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.


  1. Thanks for the mention, Michael. Another point I failed to mention is that a lot of complex strategies assume investing in a taxable account where the investor is in the highest marginal tax bracket. That advantage clearly doesn't apply to the average Redditor investing $10,000 in a registered account.

    As for benchmarking, how can you possibly know if your judgements are adding any value whatsoever over a rules-based passive fund without making that direct comparison.

    I know for me it wasn't until I started comparing my own dividend stocks picks to CDZ (and also with an eye to the TSX and S&P500) that I realized I would be better off buying index funds.

    Investing without a benchmark is how mutual fund investors fail to see that their managed funds are underperforming. They think their funds have done "okay" with average returns of 5%. Meanwhile, an appropriate passive benchmark returned 7% or more. I see it all the time.

    1. Hi Robb,

      Yes, you have to pick a tax rate to show performance numbers in any portfolio example, and most of the public descriptions assume the top marginal tax rate. I can tell you that for my own portfolio, my marginal tax rate is lower. With some of our future spending being capital in taxable accounts and some from TFSAs (neither of which is taxed), and with my wife and I splitting income, our annual spending can get very high without getting to high marginal tax rates.

      You make good points about benchmarking. I understand that it's work and may bruise the ego, but those aren't good reasons to avoid it.

  2. Hey Michael, there is always the ctrl + or - to save the day if you don't like the font size.

    As a future topic suggestion, have you ever investigated Stakeholder vs shareholder investing? There seems to be a lot thrown about in various media these days about it. I have even seen this brought up as a voting topic in LB's shareholder meeting and Capital Power seems to be on board with it. If there is a shift to stakeholder investing, what are the implications for investors? I could see lower returns for those in retirement that had invested long term in companies that make that shift if this was to occur.

    1. Hi Paul,

      There has always been a battle among shareholders, bondholders, and employees for power over the actions of a company. It's hard to tell if there is meaningful shift of power away from shareholders, or whether companies are just paying lip service to the needs of non-shareholders. If such a trend exists, it would reduce profits, which would cause a drop in share prices. However, once the level of shareholder power stabilizes, I don't see why returns on stocks would be lower. Returns might actually be higher because risk to shareholders would be higher. (Of course, share prices would have to drop even more to increase the size of returns.) Another effect would be that it would be harder for companies to raise capital. Shareholders would look for companies that don't favour non-owners' interests.

  3. Thanks for your reply. I totally agree. It seems like a slow self destructive process for exactly what you write in your last sentence. I also believe the massive positive marketing for ESG investing is the gateway and eventual means to get to Stakeholder investing. It will slowly change the culture and the structures of companies making them address the demands with more than just lip service. They will demand changes that don't add real value.
    When I read the demands that were asked of Laurentian Bank to vote on for example, i have to say I was concerned. Wording like - Forcing successful board members to leave after 10 years "to avoid a club like atmosphere..." - very strange request IMO. This would make space for new "administrators", for example replaced with a recent ESG hire that may not have as good a business sense vs. a cultural focus component causing conflicts in the companies direction.