Friday, September 24, 2021

Short Takes: European Bank Customer Abuse, Opening a RRIF at Questrade, and more

The word “millionaire” is frequently used to mean a person who doesn’t have any financial concerns and whose wealth is much greater than what the rest of us have.  However, imagine a couple whose house is now worth $750,000, they have a $300,000 mortgage, they owe $50,000 on their cars, and one has a public service pension now worth $600,000.  On paper, this couple has a million dollars, but they are hardly rich, and they definitely still have financial worries.  It’s time to start using “decamillionaire” to mean a very wealthy person.  Maybe $5 million is enough, but we don’t have a common word for that level of wealth.

Here are my posts for the past two weeks:

Debunking a Bogus Stock Market Prediction

Wilful Blindness

Here are some short takes and some weekend reading:

Andrew Hallam
explains how European banks sell some horrific “investments” to unsuspecting consumers.  He also exposes the huge downside of index-linked investments that promise no down years.

Robb Engen at Boomer and Echo explains how to convert an RRSP to a RRIF at Questrade.

Big Cajun Man
thinks it’s important to teach your kids to be frugal at back-to-school time.  I agree.  Just because some people call student debt “good debt,” it’s still better to finish school with your debt smaller rather than larger.

Monday, September 20, 2021

Wilful Blindness

Reporter Sam Cooper tells a remarkable story of the British Columbia provincial government profiting from Canada’s epidemic of fentanyl deaths in his book Wilful Blindness: How a Network of Narcos, Tycoons and CPP Agents Infiltrated the West.  Cooper’s evidence is strongest for B.C.’s cooperation in laundering money for the drug trade in return for a cut of the profits.  However, he demonstrates connections to trans-national organized crime, Canada’s housing bubble, and China’s communist party.

The book begins by carefully explaining that the evidence presented is not intended as an indictment of the people of Canada or China but rather criminal organizations within these countries and parts of government.

Cooper paints a picture of massive amounts of drug cash being laundered through B.C. casinos, and authorities happy with the huge “gambling profits” thwarting RCMP efforts to stop illegal activity.  There was a “rapidly growing narco-economy that B.C.’s government was taking a cut from.”

Part of the money laundering process involved buying and selling Canadian real estate.  According to a Vancouver developer, “$300,000 of every $1 million spent in Vancouver real estate comes from Mainland China.”  A Global News article proclaimed “Secret Police Study Finds Crime Networks Could Have Laundered Over $1 Billion Through Vancouver Homes in 2016.”

Although Cooper claims that “China’s government is in fact controlling drug cartels,” we can only guess at the extent of the connection.  “David Mulroney, Canada’s former ambassador to Beijing” is quoted as saying “The course of modern Chinese politics, from the earliest days of the Communist Party in Shanghai, has been interrelated with the rise and fall of various crime bosses and triads.”  There’s a wide continuum of possibilities from, at one end, elements within a government forming temporary alliances with criminals and, at the other end, the highest levels of a government forming and directing criminal organizations.  It’s hard to tell where in this continuum Cooper’s evidence points.

I don’t have the knowledge to form an accurate high-level picture given Cooper’s mountain of evidence, but you may be interested in reading this book just for its many wild stories of criminal activity going on inside Canada.

Thursday, September 16, 2021

Debunking a Bogus Stock Market Prediction

It would be much easier to plan for the future if we knew what stock prices were going to do.  Bank of America has a chart with seemingly solid evidence that stocks will lose a total of about 8% over the next 10 years.  I’m going to show why this evidence is nonsense.  But don’t worry; I’ll do it without making you try to remember any of your high school math.

The Bank of America chart looks intimidating to non-specialists, but I’ll summarize the relevant parts in easy-to-understand language.  The basic idea is that for each month since 1987, they looked at how expensive stocks were that month and compared that to stock market returns over the 10 years following that month.  They found that the more expensive stocks were, the lower the next decade of returns tended to be.  The hope is that we can just use the chart to look up today’s stock prices to see what stock returns we’ll get over the next 10 years.

In the chart below, each dot represents one month from 1987 to 2010.  Notice that the dots are fairly close to forming a straight line.  Statisticians get excited when they see a strong relationship like this.  If the line were perfectly straight, we could just look up how pricey today’s stocks are (using a measure called the P/E or price-to-earnings ratio), and read off the average annual stock return we’ll get over the next 10 years.

The line isn’t perfectly straight, but it’s fairly close.  One measure of how close to a straight line we have is called R-squared.  For our purposes here, we don’t need to know much about R-squared other than 100% means a straight line, and as this percentage drops toward zero, the cloud of dots spreads out.  The chart indicates an R-squared of 79%, which is a strong relationship.

Also indicated on the chart is the prediction that stocks will lose an average of about 0.8% each year over the next decade.  However, if we imagine an oval surrounding the full range of dots, this chart predicts annual stock returns between about -3% and +2%.  If we knew future stock returns really would fall in this range, most people would sell their stocks.  But can we count on stock returns falling in this range?  It turns out that we can’t because the chart is deeply flawed, as I’ll explain below.


The first thing to observe is that this chart is based on about 34 years of stock market data, a little over 3 decades.  Because we’re talking about 10-years returns, you might wonder why there are more than 3 dots on the chart.  The answer is that it uses overlapping periods.  There is a dot for January 1987, then February 1987, and so on.

Consider the ten years of returns starting in January 1987 and compare this to the ten years of returns starting in February 1987.  They are the same in 119 of 120 months.  Each decade of returns starting monthly from 1987 to 2010 overlaps with 119 other decades.  There is a huge amount of redundancy in the chart.  Somehow we went from a 3-dot chart to one with hundreds of dots.

Using overlapping data isn’t always a bad thing, but it is in this case because there is just too little independent data to have any statistical significance.  To show this, I ran some simulations.  I created random stock market data and measured R-squared values.

The method I used for creating this simulated stock market data created returns that ignored stock valuations.  This means that using P/E values to predict stock market returns is futile with this simulated data; the R-squared value of the underlying probability distribution used in the simulations is zero.  To confirm this, I generated a million years of stock market data, and measured the R-squared value.  In a thousand repetitions of this experiment, all R-squared values were less than 0.02%.

However, coincidences are common when you examine very small amounts of data.  I ran simulations of 34 years of stock market data.  I repeated this experiment 100 million times.  Amazingly, in just over one-tenth of the simulations the R-squared value was above 79%, and in 51% of the simulations the R-squared was above 50%.  These seemingly strong correlations are what you get with small amounts of random data, even though the underlying probability distribution has no correlation at all (R-squared equal to zero).

What can we conclude from these experiments?  The data in the Bank of America chart is a meaningless coincidence.  In an earlier article I showed that when we examine stock market data back to 1936, the correlation becomes much weaker (the dots look more like a wide cloud).  We can’t tell what will happen with stocks over the next 10 years with any accuracy just by looking at 34 years of stock returns, and it turns out that going back to 1936 doesn’t help much either.

Why was this error missed?

If this chart is so deeply flawed, why did Bank of America create it and why are so many people spreading it through social media as evidence that stocks will perform poorly?  The answer is that few people are good at probability theory.  Most people who use statistical methods professionally don’t understand the underlying probability theory well enough to use statistics safely.  When we use statistical tools to process data, it’s very easy to lose sight of significant problems, such as having too little data.

All the Bank of America chart is saying is that when stocks were expensive around the year 2000, the market crashed, and now that stock prices are very high again, the stock market may crash again soon.  Or it might not; it’s hard to tell.  The statistics just take this simple idea and dress it up to seem more scientific than it is.

Is this chart a deliberate deception?  Probably not.  Hanlon’s razor applies here: “never attribute to malice that which is adequately explained by stupidity.”  When people who know just enough math to be dangerous, they often fool themselves first and fool others later.

Does this mean stocks will keep going up?

No.  It just means we don’t know what will happen, and the Bank of America chart sheds almost no light on the question.  There are good reasons to believe that a market crash and poor returns over the next decade are more likely today than when stock prices were lower.  But this chart isn’t one of the good reasons.


The crystal ball for viewing future stock returns is still cloudy.  We need to consider a wide range of possible market outcomes in our planning.  It’s important to strike a balance between being positioned to benefit from a rosy future and being protected against a bleak future.  With stock prices so high, I’ve chosen to shift my focus a little more toward protecting myself against poor market returns.

