Friday, September 23, 2022

Short Takes: Investment Signs, Alternative Asset Class Returns, and more

I’ve been reading a lot lately about how a recent ruling in Ontario has crushed the hopes for making the designation “Financial Advisor” meaningful.  Sadly, this is hardly surprising.  The big banks want to be able to call their employees financial advisors.  Banks will always be formidable foes, and any designation a bank employee is able to hold is necessarily meaningless.  Bank financial advisors may mean well, but they are no match for the carefully constructed banking environment that forces them to sell expensive products to unwary customers.

I wrote one post in the past two weeks:

Nobody Knows What Will Happen to an Individual Stock

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand has an entertaining and important list of investment signs we should look for.

Ben Felix and Cameron Passmore come up with estimates of returns for alternative asset classes including private equity, venture capital, angel investing, private credit, hedge funds, private real estate, and cryptocurrencies.  I don’t know much about most alternative asset classes, but I do have a way of modeling investing in things you don’t understand.  Just load your cash into a device most people have in their backyards, spark it up, and feel the heat of investing for your ego.

Morgan Housel explains how incentives can bend our definitions of right and wrong, even though few of us believe this is true of ourselves.  This reminds me of discussions about Nortel after the tech bubble burst.  The CEO cashed in stock options for a 9-figure payday before the stock burned to the ground.  It was widely believed that the CEO had taken actions to enrich himself at the expense of the company’s future health.  However, when I asked these people if they could have resisted hundreds of millions of dollars themselves, they all said they would have resisted.  I guess I’m the only one in the world who doubts whether his morals would have survived such temptation.

Tuesday, September 20, 2022

Nobody Knows What Will Happen to an Individual Stock

When I’m asked for investment advice and I say “nobody knows what will happen to an individual stock,” I almost always get nodding agreement, but these same people then act as if they know what will happen to their favourite stock.

In a recent case, I was asked for advice a year ago by an employee with stock options.  At the time I asked if the current value of the options was a lot of money to this person, and if so, I suggested selling some and diversifying.  He clearly didn’t want to sell, and he decided that the total amount at stake wasn’t really that much.  But what he was really doing was acting as though he had useful insight into the future of his employer’s stock.

He proceeded to ask others for advice, clearly looking for a different answer from mine.  By continuing to ask others what they thought about the future of his employer’s stock, he was again contradicting his claimed agreement with “nobody knows what will happen to an individual stock.”

Fast-forward a year, and those same options are now worth about 15 times less.  Suddenly, that amount that wasn’t that big a deal has become a very painful loss.  He has now taken advantage of a choice his employer offers to receive fewer stock options in return for slightly higher pay.  It’s hard to be sure without seeing the numbers, but in arrangements I’ve seen with other employers, a better strategy is to take the options and just sell them at the first opportunity if the stock is far enough above the strike price.  Again, he’s acting as though he has useful insight into the future of his employer’s stock.

The lesson from this episode isn’t that people should listen to me.  I’m used to people asking me for advice and then having my unwelcome advice ignored.  What I find interesting is that even if I can get someone to say out loud “I don’t know what’s going to happen to any individual stock,” they can’t help but act as though either they know themselves, or they can find someone who does know.

Friday, September 9, 2022

Short Takes: Microsoft Class Action, New Tontine Products, and more

I finally got my $84 from the Microsoft software class action settlement.  As I predicted 19 months ago, I had forgotten about this lawsuit, and when the money arrived, it brightened my day (at least until I had to fight with Tangerine’s user interface to figure out how to deposit a paper cheque).  I’m not sure why it pleases me so much to get these small sums from class actions, but I’ll keep putting in claims when it’s convenient to do so.

Here are some short takes and some weekend reading:

Jonathan Chevreau describes Moshe Milevsky’s latest work on tontines to solve the difficult problem of decumulation for retirees.  Milevsky says “until now it’s all been academic theory and published books, but I finally managed to convince a (Canadian) company [Guardian Capital] to get behind the idea.”  Guardian Capital offers 3 solutions based on Milevsky’s ideas.  I’ve complained in the past that academic experts such as Moshe Milevsky and Wade Pfau write about the benefits of idealized products, such as fairly-priced annuities, but that these products don’t exist in the real world.  Every time I dig into the details of existing products, I find some combination of excessive fees and poor inflation protection.  Perhaps these experts feel the same frustration.  Hopefully, these latest products from Guardian are better.

Robb Engen at Boomer and Echo takes an interesting look back at what would have happened if he had invested differently back in 2015.  He tried several alternate investing strategies.  His actual investing approach fared well compared to what would have happened if he had stuck with dividend investing.  However, shifting to a U.S. stock index would have given the best outcome.  This kind of thinking is harmless as long as you treat it as just fun as Robb does, and you don’t get upset over what might have been.  There’s always going to be some choice you could have made differently that would have worked out better.

Friday, August 26, 2022

Short Takes: Portfolio Construction, Switching Advisors, and more

I haven’t found much financial writing to recommend lately, and I haven’t written myself, so I thought I’d write on a few topics that are too short for a full-length post.

Be ready for anything

I sometimes see this advice in portfolio construction: be ready for anything.  On one level this makes sense.  It’s a good idea to evaluate how it would affect your life if stocks dropped 40% or interest rates rose 5 percentage points.  Would you lose your house or would it just be a blip in your long-term plans?

However, those who give this advice sometimes use it to mean that you should own some of everything that performs well in some circumstances.  So they advocate owning gold, commodities, Bitcoin, and other nonsense along with stocks and bonds.

Just because you always own at least one thing that is rising doesn’t mean your overall portfolio will do well.  What you want is a portfolio that is destined to do well over the long term, with the caveat that you’ll survive any shocks along the way.  This means controlling leverage and risk.  It doesn’t mean you should own a bunch of unproductive assets.

Switching advisors

“My guy has done very well for me.” People think their returns come from their advisors’ great choices, but returns really come from a rising market.  When markets inevitably fall, many of these people will dump their advisors looking for something that doesn’t exist: an advisor who can steer them away from losses.  What a good advisor can do is help you choose a sensible risk level, keep you from making impulsive decisions, tax planning, and other services unrelated to portfolio construction.

How I would run my portfolio if it weren’t automated

For a DIY index investor, my portfolio is fairly complex.  I’m able to maintain it with little work because I run it with an elaborate spreadsheet that automates almost all decisions.  What would I do if I couldn’t automate it this way?  I’d own just VEQT for stocks, and a mix of VSB and high-interest savings accounts for my fixed income.  I need to be able to ignore my portfolio for weeks at a time without anything bad happening.


It’s not hard to compare the premiums of insurance policies from different insurance companies.  What is difficult is figuring out whether they’ll pay you or fight you if you make a large claim.   If I had useful information about which insurance companies are fair and which are most aggressive in denying claims, I might be willing to pay a higher premium to a better company.

Friday, August 12, 2022

Short Takes: Factor Investing, Delaying CPP and OAS, and more

I haven’t written much lately because I’ve become obsessed with a math research problem. I’ve also had an uptick in a useful but strange phenomenon.  I often wake up in the morning with a solution to a problem I was thinking about the night before.  Sometimes it’s a whole new way to tackle the problem, and sometimes it’s something specific like a realization that some line of software I wrote is wrong.  It’s as though the sleeping version of me is much smarter and has to send messages to the waking dullard.  Whatever the explanation, it’s been useful for most of my life.

Here are some short takes and some weekend reading:

Benjamin Felix and Cameron Passmore discuss two interesting topics on their recent Rational Reminder podcast.  The first is that they estimate the advantage factor investing has over market cap weighted index investing.  They did their calculations based on Dimensional Fund Advisor (DFA) funds used in the way they build client portfolios.  They also take into account the difference between DFA fund costs and the rock-bottom fund costs of market cap weighted index funds.  The result is an expected advantage of 0.45% per year for factor investing.  Others would be tempted to try to justify a much larger advantage, but to their credit, Felix and Passmore came up with a realistic figure.  As far as I could tell, this figure doesn’t take into account their advisor fees.  So they still have to sell the value of their other services to potential clients rather than claim these services come “for free” with factor investing.  The second interesting topic is a discussion of a study showing that “couples who pool all of their money (compared to couples who keep all or some of their money separate) experience greater relationship satisfaction and are less likely to break up.  Though joining bank accounts can benefit all couples, the effect is particularly strong among couples with scarce financial resources.”  Although my wife and I never joined bank accounts, we do think of all we have as “ours” instead of “yours” and “mine”.  For example, which one of us gets cash from a bank machine or pays the property taxes is determined by convenience rather than some division of expenses.  However, it appears that this study would lump us in with the group that didn’t pool their money.

