Friday, December 31, 2021

Short Takes: The Party in Stocks, Guessing a Person’s Salary, and more

A friend was asking for some financial advice.  It involved what to do with the proceeds of selling a rental property.  It turns out his sister’s financial guy made her a lot of money lately.  I tried to explain that she made money because the stock market went up.  A financial guy can help you find an appropriate mix of stocks, bonds, and cash, but whether you make or lose money in the short term has nothing to do with the financial guy.  

People always look skeptical at this point.  They seem to firmly believe that whether or not their investments do well is 100% attributable to the “moves” their financial guy makes.  I always lose credibility by saying something that is true but the opposite of what is widely believed.  Such is life.

Here are my posts for the past two weeks:

Behavioural Issues with Variable Asset Allocation

The Boomers Retire

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand says investors are dancing like it’s 2007.

Big Cajun Man shows how you can determine someone’s income if they reveal when during the year CPP stopped coming off their pay.

Ellen Roseman
interviews Dan Bortolotti, a.k.a. Canadian Couch Potato, on the Moneysaver podcast.  They discuss index investing with ETFs and robo-advisors and Dan’s new book Reboot Your Portfolio.

Andrew Hallam
tells an interesting story about people making the mistake of trading life satisfaction for more money.  It’s worth reflecting on whether we’re doing the same thing.

Thursday, December 30, 2021

The Boomers Retire

It’s no secret that the interests of financial advisors and their clients are not well aligned.  Even financial advisors who mean well can believe that a choice is best for the client when it’s really best for the advisor.  That’s the nature of conflicts of interest.  These conflicts will shape how advisors use the book The Boomers Retire: A Guide for Financial Advisors and Their Clients, whose fifth edition was written by Alexandra Macqueen and David Field.  Lynn Biscott wrote the earlier editions.

Throughout my review of this book, I will sometimes be commenting on the substance of its contents and sometimes on how financial advisors might use or misuse the contents, which is arguably not the fault of the authors.

The book covers a wide range of important topics that financial advisors should understand, including government benefits, employer savings plans, personal savings, investing, tax planning, where to live in retirement, insurance, and estate planning.  Here I discuss a few of the subject areas that stood out for me.

Life Expectancy

A big challenge with managing money through retirement is not knowing how long you’ll live.  I sometimes hear people talk about planning for a retirement that will end in their early 80s.  There are two problems with this.  One is that it is based on life expectancy from birth.  If you make it to age 60 or 65, your median life expectancy is longer than it was when you were born.  The second is that it makes little sense to make a plan with a 50% chance of failure.

The authors address these problems sensibly.  FP Canada standards “recommend that planners project life expectancy to the 25th percentile,” which is 94 for men and 96 for women when starting anywhere from age 55 to 70.  “For some clients, who are longevity-risk averse, a 25 percent probability will not be sufficient and advisors will want to plan to the more conservative 10 percent probability.”  This adds about 4 years to the planned retirement length.

When to take CPP

Canadians can start collecting CPP anywhere between age 60 and 70, with 65 considered the “standard” starting age.  Starting CPP at 60 reduces benefits by 36%, and starting at 70 increases benefits by 42%.  These percentages are higher when the average industrial wage grows faster than inflation, as it has done on average.  The 36% reduction might be somewhat smaller if there are non-contributing years between age 60 and 65.

These decreases or increases in CPP benefits are permanent.  Consider twin sisters, Anna and Brie with identical CPP contribution histories.  Anna takes CPP at 60 and Brie waits until she’s 70.  Anna receives CPP payments for 10 years that Brie doesn’t get, but from age 70 for as long as they live, Brie’s monthly benefits will be 2 to 2.5 times those of Anna.

There are many factors to take into account in choosing when to start collecting CPP.  However, if we consider only an advisor’s financial interests, the decision is easy.  If the client takes CPP at 60, she will spend less of her savings, leaving more assets under management to generate income for the advisor.  With this in mind, let’s look at the authors’ list of “factors” to consider in the timing of CPP benefits.

“If the client receives the retirement benefit at an early age, does that reduce or eliminate the need to draw on investments to cover expenses?”  It’s important not to spend your savings down to zero leaving no margin for error, but as written, this question makes it seem like preserving all savings is vital.  There’s nothing wrong with spending down savings somewhat in anticipation of larger CPP benefits in a few years.  Focusing too much on preserving savings serves the advisor’s interests more than the client's.

“Many people believe that it’s best to take the benefit as soon as possible so as not to miss out should they die prematurely.  This approach has some merit for couples where each spouse is entitled to CPP/QPP is his or her own right [because CPP survivor benefits may be modest].”  It’s true that many people think this way, but the truth is that most people will ultimately get more from CPP if they wait to start.  Income for a surviving spouse is a consideration, but the advisor’s job is to work out what’s best for the client even when it goes counter to the client's emotional preference.

“If the client stops working at 60, but waits until 65 to apply for the benefit, … her record will show five years of zero contributions — which may reduce her entitlement when the retirement benefit is calculated.”  This is true, but the effect is often small enough that it’s still best for the client to delay CPP.

Among the techniques listed to smooth income over time and reduce “clawbacks and higher taxes rates” are “Taking CPP/QPP and OAS as early as possible,” and “Starting RRSP withdrawals earlier than required.”  In most cases, RRSP/RRIF withdrawals can be used to hit any desired level of taxable income.  Wealthy clients without RRSP savings could realize capital gains to hit an income target.  Needing to use CPP and OAS to increase income in a client's 60s appears to be rare.

All the information the authors provide about CPP would be useful to an advisor planning to do all the calculations necessary to determine what’s in the client’s best interests.  However, there is no direct guidance for doing these calculations.  This part of the book is more directly useful as a playbook for self-interested advisors to encourage their clients to take CPP early.

Pension or Commuted Value

When leaving a job with a pension plan, a big decision is whether to take the eventual monthly pension or take the commuted value of the pension to invest in a Locked-in Retirement Account (LIRA).  This is another example of a choice where advisor and client interests are not aligned; the advisor has nothing to manage if the client doesn’t take the commuted value.

In this case the authors do a good job explaining the considerations that go into making this choice.  I’ve seen too many cases where people (helped by an advisor) took commuted values when they shouldn’t have.  However, advisors not blinded by self interest could use the authors’ advice to come to a sensible decision for their clients.

Rolling RRSPs into RRIFs

Clients need to “make a new beneficiary designation when they roll an RRSP into a RRIF.”  “The designation that was made on the RRSP does not automatically carry over to the RRIF.”  That’s definitely something I could miss.  We’ll see if the calendar reminder I set will still be there that far into the future.

“Originally, financial planners were taught that the best approach to drawing funds from a RRIF was to wait until” age 71 to maximize “tax-deferred accumulation of funds.”  “The problem with this approach is that it sometimes results in a low taxable income between retirement and age 71, followed by required RRIF withdrawals that are higher than the client needs.”  The client may end up “in a higher tax bracket” and “may be subject to clawback of their OAS benefits (including GIS) and their age credit.”

“Today, most astute planners would agree that a more sensible approach is to create a level stream of income, including both registered and non-registered sources, throughout the retirement period.”  This is consistent with various retirement simulations I’ve done.

“To take advantage of the [$2000] pension income tax credit at age 65,” a client could “transfer at least a portion of his or her RRSP into a RRIF or annuity at that age.”  This makes sense, particularly if you’ve already decided to start drawing from RRSPs.


A big problem with common annuities is that their payments aren’t indexed to inflation.  I’m not aware of any insurance company in Canada that sells CPI-indexed annuities.  It seems the best you can do is add a fixed percentage annual increase to annuity payments, such as 2%.  However, the authors dismiss such increases as “costly as it increases the purchase price of the annuity.”

In a later section on choosing an annuity or a RRIF, inflation isn’t mentioned as a factor to consider.  Few people, including both clients and advisors, seem to understand the devastating effect decades of inflation can have on a retiree's income.  Even seemingly low inflation builds up significantly over time.  Clients considering fixed annuity payments seem unable to understand how much their buying power will erode after a decade or two have passed.

