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.