Friday, September 10, 2021

Short Takes: Gen X Wealth, Plug-in Hybrids, and more

Eight months ago, a group of friends including my wife and I took a chance and booked a PEI vacation.  Fortunately, we were able to go, and we’re just back from a great time.  I’m starting to wonder if we were lucky enough to hit a window that’s now closing as the COVID-19 Delta variant continues its exponential spread through Canada.  We just don’t have enough Canadians vaccinated yet to stop the growth without restricting our movements as they were earlier in the pandemic.  It’s been interesting to watch governments at all levels struggle with attempts to encourage people to get vaccinated and to apply lockdown rules only to those who have chosen not to be vaccinated.  All this is a work in progress and teething pains will continue.

Here are some short takes and some weekend reading:

Economist Writing Every Day says U.S. Gen Xers are now 30% wealthier than Boomers were at the same age, and that Millennials are on a similar path.  It would be interesting to see similar data for Canada.

John Robertson dives into the costs of plug-in hybrid vehicles, complete with a spreadsheet for comparing costs.  We’re in a transition period right now when plug-in hybrids make sense.  This will last until battery costs come down enough to make solely electric vehicles the obvious choice.

Scott Ronalds at Steadyhand
reports that  92% of Steadyhand employee financial assets are invested in Steadyhand funds and that employees get no special breaks on fees.  Steadyhand’s situation is one of the rare times that talk of “aligning interests” is true.

Friday, August 27, 2021

Short Takes: Changing Risk Appetite, the 4% Rule, and more

Over the past decade I’ve rented places in Florida through VRBO, and I’ve noticed an interesting change in the ongoing battle between owners and renters.  Early on, when searching for a place, filtering by price worked reasonably well.  You could count on the actual full price to be 20-25% more than the advertised rental price once they added various fees.  Then owners got clever and began to add ever-larger nonsensical fees.  In one extreme case, the added fees doubled the total rental cost.  Filtering by price became useless.  VRBO responded by calculating a full price with all the add-on fees to show to prospective renters during their search.  So, filtering by price works again, except for a new game.  Owners are very cagey about the price of pool and hot tub heat.  Because this is optional, VRBO doesn’t include it in advertised prices.  Owners try to get renters to commit to a rental and then hit them with punitive pool heat prices.  To find a place, we now have to find some suitable rentals and send queries to their owners to find out about pool heat cost.  Owners generally reply, but they avoid giving an actual price. Sometimes they eventually give a figure after a few exchanges, but sometimes they don’t.  In one case, they wanted US$40 per day, which is many times what it costs to heat a much larger pool in Canada.  It pays to understand the game and be wary.

Here are my posts for the past two weeks:

Narrative Economics

Retirement for the Record

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand
discusses ways to change your risk appetite when it differs from your risk capacity.  I’ve long believed that with the right approach, young people should be able to become comfortable with the gyrations of the stock market with their long-term savings.

The Rational Reminder Podcast
has a recent episode that gathers together expert opinions on the 4% rule for retirement spending from a portfolio.  This includes Moshe Milevsky’s entertaining demonstration of the foolishness of picking a spending level and blindly increasing it by inflation each year without any regard for how your portfolio grows or shrinks.  However, that doesn’t mean William Bengen’s original work on the 4% rule was foolish.  We can decide to adopt a flexible spending plan but choose an initial spending level that isn’t likely to have to be reduced.  We then do an analysis similar to Bengen’s to choose that starting spending level.

Robb Engen at Boomer and Echo say that what we should do about high stock prices is “If you’re invested in a globally diversified and risk appropriate portfolio, the answer is to lower your expected future return assumptions and do nothing else.”  He sees those who act on predictions of market crashes as overconfident.

Monday, August 23, 2021

Retirement for the Record

Just in case you’ve ever wanted to read a book about both retirement planning and the music of the 60s and 70s, Daryl Diamond has you covered with Retirement for the Record: Planning Reliable Income for Your Lifetime … to the Soundtrack of Your Life.  This book’s main focus is the value of an advisor (and his firm in particular) in retirement financial planning.  However, about a third of it is stories about the music most relevant to those born near the peak of the baby boom.

I expected more discussion of how to plan your finances in retirement, but the consistent message is that such planning is difficult, you need help, most advisors aren’t good at it, but Diamond and his firm do it well.  An early chapter tells us that there are no cookie cutter solutions, because the answer to most retirement planning questions is that “it depends” on your particular circumstances.  There is some truth to this, but it would certainly be possible to lay out 6 or 8 examples that illustrate the most important themes of planning a person’s retirement.  Unfortunately, Diamond doesn’t do this.

“I have seen plenty of situations where a DIY investor is trying (trying is the operative word here) to efficiently set up their income streams and in the process ends up sabotaging a preferable outcome. Unfortunately, I meet far too many ‘do-it-yourself investors’ who aren’t doing a good job transitioning to the income years themselves and, realizing this, are seeking my help at this point in their life.”  Of course, he doesn’t see any DIYers who plan their retirement well, because they don’t go to see him.  Given the repeated pitches for advisors and his firm in particular, this whole message just comes off as self-serving.

To show the complexity of retirement financial planning, Diamond lists ten questions that must be answered before it’s possible to tailor a plan to a client’s needs.  Unfortunately, he doesn’t discuss what he would do with the answers.

The Good

Before continuing with criticisms of this book, let’s look at a few parts I liked.  To avoid big tax bills in the future, it often makes sense to start drawing from RRSPs early instead of waiting for mandatory RRIF withdrawals to begin.  “To the best of my knowledge, only one of the Big Five banks allows their planners to illustrate scenarios in which RRSPs are not deferred as long as possible.”  Aside from the problem of possibly giving bad advice to clients, how can planners within big banks be considered professionals if they must do what their bosses tell them to do even if it hurts clients?

Diamond gives a good discussion of the importance of line 23600 (net income) on Canadian tax forms.  This net income figure determines your OAS clawback and the value of your age amount and age credit (for those 65 and older).  Many people don’t realize that if you carry capital losses from previous years forward to offset capital gains in the current year, it reduces your taxes this year, but it doesn’t change line 23600.  So, previous capital losses can’t reduce your OAS clawback or increase your age amount.

There’s nothing wrong with deciding to become more conservative with your investments, but too many investors do this “at precisely the wrong time.”  Investors who get conservative after stocks have crashed “lock in their losses,” “experience lower returns than if they had stayed invested,” “miss the subsequent upturn in the markets,” and “need to decide when to enter back into the markets—and this happens after they have already missed meaningful gains.”

The Not So Good

In a chart showing the “factors for successful investing,” the claimed least important factor is “fees.”  Even a 1% annual fee will consume about one-quarter of the assets you accumulate and decumulate over an average lifetime, so it’s hard to see how fees are unimportant.

Diamond is adamant that most people should take CPP and OAS as early as possible thereby “preserving your personal income-producing assets.”  Unfortunately, his reasons for this mostly come down to focusing on the possibility of dying young.  “I can tell you that over the last eighteen months we have unfortunately had twenty of our clients pass away.”  “Fifteen passed before the age of 71.”  Of course, there are many who are still alive and will live long lives.  Frederick Vettese’s take on when to start CPP in his book Retirement Income for Life (second edition) makes more sense.

One chapter warns what could happen if you’ve delayed CPP and OAS, but one spouse dies.  In this case, that spouse’s CPP and OAS get replaced with a smaller CPP survivor pension.  In one example, a widow sees her income drop 25%, an apparently disastrous outcome.  However, her expenses will drop as well.  It’s important to actually analyze a couple’s spending to see how it would change if one spouse died. Instead, Diamond treats any income drop as a calamity, and declares that almost everyone should take CPP and OAS as early as possible.  In reality, the possibility of living a long life and needing to avoid running out of money have to be considered together with other possible outcomes.

When fees are based on a percentage of client assets, “the better the portfolio performs, the better it is for the client and for the advisor.  There is an alignment of interests in this arrangement, which is why we prefer it and it is the model we use in our firm.”  The alignment of interests is pretty weak with this arrangement.  We get much better alignment when advisors hold the same assets in their personal portfolios as they recommend for their clients.

In a rant about fee disclosure and HST, Diamond writes “While the government contends that it is so interested in fee disclosure and the desire to ‘help’ investors, they are certainly not shy about carving money out of your returns in the form of taxes [HST on management fees and dealer fees].”  I’m not convinced that this HST only affects investor returns.  What if managers and dealers already charge as much as they can get away with, and they would just raise their fees if the HST went away?  Then the HST bites into their fees rather than investor returns.  In reality, this HST affects both sides: investors and managers and dealers.