Reverse Mortgages

In an otherwise thorough discussion of reverse mortgages, not mentioned is a common clause that retirees must properly maintain their homes.  It’s common for people who’ve always kept nice homes to become old and unable to maintain their homes to a reasonable standard.  They stop caring about a broken deck, squirrels in the attic, or cat pee on the basement floor.  A motivated lender could use this clause to force such people out of a home when the reverse mortgage is no longer profitable for the lender.

Index Investing

It was good to see low-cost passive investing mentioned among more questionable investment choices such as segregated funds, guaranteed minimum withdrawal benefits, index-linked GICS, and principal protected notes.  As for mutual funds, according to Morningstar, in 2019 “the asset-weighted median expense ratio of equity funds in Canada is 2.28 percent, while the fixed-income funds come in at 1.49 percent.”  It would have been nice to see these costs illustrated with their effects over 25 years, 43% for equity funds and 31% for fixed-income, but at least these high costs were mentioned.  Index (passive) investing cuts these costs considerably.


At one point the authors describe TFSAs as “an even better shelter than registered savings, which are only tax-deferred.”  Some readers may take this to be true in general (it isn’t); it only sort of makes sense in the context where the comment appeared.  The context is the strategy of smoothing income in retirement by drawing down RRSPs before age 71.  If the withdrawals aren’t needed to live on, moving them to a TFSA has tax advantages.

In general, if your marginal tax rate (adjusted for relevant clawbacks) is the same when you contribute to an RRSP as when you withdraw, then RRSPs and TFSAs shelter you from taxes equally.  In the context of the strategy the authors were describing, a client would be changing the timing of RRSP/RRIF withdrawals to get a lower marginal tax rate.  The fact that a TFSA is involved in this strategy doesn’t somehow make TFSAs better than RRSPs.

Medical Expenses

“To maximize the benefit of the [medical expenses] tax credit, the lower-income spouse or partner should consider claiming the expenses for both.”  I ran into a case where this advice isn’t right.  If the lower-income spouse’s income is too low, it might be better for the higher-income spouse to make the claim.

Low Income Retirees

“Many Canadians will have modest incomes in retirement, but retirement planning advice often focuses on people with higher incomes.”  Very true.  It’s good to see a section on lower income retirees in a book aimed at financial advisors.

“Advice targeted at higher-income Canadians can be unsuitable for people retiring with lower incomes, because following it can lead to low-income retirees paying more tax in retirement or receiving smaller benefits from government programs.”  The existence of the GIS and other income-tested benefits causes low income retirees to have very high “marginal effective tax rates,” which changes what strategies they should follow.

Where to Live

The chapter on where to live in retirement is excellent.  It covers country property, seniors communities, snowbirds, moving to another country, foreign income taxes, retirement homes, and long-term care.  I found the extensive checklists for buying new or used condos valuable.

I have power of attorney documents set up, but something I’ve never thought about is that “Power of attorney documents should also be created in any place where you will be spending a lot of time.”  My POAs may not work well outside of Canada.


The chapter on insurance paints a picture of critical illness insurance and long-term care insurance as necessary for most retirees.  I would have thought Canada’s health care system would make these forms of insurance less important once you’re not protecting an income, but I don’t claim to have much expertise in this area.

On the subject of dental insurance, the authors make the sensible point that “the amount of coverage is rarely more than the cost of the insurance.  With the low amount of reimbursement, it can barely be considered insurance, and functions more like a ‘cost-smoothing’ mechanism.”  “A retiree is often better off opting out of dental insurance entirely.”

Some good advice on travel insurance: “When evaluating travel insurance providers, plans that pay for medical care directly instead of reimbursement for expenses is best.  It is also important to understand what the insurance company’s claim service is like.  Some provide an international number to call and then they take over.  Not all insurance providers will give that level of service.”  “The cost of travel insurance may be claimed as an eligible medical expense on your yearly tax return.”

The authors offer some reasons why a retired couple would need permanent life insurance, including “lost ability to income split,” and “any reduced benefit from the Canada Pension Plan.”  The fate of a surviving spouse is important to consider.  Not mentioned is the need for detailed calculation.  To start with, a single retiree eats less food, buys less clothing, and spends less than a couple in other ways.  So, it’s important to estimate the reduction in cash flow required by a single retiree compared to a couple.  Then comes calculating how after-tax income would drop if one spouse passed away at various ages.  Only then do we see if any life insurance is needed.  It could be that none is needed, or possibly just term life insurance for a decade.  Without performing these calculations, the image of a lonely retiree losing a spouse and struggling with money becomes just a way to sell expensive life insurance.

Estate Planning

I found the estate planning chapter to be a helpful overview.  An interesting problem I’ve seen multiple times is that “Some financial institutions incorrectly insist that their own form be used to convey POAs.  Clients should think carefully before they sign these forms.  Doing so could cause a previously drafted POA to be revoked.”

“One way for clients to [reduce probate fees] is to gift assets while they are still living.  Many retirees choose to help family members in this way, so that they have the pleasure of seeing their gift put to good use and benefiting others.”  This is what I plan to do.


This book addresses the many complex issues where clients need help from their advisors.  In general, the relevant factors in making these decisions are discussed.  However, advisors seeking to serve their clients’ best interests will need other resources for how to go about performing the necessary calculations to make these decisions.  Advisors blind to their own self interest will find that deciding these matters in their own favour requires few calculations, and they won’t need additional resources beyond pulling quotes selectively from the book.  The authors can’t be blamed if their book is misused in this way; after all, any tool can be used for good or bad purposes.  However, I would like to have seen parts of the book explore how to do the calculations behind making an important decision.

Monday, December 20, 2021

Behavioural Issues with Variable Asset Allocation

I recently adopted a specific type of dynamic asset allocation for my personal portfolio.  I call it Variable Asset Allocation (VAA).  It only deviates from my original long-term plan when the world’s stocks become pricey, but any time you change your long-term investing plan, there’s the possibility you’re just looking for a smart-sounding justification for giving in to your emotions.

It’s certainly true that I’ve been concerned for some time that stock prices are high and that the chances of a stock market crash have been rising.  But I know better than to join the chorus of talking heads predicting the imminent implosion of the stock market.  I don’t know what will happen to stock prices in the future.

I’m not tempted to just sell everything and wait for the crash.  It’s possible that stocks will keep rising, and when they finally do decline, it’s possible they’ll remain above today’s prices.  It must be sickening to wait for a crash that doesn’t happen.  This would have been the fate of someone who decided 5 years ago that prices were too high and sold out.

Whenever an investor sells completely out of stocks, the problem is when to get back in.  Sometimes, it’s a significant market decline that causes investors to sell all their stocks in fear.  Then they have to decide when it feels safe enough to buy back in.  Too often, they wait until prices are much higher than when they sold.  The same thing can happen to those who sell because they think stock prices are too high.  They can sit in cash waiting for the big crash that never comes.

So, could some form of this happen to me with my VAA?  The answer is no, but only if I follow VAA strictly.  With VAA, if my portfolio’s blended Cyclically-Adjusted Price-Earnings (CAPE) ratio exceeds 25, I add CAPE minus 25 (as a percentage) to my bond allocation.  For example, when the blended CAPE of my portfolio sits at 32, I add 32-25=7 percentage points to the bond allocation I would have had if the CAPE were below 25.

If stock prices rise, the CAPE rises, and if my bond allocation rises enough to trip my rebalancing threshold, I rebalance from stocks to bonds.  However, given that I’ve chosen to adopt VAA, selling stocks is easy because that’s what my emotions are already telling me to do.

What if stock prices go down by just enough to trip my rebalancing threshold?  VAA would have me buy back some stocks.  But what if I’m still nervous about owning too many stocks?  I might delay rebalancing, or worse, I might tinker with my VAA rules so that I don’t have to buy stocks.  This is the danger of constantly tinkering with long-term plans.  Even if each change has a smart-sounding reason, I might really be just giving in to emotions.

So, the real test of whether my switch to VAA is a fixed long-term plan will come if stock prices drop enough that my spreadsheet calls for rebalancing from bonds back to stocks.  I admit that when this happens, I likely won’t feel good about buying stocks, but my intention is to obey the spreadsheet.