Robb Engen at Boomer and Echo does an excellent job illustrating the power of delaying CPP and OAS to age 70 for certain retirees.  However, this creates what he calls the Retirement Risk Zone, during which the retiree spends down assets in anticipation of large CPP and OAS payments at age 70.  This approach makes a lot of sense for those with average health and enough assets to get through the Retirement Risk Zone, but most people are very resistant to this idea.

Neil Jensen announces that Tom Bradley of Steadyhand Investment Funds was inducted into the Investment Industry Hall of Fame.  Tom Deserves it.  He created an investment firm that focuses on client success rather than treating client assets like an ATM, and he regularly writes articles that teach important investment concepts in an age when we see so much useless commentary on stock prices.

Friday, July 15, 2022

Short Takes: Savings Account Interest, Reverse Mortgages, and more

EQ Bank says they’re “excited to announce an increased interest rate!”  It’s now 1.65%.  Meanwhile, Saven is up to 2.85%.  Unfortunately, Saven is only available to Ontarians.  It’s normal for banks to offer different rates, but the gap down to EQ is disappointing.  Fortunately, the fix is easy; with just a few clicks, my cash savings are mostly in Saven.

Here are my posts for the past four weeks:

A Failure to Understand Rebalancing

Portfolio Projection Assumptions Use and Abuse

Here are some short takes and some weekend reading:

Jason Heath explains the advantages and disadvantages of reverse mortgages compared to other options.  He does a good job of covering the important issues, but doesn’t mention home maintenance.  With reverse mortgages, the homeowner is required to maintain the house to a set standard.  It’s normal for people’s standards for home maintenance to decline as they age, sometimes drastically when they don’t move well and can’t afford to pay someone else to do necessary work.  Reverse mortgage companies have no reason to go around forcing seniors out of poorly-maintained homes now, but once they have a lot of customers who owe more than their homes are worth after costs, their attitude is likely to change.

Robb Engen at Boomer and Echo
defends some aspects of mental accounting and sees problems with others.  Here is my thinking.  I see some forms of mental accounting as a rational response to the fact that the time and effort we put into making decisions has a cost. So, if we’re trying to be rational and account for all relevant costs when making decisions, we have to limit the time we spend making decisions. This necessarily means using easy rules of thumb (or mental accounting rules) that we only examine infrequently.  However, these rules of thumb do have to be examined occasionally to make sure they’re not wrong.

Big Cajun Man
says Nortel is still paying him tiny amounts he’s owed.  He also makes a good point about clutter costing money.

Thursday, July 7, 2022

Portfolio Projection Assumptions Use and Abuse

FP Canada Standards Council puts out a set of portfolio projection assumption guidelines for financial advisors to use when projecting the future of their clients’ portfolios.  The 2022 version of these guidelines appear to be reasonable, but that doesn’t mean they will be used properly.

The guidelines contain many figures, but let’s focus on a 60/40 portfolio that is 5% cash, 35% fixed income, 20% Canadian stocks, 30% foreign developed-market stocks, and 10% emerging-market stocks.  For this portfolio, the guidelines call for a 5.1% annual return with 2.1% inflation.  This works out to a 2.9% real return (after subtracting inflation).

We’ve had a spike in inflation recently, but these projections are intended for a longer-term view.  The projected 2.9% real return seems sensible enough.  Presumably, if inflation stays high, then companies will get higher prices, higher profits, their stock prices will rise, and the 2.9% real return estimate will remain reasonable.  Anything can happen, but a sensible range of possibilities is centered on about 3%.

However, the projections document has an important caveat: “Note that the administrative and investment management fees paid by clients both for products and advice must be subtracted to obtain the net return.”  For a typical advised client, total fees for products and advice can be around 2%, leaving only a real return of 0.9% for the client.

This creates a dilemma for the advisor: to use 2.9% and conveniently forget to subtract fees, or use the embarrassingly low 0.9% that will surely make clients unhappy.  It’s easy enough to justify using the larger figure; just pretend that great mutual fund selection will make up for the fees, even though all the evidence proves that this rarely happens.

But it gets worse.  The guidelines offer some flexibility: “financial planners may deviate within plus or minus 0.5% from the rate of return assumptions and continue to be in compliance with the Guidelines.”  So, unscrupulous advisors can lower inflation by 0.5% and raise all return assumptions by 0.5% to get a 3.9% expected return assumption (if they conveniently forget about fees) and still claim to be following the guidelines.

The typical problem with sophisticated portfolio projection software and spreadsheets is the return assumption baked into them.  No matter how impressive the output looks, it’s only as good as the underlying assumptions.

Monday, June 27, 2022

A Failure to Understand Rebalancing

Recently, the Stingy Investor pointed to an article whose title caught my eye: The Academic Failure to Understand Rebalancing, written by mathematician and economist Michael Edesess.  He claims that academics get portfolio rebalancing all wrong, and that there’s more money to be made by not rebalancing.  Fortunately, his arguments are clear enough that it’s easy to see where his reasoning goes wrong.

Edesess’ argument

Edesess makes his case against portfolio rebalancing based on a simple hypothetical investment: either your money doubles or gets cut in half based on a coin flip.  If you let a dollar ride through 20 iterations of this investment, it could get cut in half as many as 20 times, or it could double as many as 20 times.  If you get exactly 10 heads and 10 tails, the doublings and halvings cancel and you’ll be left with just your original dollar.

The optimum way to use this investment based on the mathematics behind rebalancing and the Kelly criterion is to wager 50 cents and hold back the other 50 cents.  So, after a single coin flip, you’ll either gain 50 cents or lose 25 cents.  After 20 flips of wagering half your money each time, if you get 10 heads and 10 tails, you’ll be left with $3.25.  This is a big improvement over just getting back your original dollar when you bet the whole amount on each flip in this 10 heads and 10 tails scenario.  This is the advantage rebalancing gives you.

However, Edesess digs further.  If you wager everything each flip and get 11 good flips and 9 bad flips, you’ll have $4, and with the reverse outcome you’ll have 25 cents.  Either you gain $3 or lose only 75 cents.  At 12 good flips vs. 12 bad flips, the difference grows further to gaining $15 or losing 94 cents.  We see that the upside is substantially larger than the downside.

Let’s refer to one set of 20 flips starting with one dollar as a “game.”  We could think of playing this game multiple times, each time starting by wagering a single dollar.  Edesess calculates that “if you were to play the game 1,001 times, you would end up with $87,000 with the 100% buy-and-hold strategy,”  “but only $11,000 with the rebalancing strategy.”

The problem with this reasoning

Edesess’ calculations are correct.  If you play this game thousands of times, you’re virtually certain to come out far ahead by letting your money ride instead of risking only half on each flip.  However, this is only true if you start each game with a fresh dollar.

In the real world, we’re not gambling single dollars; we’re investing an entire portfolio.  If one iteration of the game goes badly, there is no reset button that allows you to restore your whole portfolio so you can try again in a second iteration of the game.

Edesess fundamentally misunderstands the nature of rebalancing and the Kelly criterion.  They don’t apply to how you handle single dollars or even a subset of your portfolio; they apply to how you handle your entire portfolio.  If you have a bad outcome and lose most of your portfolio, the damage is permanent; you don’t get to try again.  Unless you’re a sociopath who invests other people's money in insanely risky ways hoping to collect your slice from a big win, you don’t get to find more investment suckers to try again if the first game goes badly.

Warren Buffett has said “to succeed you must first survive.”  This applies here.  The main purpose of rebalancing is to control risk.  It may be true that several coin flips could turn your $100,000 portfolio into tens of millions, but it could also turn it into less than $1000.  The rebalancing path is much smarter; it will give you more predictable growth and make a complete blowup much less likely.  It turns out that the academics understand rebalancing just fine; it’s Edesess who is having trouble.

Friday, June 17, 2022

Short Takes: Dividend Irrelevance, Housing Bears, and more

A popular type of investing is factor investing.  This means seeking out companies with attributes that performed strongly in the past, such as small caps (low total market capitalization) and value stocks (low price-to-earnings ratios).  I can’t say I’ve studied this area extensively, but one observation I’ve made is that these factors always seem to disappoint investors after they become popular.

It’s hard to figure out exactly why factors seem to disappoint, but I’m not inclined to pay the extra costs to pursue factor investing beyond my current allocation to stocks that are both small caps and value stocks.  Several years ago this combination was my best guess of the factor stocks most likely to outperform.  I’m still not inclined to try others.

Here is how I think about whether someone is ready for DIY investing:

What You Need to Know Before Investing in All-In-One ETFs

Here are some short takes and some weekend reading:

Ben Felix
explains why dividends are irrelevant.  His extensive references to peer-reviewed literature make his arguments tough for dividend lovers to refute, but they can always go with “ya, well, I like Fortis.”

John Robertson
hasn’t found it easy being a housing bear over the years, but now that prices are falling, he looks at what type of buyer would enter the market at different reduced price levels.