An entire section of the book devoted to “investing in retirement to generate income” can be summarized as “we use income funds.”  Diamond stresses the importance of “preserving the invested capital” by spending only income and not selling units of the income fund.  However, income fund managers sell capital within the fund to make up part of the promised payments.  This is called return of capital (ROC).  The claim that your “capital can remain invested” is at best misleading.  Diamond views ROC “as a component of this managed investment process that generates regular income.”  This is just double-talk to disguise the fact that income funds don’t really preserve capital.

Diamond advocates a 5% to 5.5% withdrawal rate in retirement.  This is dangerously high, particularly when you’re also paying advisor fees, but has worked out well during the bull run in stocks over the past decade or so.  Who knows what will happen in the coming decade.  Something I didn’t see mentioned is increasing the withdrawal rate with age.  An early retiree certainly should be drawing less than 5%, and an 80-year old can safely draw more than 6%.


Overall, I’m not a fan of the retirement planning part of this book; I found it self-serving for the author.  He could have actually explained his process to help other advisors and maybe some DIYers.  However, it’s clear that Diamond has great passion for the music of his youth.  Readers of the right age (baby boom peak) may enjoy his many interesting music-related stories and trivia questions.  Even though I’m significantly younger than the author, I enjoyed the music discussions more than the retirement planning.

Monday, August 16, 2021

Narrative Economics

In his book Narrative Economics: How Stories Go Viral & Drive Major Economic Events, Nobel Prize-winning economist Robert J. Shiller calls on other economists to incorporate the study of narratives into their predictive models.  He believes the stories we tell each other that go viral are important factors in how economic events unfold.  The book is clearly written and makes its case convincingly, but there isn’t much for individuals to apply to their own lives unless they are economists or politicians.

A simple example of how narratives can cause future events is a viral story about deflation.  At times in the past, people have widely believed that prices were going to fall.  As a result, consumers delayed purchases expecting to buy cheaper later.  This caused spending to fall, and ultimately contributed to sellers lowering their prices.  Narratives can become reality.

Shiller gives many examples of different classes of narratives, including the morality of frugality and conspicuous consumption, the gold standard, automation replacing jobs, market bubbles, evil business, evil unions, and more.

Broadly, the book shows that “popular narratives gone viral have economic consequences.”  Shiller wants “economists to model this relationship to help anticipate economic events.”  He calls on economists to collect data on narratives to facilitate future economic analyses.  He also says “Policymakers should try to create and disseminate counternarratives that establish more rational and more public-spirited economic behavior.”

“When it comes to predicting economic events, one becomes painfully aware that there is no exact science to understanding the impact of narratives on the economy.  But there can be exact research methods that contribute to such an understanding.”  A further challenge is “distinguishing between causation and correlation.  How do we distinguish between narratives that are associated with economic behavior just because they are reporting on the behavior, and narratives that create changes in economic behavior?”

Shiller did a good job of convincing the reader that narratives matter in economics.  However, I have one minor criticism.  In one discussion of bankers and the poor choices they appear to make, Shiller says “It may be best to think of bankers’ behavior at such times as driven by primitive neurological patterns, the same patterns of brain structure that have survived millions of years of Darwinian evolution.”  This unflattering portrayal of bankers’ thinking presupposes that bankers intend to act in the best interests of their banks.  I find this doubtful.  Bankers as individuals all the way up to the CEO have periods of time where they make a lot of money doing things that look good in the short run but hurt the bank in the long run.  This is captured nicely in Charles Prince’s comment, “As long as the music is playing, you’ve got to get up and dance.”  Sometimes, apparently dumb behaviour is actually evil and greedy behaviour.

Overall, Shiller makes a strong case that the spread of narratives should be studied by economists.  However, readers looking for concrete ideas for improving their own investment results won’t find them because this isn’t the book’s focus.

Friday, August 13, 2021

Short Takes: In Praise of Small Steps

I’m not against having grand plans, but I’ve often seen them get in the way of real progress.  I recall a family member telling me about grand plans to organize his many piles of papers strewn throughout his house and eventually write a book.  I asked “would you like me to help sort this one pile of out-of-order papers right here?”  The answer was “No, no, not right now.”  A friend and I were looking in one of his closets one time, and he told me about plans to sort through everything in his overstuffed house.  As he reached to set down an item he had already declared to be garbage, I asked if he wanted me to throw it out.  The answer: “No, that’s fine.  I’m going to do it all together one day.”  

Waiting for a magical day in the future when you’ll want to do what you don’t want to do today isn’t a great formula for success.  I do better completing tasks in small steps.  My wife and I just got rid of some old paint cans.  We could have just talked about grand plans to clean up every part of the house, but instead we just cleaned up a small part and went back to lazing around.  It’s true that big projects like writing a book require spending some time thinking about the whole project, but it still has to be completed in many small steps.  It’s better to just do one of the small steps than procrastinate by convincing yourself you’ll do a lot of work some other day.

Here are some short takes and some weekend reading:

Morgan Housel makes some excellent points about how when we see others appear to make mistakes, it’s often our own lack of information that leads us to make this judgement.  In my experience, the missing information is often the other person’s motives.  If you have the wrong idea about another person’s goals, it’s easy to decide that their actions are mistakes.

John Robertson reflects on his decision a decade ago to rent instead of buy a home in Toronto.  One result of his analysis that would surprise many people is that someone who paid cash for a house in Toronto 10 years ago would have been better off renting and investing the cash in stocks.  It’s only when we consider a leveraged house purchase (i.e., with a mortgage) to an unleveraged stock investment that buying a home would have beat renting.

Robb Engen at Boomer and Echo reviews The Boomers Retire, written by David Field and Alexandra Macqueen.  The authors describe their book as a retirement resource rather than a novel, and they sought to make it as broadly useful as possible.

Big Cajun Man says that when it comes to speculation, never is better than being late.

Friday, July 30, 2021

Short Takes: 4% Rule Troubles, Factor Investing, and more

In a very small sample size I’ve noticed that owners of short-term rental places seem to be offering better than usual terms for letting renters cancel without penalty.  It’s hard to tell if it’s just a coincidence or if the owners recognize that a COVID-19 upsurge is a worry for renters.  I’m still hoping to go east to golf this fall and head south for the winter.  Fortunately, these owners have let me book without worrying about getting my money back if I can’t go due to the ongoing pandemic.

In the past two weeks I reviewed a book of a different type than my usual:

How to Retire Happy, Wild, and Free

Here are some short takes and some weekend reading:

Chris Mamula objects to Vanguard’s report on the shortcomings of the 4% rule for FIRE enthusiasts.  His objection isn’t with any of Vanguard’s technical points; he just thinks the FIRE community already knows about the problems with the 4% rule.  While it’s true that there are FIRE bloggers who have made these same points (as well as other bloggers, including me), the majority of FIRE enthusiasts certainly don’t understand all of these points.  We don’t get to define the FIRE community narrowly to only include a small number of knowledgeable people.  Like any large group of people, the range of knowledge levels is very wide, and it makes little sense to pretend they all have similar knowledge levels.  Mamula says “Vanguard has bought into the myth that this is a community of naive investors and planners.”  The FIRE community has brilliant people, naive people, and everything in between.  Further, there are plenty of people around who disagree with Vanguard’s sensible take on the 4% rule.  In particular, it’s not hard to find people who think drawing 5%, 6%, or more annually from a portfolio is safe.  I applaud Vanguard for trying to counter confusion and misinformation about how to draw down a portfolio over many decades.

Larry Swedroe
discusses how factor premiums decline or even disappear after they are identified and publicized.  I’ve tended to be skeptical of most factors, mainly because trying to exploit them increases investment costs.  You have to hope that enough of the factor premium will hang around to cover these higher costs.  I have a tilt to small value stocks, but other than that, I stick to broad cap-weighted indexing.

Preet Banerjee interviews Peter Mansbridge to discuss some of the stories behind big moments in his career.

Wednesday, July 28, 2021

How to Retire Happy, Wild, and Free

Most of the books I’ve read about retirement have focused on saving, investing, and decumulation strategies.  However, the whole point of being able to retire is to enjoy life.  Not everyone deals well without the structure of work, but Ernie J. Zelinski is here to help with his book How to Retire Happy, Wild, and Free.  If even a small fraction of this book resonates with someone who finds retirement unsatisfying, it can help.

For younger people who dream of having less time pressure in their lives, the idea that too much leisure could be unsatisfying may seem ridiculous.  However, many people end up having no good answer to the question “What will you do with your time if you have never learned to enjoy your leisure?”  Zelinski offers hundreds of ideas in categories of lifelong learning, friends, travel, relocation, and more.