Friday, December 17, 2021

Short Takes: Dynamic Asset Allocation, Canadian Bank Profits, and more

My post describing my plan to shift slowly out of stocks as the CAPE exceeds 25 drew some good comments.  Only one comment indicated a lack of interest in such a plan, but I suspect the majority of readers with indexed portfolios intend to stick with a fixed asset allocation that doesn’t take into account the CAPE.  For these investors, I wonder if they would keep owning the same percentage of stocks even if the CAPE doubles from its current level into the range of Japanese stocks before 1990.  If there is some stock price level at which you’d take some money “off the table”, then the difference between your plan and mine is that I start shifting slowly out of stocks at a CAPE of 25, and your threshold is higher.

I wrote one post in the past two weeks:

What to Do About Crazy Stock Valuations

Here are some short takes and some weekend reading:

Mikhail Samonov
explains why trying to use Shiller’s CAPE ratio to make hard switches between stocks and bonds is likely to fail.  Some form of dynamic asset allocation that makes gradual shifts between stocks and bonds is more likely to give satisfactory results.  My Variable Asset Allocation (VAA) approach is one I designed to try to reduce risk in expensive markets.

Steadyhand keeps tabs on Canadian bank profits.  “Nowhere in the world do banks earn this level of profit from their individual customers.”

Justin Bender brings us part two of his series on asset location strategies.  He explains the strategy he has named “Ludicrous”.  Any DIY investor who truly understands portfolio taxes and how they affect portfolio risk would never use this strategy.  It is based on the idea of maximizing your expected portfolio gains subject to the constraint of a particular before-tax asset allocation (BTAA).  However, it is your after-tax asset allocation (ATAA) that determines your expected returns and portfolio risk.  By following the Ludicrous strategy, you’re taking on more risk than you realize if you’re focusing on your BTAA, and you have all your low-return bonds in a tax-advantaged account.  This may be sensible for an advisor who wants to create riskier portfolios than the client realizes, but makes no sense for DIY investors.  I understand that there are also regulatory reasons why advisors are constrained to focus on BTAA, even though it is the ATAA that will determine the client’s financial fate.

Monday, December 13, 2021

What to Do About Crazy Stock Valuations

The last time I had to put a lot of effort into thinking about my finances was back when I retired in mid-2017.  I had ideas of how to manage my money after retirement, but it wasn’t until a couple of years had gone by that I felt confident that my long-term plans would work for me.  I had my portfolio on autopilot, and my investing spreadsheet would email me if I needed to take some action.

I was fortunate that I happened to retire into a huge bull market.  I got the upside of sequence-of-returns risk.  The downside risk is that stocks will plummet during your early retirement years, and your regular spending will dig deep into your portfolio.  Happily for me, I got the opposite result.  My family’s spending barely made a dent in the relentless rise of the stock market.

However, stock prices have become crazy, particularly in the U.S.  One measure of stock priciness is Robert Shiller’s Cyclically Adjusted Price-Earnings (CAPE) ratio.  In the U.S., the CAPE ratio is now just under 40.  The only other time it was this high in the last 150 years was during the dot-com boom in the late 1990s and early 2000s.  Just before the 1929 Black Tuesday stock market crash, the CAPE was only about 30.

Outside the U.S., prices aren’t as high, but they are still elevated.  My stock portfolio's blended CAPE is a little under 32 as I write this article.  Even if stock prices were cut in half, this would just bring the CAPE close to the average level over the past century.  To say that these thoughts made me think hard about whether I should change how I manage my portfolio is an understatement.

A change in thinking about high stock prices

For a long time, my thinking was to ignore inflated stock prices and just rebalance my portfolio as necessary to maintain my chosen asset allocation percentages.  I have a planned “glidepath” for my stock/bond mix that has me about 20% in bonds at my current age and increasing as I get older.  My bond allocation consists of cash and short-term bonds, and the rest is spread among the world’s stock indexes.  I saw no reason to change my plan as my portfolio grew.

Then a question changed my thinking.  If the CAPE rises to 50, or 75, or even 100, would I still want such a high stock allocation?  It’s not that I expect the U.S. or much of the rest of the world’s stocks to become as overvalued as Japanese stocks in 1990, but I should be prepared for how I’d respond if they do.

At a CAPE of 50, I wouldn’t want more than about half my money in stocks, and at 100, I wouldn’t want much in stocks at all.  So, even though I’m comfortable with 80% stocks at a blended CAPE of 32, something would have to change if the CAPE were to rise from 32 towards 50.

A first attempt

Once I realized I definitely would reduce my stock allocation in the face of ridiculously inflated markets, I had to work out the details.  I started with some rules.  First, I don’t want any sudden selloffs.  For example, I don’t want to hold a large stock allocation all the way up to a blended CAPE of 39.9 and suddenly sell them all if the CAPE hits 40.  A second rule was that I don’t want any CAPE-based adjustment to apply unless the CAPE is above some threshold level.

As the CAPE kept climbing, I felt some urgency to choose a plan.  My first attempt was to change nothing if the CAPE is under 30, and when it’s above 30, I multiplied my bond allocation by the CAPE value and divided by 30.  I implemented this idea in my portfolio as an interim plan before I analyzed it fully.

Another adjustment I made a little earlier was to reduce my expectation for future stock returns.  When the current CAPE is above 20, I now assume the CAPE will drop to 20 by the end of my life.  This doesn’t directly affect my portfolio’s asset allocation, but it reduces the percentage of my portfolio I can spend each year during retirement.  When stocks rise and the CAPE rises, my portfolio grows, and this increases how much I can spend.  But then this new rule reduces my assumed future stock returns, and reduces my safe spending percentage somewhat.  Increasing stock prices still allow me to spend more, but this rule slows down the increase in my spending.

A new simpler rule for adjusting my stock allocation based on high CAPE values

I’m still happy with the way I’ve adjusted my expectation for future stock returns when the CAPE is high, but I’ve changed the way I adjust my bond allocation to the CAPE.  I now have a simpler rule I named Variable Asset Allocation (VAA) that better matches my thinking about what I’d want if the CAPE got to 50 or 100.

VAA: If the CAPE is above 25, I add CAPE minus 25 (taken as a percentage) to my age-based bond allocation.  

For example, without VAA my current bond allocation based on my age is about 20%.  The current blended CAPE of my portfolio is about 32, so I add 32–25=7% to my bond allocation.  So, I’m currently 27% in bonds and 73% in stocks.

This might not seem like much of a bond allocation adjustment in percentage terms, but it’s a bigger adjustment in dollar terms.  Consider the following example.  Suppose a $500,000 portfolio with a 20% bond allocation sees a jump in the CAPE from 25 to 32.  This is a 28% increase in stock prices.  So, we started with $100,000 in bonds and $400,000 in stocks, and the stocks jumped in value to $512,000 for a total portfolio size of $612,000.  When we adjust the bond allocation to 27% in accordance with VAA, we have $165,000 in bonds and $447,000 in stocks.  Of the $112,000 jump in stock value, we shifted $65,000 over to bonds, and left only $47,000 of it in stocks.  Although the bond allocation went from 20% to 27%, a 35% increase, the dollar amount in bonds rose 65%.  This is a substantial shift, and it leaves a healthy bond buffer if stock prices subsequently crash.

Some analysis

One concern I had with adjusting my asset allocation based on the priciness of stocks is whether it produces reasonable stock and bond allocations across a range of CAPE values.  By design, VAA matches my intuition about bond allocations at different CAPE levels.  If the CAPE gets to 50 sometime soon, my bond allocation would go to 20+(50–25)=45%, which seems reasonable.  At a CAPE of 75, my bond allocation would be 70%, which also seems reasonable.  It’s possible that something about the world might change that makes high CAPE values seem sensible and that I’d want to own more stocks, but for now I’m happy to shift automatically away from stocks as the CAPE rises through crazy levels.

The following chart shows how a hypothetical portfolio using VAA responds to the CAPE rising from 25 all the way to 105.  We begin with $100,000 in bonds and $400,000 in stocks with the CAPE at 25.  The curves look smooth, but there are 27 rebalancing operations as the CAPE rises from 25 to 105.  Initially, as stock prices and the CAPE rise, we shift most of the stock gains to bonds.  As the CAPE gets into the low 40s, all stock gains are shifted to bonds, and as the CAPE exceeds 45, VAA shifts all the stock gains and more into bonds.

It’s not until the CAPE reaches about 60 that the dollar amount in stocks dips below the initial $400,000.  However, the dollar amount in bonds doubles by the time the CAPE reaches 35, and doubles again with the CAPE in the low 50s.  The idea of VAA is to take the huge stock gains that come with a rising CAPE and preserve them in safe bonds.  Why keep playing the risk game when you’ve already won?