Justin Bender examines the merits of bond ETFs vs. GIC ladders.  Investors who want to reduce duration to reduce interest rate risk can consider an ETF of short-term bonds as well.  The way I look at the bond duration choice is whether I’d be happy to hold a 10+ year bond to maturity at current interest rates.  Interest rates have improved lately, but I still prefer to stick with short duration for now.

Thursday, June 9, 2022

What You Need to Know Before Investing in All-In-One ETFs

I get a lot of questions from family and friends about investing.  In most cases, these people see the investment world as dark and scary; no matter what advice they get, they’re likely to ask “Is it safe?”  They are looking for an easy and safe way to invest their money.  These people are often easy targets for high-cost, zero-advice financial companies with their own sales force (called advisors), such as the big banks and certain large companies with offices in many strip malls.  An advisor just has to tell these potential clients that everything will be alright and they’ll be relieved to hand their money over.

A subset of inexperienced investors could properly handle investing in an all-in-one Exchange-Traded Fund (ETF) if they learned a few basic things.  This article is my attempt to put these things together in one place.

Index Investing

Most people have heard of one or more of the Dow, S&P 500, or the TSX.  These are called indexes.  They are a measure of the price level of a set of stocks.  So, when we hear that the Dow or TSX was up 100 points today, that means that the average price level of the stocks that make up the index was up.

It’s possible to invest in funds that hold all the stocks in an index.  In fact, there are funds that hold almost all the stocks in the whole world.  There are other funds that hold all the bonds in an index.  There are even funds that hold all the stocks and all the bonds.  These are called all-in-one funds.

Most people know they know little about picking stocks.  They hear others confidently talking about Shopify, Google, and Apple, but it all sounds mysterious and scary.  I can dispel the mystery part.  Nobody knows what will happen to individual stocks.  Bold claims about the future of a stock are about as reliable as books about future lottery numbers.  However, the scary part is real.  If you own just one stock or a few stocks, you can lose a lot of money.

When you own all the stocks and all the bonds, it’s called index investing.  This approach to investing has a number of advantages.

Investment Analysis

Investors who pick their own stocks need to pore over business information constantly to pick their stocks and then stay on top of information to see whether they ought to sell them.  When you own all the stocks and all the bonds, there’s nothing to analyze or track on a frequent basis.


Owning individual stocks is risky.  Any one stock can go to zero.  Owning all stocks has its risks as well, but this risk is reduced.  The collective stocks of the whole world go up and down, occasionally down by a lot, but they have always recovered.  We can’t predict when they’ll drop, so timing the market isn’t possible to do reliably.  It’s best to invest money you won’t need for several years and not worry about the market’s ups and downs.

To control risk further, you can invest in funds that include both stocks and bonds.  Bonds give lower returns, but they’re less risky than stocks.  Taking Vanguard Canada’s Exchange-Traded Funds (ETFs) as an example, you can choose from a full range of mixes between stocks and bonds:

ETF Symbol 
    Stock/Bond % 
      VEQT           100/0
      VGRO           80/20
      VBAL           60/40
      VCNS           40/60
      VCIP           20/80


Sadly, many unsophisticated investors who work with financial advisors don’t understand that they pay substantial fees.  These investors typically own mutual funds, and the advisor and fund company help themselves to investor money within these funds.  There is no such thing as an advisor who isn’t paid from investor funds.

It’s common for mutual fund investors to pay annual fees of 2.2% or higher.  This may not sound like much, but this isn’t a fee on your gains; it’s a fee on your whole holdings, and it’s charged every year.  Over 25 years, an annual 2.2% fee builds to consume 42% of your savings.  This is so bad that many people simply can’t believe it.

With Vanguard’s all-in-one ETFs, the annual costs are about 0.25%, which builds to only 6% over 25 years.  Giving up 6 cents on each of your hard-earned dollars may not seem great, but it’s a far cry from 42 cents on the dollar.

Closet Index Funds

Can’t we just find a mutual fund run by a smart guy who can do better than index investing?  Sadly, no, we can’t.  Every year, experts analyze mutual fund results, and every year, they come up with the same answer: most mutual funds do worse than index investing.  A few do better for a while, but sooner or later, they stumble and fall behind index investing.  They simply can’t overcome their high fees for long.  We can’t predict in advance which funds will beat the index in a given year, so jumping from fund to fund is a losing game.

But things get worse.  A great many mutual funds aren’t even trying to do better than index investing.  They are called closet index funds.  They hold portfolios that look a lot like the indexes, but charge high fees anyway.  They focus more on selling their funds to investors than they focus on investment performance.  They hope their investors don’t notice that they’re not really doing much.

Canadians who invest at big bank branches and strip mall offices of big investment companies typically own closet index funds.  If you take the trouble to look through the holdings of their mutual funds, you see a set of stocks and bonds that isn’t much different from Vanguard’s all-in-one ETFs.  The difference is the cost.

Fear, Uncertainty, and Doubt

If index investing is so superior to the typical mutual fund, why doesn’t everyone switch to indexing?  The answer is that there are many people who make their living from the high-fee model.  Their salaries depend on extracting high fees from your savings.

Most advisors in big bank branches and in the strip mall offices of big retail investment companies have a list of talking points to scare people away from index investing.  But the truth is that the only scary thing about indexing is the threat to their salaries.

Going On Your Own

If you chose to invest in Vanguard Canada’s VBAL, which is 60% stocks and 40% bonds, you’re probably going to own close to the same stocks and bonds an advisor at a bank branch or strip mall would recommend.  The differences are that lower fees would leave you with higher returns, but you’d have to open your own investment accounts and make some trades on your own instead of having an advisor tell you everything will be fine.

So, this would involve choosing a discount broker, opening an RRSP and a TFSA and possibly other accounts, adding some money, and performing trades to buy an all-in-one ETF with money you won’t need for several years.  It’s best not to invest in stocks with money you may need soon, such as an emergency fund.  

Handling your own savings this way can be scary at first, and it isn’t for everyone.  The main challenges are getting started with making trades with large sums of money, avoiding selling out when the stock market goes down and you’re nervous, and avoiding changing your plan when something enticing comes along like day-trading, stock options, or cryptocurrencies.

Making the Switch

Getting started with investing on your own using all-in-one ETFs is easier for the beginning investor than it is for someone already working with an advisor.  The good news is that you don’t have to make the switch by talking to your advisor.  The process begins with opening new accounts at a discount brokerage and filling out forms to move your money from the accounts controlled by your advisor.  Your advisor is likely to notice and might try to talk you out of it, but you’re not obligated to work with your advisor when making the switch.

One approach that might make the process easier is to open new discount brokerage accounts and only add small amounts of money first.  After you’re more comfortable with trading and everything else at the discount brokerage, you can then fill out the paperwork to transfer the rest of your assets over to the new accounts.

Not For Everyone

Investing on your own isn’t for everyone.  However, all-in-one ETFs make it as easy as it can be to invest on your own.  As long as you can avoid the mistakes that come with fear and greed, you stand to save substantial investment fees over the decades.

Friday, June 3, 2022

Short Takes: Finding a Good Life, DTC for Type 1 Diabetics, and more

I was reminded recently of the paper The Misguided Beliefs of Financial Advisors whose abstract begins “A common view of retail finance is that conflicts of interest contribute to the high cost of advice. Within a large sample of Canadian financial advisors and their clients, however, we show that advisors typically invest personally just as they advise their clients.”

I didn’t find this surprising.  Retail financial advisors are like workers in a burger chain.  I wouldn’t expect these advisors to understand the conflicts of interest in their work any more than I’d expect workers in a burger chain to understand the methods the chains use to draw customers into eating large amounts of unhealthy food.  It’s hardly surprising that so many advisors understand little about investing well, and that they run their own portfolios poorly.

However, this doesn’t mean the conflicts of interest don’t exist.  It is those who run organizations that employ, train, and design pay structures for financial advisors who have the conflicts of interest.  The extra layers between the clients and those who understand the conflicts make the situation worse.  It’s easier to tell someone else to do bad things to people than it is to do bad things to people yourself.  It’s even easier at higher levels to yell at underlings to create more profits and let them tell the clueless advisors at the bottom layer to do bad things to clients.

Of course, not all advisors in this sort of environment are clueless, and many manage to escape to run practices where they are able to treat their clients better.  Unfortunately, this type of advisor usually either only takes clients with a lot of money or charges fixed amounts that are large enough to scare off clients with modest savings.

Here are my posts for the past two weeks:

Taking CPP and OAS Early to Invest

Why Do So Many Financial Advisors Recommend Taking CPP Early?