Whether we choose to stop working or have it forced on us by an employer, retirement is in most people’s futures.  Finances are an important part of retirement, but so is personal fulfillment.  “It’s wise to start thinking about the personal side a long time before you actually retire, particularly if you are a workaholic with few interests outside work.”  “Individuals who have had someone else plan a major portion of their waking hours are at a loss when there is no one else there to do it for them.”

Zelinski offers some exercises for finding a path in retirement that begins with “To get a better idea of your true identity, first ask yourself what sort of person you would want to be if work was totally abolished in this world.”

It’s important to find new structure and routines for your leisure to avoid the problem that “after they have left their careers for good, some retirees are so lost that they have been known to start missing jobs they hated and colleagues who used to drive them berserk.”  The retirement “transition can seriously affect one in five individuals, leaving them in a state of mild to severe depression.”

Sadly, a common mistake among people with successful careers is to live unhealthy lifestyles.  “In the event that you are less healthy than you should be, you should put a lot more time and energy into improving your health than increasing the size of your retirement portfolio.”

Although I’ve never had any trouble finding enjoyable and productive ways to spend my free time, one part of this book resonated strongly with me.  This is best summed up by the section’s title: “Your Wealth is Where Your Friends Are: Above All, Friends Make Life Complete.”

Choosing to move to a new country or even within your own country for financial or other reasons is a big step.  Zelinski offers a comprehensive list of what to look for in a new location before making the plunge.  “If you think you’ve found where you want to spend your retirement, the best way to check it out thoroughly is to take a vacation there first.  Go more than once or twice.  Try to visit the city or country in all seasons so you can get a sense for whether you’ll be happy living there full time.”

There are a few areas where this book deserves some criticism.  One is that much of the material is about two decades old, despite the copyright of 2016.  While much of the advice is timeless, one section discusses the dangers of eating too much fat, but we now know that the greater enemy is the unseen sugar added to so many of our foods.  Another criticism is some of the claims of causation from research studies such as “people with negative views about aging shorten their lives by 7.6 years.”  No doubt the correlation exists, but having a negative attitude is often caused by having poor health.  It’s still a good idea to be upbeat, but don’t put too much pressure on someone experiencing constant pain to be positive about life.

The book contains many interesting quotes.  Here are a few:

“A career is a job that has gone on too long. — Jeff MacNelly”

“It is always the same: once you are liberated, you are forced to ask who you are. — Jean Baudrillard”

“The best time to make friends is before you need them. — Ethel Barrymore”

“Reality is a temporary illusion brought about by the absence of beer.”

In conclusion, this book will most help unhappy retirees who find themselves bored and unsure of what to do with their time.  But even readers who already have plans for a satisfying retirement may find a few ideas for making life better.

Friday, July 16, 2021

Short Takes: Inflation, Drawing Down RRSPs Early, and more

I’ve seen a lot of discussion about inflation lately.  The raging debate is whether the inflation we’re starting to see will be “transitory” or not.  The part of all this that amazes me is that so many twitterers think they know the answer.  I don’t know if inflation will be transitory, and I don’t believe anyone else does either, not even the U.S. Fed Chairman.  To be fair, the Fed has to choose some sort of action or inaction, so they have to have some sort of opinion about things they can’t possibly know with certainty.  But the truth is that they keep adapting to changes as they see them in the present to compensate for past predictions that turned out to be wrong.

Here are my posts for the past two weeks:

How to Respond to Rising Stock Markets

Responses to Emails I Usually Ignore

Here are some short takes and some weekend reading:

Alexandra Macqueen shows that even couples with modest RRSP savings can benefit (under the right circumstances) from drawing down RRSPs slowly prior to age 71.

Robb Engen
has decided that he’d rather work less hard for a longer time than hustle like crazy to retire early.  Fortunately for him, the type of work he’s doing lends itself to this approach.  He’s likely to enjoy the work more if it doesn’t dominate all his time.  I’ve certainly known people who’ve claimed to be using this type of strategy, when in reality they’re just lazy or scared of looking for work.  But this doesn’t seem to apply to Robb at all; his reasoning is sound.

Friday, July 9, 2021

Responses to Emails I Usually Ignore

I enjoy interacting with readers who have questions or comments on my articles.  I’ve benefited greatly from this joint pursuit of good ideas about investing and generally handling money well.  Here are some replies to emails I usually ignore.


Dear Darcey,

I received your exciting “cooperation offer” to post ads on my website disguised as genuine articles.  I’m so grateful that I’d like to make a similar offer.  Please let me know when you’re available for me to drop by your home to dump garbage in your living room.




Dear George,

Please excuse the delay in my reply, but I wanted to wait a few months to see how your prediction of a “permanent” increase in bitcoin prices would work out.  So far, the answer appears to be “not very well.”  This setback has undermined my confidence in your more recent predictions.  I’m starting to think I can’t trust free unsolicited market predictions as a way to get rich.




Dear Julia,

Your client does indeed sound like a very important business in the casino and betting industry.  My blog states that I don’t take fake articles, but you saw through that and asked how much I charge.  For a big player as important as your client is, let’s make it a round million.

Wednesday, July 7, 2021

How to Respond to Rising Stock Markets

As stock markets rise to ever larger price-to-earnings (P/E) ratios, the odds of a market crash grow.  However, we can’t know when such a crash might come, so I’m not interested in trying to time a sell-off of all my stocks.  Stocks remain the best bet for future returns, but how much higher can P/E ratios go before this is no longer true?

When we examine the relationship between Robert Shiller’s Cyclically-Adjusted Price-Earnings (CAPE) ratio to the following decade of stock returns, the correlation is quite weak; the result is closer to a cloud than a straight line.  The most we can say is that when the CAPE is high, future expected stock returns appear to be somewhat lower.  There is logic to the idea that P/E ratios will likely return to some form of normalcy in the future, but this may take a very long time.  In the interim, stocks remain the best bet for future returns.

But at what P/E level can we decide that stocks are no longer a good bet?  Shiller’s U.S. CAPE is at 38 as I write this.  The highest it’s been in the last 150 years is about 45 in the year 2000.  What if the CAPE gets to 45 or higher?  At some point, the future of stocks won’t look very bright.

A few months ago I adjusted my investment spreadsheet to assume that my portfolio’s CAPE (a blended figure based on my allocation across Canadian, U.S., and international stock markets) would drop to 20 by the time I reach age 100.  I kept the assumption that corporate earnings would keep growing at an average rate of 4% above inflation each year.  The effect of this assumed slow reduction of the CAPE is that I would get lower stock returns for the rest of my life, and the amount I can safely spend in retirement is lower.  For more about the details of how I calculate my retirement spending level and portfolio allocation, see my glidepath article.

So, this change has me spending a little less money each month, but it didn’t change my asset allocation.  A minor technicality is that because I use a fixed income allocation of 5 years worth of my safe retirement spending level, this change would have had me lower my fixed income allocation.  I added some calculations to prevent this slight shift to stocks.  It would have been ironic if spending less because I’m worried about high stock prices had led me to own more stocks.  

The way I made this technical adjustment was to increase the 5-year figure to keep my fixed income allocation the same as it would have been without the CAPE-based reduction in expected future stock returns.  This led to another idea.  What if I were to increase this 5-year figure even more when the CAPE is very high?  The idea is to make a gradual shift toward fixed income as the CAPE grows ever larger.

Previously, I arbitrarily chose 20 as the CAPE level where I’d start to adjust downward the percentage of my portfolio I’d spend each month.  So, as stocks keep rising, my spending level rises as well, but not quite as fast as my portfolio goes up.  This time, I’m setting another (higher) CAPE level where I’ll gradually increase my fixed income allocation.

I haven’t decided on this second CAPE threshold, but let’s use 30 as an example.  If the CAPE is above 30, then I take my 5-year spending figure (adjusted as described earlier if the CAPE is above 20) and multiply it by CAPE/30.  So, as the CAPE rises above 30, my fixed income percentage rises.  As my stocks rise in value, the absolute dollar amount I have in stocks will keep rising, but slower than it would have risen before, and my fixed income investments would grow faster than they would have before.

Unless the stock market does something very sudden, all these adjustments will happen at their usual glacial pace.  If the stock market doesn’t crash soon, I’ll make somewhat less money with my lower stock allocation, but that’s fine because I’ve had the enormous benefit of a very long bull run.  (Why keep playing the game when you’ve already won?)  If the stock market crashes from some CAPE level above 30, I will have protected more of my portfolio than I would have before making this change.