Observe that if we had invested the whole $500,000 in stocks and the CAPE had risen from 25 to 105, we’d have $2.1 million instead of only $1.04 million with VAA.  So why bother with VAA?  The answer is that the CAPE almost certainly isn’t going to 105.  The higher it gets, the more likely stocks are to crash.

If stocks are going to crash, why not shift everything into bonds instead of messing about with VAA?  Stocks are certain to fluctuate, but we don’t know if or when they’ll have a big crash.  I have no interest in making a high-conviction bet about the stock market.  The idea of VAA is to capture some upside if stocks keep rising, and limit the damage if stocks crash.

The following chart shows the amount of stock gains we’d preserve if stocks start at a CAPE of 25 and later crash back to a CAPE of 25 after a period of rising.  We give three scenarios: VAA, maintaining an 80/20 stock/bond allocation, and 100% stocks.  As we see from the chart, if the CAPE gets to 45 before crashing back to 25, an all-stock portfolio preserves none of the stock gains, an 80/20 portfolio preserves $17,000, and VAA preserves $265,000.  VAA is the clear winner if stock prices decline enough to bring the CAPE back to historical levels at some point.

So far we’ve been talking about CAPE movements resulting from changes in stock prices.  Another way for the CAPE to move is from changes in corporate earnings, the denominator in a P/E ratio.  The chart above shows VAA’s margin of victory over other strategies when corporate earnings remain constant.  If the decline in the CAPE that brings it back to 25 is partially due to rising corporate earnings, then VAA’s margin of victory would be smaller.  However, VAA shines in any scenario with a significant drop in stock prices.

Rebalancing frequency

Another potential concern is whether I’d ever be rebalancing too often.  For example, could a very small change in stock prices trip a rebalancing trigger?  The short answer is no.  To protect me from trading too often, I have set my rebalancing thresholds such that the profits arising from rebalancing once in each direction are 20 times the trading costs in commissions and spreads.  Determining these thresholds requires some calculations that I have implemented in a spreadsheet.  For details, see the newly added section 8 of my paper Portfolio Rebalancing Strategy.

The main way I could end up trading too often is if there are anomalies with computing the CAPE that lead to its calculated value jumping up and down by enough to trigger spurious rebalancing.  I plan to protect against this by waiting until I see it happen and use my judgment in not rebalancing back-and-forth too often.

If my spreadsheet emails me with instructions to rebalance from bonds to stocks one week, and from stocks to bonds the next week, I can examine whether stock prices have really moved enough to justify rebalancing.  If not, I might suspect that the trigger for rebalancing is jitter in the calculated CAPE.  So far I’ve seen no indication of this problem.


I’m hopeful that I’ve chosen ways to respond to extreme CAPE levels that are measured, reasonable, and won’t need to be changed in the future.  Most importantly, I’ve implemented these plans in an emotionless spreadsheet that does all the work for me while I get distracted by more interesting pursuits than portfolio watching.

Friday, December 3, 2021

Short Takes: Safe Retirement Income, Buying Less Stuff, and more

BMO has expanded its marketing to me.  It used to just alternate between low-interest credit card balance transfer offers and offers to give me a few thousand dollars if I deposit a few million dollars in my account.  They seemed to figure out that I’m between those two extremes.  Now they want me to come in for a personalized financial plan because “Research shows that advised households accumulate 2.31 times more assets after 15 years!”  Of course, this research is deeply flawed.  Further, I’m not interested in their ridiculously overpriced mutual funds.

I wrote one post in the past two weeks:

A Conversation about Wealth Inequality

Here are some short takes and some weekend reading:

Morningstar Research
says the 4% rule is now more like a 3.3% rule, but that we can spend more safely if we’re flexible about adapting to market returns.  One part of the report that I disagree with is too much reliance on spending less as you age.  It’s true that you’ll probably naturally want to spend less when you’re 85 than when you’re 65.  However, it doesn’t make sense to plan for reduced real spending at too young an age.

Andrew Hallam makes a strong case for becoming happier by buying less stuff.

Justin Bender explains some key concepts about asset location strategies in both text and video.

Doug Hoyes
explains how debt settlement firms exploit people who need to file a consumer proposal.

Tuesday, November 30, 2021

A Conversation about Wealth Inequality

Please welcome a person I’ll call John Doe.  The following “interview” is loosely based on a real conversation with an acquaintance.

Michael James:  Hello, John.  Thanks for agreeing to discuss your ideas on wealth inequality.

John Doe:  I’m glad to be here.

MJ:  Let’s get right to it.  How can we solve the wealth inequality problem?

JD:  Nobody should be allowed to have more than a million dollars.

MJ:  Interesting.  Some people already have more than a million dollars.  What should we do about this?

JD:  Take it away.

MJ:  So, somebody should take away the excess above a million dollars.  Who should do that?

JD:  The government.

MJ:  I have some questions about how this would play out.  Let’s look at a specific case.  You work for the federal government, and your pension is currently worth about $1.2 million.  You also have about $400,000 of equity in your house.  It would be easy for the government to seize your bank accounts and your car, but how should they go about getting your excess $600,000?

JD:  What?

MJ:  You're a millionaire.  How should the government go about taking away the excess wealth you have in your pension and house?

JD:  They can’t touch my pension or house.

MJ:  Would that be an exception just for you?

JD:  No.  The government can’t touch anyone’s pension or house.

MJ:  Okay, so we’re refining the rule to ‘nobody should be allowed to have a million dollars, excluding pensions and real estate.’  Is that right?

JD:  Yes.

MJ:  What will we do about the housing supply problems when all the millionaires start buying more houses so the government won’t seize their assets?

JD:  Huh?

MJ:  If I had millions the government was about to seize, I’d buy a bunch of houses or maybe a big patch of land.  Then I could sell off a house or a strip of land once in a while to live rich.  Many wealthy people would have this idea.  Then people who aren't rich wouldn’t be able to find somewhere to live.  What will we do about this problem?

JD:  They can’t do that.

MJ:  What would stop them?

JD:  They can only have one house that’s not too big.

MJ:  Okay.  The next challenge would be rich people buying huge annuities or pensions to shelter their wealth.  I suppose this wouldn’t cause a new problem, but it’s an obvious workaround for the rule about limiting wealth.

JD:  They can’t do that.

MJ:  What will stop them?  Never mind.  Maybe it’s time to add some detail to your rule.  I’ll try to keep it consistent with your intent.  ‘The government should come up with a complex set of avoidance rules to limit people to a reasonable amount of real estate, a reasonable size of pension, and at most a million dollars in other assets.’  Does that sound right?

JD:  Yes.

MJ:  Most people who run medium and large businesses already have far more money than your proposed limits.  So, they have no incentive to keep working.  Having cable companies and banks shutting down would be inconvenient, but the most immediate problem would be the complete breakdown of the supply chain bringing food into cities.  What would you do about this problem?

JD:  That wouldn’t happen.

MJ:  If I already had more money than is allowed, there’s no way I’d keep working only to have my pay seized by the government.  Most rich people would simply stop working or leave Canada.  Having so many rich people who currently work in key positions suddenly quit would create chaos.  Food riots would be only weeks away.  What would you do about this?

JD:  They can’t quit.

MJ:  So everyone would be compelled to keep working?

JD:  Yes.

MJ:  That sounds like a huge political shift for Canada.  We’d be abandoning the Charter of Rights and Freedoms and moving to a communist-style state where the government tells people what jobs they have to do.  That’s a bold proposal.

JD:  I don’t want any of that.  I just don’t like seeing rich people who have more than I have.

MJ:  Everything has side effects.  We can probably find a way to reduce wealth inequality somewhat without devastating side effects, but you don’t seem to have it figured out yet.

JD:  Leave me alone.

MJ:  Thanks for coming by.

Friday, November 19, 2021

Short Takes: Commission-Free Trading, Asset Location, and more

It’s amazing how little that gets written about investing remains relevant once you’ve decided not to try to beat the market.  Even a great writer such as Morgan Housel has beating the market as the underlying motivation for much of his writing.  Once you choose indexing as an investment strategy, there’s little to do or say on a day-to-day basis other than enjoy other aspects of your life.

