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 Your 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.”

Conclusion


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.

Glidepath


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.

Conclusion

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.”

Rebalancing


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.”

Conclusion

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.