Sharp-eyed readers may wonder whether I’m opening myself up to a bond crash.  I don’t buy long-term bonds.  My fixed income is currently in high-interest savings accounts, a few GICs, and some short-term government bonds.  So, a crash in the bond market wouldn’t affect me much.

I don’t claim that this response to nosebleed stock levels is optimal in any sense.  But I do believe it will help me in some stock market crash scenarios without taking away too much of my potential upside.  A further benefit is that I can automate it in a spreadsheet and keep my feelings out of any decisions.

Friday, July 2, 2021

Short Takes: TFSA Penalties, Dividend Myths, and more

I’ve known for some time that I need to be prepared to respond in some way if stock price-to-earnings ratios grow ever higher.  The problem was that I wasn’t sure of the best response.  Unfortunately, the extended exchange I’ve had lately with John De Goey concerning the possibility of a stock market crash hasn’t taught me anything new.  But this exchange did prompt me to solidify my plans.  The first step was to reduce my expectations for future returns which also reduces the percentage of my portfolio that I can spend each year.  I’ll write about the second step in the coming days, which is to gradually adjust my stock allocation percentage as a function of stock price levels.

I managed only one post in the past two weeks:

Portfolio Optimization Errors

Here are some short takes and some weekend reading:

Jamie Golombek
gets a CRA opinion on an interesting TFSA overcontribution case where a TFSA is empty but still has an overcontribution.  I wrote about this possibility a few years back.

Boomer and Echo dispels some very persistent myths about dividend investing.  I’ve tried to address some of this misguided thinking myself, and the reaction from true believers is often fierce.

Andrew Hallam makes a good point about how difficult it is to know how you’ll react to your first big stock market decline.  He suggests starting with a slightly lower stock allocation than you think you can handle to reduce the odds that you’ll sell at a bad time.  I took a different approach for myself and for advising my sons.  I suggest keeping in mind that it’s pointless to hope that stocks won’t crash.  They are certain to crash, but we don’t know when.  The knowledge that stocks will crash while I own them helps to keep me calm when the inevitable crash comes.

Canadian Couch Potato explains what’s going on inside Tangerine’s Global ETF portfolios.  As he explains, they’re mutual funds whose holdings are ETFs.

Thursday, June 24, 2021

Portfolio Optimization Errors

A friend of mine likes to save money by ordering items in the U.S. and driving across the border to pick them up.  The trouble with his claim of having saved $50 on some order is that he ignores his car costs and the value of his time.  This mistake of leaving out important considerations because they are hard to value accurately creeps up in many decisions.

A group of my golfer friends like to figure out whether to buy a golf membership or not.  If the membership is $2400 and an average round costs $40, they reason that they need to play 60 rounds to break even on a membership.  However, getting a membership gives access to regular social functions.  This social consideration could easily be worth a lot to some people, and could even be a negative for others.  It’s also valuable to be able to start playing when the weather is iffy without worrying about losing money if the round has to be abandoned.  Some members even play more often than they really want to so they can justify the cost of a membership.  It’s better to come up with a roughly correct answer that takes into account all important factors than it is to come up with an exact answer that leaves out relevant considerations.

Whenever I see someone declare something like “I calculated that REITs should be 18.5% of my portfolio,” it’s obvious that relevant factors have been ignored.  We can’t know the exact future distribution of asset class returns.  Any attempt to use mean-variance optimization or some other optimization technique necessarily ignores the fact that the future may not look exactly like the past.

There’s nothing wrong with using past returns as a guide to the future, but we also need to think through other possibilities.  We could have higher (or lower) inflation in the future than the average over some period of the past.  The four decade bull run in bonds could transition into a multi-decade bear market in bonds.  Tax rates could change.  Stocks could tank in a way we’ve never seen before.  We can’t optimize for all these possibilities, but we can try to choose a plan where we’ll come out okay across all reasonably likely outcomes.  Thinking this way is very different from using guessed correlation figures to calculate perfect portfolio percentages.

Another mistake I see among those seeking the perfect portfolio is frequent tweaking to take into account new information.  These investors seem to think each portfolio change they make will be the last because their portfolio is finally perfect.  But then they learn something new that leads to more changes.  For some, all the adjustments become a form of buy high and sell low as they constantly shift toward whichever asset performed well recently and has a good story.

An area where I had to let go of trying to be perfect was in my asset location choices.  I have a set of rules for which types of accounts hold which asset classes.  For example, I try not to hold any fixed income in my RRSPs.  However, when it comes time to rebalance my portfolio, sometimes it’s just easier to buy some short-term bonds in my RRSP.  I still mostly stick to my asset location rules, but I’m not strict about it.  Any losses I suffer from not having a perfect portfolio are small compared to the peace of mind that comes from not worrying about small things.  This frees me to think about more important issues, like the possibility that the U.S. might change inheritance tax rules for Canadians who hold U.S. assets.

In summary, it’s much better to think about all the important factors in any choice, including those that are hard to quantify, than it is to calculate the easy-to-quantify factors to three or four decimal places.

Friday, June 18, 2021

Short Takes: Future of Cash Edition

Like many people, I’ve been enjoying the good weather as much as possible lately.  As a result, I haven’t done much writing, so I thought I’d reflect on the effect the pandemic has had on the use of cash.

Understandably, people have been nervous about handling cash through the pandemic.  Many people stopped using it, and some retailers refused to take it.  I’m curious about what will happen as we come out of the pandemic.

Will most people who sometimes used cash before the pandemic go back to it?  Will some retailers continue to refuse cash?  Banks would certainly like to see the end of cash so they can be assured of getting their cut of every transaction.  No doubt some retailers like the information they can gather about their customers when they use cards.

I’d like to see cash remain an option wherever I go.  Then those who prefer to use a card can do so, and those who want to use cash can do so.  In some contexts, I like the anonymity of paying cash, and at the end of the month, I prefer not to have a credit card statement riddled with small purchases.

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand
explains why it’s better to focus on total return rather than dividend yield.

The Rational Reminder Podcast brings us a sensible discussion of the decision to rent or buy a home.

Friday, June 4, 2021

Short Takes: Firing Your Financial Advisor, Measuring Returns, and more

As long as the pandemic feels like it has lasted, I’m amazed at how quickly we’ve reached the point we’re at today.  Early on, we hoped a vaccine would be ready by sometime in 2021, but maybe it would take longer.  Then once we had a vaccine ready, it seemed optimistic to hope that we’d be vaccinated by the end of 2021.  Then the Canadian federal government promised that every adult who wanted a vaccine would get it by September, and the general reaction was “sure, I’ll believe it when I see it.”  Now it’s starting to look like adults and children as young as 12 who want a vaccine may be fully vaccinated by the end of August.  I know it feels like this has all gone on forever, but our estimates for when it would end have been consistently getting earlier.  There is every reason to believe that the world’s reaction to the next pandemic will be even faster.

I managed only one post in the past two weeks:

How to Lie to Yourself about a Stock Crash with Statistics

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand lays out ten good reasons to fire your financial advisor.

Canadian Couch Potato gives a good overview of some different ways to measure your portfolio’s returns as well as some videos for those who want to dive in further.

The Blunt Bean Counter explains the various ways siblings can get into conflict over their parents’ estate.  Believing your own children would never squabble over your estate is seeing the world as you want it to be rather than how it is.

Preet Banerjee interviews Ben Rabidoux who analyzes what’s been happening in the Canadian housing market.

Justin Bender compares the global ex-Canada stock ETFs VXC and XAW in a recent video.  He has a stronger preference this time than in most of his other ETF comparisons.

Wednesday, June 2, 2021

How to Lie to Yourself about a Stock Crash with Statistics

Wouldn’t it be great if we could predict the future movements of stock markets so we could capture the gains and avoid the losses?  It turns out we can’t, but that doesn’t stop people from trying.

After a Twitter exchange with John De Goey, I ended up reading the article The Remarkable Accuracy of CAPE as a Predictor of Returns by Michael Finke.  He gives a chart that appears to show we can predict the coming decade of stock returns by calculating what is known as the CAPE (Cyclically Adjusted Price-to-Earnings Ratio).

For our purposes, we don’t need to know much about the CAPE other than that it is a measure of how expensive stocks are, and that it was invented by Robert Shiller who received a Nobel Prize in Economics in 2013.  In fact, we don’t even have to calculate the CAPE ourselves; it is freely available and updated daily.

Right now, stock prices are very high.  As I write this, the CAPE for U.S. stocks stands at 37.  The only time it was higher in the past century was during the tech boom and bust around the year 2000.  We seem to be repeating the boom part, and the fear is that we may soon repeat the bust part.