Here are my posts for the past two weeks:

Reboot Your Portfolio

Invest As I Say, Not As I Do

The Procrastinator’s Guide to Retirement

Here are some short takes and some weekend reading:

Preet Banerjee explains the good and bad parts of commission-free trading.  I definitely learned a few interesting things about how brokerages make their money.

Justin Bender explains key concepts about asset location decisions, including the main one that it is your after-tax asset allocation that determines your portfolio’s returns and not your before tax asset allocation.  This means that Justin’s asset location strategy that he’s named “Ludicrous” is actually a means of tricking yourself into having higher exposure to stocks than you think you have, as I explained in my article Asset Allocation: Should You Account for Taxes?  DIY investors are best off either using the same asset allocation in every account or, in rare cases, going all the way to Justin’s “Plaid” portfolio.

Jason Heath answers a question about whether it makes sense to withdraw $50,000 from an RRSP to make a lump sum mortgage payment to reduce future mortgage payments and improve future cash flow.  I found it interesting that the questioner didn’t even consider making a small RRSP withdrawal to cover one mortgage payment to free up a couple thousand dollars of cash flow and relieve the pressure.  This isn’t necessarily the best solution, but draining $50,000 from the RRSP is much more extreme.  Perhaps the questioner knows that having a couple thousand dollars available would make some frivolous spending irresistible.

Boomer and Echo explains how to make RRSP contributions and get tax reductions during the year instead of waiting until filing your taxes to get a big refund.

Thursday, November 18, 2021

The Procrastinator’s Guide to Retirement

David Trahair’s recent book The Procrastinator’s Guide to Retirement has a great title.  With so many Canadians fearful that they’re way behind on retirement readiness, this book seems like it could rescue them.  Unfortunately, the actual contents leave a lot to be desired.

The main idea is that if you save a lot of money every year during your last decade of work, you can build an acceptable retirement.  There are detailed examples overflowing with numbers where people whose big mortgage and child expenses fall away in time for a decade-long sprint to retirement.  However, if you can’t suddenly save a lot of money every year, this book offers no magic for building wealth.

Questionable Analyses and Advice

A chapter on whether to contribute to an RRSP or pay down your mortgage begins with a question whose answer “is obvious”: “Should I contribute to my RRSP or pay down my credit card, which is charging me 20 percent interest per year?”  Trahair proceeds to explain in detail that you’d have to earn a 28.6% return on your RRSP investment to do as well as paying down your credit card debt (assuming a 30% marginal tax rate).  However, he failed to take into account the tax deduction: you really need to earn ‘just’ a 20% return to do as well as paying off the credit card.  The curious thing is that he properly takes into account the RRSP tax deduction in an example on the next page.

“Contrary to what many people think, some professional money managers do consistently beat the market.”  “Simple strategies like ‘buy and hold’ may not work well.”  Steering readers to chase star mutual fund managers and market timing is terrible advice.

“Many people focus too much on fees.  Fees are a necessary part of the equation, but they can only be judged when compared to the value received.”  “That value should be measured in a performance report that shows rate of return (net of fees) compared to the relevant benchmark index.”  This just steers readers to the failed strategy of piling into last year’s best-performing mutual fund.

In a discussion of when to start CPP, Trahair says you need to ask yourself 4 questions.

1. “Do you need the money early?”  Without context, this is hard to answer properly.  It often makes sense to spend from your RRSP for a while and delay CPP, but a reader who thinks RRSPs should be preserved until age 71 might give the wrong answer for his or her case.

2. “If you don’t really need the money, are you in a low tax bracket?”  The idea is to take CPP early to boost a low taxable income, but once again, it may be better to boost income by drawing from RRSPs.

3. “Can you shelter your CPP pension from tax?”  The idea is that if you have RRSP room available, you can use your CPP to build RRSP savings.  This is often the opposite of what people should do, depending on other factors.

4. “Do you think your RRSP will grow at a higher rate than the penalty to elect early [7.2% per year] or the bonus to wait [8.4% per year]?”  Because CPP is indexed, these returns are above inflation.  Asking readers if they can beat these rates is mostly an overconfidence test.  To Trahair’s credit, he points out that “Those rates will be extremely difficult to beat after investment fees on a consistent basis.”

In an homage to one of his earlier books (that is no better than this one) Enough Bull: How to Retire Well Without the Stock Market, Mutual Funds, or Even an Investment Advisor (my review here), Trahair suggests “Maybe Simple GICs Are All You Need.”

“In Canada, males who reach the age of sixty-five are likely to live to age eighty-four (nineteen more years), and females who reach sixty-five can generally expect to live to age eighty-seven (twenty-two more years).”  “You should assume that you need to budget for approximately twenty years of retirement after age sixty-five.”  How does that make any sense?  That leaves about half of all people completely out of savings while they’re still kicking.  I guess the other half won’t need to eat cat food.

Another section promotes the idea of leasing a car in retirement to improve cash flow.  Auto dealerships love this idea.

Some Good Points

This book has some good points.  One that stood out for me concerned mutual fund dealers.

“I once had a client who had just emerged from bankruptcy, and her advisor was strongly pushing her to take out a loan to make an RRSP contribution.  She couldn’t control her spending but was being advised to immediately load up on more debt!  It didn’t make sense, but this kind of sales advice is often the result when there is financial incentive to sell, sell, sell.”

“Which fund do you think your advisor would rather sell you: Fund A, which pays him and his firm a trailer fee of 0.75 percent a year, or Fund B, which pays them 0.15 percent a year?  Of course, it is Fund A.  Which fund is better for you?  Fund B.  It’s a total conflict of interest.”


This book has a great title to draw in readers, but I can’t recommend its contents.

Wednesday, November 10, 2021

Invest As I Say, Not As I Do

When I answer investing questions for friends and family, I tend to steer them to simple solutions that are consistent with their level of interest in investing.  However, I run my own portfolio differently in certain ways.  In reading Dan Bortolotti’s excellent book Reboot Your Portfolio, I noticed that the advice I give usually matches his advice, and it’s my own portfolio choices that sometimes differ from what’s in the book.  Here I see if the differences between my portfolio and Bortolotti’s advice hold up to scrutiny.

Before I go any further, I want to be clear that this isn’t a case of me having a “smarter” portfolio where I’m actively trading to beat the market.  I steer people to low-cost passive investing and that’s what I use myself.  The main difference between me and other do-it-yourself (DIY) investors is the degree to which I’ve built most of the complexity of my portfolio into an elaborate spreadsheet that alerts me by email when I need to take some action.  I’m happy to automate complexity in this way and let the spreadsheet tell me what to do.  I can safely ignore my portfolio for months without worry.

Pay Yourself First

Bortolotti says “‘Pay yourself first’ has become a cliché because it works.”  “Sure, you could wait until the end of the month and then save whatever is left after paying all your expenses.”  “People following this approach rarely wind up with any surplus cash.”  “Make your savings a fixed expense, too, and you’ll be well on your way to meeting your investment goals.  It’s impossible to overstate how important this is.”

This is excellent advice.  I recommend it to my sons.  My wife and I never followed it ourselves.  From a young age we were used to only spending money on necessities.  It’s taken us decades to get used to spending money more freely.  During our working years, our savings rate bounced around, but it was rarely below 20%, and reached 80% for a while when the family income rose and the kids cost us less.  This wasn’t a case of us scrimping or having a savings target.  That’s just what was left after we bought what we needed and wanted.

Expected Future Returns

Vanguard research showed “that most of the techniques people employ to forecast future stock returns are utterly worthless.”  “So don’t get clever when you’re trying to estimate stock returns in your own financial plan.  That average over the very long term—about 5% above inflation—is a reasonable enough assumption.”

As a retiree, I find it wise to back off from the long term average of 5% and use 4%; I’d rather spend a little less starting now than be forced to spend a lot less in the future if stocks disappoint.

Bortolotti is right that P/E ratios have little predictive value.  I made this point myself recently.  However, long-term data show a consistent weak correlation between P/E levels and future stock returns.  This effect is almost unmeasurable over a year, and is very weak over a decade.  However, it builds over multiple decades.  I model this effect by assuming that P/E levels will decline to a more normal level by the time I turn 100, and corporate earnings will grow at an average rate of 4% annually above inflation over that time.  At the time of writing, this amounts to assuming stocks will return 2.6% above inflation over the rest of my investing life.  The missing 1.4 percentage points comes from the assumed drop in P/E levels over the decades.