Measuring Rebalancing Profits and Losses

Here are some short takes and some weekend reading:

Benjamin Felix has an interesting paper called Finding and Funding a Good Life.  He looks at the research on happiness and how to achieve a good life.   One of the reflective questions he poses is one I’ve thought about a lot: “Are there unpleasant tasks in your life that you could outsource?”  I often decide that it’s easier to clean my house myself than to become an employer, but maybe that’s just an excuse for not taking action.  Another interesting point is that “when people are told what to do they are more likely to rebel against the instruction to regain their sense of freedom.”  I think that explains why I lost any desire I used to have for working for a boss, no matter how well I was treated.

Big Cajun Man
reports that Canadians with Type 1 Diabetes should have an easier time getting the Disability Tax Credit (DTC) after recent changes.

Kerry Taylor discusses how to raise your credit score with licensed insolvency trustee Doug Hoyes.  Among the many good points Doug makes, he says that it’s your credit history over time that matters more than a snapshot of your credit score.

Thursday, June 2, 2022

Measuring Rebalancing Profits and Losses

Investors often seek to maintain fixed percentage allocations to the various components of their portfolios.  This can be as simple as just choosing allocations to stocks and bonds, or it can include target percentages for domestic and foreign stocks and many other sub-categories of investments.  Portfolio components will drift away from their target percentages over time, requiring investors to perform trades to rebalance back to the target percentages.  A natural question is whether rebalancing produces profits, and if so, how much.

A long-time reader, Dan, made the following request:

I have a topic request. On the subject of portfolio rebalancing, I have read your many posts and whitepaper [see Calculating My Retirement Glidepath]. I have actually implemented something similar (but not exactly the same) myself.  I saw in one blog post, cannot find where, that you said something to the effect of “my rebalancing trades last year produced a profit”.

My topic request is, could you detail specifically, your method for tracking & determining profitability of those rebalancing trades?

It’s true that the rebalancing I did through the brief but fairly deep stock market decline at the start of the pandemic produced nontrivial profits for me.  These profits came from purely mechanical trades I made when my spreadsheet declared my portfolio to be too far out of balance.

However, I don’t consider profit to be the primary purpose of rebalancing.  I do it to maintain a sensible risk level for my portfolio given my age and the fact that I’m retired.  In fact, I expect to lose money over the decades from rebalancing, as I’ll explain before I get to the details of how investors can measure the profits and losses from rebalancing.  

There are two different effects that can occur as the prices of portfolio components vary.  One effect creates profits, and the other creates losses.

Rebalancing profits

Rebalancing is profitable when one asset, say U.S. stocks, rises faster than another asset, say Canadian stocks, and later the Canadian stocks catch up.  By selling some U.S. stocks to buy Canadian stocks just before Canadian stocks begin to perform better, the rebalanced portfolio outperforms just holding through the whole period.

In general, when two assets grow at roughly the same long-term rate, but the lead seesaws back and forth between them, rebalancing is profitable.

Rebalancing losses

Rebalancing gives losses when one asset, say stocks, consistently outperforms another asset, say bonds.  In this case, rebalancing usually involves periodically selling some stocks to buy bonds, and the rebalanced portfolio won’t perform as well compared to buy-and-hold.

Of course, there are times when bonds outperform stocks by a wide margin, mainly when the stock market crashes.  So, there will be periods when rebalancing will produce short-term profits to offset the long-term rebalancing losses from mainly selling stocks to buy bonds.

I expect the rebalancing between different classes of stocks to produce small profits, and to occasionally get rebalancing profits from rebalancing between stocks and bonds, but I expect the long-term losses from rebalancing from stocks to bonds to dominate.

So, why rebalance if we expect losses?

There is no guarantee that rebalancing will produce losses on balance.  If there is an extremely large drop in stock prices some time in the future, it’s possible that rebalancing will produce net profits.  By maintaining a fixed percentage in bonds instead of letting the bond percentage dwindle, the investor who rebalances will be spared somewhat when stocks crater.

So, even though I expect to lose out over the decades from rebalancing because I’m optimistic about the future of stocks, it’s possible that rebalancing will save me at a terrible time for stocks.  This is the main idea behind the risk-control value of rebalancing.  I’d rather get some protection if future returns disappoint than try to become even richer in case the future is very bright.

Calculating rebalancing profits and losses

Back in 2020, my spreadsheet told me to rebalance several times as stocks dropped sharply and then rebounded quickly.  Each time I rebalanced, I took a snapshot of my portfolio holdings.  Later, I looked at the snapshot from just before the first rebalancing, and calculated what my portfolio’s value would have been if I had never rebalanced through the pandemic.  The difference between this value and the actual portfolio value I ended up with as a result of rebalancing gave me my net rebalancing profit.  This difference proved to be larger than I expected.

In general, any discussion of profit and loss comes from comparing two different courses of action.  In this case, it comes from comparing an actual portfolio with rebalancing to a hypothetical portfolio without any rebalancing over a particular period of time.

I don’t do these calculations often.  I’m satisfied that rebalancing makes sense for me for risk reasons.  I’m not waiting for the outcome of an experiment to see whether rebalancing will be profitable over the long run.  I got interested in rebalancing through the pandemic and did some calculations out of curiosity.

A more serious approach

I don’t think it’s important to track rebalancing profits and losses, but I can understand that some technically-minded investors may be interested.  So, let’s dig into how one might implement tracking rebalancing profits and losses.

The biggest complication comes from portfolio inflows and outflows.  In addition to running your actual portfolio and deciding which assets to buy or sell each time you add or withdraw money, you’d have to make these decisions for a hypothetical non-rebalanced portfolio.  An easier task is to take a snapshot of your portfolio before each rebalancing, and to track inflows and outflows.  This permits you to run a hypothetical non-rebalanced portfolio over any period of time and then compare its results to your actual portfolio’s results.

If the hypothetical portfolio isn’t supposed to have rebalancing, it’s not obvious what assets you should buy or sell when adding or withdrawing money.  The choices you make with the hypothetical portfolio could make a big difference in the measured values of rebalancing profit and loss.

When I looked at my rebalancing gains through the pandemic, I didn’t have any inflows and had only small outflows, so it didn’t make a lot of difference what assets I chose to sell for the outflows.  Over longer periods, the choice of what assets to buy or sell can make a big difference in the calculated rebalancing gains and losses.

Here are some possibilities for how to run the hypothetical portfolio:

  1. Add or withdraw from each asset class in proportion to its percentage of the portfolio.  This leaves asset class percentages unchanged.  This is what I did when I calculated my rebalancing gains through the pandemic.

  2. Add or withdraw from asset classes in a way that takes them closer to their target percentages.  This is a form of rebalancing with cash flows.  With this approach, what you’re measuring is the profits or losses from the “extra” rebalancing in your real portfolio that becomes necessary when asset classes diverge strongly enough that they can’t be kept in balance with cash flows.

  3. Perform cash flows the same way you do them for your real portfolio, and then rebalance on a fixed time schedule.  For those who use threshold rebalancing, this method compares the results from threshold rebalancing to the results of periodic rebalancing.

  4. Use one of the other three methods and reset the hypothetical portfolio to the real portfolio periodically (perhaps annually) after calculating the period’s rebalancing gain or loss.  This will give very different results from letting the hypothetical portfolio diverge from the real portfolio over many years.

No doubt there are many other possible approaches to running the hypothetical portfolio.  


There are so many choices for how to proceed to measure the value of rebalancing that whatever method you choose would be a personal customized measure of something that may or may not represent the long-term value of rebalancing.  For now, I’ll just compute short-term rebalancing gains or losses when the mood strikes.

Wednesday, May 25, 2022

Why Do So Many Financial Advisors Recommend Taking CPP Early?

No doubt there are many financial advisors out there who do a good job of advising their clients on when to start their CPP benefits.  However, I frequently encounter advisors who declare that they always advise their clients to take CPP at 60.  Given the significant benefits of delaying the start of CPP benefits for those with sufficient assets or income to wait, why are some advisors so adamantly against it?  Here I offer some possible reasons.

According to Owen Winkelmolen, in 2018, 38% of Canadians took CPP at 60, only 7% waited until after they were 65, and only 2% waited until they were 70.  This certainly doesn’t suggest that many financial advisors advise their clients to delay CPP.

So, here are some possible reasons why so many financial advisors recommend taking CPP early.

Higher Assets Under Management (AUM)

When clients take CPP early, they spend less from their savings, and this increases the advisor’s AUM.  This is true, but the effect isn’t big, and it’s hard to imagine that many advisors are scheming to get a small bump in AUM.  For those advisors who are effectively salespeople, it’s possible that this is a motive for the organizations they work within.

Advisors are simply repeating what they were taught

It’s possible that advisors were taught that starting CPP early is best, and they’re simply repeating what they were taught.  This seems plausible for those advisors who work essentially as salespeople and whose training came primarily from their sales organization.  This seems less plausible for advisors who have more substantial training.