Here is my reproduction of a chart similar to Finke’s chart:

Finke’s chart used nominal U.S. stock returns rather than real (inflation-adjusted) returns, but they show the same thing: an apparently close relationship between the CAPE and U.S. stock returns over the subsequent decade.  Given the current CAPE, stock returns appear to be predictable to within +/- 3% per year.  That would be amazingly accurate if true.

Based on this chart and the fact that the CAPE is currently 37, we’d expect the average annual stock return in the next 10 years to be between inflation minus 4% and inflation plus 1.5%.  If true, this would clearly mean it makes sense to sell stocks.  De Goey made his position clear in an article titled Get Out!.

Sadly, there holes in this story.  Nobel Prize winner Shiller invented the CAPE, but he isn’t involved with Finke’s paper, despite De Goey’s implication when he defended Finke’s chart saying “Oh, and the guy who came up with the concept has a Nobel Prize.”

You might wonder how the chart above has so many points when we’re talking about 10-year returns and it covers only 25 years of stock market data.  The answer is that the chart uses 300 overlapping 10-year periods.  So, each point represents a starting month.  Two successive months are likely to have nearly the same CAPE and nearly the same 10-year annual returns.  So, we get lots of bunched up dots.

But the truth is that we have very little data.  We really only have two independent 10-year periods.  Despite the impressive correlation the chart shows, we’re extrapolating from little information.

To show the problem, let’s repeat this chart for another time period:

I didn’t choose this date range at random; I selected it to make a point.  If we were to devise a strategy based on this chart, we’d say not to worry if the CAPE gets high because you’ll still get decent returns.  But when the CAPE is in the 17 to 18 range, stocks are either going on a big run, or they’ll crash, and you have to be ready to get out.  This is obviously nonsense.  It’s dangerous to try to build strategies on too little information.

Here’s a chart using S&P 500 stock data from 1936 to the present:

This data still only covers seven independent decades, but we can see the real picture of the relationship between the CAPE and stock returns is a lot fuzzier than the first chart made it seem.  We can still reasonably guess that a higher CAPE reduces future expected stock returns, but the range of returns is still wide.

We might guess that the CAPE appears to have predictive value when it is above 30 because future stock returns are limited to a narrower range.  Again, this is because we have limited data and the periods overlap.  In fact, two overlapping decades a month apart are over 99% identical (119 of the 120 months).

To reduce this illusion of seeming to have more data than is truly available, here’s a chart of the same results back to 1936, but with overlapping decades spaced a full year apart:

Now we see how little information there is for the CAPE above 30.  But it gets worse.  Those five points are from consecutive years during the year 2000 tech boom and bust, so they all overlap by six to nine years.  Any strategy we develop based on high CAPE values is just guessing that the tech bust 20 years ago will repeat.

Does this mean we should blissfully assume a rosy future for stocks?

Absolutely not.  Stocks can crash at any time, and that last chart shows that we should assume lower than average expected stock returns over the next decade or more.  

Does this mean we should get out of stocks?

We don’t know the future.  Stocks may crash soon or they may not.  Nobody knows which.  The important question to answer is whether there is some investment other than stocks with a higher expected return right now.  Unfortunately, bonds and real estate (especially Canadian real estate) are expensive right now too.

If we really believed stocks would lose money over the next decade, we’d be better off with cash in a savings account.  But we can’t know if this will happen or not.  My own take is that stocks still have a higher expected return than other investments, so I am sticking to my investment plan.

However, I have lowered my expectations for future returns.  The main effect this has is to slightly reduce my family’s spending to preserve capital in case future stock returns really are poor.

If the CAPE continues to rise, I can’t say I’d stick to my current investment plan indefinitely.  I’m open to the possibility that it will make sense to taper my stock holdings if the CAPE gets to even crazier levels.  

One thing is certain though: I don’t believe it makes sense to make a radical change all at once.  For example, I wouldn’t suddenly sell all my stocks if the CAPE hits 50.  I’d devise some plan for my stock allocation as a function of the CAPE that would gradually reduce my stock holdings as the CAPE rises.  But I have no such plan for now.

De Goey’s call to get out of stocks will eventually look either prophetic or misguided.  But I won’t be among those who look back to judge his call to be right or wrong.  If you place a bet at a roulette table, you’ll either win or lose, but I’ll judge you by whether the bet made sense at the time you placed it.  For now, De Goey hasn’t made a case that convinces me, and I would never suddenly sell all my stocks anyway.  For now, you can count me among those concerned about high stock prices but unconvinced there’s a better place for my money.

It’s very easy to fool yourself with statistics, particularly when the amount of data is far short of enough to be statistically significant.  But, even in the absence of data, we have to make decisions.  To make a case for switching from stocks to some other asset class, we’d have to look somewhere other than past stock prices.

Friday, May 21, 2021

Short Takes: Investing Questions, CRA Oral Interviews, and more

My attempt to move the email delivery of my articles from Feedburner to follow_it has been anything but smooth.  Follow_it decided to require everyone to click a confirm link at the top of my Test post before they could get more articles.  My wife missed that and apparently many others did too.  I’m not happy with the inane ads follow_it places at the end of my articles, and I don’t like the tracking stuff they add to all links in my articles.  I’m seriously considering eliminating email subscriptions on my blog, but I’ll wait a while longer before making a final decision.

Here are my posts for the past two weeks:

What Might Have Been

Seeking Prophets

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand asks some very interesting questions.  One good one is “Who is going to buy the flood of low yielding government bonds being issued?”  Another is “Is the political risk around China fully reflected in securities prices?”  I won’t be buying the new bonds, and I’m wary of investing in China.

Anna Malazhavaya explains that CRA can now compel oral interviews.  This is a change announced in the 2021 Federal Budget.  If I understood correctly, they can even compel people to answer questions about a neighbour.  I guess that’s another good reason to get along with your neighbours.

Big Cajun Man continues to have difficulties making contributions to his son’s RDSP.  It seems that TD is trying to apply rules that make sense for RRSPs to RDSPs where they don’t make sense.

Boomer and Echo looks at reasonable expectations for future market returns.  Some investors expect the high stock returns of recent years to keep rolling.  The party has to end sometime, and making moves to try to keep it going likely won’t end well.

Wednesday, May 19, 2021

Seeking Prophets

It ain't so much the things that people don't know that makes trouble in this world, as it is the things that people know that ain't so. — Mark Twain.
Recently, I was reminded of how difficult it can be to help people with their financial decisions.  What they don’t know isn’t the problem so much as what they think they do know.

A young man I’ll call Lucas came to me wondering what to do with a modest sum in employee stock options.  He’s not sure which way the stock market is going, and he’s not sure where his employer’s stock is going.  Is now a good time to sell the options or not?

I started by explaining that nobody knows where the stock market or any individual stock is going, and that selling should be based on other considerations, like diversification and needing the money.  I tried to continue with how his best course of action depended on the stock’s price and the strike price as well as the amount involved, but there was little point.  As far as Lucas was concerned, I couldn’t help him and he’d have to ask someone else.  No doubt Lucas will find someone else who will confidently make random predictions about the stock market.

There are things Lucas doesn’t know that made it difficult to help him.  For example, he doesn’t know what a strike price is, so he couldn’t tell me how far into the money the options are.  He told me a dollar amount for the options, but I’m not sure if that’s the value of the stock or the net value of the options.  It’s even possible he doesn’t have options at all, but has some restricted stock.

The bigger barrier to helping Lucas is his mistaken belief that he needs help from some stock market prophet who can tell him the future.  I’ve had the experience before of having someone nod in agreement that such prophets don’t exist, and then immediately ask another question searching for predictions of the future.

Even when someone knows very little about investing, it’s necessary to first get them to unlearn things they think they know but are wrong.  Only then is it possible to help them.

Monday, May 17, 2021


This is a test post after I tried to fix my blog.  Feedburner is dropping email subscriptions, and I tried to switch them to  So, if this worked, emails will look different going forward.  If it didn't work and I broke my feed, I'll have some extra time on my hands.

Wednesday, May 12, 2021

What Might Have Been

I’ve let some very lucrative opportunities slip through my fingers over the years.  I won’t call them regrets as I’ll explain later, but I could have ended up with a lot more money than I have now.  Here I describe the top three potential paydays that got away from me.


I spent my career as a cryptographer, so it’s not too surprising that I took an interest in the workings of bitcoin when it first appeared.  I learned how it worked and appreciated the clever way it was designed to mimic mining for gold without the need for a central authority.  For a while, that’s as far as my interest went.