The difference between my assumption of 2.6% and Bortolotti’s 5% is substantial.  It’s probably not important to those still a decade or more away from retirement; they have time to try to save more, work longer, or plan a more modest retirement.  Current retirees are another matter.  If they assume their stock allocation will beat inflation by 5%, high spending in early retirement could leave them with meagre later years.

Factor Investing

Investment research over the decades has shown that stocks with certain properties have outperformed.  These properties are called “factors,” and this whole area is sometimes referred to as “smart beta.”  Some well known factors are value (“stocks with low prices relative to their fundamentals”), small cap (small companies whose market capitalization is below some threshold), and momentum (“when stocks rise in price, they continue that trend for months before eventually settling back to earth”).

Although the research behind factor investing is solid, there is no guarantee that factors will outperform in the future.  There is good reason to believe that once people routinely invest in factors, the outperformance will decline or disappear.  Bortolotti makes a number of other good arguments for avoiding smart beta.  For myself, I decided years ago that the most solid factor was the set of stocks with both the small factor and the value factor.  Vanguard has a low-cost ETF for small value U.S. stocks with the ticker VBR.  So, for better or worse, I chose to make VBR part of my asset allocation.  Of all my deviations from Bortolotti’s advice, I find this one the hardest to defend.


The term “glidepath” refers to the path of your stock allocation percentage over time.  Bortolotti writes “there are occasions when it is appropriate to reconsider your asset allocation.  Your time horizon gets a little shorter every year, so you will want to reassess your portfolio’s risk level as you get older.”

I agree, but rather than reevaluating my portfolio’s risk level periodically, I’ve chosen a glidepath in advance.  My allocation to stocks drops slowly over time.  The process has some complexity, but that’s all buried in my spreadsheet.  If my slowly declining stock allocation happens to trigger the need to rebalance, I’ll get an email telling me what to do.

I’ve also decided to increase my fixed income allocation (cash, GICS, and short-term bonds) in proportion to the stock market’s P/E when this level is over a fixed threshold.  This is built into my spreadsheet so that if rising stock markets trigger the need for me to rebalance, I get an alert email.  Without this adjustment, my fixed income allocation would be about 20%, but the adjustment moves it up to 24% at the time of this writing.  This may not seem like much of an adjustment, but it’s large in dollar terms.  For the stock market P/E to get up to its current lofty level, stock prices had to rise substantially.  So, 24% of a larger portfolio is a lot more dollars than 20% of a smaller portfolio.  

In a technical sense, this part of my investing spreadsheet amounts to market timing.  However, the shifts are subtle, they take place over long periods, and they are fully automated.  I see this as very different from a nervous investor who suddenly decides to sell all his stocks.  I tend to think of this added money in fixed income investments when stocks are expensive as my answer to the question “Why keep playing the investment risk game when you’ve already won?”

U.S.-listed ETFs and Asset Location

“US-listed ETFs offer some advantages over those from Canadian providers.”  “The most obvious is lower fees.”  They are also “more tax-efficient in RRSPs [and RRIFs].”  “US securities held in RRSPs are exempt from [dividend] withholding taxes, thanks to a tax treaty between [the U.S. and Canada].”  This treaty doesn’t apply for Canadian-listed ETFs, even when they hold the same assets as U.S.-listed ETFs.

One downside of using U.S.-listed ETFs in your RRSPs is the need to trade in U.S. dollars.  This creates the need for either expensive currency exchanges or cheaper but complex Norbert’s Gambit currency exchanges.  Another downside is the complexity of trying to maintain near optimal asset location choices across your entire portfolio.  My spreadsheet figures this out for me, but I’d be frustrated if I had to figure it out every time I needed to trade.  Most DIY investors would struggle as well.

“I recommend that do-it-yourself investors stick to using ETFs that trade on the Toronto Stock Exchange.”  I make the same recommendation.  Bortolotti allows that “If you have large foreign equity holdings in your RRSP, and you’re an experienced investor who is comfortable with the added complexity, then you can make a good argument for US-listed funds, but only if you have US cash to invest or you’re able to convert your currency cheaply.”

I’ve recommended to my sons that they stick to Canadian-listed ETFs, but I use U.S.-listed ETFs in my own RRSPs.  The monthly savings my wife and I get from U.S.-listed ETFs and careful asset location choices is roughly equal to half of what we pay in income taxes each year since we retired.  To save this much, I’m happy to let my spreadsheet do the work.  I’d probably just use a single asset allocation ETF in all my accounts if I didn’t have the spreadsheet.


I’ve taken my shot at defending the ways my portfolio deviates from the advice I give others and the advice Bortolotti gives in his book.  However, I still consider myself to be strongly in the low-cost index investing camp.  In my view, those who pick some stocks on the side or time the market based on hunches are going further afield.

Tuesday, November 9, 2021

Reboot Your Portfolio

Dan Bortolotti is well known as the creator of the authoritative Canadian Couch Potato blog and podcast.  His latest book Reboot Your Portfolio: 9 Steps to Successful Investing with ETFs is my pick for best investing book for Canadians.  The writing is clear, the advice is practical, and it anticipates the challenges readers will have in following through on his 9 steps.  Whether you work with a financial advisor or manage your own investments, reading this book will make you a better investor.

Stop Trying to Beat the Market

One of the many strengths of this book is that Bortolotti explains why his advice makes sense without being dogmatic.  While explaining the advantages of investing in index exchange traded funds (ETFs), he allows that “Some skilled (or lucky) investors have been able to” “outperform the overall market,” but “research reveals that the probability of beating the market over the long term is distressingly low.”

“The first step in becoming a successful investor is to let go of” the idea “that investing is about trying to beat the market.”  Most people think they need to pick great stocks or find an advisor or star fund manager who can pick great stocks.  Ironically, it is this pursuit of outperformance that causes people’s portfolios to underperform.  Over the long term, markets provide excellent returns, and those who choose to capture these returns with minimal fees will do well.

Stock pickers may brag about their successes, but that doesn’t necessarily mean they outperform markets.  “Individual investors almost never calculate their returns accurately,” and they rarely talk about their failures.  Even well-known successful stock pickers like Benjamin Graham and Warren Buffett think most investors shouldn’t pick individual stocks.

Not So Fast

After you’re convinced that you’re better off not trying to beat the market, you might leap to “What ETF should I buy?”  But Bortolotti says that puts “the cart before the horse.”  First you need to set your financial goals and choose an asset allocation.

Even before worrying about financial goals, there may be debts to deal with.  “In most cases, you shouldn’t even think about investing until you’ve paid off any non-mortgage debt.”  Presumably this includes car loans, which makes sense to me, but others may disagree.  I’d go a little further: if your mortgage is larger than about two-thirds of the maximum a bank would lend you, it makes sense to at least split your savings between investing and making extra payments against your mortgage.  Just in case your life and investments don’t always have a smooth ride, avoiding ruin is more important than trying to squeeze out the last dollar of upside.

Asset Allocation

An important lesson about what it means to have an asset allocation is one “that many people never fully grasp.”  When you have new money to add to your portfolio, rather than ask yourself “is now a good time to buy stocks” (rather than bonds), you should just invest the money according to your long-term asset allocation.

While explaining the benefits of diversification, the author mentions Modern Portfolio Theory (MPT), but doesn’t go very deeply into it.  This is a good thing because that’s about all that makes sense in MPT.  Discussions of mean-variance optimization can sound impressive, but it often produces highly-leveraged portfolios.  All people should remember from MPT is that diversification is a good thing.

“It’s fine to change your asset allocation if you realize you overestimated your risk tolerance.”  Unfortunately, people tend to do this after stocks take a beating.  It’s not too bad to lower your stock allocation once, but if you raise your stock allocation again later when stocks seem safer, you’re just in a damaging buy high and sell low cycle.  It’s when stocks are high that it makes sense to think about how you’d feel if they dropped 40%.  This is a much better time to permanently reduce your stock allocation.

