RRIFs can be used in a surprising number of ways.” It would be good to learn some of those ways.

John Robertson uses the closing of Planswell as a check to see how investor assets are protected from a robo-advisor’s failure.

Thursday, November 14, 2019

Poor Charlie’s Almanack

Most people have heard of the great investor Warren Buffett, but fewer have heard of his long-time business partner Charlie Munger. Charlie’s approach to understanding the world is laid out in Poor Charlie’s Almanack, a long, but interesting, book edited by Peter D. Kaufman.

This book covers such a wide array of topics that it resists summary. To this reader, Munger’s biggest ideas are 1) that we should understand the biggest and most useful ideas from a broad range of fields, and 2) that we should understand the many ways that our psychology gets in the way of drawing sensible conclusions.

Whether we agree or disagree with Munger’s ideas, I found a great many worth thinking about. I’ll list a few here as an enticement to reading the book.

Munger is known for challenging and often abandoning his best-loved ideas: “a thing not worth doing is not worth doing well.” It may not be a good idea to change your mind too often, but we have to be open to the possibility that our ideas are wrong or no longer useful.

“Our investment style has been given a name—focus investing—which implies ten holdings, not one hundred or four hundred.” Other investors should be wary of following this path; few others have the stock-picking skill of Buffett and Munger.

“Black-Scholes [option-pricing model] works for short-term options, ... but the minute you get into longer periods of time, it’s crazy to get into Black-Scholes.”

“The efficient market theory is obviously roughly right—meaning that markets are quite efficient and it’s quite hard for anybody to beat the market by significant margins.” However, Munger is very critical of the strong form of Efficient Market Theory. He laughs at those who claim that Berkshire-Hathaway’s investment record is just luck.

“Anytime somebody offers you a tax shelter from here on in life, my advice would be don’t buy it.” “In fact, anytime anybody offers you anything with a big commission and a 200-page prospectus, don’t buy it.”

“If I were running the civilization, compensation for stress in worker’s comp would be zero—not because there’s no work-caused stress, but because I think the net social damage of allowing stress to be compensated at all is worse than what would happen if a few people that had real work-caused stress injuries were uncompensated.” Allowing fraudulent claims for hard-to-diagnose ailments invites otherwise honest people to game the system.

In a discussion of Coca-Cola, Munger describes Coke as giving “harmless pleasure.” I can see where he’d like to believe Coke is harmless given the massive returns he has received from Coke stock, but the evidence says that soda is a large part of the blame for obesity and type 2 diabetes.

We have a tendency to overweight things that can be measured and underweight the things that can’t be measured accurately. I saw this in the justifications for open office plans for software developers. The money saved on floor area and walls is easy to measure. Harder to measure is the lost productivity due to programmers constantly being interrupted by noise and their unwillingness to work collaboratively lest they disrupt others’ work.

Munger likes to ask people for examples of cases where raising prices allows you to sell more of something, which violates the simple price-quantity curve we learn in introductory economics. His favourite answer is mutual funds when you raise commissions “to bribe the customer’s purchasing agent.”

When you shout ideology, “you’re ruining your mind, sometimes with startling speed. So you want to be very careful with intense ideology.” This is a good warning from those who get drawn into either conservative or liberal Facebook nonsense. If you can’t come up with both good and bad things to say about some politician, you’re ideas aren’t worth listening to.

“You do not want to drift into self-pity. I had a friend who carried a thick stack of linen-based cards. And when somebody would make a comment that reflected self-pity, he would slowly and portentously pull out his huge stack of cards, take the top one and hand it to the person. The card said ‘Your story has touched my heart. Never have I heard of anyone with as many misfortunes as you.’”

A large section of the book is devoted to Munger’s list of 25 psychological tendencies we have that steer us to poor decisions. In many ways, this list resembles much of the work in behavioural economics.

To illustrate our tendency to misreact to contrasts, we have a “reprehensible” real estate broker trick: “The salesman deliberately shows the customer three awful houses at ridiculously high prices. Then he shows him a merely bad house at a price only moderately too high. And, boom, the broker often makes an easy sale.”