Later, some enthusiasts formed a group to work on mining bitcoins, and they wanted me to join.  I was tempted, but decided that I had other things to do with my time.  Given the way I tend to get obsessed with technical projects, if I had joined in those early days, I could have mined thousands of bitcoins.

When bitcoin prices were manipulated upward to spark the mania we’ve witnessed, I would have sold my bitcoins off a little at a time to avoid having too much of my net worth tied up in a volatile currency of questionable real value.  It’s possible that I could have ended up with around CDN$50 million after taxes.  But I’ll never know for certain what might have been because I didn’t join the group.

Apple Stock

I bought 3000 shares of Apple stock in October 2000.  They were only $20.54 each.  A little less than three years later, I sold them for a loss of about US$3000.  Since then, Apple shares have split 2 for 1, 7 for 1, and recently 4 for 1.  If I had held onto this stock, I’d have 168,000 shares now.  As I write this, these shares trade at $126.85, for a total of US21.3 million.

I would never have held on all the way to today without selling any shares.  To reduce risk, I would have sold small blocks of stock along the way.  My best guess is that I’d now have about CDN$10 million after tax from holding these Apple shares.  But I didn’t hold them, so I’ll never know for sure.


I had the good fortune to work for a tech company that had its initial public offering in the midst of the late 1990s tech boom.  I had no way of knowing what was about to happen, but the company’s stock price grew to 20 to 100 times any sensible valuation.  I did well with my allotment of stock options.

Leading up to the IPO, I had the chance to move into management but turned it down.  I decided I was happier doing technical work.  If I had embraced management for just a couple of years, I would have received substantially more stock options.  I could easily have ended up with a few million more dollars.  But, I chose reasonable working hours and work I liked better.


It’s tempting to look at these missed chances and draw some lessons like “when you see an opportunity, go for it” or “don’t be left with regrets,” but I think this is wrong.  None of these outcomes was foreseeable.

In the early days of bitcoin, there were believers in bitcoin as the future of transactions, but nobody was talking about getting rich from a crazy runup in bitcoin prices.  Bitcoin miners were geeks who liked the technology.  They weren’t young people seeking their fortune.

Fifteen to twenty years ago, Apple was just another small tech company that seemed sure to get crushed by the Microsoft behemoth.  Betting on Apple back then made no more sense than betting on several other tech companies.  But none of the others grew to what Apple is now.

My whole career I avoided management because I didn’t like the work, didn’t think I’d be good at it, and didn’t want to work the long hours management requires.  I had no way of knowing that enduring management for a small slice of a decades-long career would have a big payoff.

I’ve focused here on missed opportunities, but I’ve had a tremendous amount of good fortune in my life as well.  Some of the random choices I’ve made have paid off in unexpected ways.  The real lesson here is that life is unpredictable, and you’re destined to be fortunate sometimes and unfortunate other times.  There’s no point in mooning over what might have been.  Look to the future.

Friday, May 7, 2021

Short Takes: Leverage Losses, Financial Advice, and more

Speculation that we’re in a bubble is growing.  I don’t know how to identify bubbles while they’re happening, so the most I can say right now is that the prices of stocks, bonds, and real estate are high.  But let’s suppose for the moment that all three assets are in a bubble.  What are we to do with this information?  Maybe one or more of these assets will crash.  But what if they keep rising for quite a while longer before this crash happens?  What if the economy booms and we grow our way out of the bubble without a crash?  There’s no guarantee that selling assets and waiting for a crash will work out well.  Because I don’t know what’s going to happen, I’m sticking with my investment plan.  The only change I’ve made is to lower my expectations of future investment returns.  So, I haven’t changed the way I invest, but I haven't grown my spending as much as my portfolio’s growth dictates in case future returns disappoint.

I managed only one post in the past two weeks:

The “Explore” Part of a Portfolio

Here are some short takes and some weekend reading:

John Robertson
tells a deeply personal story about personal loss and financial loss due to leverage.  When it comes to investing with borrowed money, everyone is a genius until suddenly they’re not.

Ben Felix (video) explains what is and is not good financial advice.  He says that investing is largely a solved problem, but goes on to explain the ways that people need help.  He makes an excellent case that most people could benefit from an advisor who does a good job providing this help.  I have little doubt that he is able to do a good job in his practice.  However, after listening to many financial advisors of different types, including those who work with high net worth clients, I have my doubts that most of these advisors perform Ben’s list of tasks well.

Jason Heath answers a question about making spousal RRSP contributions in your 70s.

Monday, April 26, 2021

The “Explore” Part of a Portfolio

Many people advocate having a portfolio made up of mostly a core of low cost index funds along with a small “explore” part for taking concentrated risks on favourite investments.  This can work well enough if you’re realistic about it, but most investors cross the line to self-delusion.

Ben Carlson does a good job justifying the existence of explore-type investments in his article The Case for Having a Fun Portfolio.  After all, people are entitled to spend their money however they want.  Not every expenditure has to be part of a logical long-term plan.  We can buy a beer, or a motorcycle, or some favourite stock if we want.  So what if the long-term expectation is that the explore part of people’s portfolios will underperform indexes.

All the logic makes sense up to this point.  But just about every stock-picker I know can’t resist taking this a step further.  “Besides, the stock I picked is going to do great.”  In their hearts, they know their stock picks are going to outperform.  Past results don’t seem to deter them.  They wouldn’t bother with the explore part of their portfolios if they truly believed they would lose money over a lifetime of picking stocks.  All the evidence says that professional investors today set good relative prices so that individual investors who choose their own stocks are essentially making random picks.  The odds are against the small guy, but hope springs eternal.  I prefer to find hope in other pursuits.

Friday, April 23, 2021

Short Takes: Estimating Future Returns, Leveraged Blow-Up, and more

The email delivery of my blog posts is run through Feedburner, and Google has announced that they’re dropping this email service in September.  So, if my posts are to still get out to email subscribers, I’ll need to find some other way.  My first attempt to find a replacement came up empty.  Suggestions for an easy solution are welcome.

I managed only one post in the past two weeks:

If Simplicity in Investing is Good, Why is My Portfolio Complicated?

Here are some short takes and some weekend reading:

The Rational Reminder Podcast takes an interesting look at how to estimate future stock returns.  What they’re trying to do is harder than what I did.  I didn’t concern myself with what would happen in the near future.  I just used a conservative estimate of corporate earnings growth, and presumed that the market price-to-earnings ratio would decline to more typical levels by the time I get to be 100 years old.

Bill Hwang’s huge personal loss with his Archegos family office doesn’t seem very relevant to personal finance, but it does serve as a reminder of the dangers of leverage (borrowing to invest).  Warren Buffett says “Never risk what you have and need for what we don't have and don't need.”

Big Cajun Man reports on changes to the disability tax credit in the latest federal budget.

Wednesday, April 21, 2021

If Simplicity in Investing is Good, Why is My Portfolio Complicated?

My recent article on A Life-Long Do-It-Yourself Investing Plan describes a way to make investing uncomplicated while keeping costs to a reasonable level.  Reader reactions were very positive, but some of the questions I received are worth discussing.

“You’re advocating simple investing, but your own portfolio is complex.”

That’s true.  If the all-in-one exchange-traded fund VEQT had existed back when I was switching to index investing, I might have used it for all my stocks.  Unfortunately, it wasn’t around back then, and I settled on a mix of 4 stock ETFs.  In trade for this complexity, I estimate that I save approximately 0.29% per year in MERs and foreign withholding tax (FWT) compared to owning only VEQT.

As it happens, I’m well suited to building a spreadsheet to manage my portfolio, including automating rebalancing and following asset location rules.  Even so, if I were starting out today with no spreadsheet, I might forgo the savings and just buy VEQT for all my stocks.  However, given that I’ve already done the work to decide on a set of rules and have automated them all, I’m happy to save the 0.29% each year.

Much of my writing on portfolio details over the years has been aimed at investors like myself.  If you enjoyed your high school math classes, then maybe you have the temperament to manage a more complex portfolio.  However, I’m confident that the vast majority of people would be happier with something simpler.  It’s not just about a trade-off between effort and savings; there are many ways to mess up a complex portfolio.  You could end up doing a pile of work and saving nothing, or worse.

“Can I see a version of your spreadsheet with your personal details removed?”

I’ve started to make a public version of my spreadsheet several times.  Each time I despair at how hard it is to make such a spreadsheet generic enough to be widely useful, and simple enough to be understandable.  So, I doubt I will ever complete this task.