Bortolotti says you don’t need any asset classes other than stocks and high-quality bonds.  He recommends excluding real estate, preferred shares, junk bonds, gold, and other commodities.  He also argues against real return bonds because of their extremely long maturities.  “You don’t need that kind of volatility on the bond side of your portfolio, which is supposed to be the stabilizer.”  I think this argument carries over to any long-term bonds.  I prefer to stick with maturities of 5 years or less.

Taking Action

It’s only once you’ve examined your financial goals and chosen an asset allocation that it’s time to choose some ETFs and open some accounts.  At this point Bortolotti pauses to ask the reader whether do-it-yourself (DIY) investing is the right choice and “to consider the other options: hiring a human advisor or working with a robo-advisor.”  “Few people have the skill set or the desire to manage an ETF portfolio on their own.”

Although Bortolotti discloses that “I make my living as a portfolio manager and financial planner,” he paints a grim picture of your chances of finding a good full-service advisor.  Unless you have about half a million or more, “your choices may be limited to old-school salespeople who are paid by commissions,” which “creates an obvious conflict of interest.”  Even larger accounts are needed to get a break on fees.  “Although many advisors now include ETFs in their client portfolios, the vast majority use them in active ways, making tactical moves or choosing narrowly focused ETFs, which are very different from the ones I’ve recommended here.”

The author is much more upbeat about robo-advisors for those who don’t want to go the DIY route.  He provides practical advice about what you can expect from robo-advisors, even for people with small portfolios.  He continues with practical advice for DIY investors on choosing a discount broker, opening accounts, using limit orders, ETF liquidity, not trading ETFs when U.S. markets are closed, the anxiety you’ll feel making your first trades, and being wary of your brokerage trying to train you to become an active trader.

Leaving your advisor

Another good section is on “Cutting ties with your advisor.”  “Breaking loose from your advisor can be awkward if he or she is a friend or family member,” and “most people don’t relish the thought of firing someone.”  “When you break the news, don’t make it personal.  Just explain that you’ve done the research and concluded that active management is not worth the fees.”  “You should expect some pushback.”

If your advisor challenges the “research on the benefits of indexing,” “entering a debate” with your advisor” is “futile.  No active advisor is ever going to concede that indexing is a superior strategy.”  “You don’t need to change each other’s minds.”

Some advisors may try to scare you with the claim that “Active managers can protect you during a downturn,” but even if they succeed at selling out before the bottom, “these managers are often sitting on the sidelines when the markets rebound.”  Another scare tactic is the nonsensical claim that “ETFs are dangerous.”


Over time, your portfolio will deviate from your carefully-chosen asset allocation percentages.  Restoring these percentages is called rebalancing.  “Many people assume rebalancing is designed to boost returns, but that’s not necessarily the case.”  “The real goal is to keep your portfolio’s risk level consistent over time.”

The book covers the three ways of rebalancing, and rather than dogmatically picking one, “There’s no reason why you can’t use some combination of all three rebalancing strategies—by the calendar, by thresholds and with cash flows.”

It’s at this point that Bortolotti makes a strong case for asset allocation ETFs that hold all the asset classes he recommends and do the rebalancing for you.  This is likely the best and easiest option for DIY investors.  “If your equity allocation is a multiple of 20 … you can build your portfolio with a single fund.  If it falls between those numbers … then you can combine one of the all-equity ETFs with a bond ETF and, when necessary, rebalance with just two trades.”  This would work, but owning two asset allocation ETFs, say those with 60% and 40% equities to get to a desired target of 50%, would require much less rebalancing.

Staying on Track

It’s one thing to start on a sensible investing path, but staying on track is it’s own challenge.  “Analysis paralysis continues to afflict people even after they have implemented their new portfolio.  They second-guess their early decision as they do more reading or learn about more funds.”  “Investors may also feel paralyzed by the thought of investing a large sum.”

Media commentators make lots of pointless predictions designed to scare us into some sort of action.  They can’t just say the same thing every day: “investors should just stick to their long-term plans.”  “You should also keep in mind that many market commentators work in the financial industry.”  “They write for free simply to get exposure … and to make investors feel confused and uncertain so they can lure new clients.”

The urge to pick stocks can be powerful.  If you give in and buy stocks with some fraction of your portfolio, “The real risk here, in my view, isn’t that you will fail miserably as a stock picker; it’s that you will enjoy some initial success.”  If you decide your luck is actually skill, you might shift more of your savings to your risky stock picks that might fall flat later.

Other things that can knock you off course are “the urge to do something” when your long-term plan calls for sitting on your hands, “fear of missing out” on the latest big thing in investing, “overestimating your risk tolerance,” “believing the industry’s BS,” and “not giving [indexing] time to work.”


This book is now my number one choice for lending to friends and family who show some interest in investing.  When it comes to the investing part of personal finance, this book gives readers the tools they need to succeed, whether they invest on their own, use a robo-advisor, or work with a human advisor.

Friday, November 5, 2021

Short Takes: Cryptocurrency Experiment, Evergrande Crisis Explained, and more

I’m sometimes surprised by the things that make me happy.  Lately, whenever I look out at my pool and see that the water level is the same as it was the day before, I smile.  I didn’t realize it at the time, but a decade ago I had a repair done that left a small leak when some parts weren’t fitted together properly.  Each passing year the leak got a little bit worse.  It took me until three years ago to figure out what was wrong.  I began calling around to find someone who would replace the problem parts.  The job required cutting cement, a little digging, and patching the cement, so I needed someone with some skill and it wasn’t going to be cheap.

So far this story isn’t too surprising.  A guy who knows little about pools takes forever to find a problem.  The next part still feels surreal to me.  All the pool repair places just said no.  I called dozens over the three years, and sought recommendations from friends.  They could have asked for a high price, but they just weren’t interested.  Apparently, skilled workers were meeting high demands for new pools, and less skilled workers were handling the profitable pool openings and closings.  When the pandemic came along, these problems became worse as the demand for new pools grew and workers were understandably nervous about getting exposed to COVID-19.

As the leak got worse, I tried to stem it with some epoxy putty, but the leak reached the point where I was wasting about $1000 worth of water each season.  Fortunately, my now favourite pool company recently did the repair, and I’m still happy about it.

Here are my posts for the past two weeks:

Will Your Nest Egg Last if You Retire Today?

Saving for a Home is Possible

Here are some short takes and some weekend reading:

Andrew Hallam has an interesting take on cryptocurrencies.

Preet Benerjee
explains the Evergrande crisis clearly for nonspecialists in this video.

Dan Bortolotti has a new book out called Reboot Your Portfolio: 9 Steps to Successful Investing with ETFs.  He says “simplicity always trumps complexity.”  I agree, although I don’t mind letting a computer handle some complexity as long as my role remains simple.  Preet Banerjee interviewed Dan about his book on the Mostly Money podcast.

The Blunt Bean Counter explains some of the pitfalls in gifting money to your children to buy a house.  The main area of trouble comes if your child splits with a spouse.  In such a case, you may have been better off lending the money for the house instead of gifting it.  But even that becomes tricky because the courts often rule that a loan was really a gift.

Tuesday, November 2, 2021

Saving for a Home is Possible

It’s no secret that Canadian house prices have been rising rapidly in recent years.  Many young people feel that they’ll never be able to afford to buy a home.  However, as fast as house prices have been rising, the stock market has risen faster.

The following chart shows a decade of my cumulative investment returns compared to the rise in Canadian real estate prices.  There was nothing special about my returns over this period; the stock market was booming.  My investments were primarily in stock index ETFs, although my returns were reduced somewhat by the 20% or so I’ve had in fixed income since I retired in mid 2017. To measure real estate prices, I used Teranet-National Bank House Price Indexes for Toronto, Vancouver, and a composite index of all Canadian metropolitan areas.

The chart shows that even high-flying Toronto real estate didn’t keep up with my investments.   Vancouver real estate growth is a little further behind, and Canada as a whole is even further behind.

What is the lesson here?

Young people who began saving a down payment a decade ago could have seen their savings grow faster than house prices did.  Instead of wasting time worrying about real estate prices continuing to rise, it’s best to get down to the business of saving for a down payment.

Of course, there’s nothing wrong with renting a home.  By building savings, you are prepared to buy a home if the right conditions arise.  And if you choose to continue renting indefinitely, your savings will pay for rent in your retirement.  This is just one of many situations where taking action beats complaining.

Tuesday, October 26, 2021

Will Your Nest Egg Last if You Retire Today?