Some advisors have the same emotional need to take CPP early as their clients

Canadians have a strong bias toward taking CPP early for a variety of emotional reasons.  Perhaps some advisors have the same emotional reaction.  They intend to take their own CPP early, and they advise their clients to do the same.

Maintaining the illusion that they will bring client big returns

Less scrupulous advisors sell their services to potential customers (clients) by claiming they can generate high investment returns.  Perhaps claiming to be able to outperform the CPP increases that come from delaying the start of benefits is simply a matter of being consistent with the claimed ability to crush the market.

Haven’t kept up with CPP changes

Before 2011, starting CPP benefits before age 65 cost 0.5% per month.  This is now 0.6%.  Before 2011, starting CPP benefits after age 65 increased benefits by 0.5% per month.  This is now 0.7%.  A dozen years ago, the case for delaying CPP was much weaker than it is today.  Perhaps some advisors haven’t kept up with these changes.

Don’t understand how inflation indexing of CPP benefits affects this decision

I’ve seen detailed examples advisors provide where they conclude that you’re better off to take CPP early and invest the money.  However, these analyses ignored inflation.  CPP benefits are indexed to wage inflation before you start CPP, and they’re indexed to the consumer price index after you start CPP.  A flawed analysis might conclude that earning x% on your investments justifies taking CPP at 60.  A proper analysis would say that your portfolio has to beat inflation by x%.  See Taking CPP and OAS Early to Invest for a full explanation.

It’s too hard to bother fighting with clients who wants to take CPP early

Clients have strong emotional reasons why they want to take CPP early.  The amount of money at stake may not seem very much from the advisor’s point of view, and it’s just easier to tell clients what they want to hear rather than fighting them.  Many lists I see with reasons to take CPP at 60 include some version of “you (or the client) want to start CPP early.”  All decisions are ultimately up to the client, and advisors have to be selective about when to push back if they don’t want to lose the client.

After advising early CPP for years, to change now is to admit past mistakes

Nobody likes to admit they’re wrong, to themselves or anyone else.  If you’ve spent a career advising your clients to take CPP early, the only way to protect yourself from finding out you’ve been giving bad advice is to ignore evidence and keep advising clients to take CPP early.

In recent years, several sensible analyses of the benefits of delaying CPP have appeared.  But, many advisors are undeterred.  I’d be interested to hear expert insight into the dominant reasons for this lack of reaction from many advisors.

Monday, May 23, 2022

Taking CPP and OAS Early to Invest

A strategy some retirees use when it comes to the Canada Pension Plan (CPP) is to take it at age 60 and invest the money.  They hope to outperform the CPP increases they would get if they delayed starting their CPP benefits.  Here I take a close look at how well their investments would have to perform for this strategy to win.  I also repeat this analysis for the choice of whether to delay the start of Old Age Security (OAS).

This analysis is only relevant for those who have enough other income or savings to live on if they delay CPP and OAS.  Others with no significant savings and insufficient other income have little choice but to take CPP and OAS as soon as possible after they retire.

How CPP Benefits Change When You Delay Their Start

You can start your CPP benefits anywhere from age 60 to 70, with 65 considered to be the normal starting age.  For each month that you start CPP benefits before you turn 65, your benefits are reduced 0.6%.  So, suppose you’d be entitled to $1000 per month if you were 65 today.  If instead you were 60 today, you’d only get $640 per month starting CPP now.

For each month that you start CPP benefits after you turn 65, your benefits are increased 0.7%.  If you were 70 today, you’d get $1420 per month starting CPP now.


The previous examples glossed over the effects of inflation.  In reality, if you were 60 today, you’d have to wait 5 or 10 years if you choose to take CPP at 65 or 70.  During that time, inflation adjustments would affect your CPP benefits.

Continuing the earlier example, if you take CPP now, you’d get $640 per month.  These benefits would rise over time with the Consumer Price Index (CPI) at the rate of price inflation.  However, if you wait until 65 to start CPP, you’d get a lot more than $1000 per month.  This $1000 per month would rise with 5 years of wage inflation.  That’s because CPP benefits increase with price inflation after they begin, but before they begin, they increase with wage inflation.

So, if you started CPP at 65, you’d get $1000 per month plus 5 years of wage inflation.  Wages usually rise faster than prices, so the delayed $1000 per month would rise by more than the non-delayed $640 per month.  In my analyses here, I assume that wages rise 0.75% per year faster than prices.  Assuming price inflation of 3% per year, by the time you reach 65, the CPP benefits you started 5 years earlier would be $742 per month, and your delayed benefits would be $1203 per month.

If you started CPP at 70, your benefits would be $1420 plus ten years of wage inflation.  If we turn you into triplets with identical CPP entitlements who take CPP at different ages (60, 65, and 70), their monthly payments at age 70 would be $860, $1395, and $2056, respectively.

A Dropout Penalty

There are some technicalities that I’ve glossed over so far.  My analyses here don’t take into account cases where people keep working after they start CPP to get additional CPP benefits.  I also don’t take into account CPP disability benefits.  One technicality that I do examine is the effect of not fully contributing to CPP from age 60 to 65.

Your CPP benefits are based on your average contributions paid into CPP.  However, you get to drop out 17% of your contribution months with the lowest contributions.  This increases your average contribution per month and gives you higher CPP benefits.  People who look after children under 7 and those with disabilities get additional dropouts.  If you take CPP at 60, you drop out your lowest contributing months between age 18 and 60.  If you take CPP at 65, you drop out your lowest contributing months from age 18 to 65.

So, if you don’t contribute to CPP after age 60, but you wait until you’re 65 to start CPP, you’ll need to use many of your dropout months for those 5 years.  This means you won’t be able to drop out as many other low contribution months.  The result is that your average CPP contribution amount could be lowered if you delay taking CPP until you’re 65.  This “penalty” ranges from nothing to an upper limit, depending on your work history.  In my analyses here, I do calculations for both a penalty of zero and the maximum penalty.  This allows the reader to see the full range of possibilities.

If you delay CPP until you’re 70, there is an additional dropout provision that lets you not count the months from age 65 to 70.  So, the dropout penalty doesn’t grow any further as you delay CPP past 65.

Constant Dollars

For the remainder of this article, I will be using constant dollars, which means all dollar amounts are adjusted for price inflation.  So, if you’re 60, and start CPP now, you’d get $640 per month in constant dollars for the rest of your life (based on the earlier example).  

Delaying to 65, assuming you have no dropout penalty, would get you $1000 per month plus 5 years of the gap between price inflation and wage inflation, which works out to $1038 in constant dollars.  Delaying to 70, again assuming you have no dropout penalty, would get you $1420 per month plus 10 years of the gap between price inflation and wage inflation, which works out to $1530 in constant dollars.

A side effect of working with constant dollars is that when we calculate the return from delaying CPP, this is a “real return,” which means the return over and above inflation.  An investment that earns a 5% real return when inflation is 3% has a nominal return of (1.05)(1.03)-1=8.15%.

Discrete versus Continuous

There are a number of ways that your CPP benefits change over time in discrete jumps rather than changing smoothly.  CPP benefits are adjusted for price inflation once each January, and the average industrial wage that is used to calculate your starting CPP level changes once per year.  As you delay CPP longer, the number of contribution months you can drop out grows, but it’s always a whole number.  In the case of OAS, payments rise with price inflation each quarter.

I’ve smoothed out all these calculations for the purposes of the analyses here.  These discrete jumps make little difference and serve mainly as a distraction.  So, if you calculate the perfect month to start CPP based on these smoothed calculations, you might be slightly better off a few months earlier or later.

A One-Month Delay Example

Suppose you’re deciding whether to take CPP at age 60 or wait one more month.  You’d be choosing between taking $640 per month now, or waiting a month to get more.  For the one month delay, the CPP rules say you’d get an additional 0.6%.  But this is 0.6% of the amount for CPP at 65, or $1000.  So, you’d get $6 more.

You’d also get more because of the excess wage inflation over price inflation.  Your CPP benefit (in constant dollars) for delaying one month works out to $646.40.

In deciding between $640 per month now or a delayed $646.40, the difference is one payment of $640 now versus an extra $6.40 per month for the rest of your life.  Note that this is a full 1% increase instead of the apparent 0.6% increase laid out in the CPP rules.  This effect makes delaying CPP more valuable in your early 60s than it is later on, even though the percentage increase in the CPP rules goes up to 0.7% per month after age 65.

Planning Age

How valuable this 1% increase in CPP is depends on how long you’ll live.  You might be tempted to guess your likely longevity, but this isn’t the same as choosing a sensible planning age.  According to the 2022 FP Standards Council’s Projection Assumption Guidelines, because I’ve already made it to my current age, there is a 50% chance I’ll make it to 89.  However, I don’t want to use a planning age of only 89 because I might live longer.  I don’t want to spend down all my assets by my 89th birthday because I might find myself still breathing after I blow out the candles.  So, I use 100 as my planning age.

