Friday, February 28, 2020

Short Takes: Illiquid Investments, Deferring OAS, and more

My most recent post argued that all of us have shortcuts in our decision making that can lead us astray and make us look irrational at times:

Behavioural Biases are in All of Us

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand explains what investors should know before diving into illiquid investments.

Boomer and Echo explains when you should or should not defer taking OAS to age 70. It’s important not to get too caught up in guessing how long you’ll live. The important thing is having a decent income in case you live long. This tends to make deferring OAS to age 70 look like a good idea for those with the savings to pay their own way through their latter 60s.

FINRA is investigating whether brokerages that offer free trades are creating profits from order flow. If you can’t understand this article, here’s the takeaway: don’t trade frequently. There are sharks looking to take a slice of your money in many different ways.

David Robson explains how the gambler’s fallacy finds its way into decisions unrelated to gambling. I suspect that the real life examples have more complex things going on, but it’s clear that there are biases at play. The problem is that most people think these biases are things that other people have, but not themselves. Thanks to reader Gene for pointing me to this article.

The Blunt Bean Counter explains some subtle points related to the complex Tax on Split Income (TOSI) rules.

Wednesday, February 26, 2020

Behavioural Biases are in All of Us

The findings of behavioural economics are often cast as the ways that we’re irrational. This allows us to laugh at the foolish things other people do and know that “since I’m rational, none of this applies to me.” But this isn’t true. Many of these biases are baked into all of us.

Consider the tendency to heavily discount the future. To take a cookie now instead of two cookies in a year is to give up a 100% return. However, look at this from the point of view of our distant ancestors who lived on the edge of starvation. They couldn’t afford to plan too much for the future and possibly starve today.

When people refuse a 50/50 coin flip to either lose $100 or gain $200, they are using a rule of thumb that appears to be baked into all of us to avoid a loss even at the expense of the possibility of a much larger gain.

We seem to have many such rules of thumb baked into the automatic part of our brains. These rules of thumb have served us well throughout human evolution, but they sometimes give us the wrong answer to modern questions such as “should I save some of my windfall or just go blow it all on a wild trip to Las Vegas?”

When we discover a rule of thumb people use that gives poor answers to some questions, we call it a behavioural bias and declare people to be irrational. I’ve done this myself. However, I now just think of it as a useful short-cut rule that my brain misapplies sometimes. Viewed this way, it’s easier to accept that these behavioural biases are part of me and not just other people.

Rather than label others as irrational, I’m better off accepting that behavioural economics applies to me, and that I need to look out for situations where my first quick answer isn’t the best one.

Friday, February 14, 2020

Short Takes: Stock-Picking, Falling for a Ponzi Scheme, and more

My most recent post was answering an interesting reader question about whether to leave TD e-Series funds for ETFs:

Reader Question: Switching Portfolios

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand has some good therapy for investors who trade individual stocks without knowing much about the companies they buy. This is a point I’ve tried to make in the past without much success. During my not very stellar stock-picking period I pored over financial filings trying to understand the businesses I wanted to own. But it wasn’t enough to compete with other traders effectively.

Andrew Hallam explains how he fell for a Ponzi scheme.

Retire Happy explains when you shouldn’t contribute to an RRSP.

Friday, February 7, 2020

Reader Question: Switching Portfolios

A reader, Doug, asked the following interesting (lightly-edited) question about whether it’s time to switch portfolios:

I currently have over $200K in my RRSP sitting in TD e-series mutual funds (25% bonds, 25% each in CDN/US/Int'l Equity). The resulting MER is 0.37%.

Does it now make sense for me to switch over to ETFs? I was thinking another Canadian Couch Potato portfolio with the ETFs VAB and VEQT. The MER is around 0.22%, a savings of $300 per year. However, I'm very comfortable with e-series funds as I've been using them for 6 years.

With ETFs, I also have to pay commissions to buy which will amount to perhaps $120 to $240 per year as I purchase twice a month.

What are your thoughts? Any other pros and cons that you can think of? Does it make sense to switch given the saying that perfection is the enemy of good?

First of all, Doug, congratulations on amassing over $200k in savings over 6 years. You’ve given yourself more choices in life.

Your last question is an important one. No matter what your portfolio looks like, there will be some change you could that would seem to improve it. Some investors take the obsession for perfection too far.

There is nothing wrong with sticking to your TD e-series funds. You’ve obviously built a steady saving habit using these funds that is working for you. Even if your portfolio were 10 times larger, paying an extra $3000 per year (or $250 per month) is certainly tolerable, particularly when you have $2 million in invested assets.

But I understand the desire to cut costs. This is a choice I’ve made myself. You’re right that commissions could take a bite out of any MER savings. One solution would be to get an account that doesn’t charge commissions on ETF purchases. Another would be to allow cash to build up somewhat and trade less frequently.

Consider these potential changes carefully, though. Are you going to continue saving as well as you have been with this disruption to your current habits? Only you can answer this question.

I can see a number of sensible ways forward. One is to make the change all at once. Another is to open a new trading account and direct new savings to this account for a while before sending all your TD e-series assets to the new account. Or you could defer the decision about making this change for a few years when your portfolio is larger. Finally, you could decide to stick with e-series indefinitely.

If your current costs were much higher, I would say they will ultimately affect your life negatively. However, the differences among these approaches are fairly small compared to the big things in life like health, family, and friends.