If you’re thinking of retiring today on your own savings rather than a guaranteed pension, how do you factor in the possibility of a stock market crash?  If you’re like many people, you just hope that stocks will keep ticking along with at least average returns.  However, this isn’t the way I thought about timing my own retirement.

I retired in mid 2017.  At the time, stock prices were high, so I assumed that the day after retiring, the stock market would drop about 25% or so, and then it would produce slightly below average returns thereafter.  By some people’s estimations, I over-saved, but I didn’t want to end up running out of money in my 70s and be forced to find work at a tiny fraction of my former pay.

What actually happened in the 4+ years since I retired was the opposite of a stock market crash.  My stocks have risen a total of 60% (11.5% compounded annually when measured in Canadian dollars).  If I had known what was going to happen, I could have retired much sooner.  But I didn’t know, so I have no regrets.  It’s better to have too much than too little.

If you want to retire today, you face an even worse dilemma than I did because stock prices are much higher than they were when I retired.  If I were retiring today, I’d factor in at least a 40% drop in stock prices the day after I left my job.  This isn’t a prediction; it just represents the possibility that stock prices could return to more normal levels in the coming years.

For many prospective retirees, thinking this way means they will have to save substantially more before they can retire, so this is very unwelcome news.  But simply hoping stocks keep climbing could lead to a meagre retirement if markets crash in the near future.

As usual, those who think the way I do and are already over-saving will believe this line of thinking.  Those who want to retire sooner on rosy stock market predictions will dismiss my thoughts.  In most markets, optimistic retirees fare reasonably well, but with stock prices at nosebleed levels, there is the possibility that optimists will be very disappointed.

Friday, October 22, 2021

Short Takes: Dividend Nonsense, Lingering Beliefs, and more

Recently, I saw another example of magical beliefs about dividends.  Nick Maggiulli makes the claim that the bulk of investor returns over time come from reinvested dividends.  In one 40-year example, the total return is 791% without reinvested dividends and 2417% with reinvested dividends.  Unsaid is that if you withdrew all price gains periodically (and thereby failed to reinvest them), the total return from just dividends would be far less than 791%.  

This isn’t hard to understand when you look at the situation clearly.  Suppose that over several decades dividends are responsible for doubling your investments twice, and capital gains are responsible for doubling your investments three times.  So, dividends alone would have given a 300% return, and capital gains alone would have given a 700% return.  But through the magic of compounding, reinvesting all returns gives five investment doublings, or a 3100% return.  

Dividend lovers like to compare the 3100% to the 700% and declare that the bulk of long-term returns come from dividends.  This is nonsense.  It would also be nonsense to compare the 3100% to the 300% and declare that the bulk of long-term gains come from capital gains.  The relative value of these two types of return is best viewed by looking at the doublings.  In this example, dividends are responsible for 40% of returns and capital gains 60%.  Clearly, both matter.

Here are some short takes and some weekend reading:

Morgan Housel
makes a strong case that our beliefs about the world can linger on while reality changes.  His best example is the changing demographics in China.  They are feeling the effects of their former one-child policy.

Doug Hoyes explains how people seeking debt relief with consumer proposals get scammed if they go to the wrong organization.

Justin Bender explains in detail how to track the Adjusted Cost Base (ACB) of asset allocation ETFs held in non-registered (taxable) accounts.

Robb Engen reviews Fred Vettese’s new book The Rule of 30.  Robb persuaded me to add this book to my reading list.

Friday, October 8, 2021

Short Takes: RRSP Withdrawals in Your 60s, Comparing Global Stock ETFs, and more

Here are my posts for the past two weeks:

Class Action Settlement with BMO

The Deficit Myth - Modern Monetary Theory

Here are some short takes and some weekend reading:

Jason Heath looks at reasons why it can make sense to withdraw from your RRSP in your 60s.  In my case, my simulations showed that it made sense to start withdrawing from my RRSPs shortly after retiring in my 50s.  This is true even though I have non-registered assets I could be living on right now.  The reason is that I’m best off spreading out the taxable income from RRSP withdrawals over many years.

Justin Bender compares the two main global except Canada stock ETFs: VXC and XAW.

Big Cajun Man is closing his TD mutual fund accounts after TD’s latest attempt to steer its customers away from its excellent e-series funds and toward their crappy high cost funds.

The Blunt Bean Counter
explains the implications of getting an inheritance.

Thursday, September 30, 2021

The Deficit Myth - Modern Monetary Theory

Before U.S. President Nixon abandoned the gold standard in 1971, anyone with U.S. dollars could exchange them for gold at a fixed price.  Now that the U.S. government (as well as other governments including Canada) can issue new money at will, we call it “fiat money.”  Stephanie Kelton, former chief economist on the U.S. Senate Budget Committee, claims that this ability to create money at will has profound implications that she explains in her book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy.  Modern Monetary Theory is certainly a different way to think about government finances, but whether it really has profound implications is less clear.

Under the gold standard, government finances resembled a family’s finances.  To run a deficit, the government had to borrow.  However, today the government can just create new money.  Governments typically choose to issue bonds (treasuries) to cover deficit spending, but such bonds are really just a different kind of money conjured out of thin air.  The government could just create as many dollars as it needs, but it chooses to create bonds that pay some interest.

When we understand fiat money, we see that the government can’t go broke because it can create new money at will.  This means the government could wipe out the national debt in seconds, and U.S. Social Security (or CPP and OAS in Canada) can’t run out of money as long as the government chooses to keep paying these benefits.

According to Kelton, it’s a myth that “deficits are evidence of overspending.”  In reality, it’s inflation that we should look to as evidence that governments are overspending.  When deciding what projects the government should take on, financial constraints and deficits aren’t the real concern; it’s resource constraints in the economy.  There have to be enough workers and other resources in the economy to do the work the government wants done.

Kelton explains that our real constraints come from trying to control inflation.  However, she doesn’t address these constraints in any more detail.  She lists many projects governments could take on, including providing jobs guarantees, providing health care, improving education, fixing infrastructure, and addressing global warming.  She says we can ignore deficits in these pursuits, but how do we know we won’t end up with high inflation?

Kelton needs to make a case that we can pursue ambitious programs without causing inflation, but she leaves this unaddressed.  If it turns out that inflation is closely linked to deficits (perhaps with time lags), then our current focus on controlling deficits would be little different from Modern Monetary Theory’s focus on inflation.  They would be saying the same thing with different words.  I suspect they’re not saying entirely the same thing, but the degree to which they differ is hard to say.

Modern Monetary Theory (MMT) calls for a federal jobs guarantee.  The idea is that any unemployed person should be able to get a job with the government at a rate of pay slightly below the lowest pay in the private sector.  I see some challenges.  How do you deal with people who want to be paid but don’t want to work much?  How do you deal with aspiring workers who have physical or mental problems that prevent them from getting much work done?  If you employ such people, how do you prevent others from pretending to have such problems?  How do you avoid corruption among those who run such programs (e.g., no-show jobs)?  How do you avoid having some young people give up on their education and take a guaranteed job?  Maybe none of these concerns is a show-stopper, but I’d be interested in seeing solutions.

The best parts of this book explained the implications of fiat money.  While many people understand that governments can just create new money, the full implications of this fact aren’t obvious.  However, it’s not clear to what extent MMT is really a new financial theory, and to what extent it’s just a different way to express conventional ideas.

Wednesday, September 29, 2021

Class Action Settlement with BMO

BMO was sued in a class action lawsuit for charging undisclosed fees on foreign exchange conversions in customers’ registered accounts between 2001 and 2011.  Customers of BMO Nesbitt Burns, BMO InvestorLine, and BMO Trust Company will get their share of the settlement before Oct. 8.

A decade ago I calculated that I had spent $7374 in currency exchange costs while trading U.S. stocks since I had opened trading accounts at BMO InvestorLine.  When I heard about the class action settlement with BMO, I figured I’d only get back a tiny fraction of this money.  However, my wife and I are pleased to be getting a total of $2051 plus $955 in interest.

It would be nice if BMO’s response to this lawsuit was to charge sensible foreign exchange fees, but they are much more likely to simply be more careful about meeting some legal standard of disclosure.  Unwitting customers will continue to rack up unreasonably high foreign exchange costs.

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 CCP 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-year 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 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.