This may be rationalizing, but I’m not sure I’d really be helping my readers if I made a version of my spreadsheet available.  Maybe being willing and able to do the work of creating your own investing spreadsheet is a necessary condition for success at managing a more complex portfolio.

“You’ve got me thinking I should change my portfolio to match the simple portfolio you described.”

The biggest potential problem with making such a change is capital gains taxes.  If you have investments in a non-registered (taxable) account, you may have to realize capital gains to make a change.  Think carefully about adding a tax burden when making such a change.

If you’ve got a complex portfolio, it might make sense to simplify it, at least in your TFSAs and RRSPs/RRIFs.  However, if you already have a simple portfolio using one of the all-in-one ETFs that include bonds, the benefits of switching may be small.  The prospects for long-term bonds aren’t great right now, but your exposure to potential losses may be fairly low.  It pays to do some calculations before jumping on the latest investing idea.

If you’re already running a fairly simple low-cost portfolio successfully, there may be no reason to change.  If you want to change your portfolio because it will give substantial benefits, then go ahead.  But if you find your reason is an emotional need to seek perfection, then I suggest giving yourself permission to have a portfolio that isn’t quite perfect.  In my own portfolio, I sometimes have some fixed income in the wrong account because it was just easier to do it that way when I rebalanced.  The financial cost of doing this is trivial, and I’m not seeking perfection.

“There are other good ways to keep investing simple.”

That’s true.  I laid out one good way for someone to start an investment portfolio and then maintain it simply for a lifetime.  There are other ways, including many differences in the details.  Maybe you want an 80/20 all-in-one ETF, or you plan to buy an annuity with 25% of your portfolio when you retire.  We can debate the merits of these choices, but at a higher level, they just represent small differences.  The important things to focus on are simplicity, low costs, and avoiding mistakes.

Friday, April 9, 2021

Short Takes: Investing Simply, Income Tax Issues, and more

A big oversight of mine is that I never subscribed to my own email feed.  Like someone who donates to a charity to feel good about themselves without ever checking if the charity is doing good work, I made my articles available for free by email without ever checking whether the service was working well.  Fortunately, my wife subscribed and told me that sometimes there’s a day delay before an email arrives.  I’ve been working on fixing this.  I’ve now subscribed myself and noticed that the font was kind of small.  So I made it a little bigger.  Hopefully, with some periodic monitoring, I can make the experience better for everyone.

Here are my posts for the past two weeks:

Buy Now Pay Later Apps

Safety-First Retirement Planning

A Life-Long Do-It-Yourself Investing Plan

The Value of Monte Carlo Retirement Analysis

The Dumb Things Smart People Do With Their Money

Here are some short takes and some weekend reading:

Robb Engen makes a strong case for DIY investors to use a single asset-allocation ETF over more complex mixes of ETFs like Justin Bender’s Plaid Portfolio, Ben Felix’s Five Factor Model Portfolio, or my mix of VCN, VTI, VBR, and VXUS.  He’s right that few investors will manage these more complex portfolios successfully.  Complexity builds quickly when you’re managing multiple ETFs over RRSPs, TFSAs, and taxable accounts.  For my portfolio, I estimate my MER and foreign withholding tax (FWT) savings compared to just using VEQT for stocks is currently 0.29% per year.  This isn’t trivial, but you don’t have to mess up the plan much to lose these savings and more.  If I had to manage my portfolio by hand instead of having it automated in an elaborate  spreadsheet, I would gladly trade 0.29% per year for the simplicity of VEQT.  I recommend VEQT to my sons and other family and friends who ask.

The Blunt Bean Counter
is out with his list of common tax issues for the 2020 taxation year.

My Own Advisor makes a weak case that active investors shouldn’t bother benchmarking their portfolios.  I made a decision a while back to read fewer articles related to stock picking, but I still read some.  The main reasons not to benchmark your portfolio are 1) to avoid getting the bad news that your stock picks are losing to the market, and 2) to avoid the work required to figure out your portfolio’s return and to pick a benchmark.  Properly done, benchmarking begins with choosing in advance a mix of passive investments that roughly matches the allocations of your active portfolio.  Then at the end of the year, you can compare your portfolio’s return to that of your benchmark to see over the years whether your active picks are any good.  Most active investors don’t even know their portfolio’s return, so they’d be glad to hear that they don’t need to benchmark.  The few who do calculate their annual returns often find that their skills don’t look very good over the long term compared to a reasonable benchmark, and these investors are even happier to hear that they don’t need to benchmark.  My Own Advisor points to problems with finding a benchmark that matches your goals.  This isn’t actually very hard, but it usually requires blending a few indexes.  The key is to pick this mix in advance so you’re not tempted to choose a mix after the fact that makes your active portfolio look better.  My Own Advisor points to benchmarking being a lagging indicator.  However, the goal isn’t to go back in time and change your investments; it’s to find out whether you should keep picking your own stocks or abandon a losing effort.  It may be disappointing to find your efforts over a decade have lost you money, but it’s better to know the truth.  My Own Advisor suggests focusing on your life, health, and other more important things than benchmarking.  This advice applies much better to reclaiming the time you put into stock picking and just living your life while passive investments do their thing.  People are free to do as they wish with their money, including picking their own stocks and not checking their performance, but it’s not good to advise others to follow this path.

Thursday, April 8, 2021

The Dumb Things Smart People Do With Their Money

Even smart people do some dumb things with their money, according to Jill Schlesinger, a Certified Financial Planner and media personality.  In her book, The Dumb Things Smart People Do With Their Money, she goes over thirteen common costly mistakes.  It’s an easy read that might change your mind about a few things.  The focus is on the U.S., and some detailed parts aren’t relevant to Canadians, but the broad themes are still relevant.

The parts of the book I liked best dealt with buying financial products you don’t understand, buying a house in situations that clearly call for renting, taking on too much risk, indulging yourself too much during your early retirement years, not having a will, and trying to time the market.

On the subject of buying investments we don’t understand, the author says “There just isn't any need to invest in gold,” and “It’s usually a crappy investment.”  On reverse mortgages, some predatory lenders “go to extraordinary (and sometimes illegal) lengths to foreclose on borrowers’ homes,” and “many people take out reverse mortgages without analyzing whether they really should stay in their homes.”

Schlesinger believes strongly in getting advice from fiduciaries.  It’s a mistake to take “financial advice from someone who is trying, first and foremost, to sell you something that will make him or her money, rather than help you.”

In an interesting twist, the author says you don’t need professional advice or a customized plan if “you have consumer debt,” “you aren’t maxing out your retirement contributions (presuming that you are in a high enough tax bracket for that to make sense),” or “you don’t have an emergency account with enough money in it to cover six to twelve months of expenses.”

The section on taking too much risk has an excellent discussion of recency bias.  I see this in myself every time I add new money to my portfolio, take money out, or have to rebalance.  These actions always call for either buying something that has performed poorly recently or selling something that has performed well recently.  I’ve learned to overcome my recency bias in these contexts, but the feeling of wanting to stick with an asset class that has been rising never goes away.  You need “to minimize how many direct investment decisions you make.  The fewer decisions, the less opportunity for your internal biases to wreak havoc.”

Schlesinger devotes an entire chapter to indulging yourself too much early in retirement.  This flies in the face of claims that overspending early in retirement doesn’t meaningfully contribute to the fact that the average retiree spends less with age.

In one section the author links the decision to delay taking Social Security with staying on the job longer.  Maybe that makes sense under U.S. rules, but in Canada, one can certainly benefit by spending savings while delaying CPP and OAS until years after retiring.

The author believes that the amount people can safely draw in retirement is “3 percent or so.”    This makes sense as a starting withdrawal percentage for someone age 60 or younger who pays investment fees above 1% per year.  Higher safe withdrawal amounts are for disciplined low-cost DIY investors or older retirees.

“The insurance industry wants you to think that you need permanent insurance, but most people don’t.”  Well said.

The section on not trying to time the market contains many excellent points.  Unfortunately, at one point the author quotes some DALBAR figures that supposedly illustrate investors’ poor market timing.  The DALBAR methodology for calculating investor returns makes no sense.  It’s true that individual investors aren’t good market timers, but DALBAR penalizes investors who buy into the market with new savings because they didn’t invest the money sooner (i.e., before they even had it).

Overall, this book is an easy read and makes many good points.  One of the downsides of being smart is that you can delude yourself at the same time you persuade others.  This can lead to excessive risk-taking and costly mistakes.