“Light stress can slightly improve performance—say, in examinations—whereas heavy stress causes dysfunction.” I recall the feeling of reaching a higher mental level during stressful exams. However, I definitely saw many other students who fell to dysfunction. I guess we differed in how much stress we felt.

Anyone interested in a serious study of how to make better decisions about investing or anything else would do well to read this book.

Friday, November 8, 2019

Short Takes: Future of ETFs, Canadians’ Debt, and more

Here are my posts for the past two weeks:

Now We Know What Followed the Lost Decade for Stocks

The Clash of the Cultures

Here are some short takes and some weekend reading:

The Rational Reminder Podcast looks at the future of ETFs in a very interesting interview with Dave Nadig, founder of Nadig also has some pragmatic ideas for how to pay for financial advice.

Robb Engen at Boomer and Echo says Canadians have an income problem, not a debt problem. This is undoubtedly true for some people. However, there are others who are going to outspend whatever income they get. The question in my mind is how is viewing the problem this way going to help? Probably the biggest effect is that it allows people with big debts to decide the problem is someone else’s fault. This is more likely to trigger giving up than solving anything. On the positive side, it might spur some people to seek higher income. I find the change in expectations since I was a young adult interesting. Houses and cars are expensive today. When I was young, it wasn’t unusual at all for young people to rent an apartment and not own a car. This was common, even for married couples with young children. Fortunately, the standard of living has risen since then. But living standards apparently haven’t risen enough yet for every family to have a house and two cars.

The Blunt Bean Counter explains the tax implications when a spouse dies.

Wednesday, November 6, 2019

The Clash of the Cultures

John C. Bogle was passionate about helping average investors get their fair share of the wealth produced by the stock market. In his book The Clash of the Cultures, he describes what is wrong with our financial system and what should be done to fix it. Unlike many who shout complaints from the sidelines, Bogle devoted his career to fighting for necessary change.

When it comes to those who invest other people’s money, Bogle “observed firsthand the crowding-out of the traditional and prudent culture of long-term investing by a new and aggressive culture of short-term speculation.”

Bogle devotes much of the book to the history of mutual funds to make his points. Most modern mutual funds have a “double-agency” problem where managers have to serve both the fund investors and the shareholders of the management company. Sadly, investors lose out on the conflicts of interest; management companies can only make money by dipping into investor assets. Stewardship has given way to salesmanship.

“The expense ratio of the average equity fund, weighted by fund assets, rose from 0.50 percent of assets on the tiny $5 billion asset base of 1960, to 0.99 percent for the giant $6 trillion equity fund sector as 2012 began.” Annual expense ratios can be misleading; the corresponding 25-year expense ratios have risen from 12% in 1960 to 22% in 2012. These are U.S. figures; Canadian mutual funds are much more expensive.

“The leaders of the mutual fund industry, and its trade association, the Investment Company Institute, purport to represent mutual fund shareholders. But in fact they represent the management companies that operate the funds.”

To combat this double-agency problem, Vanguard mutual funds actually own their own management company. This is the reason why Vanguard has always kept their fees low. Bogle had hoped that this ownership structure would spread to other mutual funds, but this hasn’t happened.

Short-term thinking is pervasive among companies. “When a corporation’s focus on meeting Wall Street’s expectations (even its demands) takes precedence over providing products and services that meet the ever-more-demanding needs of today’s customers, the corporation is unlikely to serve our society as it should.” This criticism definitely applies to a former employer of mine whose focus on stock price became so all-consuming that making products was barely on the minds of top management.

Bogle bemoans the loss of bright minds from useful pursuits as they head to the investment industry. “‘financial’ engineering, which is essentially rent-seeking in nature, holds sway over ‘real’ engineering, ... which is essentially value-creating.”

