Friday, August 27, 2021

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

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

Here are my posts for the past two weeks:

Narrative Economics

Retirement for the Record

Here are some short takes and some weekend reading:

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

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

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

Monday, August 23, 2021

Retirement for the Record

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

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

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

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

The Good

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

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

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

The Not So Good

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

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

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

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

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

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

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


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

Monday, August 16, 2021

Narrative Economics

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

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

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

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

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

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

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

Friday, August 13, 2021

Short Takes: In Praise of Small Steps

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

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

Here are some short takes and some weekend reading:

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

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

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

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