As I get into more detailed analysis, I’ll start with a planning age of 100.  Later on I’ll give data on planning ages of 90 and 80.  For now, with a planning age of 100, delaying CPP by one month from age 60 works out to an annual real return of 12.6%.  This is an impressive return that is even better when we consider that it is a real return in excess of inflation.

All the One-Month Delays

We can think of the decision of when to start CPP as a sequence of up to 120 decisions of whether to delay just one more month.  The following chart shows the real return of each of these choices.  For the years from age 60 to 65, it shows this return for both the cases where you have no dropout penalty and where you have the maximum dropout penalty.  Individual results will be between these two values.

We see that this real return from delaying CPP by one month starts high and declines.  There is a bump up at age 65 when the CPP increase changes from 0.6% to 0.7% per month, but it declines again after that.

An investor hoping to earn 6% real returns and who has the maximum dropout penalty might be tempted to take CPP at 63 and a half.  However, this investor would then lose out on the great years from 65 to 69.  In fact, the average real return from age 62.5 to 67.5 is about 7%.  Unfortunately, we can’t take CPP at age 63.5 and then stop again at age 65.  We only get to pull the trigger once.

So, this chart doesn’t tell a complete story.  It gives the return from each one month delay, but sometimes, committing to a longer delay, such as from 62.5 to 67.5, gives better results.

The Best Delay

Instead of looking only at one-month delays, it’s better to consider all possible lengths of future delays and pick the best one.  So, for each month, I calculated the return for every possible future delay and chose the best one.  This gives the following chart, once again with a planning age of 100.

We see now that even for those with the maximum dropout penalty, there is always a delay with a real return of at least 7% all the way to almost age 68.  Anyone who thinks they can do better on their portfolios than a 7% real return has little reason to worry about amounts as small as CPP benefits.  

The 2022 FP Standards Council’s Projection Assumption Guidelines for a balanced portfolio are for about a 3% real return, and that is before deducting investment fees.  The worst case real return in the chart is 5.5% in the last month before age 70.  It’s clear that it’s not reasonable to count on a higher investment return than you can get by delaying CPP to age 70 if your retirement planning age is 100.

Planning to 90

Those with slightly weaker than normal health or who are wealthy enough that they’ll never spend all their money might choose a retirement planning age of 90.  The next chart is the same as the previous one except for the changed planning age.

We see that the real returns from delaying CPP remain very high in your early 60s.  Those who plan to make a 5% return on their investments might choose to take CPP at 68, but it’s difficult to give up a certain return in the 3% to 5% range in the hope of a better return that might not happen.

Planning to 80

Now we’re getting into the range for people with significantly compromised health.  You may have heard of an average life expectancy of around 80, but that tends to be old information, and it’s life expectancy from birth.  If you’ve already made it to age 60 today, you’re likely to make it to close to 90.

Unfortunately, some people have poor health and they’re so sure they won’t make it to 80 that they’re willing to spend down all their assets before they reach 80.  Here’s a chart for a retirement planning age of 80.

For someone expecting real returns on their investments in the 3% range, it makes sense to take CPP somewhere between age 62.5 and 65.5, depending on how much of a dropout penalty they have.  Delaying past age 67 makes no sense.

For those whose retirement planning age is well below 80 because of very poor health, it makes sense to take CPP at 60.

Delaying OAS

Unlike CPP, the earliest you can start collecting OAS is age 65.  You can delay OAS by up to 5 years for an increase of 0.6% for each month of delay.  So, the maximum increase is 36% if you take OAS at 70.

OAS payments are indexed to price inflation, and the increases before you start collecting are also indexed to price inflation.  So, OAS doesn’t have the wage inflation complications we saw with CPP.

In many ways, the OAS rules are much simpler than they are for CPP, but one thing is more complex: the OAS clawback.  For those retirees fortunate enough to have high incomes, OAS is clawed back at the rate of 15% of income over a certain threshold.  This complicates the decision of when to take OAS, and is outside the scope of my analysis here.

The following chart shows the real return of delaying OAS each month for a range of retirement planning ages, based on the assumption that the OAS clawback doesn’t apply.

We see that the case for delaying OAS isn’t nearly as compelling as it is for delaying CPP.  However, those with a retirement planning age of 100 get real returns above 3.4% for delaying all the way to age 70.  I plan to wait until I’m 70 to take OAS.

For a retirement planning age of 90, delaying OAS to 67 or 68 makes sense.  However, those whose health is poor enough that they plan to age 80 or less should just take OAS at 65.


Those who advocate taking CPP at 60 to invest and beat the returns from delaying CPP are at best misguided.  The returns from the first couple of years of CPP delay are eye-popping.  Depending on your retirement planning age and your expected investment returns, you may not choose to delay CPP all the way to age 70, but there is a strong case for doing so if your health is at least average.  The case for delaying OAS is weaker than it is for CPP, but it’s still strong enough that I’ll delay OAS until I’m 70.

Friday, May 20, 2022

Short Takes: Sustainable Investing, Mental Scripts to Calm Investors, and more

The list of needed repairs around my house that are beyond my skill to do myself keeps getting longer.  However, I’ve been promised that a contractor will be coming to complete one of them next week, and I managed to do a very poor concrete repair myself that might hold for a year.  I’m still riding high on last fall’s pool repair that I waited 3 years for.  So, it’s not all bad.  I’ll be happier when talented tradespeople aren’t all pulled into the vortex of building new houses.

Here are my posts for the past two weeks:

Money Like You Mean It


Rich Girl, Broke Girl

Interest on a Car Lease

Here are some short takes and some weekend reading:

Christiaan Hetzner reports that Standard & Poor’s sustainability index now includes Exxonmobil and excludes Tesla.  I know Tesla’s price is sky-high and Elon Musk is a weird guy who sometimes writes dumb stuff on Twitter, but how is this relevant?  This is a huge black eye for sustainable investing.  The criteria they use are clearly nonsensical.  If I ever decide to embrace sustainable investing, I’ll have to build my own index of sustainable companies.

Preet Banerjee offers some mental scripts to help control your emotions when investing.

Justin Bender says the passive versus active investing debate is dead.  When it comes to stocks this debate should be dead.

Thursday, May 19, 2022

Interest on a Car Lease

I’ve written before on how to calculate payments on a car lease.  However, when I began reading Jorge Diaz’s book Car Leasing Done Right, I saw that he believes the interest calculation is different from what I’ve seen everywhere else.

Update 2022-05-19: Jorge Diaz confirmed that his interest calculation was wrong and that he intends to fix it in the next version of his book.

Diaz gives the following example:

MSRP $27,799 + PDI $1825 = Vehicle cost of $29,624
Term: 48 months
Residual Value: $14,561
Interest Rate: 3.99%
HST: 13%

Diaz calculates the total interest paid over the 4-year lease to be $1217.01.  This figure is consistent with taking the difference between vehicle cost and the residual value and calculating interest on this as it declines to zero.  We can estimate this by starting with cost minus residual ($29,624 - $14,561 = $15,603).  The average balance owing will be about half of this.  Then we multiply by 4 years and 3.99% to get $1202.  This is just an estimate, but it comes fairly close to Diaz’s figure.

However, everywhere else I’ve looked says the interest owing on a lease is calculated on the full vehicle cost as it declines down to the residual value.  Estimating once again, the average amount owing would be ($29,624 + $14,561)/2.  After multiplying this by 4 years and 3.99% interest, we get $3526.

Diaz says he got his figure from the “Hyundai Canada Build Tool.”  However, when I looked at this tool, it didn’t give the residual value or the total interest paid, so I couldn’t learn much from it.  But I went to the Canadian Automobile Protection Association (APA) to use their lease calculator.  The result was that the pre-tax interest was $3521.16, which is close to my estimate and way off Diaz’s figure.  Further, the APA lease calculator gave after-tax lease monthly payments of $437.50, but Diaz says it is $377.84.

My conclusion is that lease interest is calculated on the entire vehicle cost as it declines down to the residual value, rather than on just the difference between vehicle cost and residual value as this figure declines to zero.

Monday, May 16, 2022

Rich Girl, Broke Girl

Kelley Keehn’s recent book Rich Girl, Broke Girl uses interesting fictional stories about women to teach personal financial lessons.  Keehn understands the circumstances, pressures, and emotions that drive women to make poor financial choices.  The advice in this book is packaged in a way that makes it an easier read for those who’d rather focus on life than money.

Keehn uses the stories of ten women to illustrate different types of financial mistakes and how to fix them.  Each chapter begins with the history of a woman whose financial life isn’t going well.  It then moves on to what she did wrong, some financial lessons, and how she can fix her troubles.  The chapters end with an update on how the woman is doing now that she has made some positive changes.  The anticipation of getting back to the story made it much easier to read the ‘lesson’ part of each chapter.