We’ve seen a revolution in equity ownership by institutional investors. Their ownership of U.S. stocks has risen from 8% in 1945 to 70% in 2011. Given the extremely high turnover in stocks, institutional investors “act less like owners of stocks than renters.” Collectively, they own a high percentage of publicly-traded companies, and they tend not to oppose company management in proxy votes.

I was surprised to read that “the shift from DB [defined-benefit pension] plans to DC [defined-contribution] plans is not only an inevitable move, but a move in the right direction in providing worker retirement security.” I see the problem with chronically underfunded DB plans, but DC plans force the masses to make their own, often terrible, investment choices. It turns out that Bogle’s optimism about DC plans is conditional on a long list of suggested improvements to mutual funds and the entire system of DC plans. “Our existing DC system is failing investors.” I think we’d be better off with a hybrid system that shifts some of the investment risk from employer to worker, but leaves assets invested at low cost by a pension plan.

The book closes with ten rules for investment success. The first is “remember reversion to the mean.” This means don’t give up on our investments when they go down, because they’ll come back, and don’t shift a higher percentage into stocks when they’re flying because they’ll come down again. The final rule is “stay the course.”

I wouldn’t call this book an easy read, but its broad messages are important, and they come through loud and clear. If you like to pick your own stocks or look for mutual funds that will outperform, you should read this book to see what you’re up against.

Monday, November 4, 2019

Now We Know What Followed the Lost Decade for Stocks

A decade ago I wrote about the lost decade for stocks from 1999 to 2008 when the S&P 500 total return failed to keep up with inflation. Since the depression, this also happened in periods that ended in 1947 and 1983. At the time I wondered what happened in the decades after these lost decades.

Here were the answers:

1948 to 1957: 14.4% per year above inflation
1984 to 1993: 10.7% per year above inflation

At the time I wrote “As you can see, those first two decades were spectacular! There is no guarantee that the upcoming decade will match these impressive results, but it does give us some hope.”

The results are now in:

2009 to 2018: 11.4% per year above inflation

This is in line with previous results, but is more than I could have hoped 10 years ago. S&P 500 stocks have nearly tripled in real terms (above inflation). Those who give up on stocks after weak periods pay a high price.

Friday, October 25, 2019

Short Takes: 60/40 Portfolio Dead, Asset Allocation ETFs, and more

I managed only one post in the past two weeks:

Time to Change Credit Cards

Here are some short takes and some weekend reading:

A Wealth of Common Sense wrote a tongue-in-cheek eulogy for the 60/40 portfolio after yet another declaration that it’s dead, this time from Bank of America. The eulogy is entertaining, and observes that “60/40 finished out its life strong, returning an astonishing 10.2% per year from 1980-2018 with just 5 down years over the past 39 years.” Some may hope for a repeat performance in the coming decades. However, in the last 39 years, U.S. interest rates dropped from about 20% to 2%. A repeat drop would get us to an absurd minus 16%. Lest you think I’m on the side declaring the 60/40 portfolio dead, the last 39 years saw the cyclically-adjusted price-earnings ratio of U.S. stocks roughly triple. It’s hard to see how it could triple again. Choosing a 60/40 portfolio is sensible enough – just don’t count on a repeat of the last 4 decades of returns.

Justin Bender just started the Canadian Portfolio Manager Podcast with a show about asset allocation ETFs. In addition to useful information, I enjoyed the sound clips he interjects into his explanations.

The Financial Independence Hub reprinted an article of mine about how fast to expect your portfolio to shrink in retirement. Some of this article was used by Jonathan Chevreau in a piece on the same subject.

Allan Norman answers a question about whether or not to take a lump-sum pension buyout. The answer is quite sensible as far as it goes, but it seems bizarre to discuss this subject without mentioning longevity risk. The biggest value of a defined-benefit pension is that it keeps paying even if you live much longer than expected. It’s very expensive to get the same level of protection investing on your own.

The Blunt Bean Counter details the steps you need to take when your spouse dies before you do. Few of the tasks are very difficult, but it’s not easy to remember them all at such a difficult time without a list.

