Friday, July 30, 2021

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

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

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

How to Retire Happy, Wild, and Free

Here are some short takes and some weekend reading:

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

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

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

Wednesday, July 28, 2021

How to Retire Happy, Wild, and Free

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Friday, July 16, 2021

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

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

Here are my posts for the past two weeks:

How to Respond to Rising Stock Markets

Responses to Emails I Usually Ignore

Here are some short takes and some weekend reading:

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

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

Friday, July 9, 2021

Responses to Emails I Usually Ignore

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


Dear Darcey,

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




Dear George,

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




Dear Julia,

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



Wednesday, July 7, 2021

How to Respond to Rising Stock Markets

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

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

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

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

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

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

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

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

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

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

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

Friday, July 2, 2021

Short Takes: TFSA Penalties, Dividend Myths, and more

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

I managed only one post in the past two weeks:

Portfolio Optimization Errors

Here are some short takes and some weekend reading:

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

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

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

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