The most interesting lesson to me was about the woman who let a casual partner move in and stay longer than she wanted.  Although she never intended for this to be a long-term relationship, they lived together long enough to be considered common-law partners.  She ended up losing half of her assets.  

More interesting advice for those who have trouble controlling their spending is to find some frugal friends.  It’s better to have peer pressure pushing you in the right direction rather than the wrong direction.

In a chapter discussing investing, Keehn offers asset location advice to readers wealthy enough that their RRSPs and TFSAs are full, and the overflow is in non-registered investments.  She says to put stocks in non-registered accounts and bonds in the registered accounts.  However, this is the least tax-efficient approach.  It appears optimal if you trick yourself into taking more risk by setting an asset allocation that ignores taxes.  See Asset Allocation: Should You Account for Taxes? for a full explanation.

Another chapter tells a story about Katie who focused on paying off her mortgage by the time she was 55 but had no investments.  The lesson here was that Katie should have invested for a higher return than she got from her mortgage payments.  If we consider extra mortgage payments to be a form of saving, I think Katie’s mistake was that she saved too little.  If she only directed savings to her mortgage, it should have been paid off sooner, giving her more time to build investments.  I agree that a balanced approach of paying off a mortgage and building investments at the same time is a good idea.  However, focusing on just one or the other can be reasonable, as long as the total amount saved is adequate.

Although the cases where I mildly disagreed with Keehn are over-represented in this review, the book is filled with excellent advice.  I read books like this to better understand why people manage their money poorly and how to help them.  It’s clear that Keehn is an expert in this area.

In conclusion, this book is a strong attempt at a difficult problem: engaging people (women in this case) in personal finance lessons.  Readers may see themselves in some of the stories and follow some of Keehn’s good advice.

Thursday, May 12, 2022


For fans of indexing and business stories, Robin Wigglesworth’s book Trillions: How a Band of Wall Street Renegades Invented the Index Fund and Changed Finance Forever is a page-turner.  Although this book is well-researched, it’s not a dry academic work.  Wigglesworth delves into the personalities of the important players who grew index investing to what it is today.

The stories begin with pioneers who sought to bring scientific rigour to investing rather than just rely on the instincts of investment managers.  These builders of index funds faced initial investor indifference as well as scorn from the traditional investment industry.  Index funds were even labeled as “un-American.”

Throughout the birth and growth of indexing, fund managers became increasingly aware of the threat to their incomes.  In 1973, “one anonymous mutual fund manager griped to the Wall Street Journal” that “a lot of $80,000-a-year portfolio managers and analysts will be replaced by $16,000-a-year computer clerks.”  Adjusting for inflation, that’s about $500,000-a-year for fund managers and $100,000-a-year for computer clerks.

Part of the impetus for index funds came from academic work including collecting data on stock returns, demonstrating the random nature of stock movements, and the Capital Asset Pricing Model (CAPM).  Much of this work assumed that stock prices followed the standard bell curve.  However, Benoit Mandelbrot had a “hypothesis that stock returns conform to ‘non-normal’ distributions,” and Eugene Fama proved this in “nauseating detail” in his PhD thesis.  It’s surprising that even today much of the investment industry ignores the reality that stock returns have “fat tails.”

A driving force behind the lowering of investment fees has been a “radical” idea of Jack Bogle’s: “mutualization.”  This is where a fund management company becomes “a subsidiary of the funds that would operate ‘at cost.’”  This solves the problem “that investment companies serve two often conflicting masters, the owners of the money manager, and the clients.”

It’s easy to get lost in the huge dollar figures involved in investing.  We often see millions, billions, and trillions.  The author makes a mistake along these lines with computer memory sizes when discussing the impact computers had on the development of indexing.  “In August 1981, IBM launched its first-ever personal computer.”  It was “puny by modern standards—an iPhone boasts about 250 times its 16K processing memory.”  The correct figure is more like 250,000 rather than 250.

In the story of the first Exchange-Traded Funds (ETFs), we learn about “a bunch of plucky Canadians stealing ahead of Team America to launch the first-ever ETF.”  The author is then quick to offer a series of excuses.  “They managed to do so mainly because of the smaller, less aggressively competitive Canadian finance industry” and “the more amenable local regulator.”  “The attempt was sponsored by the Toronto Stock Exchange, and leaned heavily on the Amex” and “State Street Spider team’s frustrating but pioneering work.”  Indeed, “the US exchange was happy to advise the TSE team on the details.”  The first ETF “tracked only the thirty-five biggest stocks in Canada—far easier than the entire S&P 500.”  “Moreover, the Canadian ETF was only a modest success.”  For the ETF revolution “to really take off it still needed a successful birth in the United States.”  Got it.  Canada was first but it doesn’t count because we had an easier job, stole the idea, got help from Americans, and did it poorly anyway.

As indexing has grown, some now claim that indexing is the cause of many ill effects.  “It is tempting to dismiss many of these concerns as the shrill self-serving scaremongering of industry incumbents coming under intensifying pressure from a cheaper, better rival.”  This is true of most complaints about indexing, but we can’t deny that indexing has some unintended side effects.  In one case, “a Chinese state-controlled maker of video surveillance cameras that had recently been put on a US government blacklist that prevents American companies from doing business with it, was added to MSCI’s flagship index.”  “Republican senator Marco Rubio blasted the decision, arguing that it would cause billions of dollars of US savings to automatically slosh into Chinese companies of dubious quality, and in some cases work directly against American interests.”

For anyone who enjoys business stories and is a fan of index investing, Trillions is an interesting read.  Wigglesworth does an excellent job of bringing the business and personal stories of the major players in the growth of indexing to life.

Monday, May 9, 2022

Money Like You Mean It

The world has changed over the past 30 years or so, and the advice baby boomers give their adult children isn’t always relevant in today’s world.  Money reporter Erica Alini offers a millennial’s view in her book Money Like You Mean It: Personal Finance Tactics for the Real World.  She delivers on her promise to offer useful financial advice for the world that millennial’s live in, and her writing style makes the book easy to read.

Millennial Challenges

Alini devotes a significant chunk of the book to the challenges millennials and women face.  She covers the familiar themes of high housing prices and student debt.  She also covers an under-appreciated problem that millennials face more than boomers did: “easy access to credit” and aggressive marketing to get people to use that credit.  Borrowing for any aspect of your lifestyle has been normalized.  Thirty years ago, people who never ate out and had no car weren’t seen as freaks.  Marketing has ramped up modern lifestyle expectations.

I’m of two minds about telling readers that the problems they face aren’t their fault.  It’s good when a reader’s reaction is to say ‘having financial troubles doesn’t mean there’s something wrong with me; I can work toward a better life despite the challenges.’  But it’s bad if a reader’s reaction is ‘there’s no point in trying because the game is rigged against me.’

Much writing I see about the challenges millennials face is just pandering: telling people what they want to hear gets clicks.  I find Alini’s writing much more thoughtful than this.  She acknowledges that boomers faced their own challenges when they were young: “This isn’t to say that everything was better in the past.  Far from it.”  Her point “isn’t about ditching individual responsibility and blaming the system for all your financial woes.  Instead, it’s about letting go of the shame and self-blame and using specific psychological techniques to make it easier to change your behaviour and get on the right track.”

The only point where Alini crossed over into pandering was when she suggests that it’s a man’s responsibility to “act like the capable human being he is by owning several household and child care tasks.”

Personal Finance Tactics

Alini covers a wide range of personal finance tactics, starting with a money bucket system for handling fixed expenses, variable spending, emergencies, short-term saving, and long-term saving.  Among the many other tactics, I’ll just mention some points that caught my attention.

“If you take a close look at your spending patterns, you’ll find a number of regular bills that don’t quite fit the definition of necessary expenses.  And I’m willing to bet a lot of them are subscriptions.”  “Research suggests we tend to dramatically underestimate just how big a chunk of our budget goes to subscriptions.”  “Too many routine costs — small as they may be — will do you in.”

Alini explains that Canadian student loans come with features that can give you repayment assistance or even loan forgiveness.  So, if you’re struggling with debt, you might want to focus on paying off other types of debt first.

“Beware of steep penalties for breaking fixed-rate mortgages” with the big banks.  Alini explains how the banks tinker with posted rates to pump up mortgage-breaking penalties.  These penalties can get so large that even if you think the likelihood that you’ll break your mortgage is low, you may not want to take the chance.