Wednesday, October 16, 2019

Time to Change Credit Cards

I forgot to pay off my credit card balance a few days ago. I do this roughly every 4 or 5 years. More annoying than paying some interest is that I seem to have to stop using the card for a couple of months to break the credit card interest cycle and get back in good standing. I need a useful reminder feature to help me avoid these mistakes.

My Tangerine Mastercard offers the following credit card email alerts:

  • Remaining Credit Less Than $100.00
  • Credit Card Payment Due
  • Credit Card Transactions Over $1,000.00
  • Money-Back Rewards Earned
  • Credit Card Payment Received
  • Money-Back Rewards Deposited

The alert I really want is “Your payment is due in a few business days, and we haven’t received anything yet.”

My wife tells me that her credit card offers this alert along with better cash-back rewards than I’m getting now. Maybe it’s time for me to dump my Tangerine credit card.

Friday, October 11, 2019

Short Takes: Student Bankruptcies, Early RRSP Withdrawals, and more

Here are my posts for the past two weeks:

The Latte Factor


Here are some short takes and some weekend reading:

Doug Hoyes and Ted Michalos make a strong case that students are being treated unfairly by preventing them from including their student loans in bankruptcies for 7 years after leaving school. In addition to their other good points, they explain why removing this rule wouldn’t allow students to have bankruptcies of convenience shortly after graduating. One troubling part of the information they bring forward is the fact that university tuition has been rising much faster than inflation for a very long time. What we need is an inquiry into why schooling is so expensive and what unnecessary costs can be stripped out. If they’re anything like any of our levels of government, universities have far too much office staff and administration that contribute little to necessary functions.

Jason Heath goes through some reasons for early RRSP withdrawals. He runs through some of the numbers to show there are situations where you’re better off not deferring RRSP withdrawals as long as possible.

Cross-Border Experts recommend that Canadians own U.S. properties through cross-border trusts to avoid expensive and time-consuming probate.

Steve Garganis says you can prevent someone from fraudulently getting a mortgage on your home by taking out a secured line of credit you have no intention of using. I’d be interested in the opinions of other experts on how effective this would be.

Robb Engen at Boomer and Echo argues that passive investing is not a bubble. He’s right about this, but it’s certainly possible for popular ETFs to contribute to a bubble in the same way that active investing can contribute to a bubble. It’s possible for a narrow ETF that becomes popular to cause a bubble in some asset class. However, narrow ETFs aren’t really passive investing. As a passive investor in broad index ETFs who buys and holds for the long run, I’m not worried about causing bubbles.

Big Cajun Man sees media confusion over the difference between debt and deficit. “Debt” is how much your life sucks. “Deficit” is how fast your life is getting worse.

Monday, October 7, 2019


Smart people who analyze different investment strategies often talk about correlations. Investments have correlations that are high, low, positive, or negative. This can all sound impressive, but as I’ll show, any conclusions we draw based on correlations can be suspect.

In the investment world, correlation is a measure of how asset returns move together. A positive correlation means two assets tend to give good returns together and bad returns together. A negative correlation means they tend to move in opposite directions. A zero correlation means the direction of one investment doesn’t tell you anything about the direction of the other investment.

It’s impossible to know the correlation of two investments exactly. All you can do is measure their correlation over a period of time. We then just assume the correlation will remain the same into the future.

To show the problem with this approach, I simulated two streams of monthly investment returns. The distributions I chose had zero correlation. Then I measured the rolling 10-year correlations of the two investments. Here are the results.

As we can see, the measured correlations aren’t particularly close to zero much of the time. The range was -11% to +24%. The fact that the correlations tended to be positive was just a coincidence; when I ran it a few more times, sometimes the correlations tended to be negative.

So, even though the correlation of the distributions I used was zero, the measured correlations from sequences of outputs varied considerably. So, analysts combing through investment returns could easily think the correlation between two investments is 20% when it is really zero.

Even more disturbing is that much mathematical analysis of investing assumes that returns follow the normal distribution (technically the lognormal distribution). However, there is strong evidence that the tails of return distributions follow power laws rather than the normal curve. This means that the standard deviation is infinite, and that correlations (in the way they are usually calculated) don’t exist.

These unsettling facts are the main reason why an analysis might calculate the optimum leverage for a portfolio to be 300%, when the real answer is more like 0% or 25%.

This doesn’t mean that any investment analysis that discusses correlations is automatically wrong. All mathematical analyses use models, and all models fail to match the real world in one way or another. The challenge is to figure out when the math gives the right answers and when it doesn’t.

Only a small minority of investors are comfortable using the math described in this article. However, among those who are comfortable with this math, only a small minority understand the errors in the models they use and how they cast doubt on their conclusions.

Tuesday, October 1, 2019

The Latte Factor

The first step to improving your finances is to spend less than you earn. But a great many people never seem to find the motivation to take this first step. The Latte Factor by David Bach and John David Mann aims to help readers find this motivation. It’s a short, easy read that many young people might find compelling.

The book is the story of a young woman whose finances are a disaster, and she gets some good advice from an unexpected source. Even without the financial lessons for readers, the story works well enough to keep the pages turning.

The first two of the book’s main messages are familiar to readers of financial advice: “Pay yourself first” and “Don’t budget—make it automatic.” The idea is that your savings should come off your pay first rather than waiting to see what’s left over after life’s expenses.

The final main message is “Live rich now.” The idea is to find a way to live the life you want now instead of waiting until some magical future time when you’ll have more money. It’s often the case that the things we truly want in life don’t cost too much money, and we can have them if we give up other things that are less important, like eating out and expensive coffee.

Some might think that this book is little more than a diatribe against expensive lattes. It isn’t. “It’s not about your coffee. The latte factor is a metaphor. It could be anything you spend extra money on that you could do happily without. Cigarettes. A candy bar. Fancy cocktails. Anything.”

One part of the book had me objecting initially. “When you rent, you are letting life happen to you. When you own, you take a hand in directing the events of your life.” With housing so expensive now relative to rents in many places, telling young people to extend themselves on a mortgage isn’t good advice. However, the philosophy of owning makes sense in other contexts such as cars and stocks.

Overall, I recommend this book for anyone whose finances are in poor shape and needs ideas for improving them. The lessons are described clearly, and the story form makes them easy to digest.

Friday, September 27, 2019

Short Takes: Canadian vs. U.S. ETFs, Real Estate, and more

Here are my posts for the past two weeks:

More Buyers than Sellers

STANDUP to the Financial Services Industry

Here are some short takes and some weekend reading:

Justin Bender looks at when it makes sense to own the all-in-one ETF VEQT and when it makes sense to hold two separate ETFs VCN and VT. I answered a similar question in a recent post, but was considering replacing VEQT with all 4 of its components.

Preet Banerjee has Ben Rabidoux back on his Mostly Money podcast for an update on Canadian real estate.

Big Cajun Man looks at the financial part of a marriage preparation course.

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.

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 too 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 never on settlement day.  They usually do it on either trading day or one business day after settlement day.  Then they charge me interest on the phantom short position in my account. I’ve done this a dozen or more times in RRSPs and cash accounts, and I get charged 21% annualized for the day or two (or 3 or 4 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.  Further, the people I speak to never seem to understand the issue.  Sometimes they reverse the charge as a “goodwill” gesture, which is a funny description for returning money that shouldn't have been taken in the first place.

Some InvestorLine customers 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, and 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 settlement day, although I can’t get them to do this anymore. The third possible explanation is that because interest doesn’t appear until the 21st of the month, 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 asking 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.

February 2022 update: For the first time in dozens of Norbert Gambit currency exchanges, BMO InvestorLine didn't charge me any interest.  Hopefully, this is a sign that their systems are now fixed and they won't charge any more interest in the future.

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.

WARNING: You might want to avoid trading on days with high stock price volatility.

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 at least 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 in some cases. 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, call and ask 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 calling 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.

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 holding 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.