Estimates of house maintenance costs as a percentage of house price aren’t very useful.  “A more useful starting point is calculating $1 per square foot” per year.  I think this is too low.  For a 2500 square foot house, that’s $50,000 in 20 years.  In that time, you’ll replace the roof for about $10,000, and you’ll replace your furnace, air conditioner, and most appliances at least once.  You’ll replace windows, carpets, and maybe hardwood flooring.  In 20 years, you might have to repair a foundation crack, or pay to have animals removed from your attic.  We’re past $50,000 now and we haven't gotten to the long list of less expensive costs.  I come in closer to $2 per square foot per year.

“There is no financial wizardry that will somehow bring housing within reach where prices and rents have ballooned.  But what you can do in this unreal real estate market is stay cool, analyze your options, and choose the one that will benefit you the most in the long term.”

In the past, “bringing home a decent paycheque wasn’t nearly as straightforward as it’s often made out to be around the dinner table at family gatherings.”  In the 1970s there was “stagflation — a dreadful combo of high unemployment and rising prices.”  The early 1980s saw “an ugly economic downturn that would drag on for years.”

We hear a lot about the merits of “side hustles”.  “Let’s be clear about what side-hustling really is: working more than a full-time job.  That comes at a cost.”  The best use of a side hustle is “to eventually switch to a higher-paying or more fulfilling daytime job.”  Testing out a potential new career as a side hustle while working full-time at another job is a lot of work, but it’s less risky than quitting your job and trying to jump into a new career.

“Increasingly, retirement is more of a slow and gradual downshifting from working all the time to working less.”  I like this idea, but it doesn’t work for all types of jobs.  In high tech, telling your boss who is working 7 days a week that you want to drop to three days a week won’t go well.  You might as well say “I’m no longer committed to this company.”  Only a few highly-regarded high tech employees can get away with tapering down their hours.

“Many boomers are opting for semi-retirement, often striking out as independent professionals after a lifetime in the office  — not because they need the money, but because they like working on their own terms.”  I often meet people who are retired from their “regular” jobs, but are working at something else.  They almost always say they don’t need the money.  But in those cases where I get to ask open-ended questions and listen long enough, they almost always get to a point where they say they need the money.

Alini quotes Ilana Schonwetter, an investment adviser, who says women get lower returns on their savings because they’re less willing to take investment risk.  However, the famous Barber and Odean studies found that women get better returns than men do.  So which is it?  I’m not sure.

“If you’re in a couple that could end up with nest-egg inequality, consider spousal RRSP contributions or beefed-up transfers to the TFSA of the lower-earning partner to reduce the disparity.”  My wife and I go further.  We keep our accounts strictly separate and only spend the income of whoever has the larger amount saved.  Practically-speaking for us, that meant spending only my income for decades.  If CRA decides to audit us, we can show that all of my wife’s savings came from just her income.

“Seeing the value of my hard-earned savings drop bothered me more than I thought it would.  Clearly, I overestimated my risk tolerance.  I didn’t do anything then and there, but when the market had recovered and all was well again, I trimmed my allocation to stocks.”  That’s a very sensible reaction.  To sell while stocks are down is to get into a buy high and sell low cycle.

A bank of mom and dad trap: “Deep-pocketed parents help their kids get into a lovely home that is far too expensive for them.”  “Don’t let a generous gift leave you house-poor.”

“It sometimes feels so hard to achieve financial goals that our parents’ generation largely took for granted.”  A subset of boomers may have taken certain financial goals for granted, but some boomers never achieved goals such as owning a home.  Millennials who grew up in well-to-do suburbs would have seen mostly successful boomers.  Other boomers lived in places that weren’t so nice.


Alini achieves her goal of offering personal finance tactics for the real world.  Rather than give a thorough treatment of each topic with all details, she focuses on advice for starting out in each aspect of personal finance in the correct direction.  This allows her to cover a broad range of topics.  Millennial readers will benefit from this book, and will need other resources to dig into the details.

Friday, May 6, 2022

Short Takes: Forecaster Intervention, the Unexpected, and more

My wife pointed out that some readers of my post on the rout in long-term bonds may not know what “long-term bond” means.  Typically, bonds pay interest for some number of years after which you get the money you invested back.  So, a $10,000 30-year bond would pay interest on the $10,000 for 30 years, and then the investor would get the $10,000 back at “maturity”.  I think of any bond whose maturity is more than 10 years away as a long-term bond, but others may have different cut-offs.

Here are my posts for the past two weeks:

The Rule of 30

The Rout in Long-Term Bonds

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand has an intervention for stock market forecasters.

Morgan Housel
explains that every year, something big and unexpected happens.  Housel is always clever, but I find his essays rarely actionable, at least for an index investor like me.  This article, however, is actionable.  We need more ready cash and other savings than we can justify based on our predictions of the future, because bad things will happen that we couldn’t predict.

Big Cajun Man explains how the RDSP rules change when the beneficiary turns 18.  He also has advice on getting school fees treated as a medical expense.

Thursday, May 5, 2022

The Rout in Long-Term Bonds

The total return on Vanguard’s Canadian Long-Term Bond Index ETF (VLB) since 2020 October 27 is a painful loss of 24%.  Why did I choose that particular date to report this loss?  That’s when I wrote the article Owning Today’s Long-Term Bonds is Crazy.

Did I know that the Canadian Long-Term bonds returns would be this bad over the past 18 months?

No, I didn’t.  But I did know that returns were likely to be poor over the full duration of the bonds.  Either interest rates were going to rise and long-term bonds would be clobbered (as they have), or interest rates were going to stay low and give rock-bottom yields for many years.  Either way, starting from a year and a half ago, long-term bond returns were destined to be poor.

Does this mean we should all pile into stocks?

No.  If you own bonds to blunt the volatility of stocks, you can choose short-term bonds or even high-interest savings accounts.  This is what I did back when interest rates became low.

Does that mean everyone should get out of long-term bonds?

It’s too late to avoid the pain long-term bondholders have already experienced.  I’m still choosing to avoid long-term bonds in case interest rates rise more, but the yield to maturity is now high enough that owning long-term bonds isn’t crazy.

Isn’t switching back and forth between long and short bonds just a form of active management?

Perhaps.  But it’s important to understand that bonds and stocks are very different.  Stock returns are wild and impossible to predict accurately.  There is no evidence that anyone can reliably time the stock market.  However, when you hold a (government) bond to maturity, you know exactly what you will get (in nominal terms).  When a long-term bond offers a yield well below any reasonable guess of future inflation, buying it is just locking in a near-certain loss of buying power for a long time.

Are investors safe if they own a bond fund with a mix of maturities?

Bond funds with a mix of maturities certainly mask what is going on, but that doesn’t save investors.  Eighteen months ago, the long term bond portion of aggregate bond funds were destined to perform terribly.  It was predictable that short-term bond funds would perform better than aggregate bond funds.  The fact that all this was largely invisible to bond fund holders didn’t change the fact that the long-term bonds in their aggregate bond funds got hammered.  Over 18 months, Vanguard’s aggregate bond ETF lost 13%, while the short-term bond ETF lost only 5%.

Will it ever make sense to own long-term bonds?

If Real-Return Bonds (RRBs) ever offer high enough returns above inflation again, I would certainly consider buying some.  The idea of getting a non-trivial return along with inflation protection is very appealing.


It pays to think about what you’re owning when it comes to bonds.  You can’t learn anything useful by just staring at the price movements of your bond ETFs.  Long-term bonds become dangerous after their prices rise to the point where yields looking forward become very small.

Monday, April 25, 2022

The Rule of 30

Frederick Vettese has written good books for Canadians who are retired or near retirement.  His latest, The Rule of 30, is for Canadians still more than a decade from retirement.  He observes that your ability to save for retirement varies over time, so it doesn’t make sense to try to save some fixed percentage of your income throughout your working life.  He lays out a set of rules for how much you should save using what he calls “The Rule of 30.”

Vettese’s Rule of 30 is that Canadians should save 30% of their income toward retirement minus mortgage payments or rent and “extraordinary, short-term, necessary expenses, like daycare.”  The idea is for young people to save less when they’re under the pressure of child care costs and housing payments.  The author goes through a number of simulations to test how his rule would perform in different circumstances.  He is careful to base these simulations on reasonable assumptions.

My approach is to count anything as savings if it increases net worth.  So, student loan and mortgage payments would count to the extent that they reduce the inflation-adjusted loan balances.  I count contributions into employer pensions and savings plans.  I like to count CPP contributions and an estimate of OAS contributions made on my behalf as well.  The main purpose of counting CPP and OAS is to take into account the fact that lower income people don’t need to save as high a percentage of their income as those with higher incomes because CPP and OAS will cover a higher percentage of their retirement needs.

Unlike my approach, Vettese counts certain types of expenses like daycare, rent, and mortgage interest.  He seeks to take the pressure off people to save so much when they’ll very likely be better able to save later in their lives.

A Concern

This brings me to a concern about the Rule of 30.  Vettese assumes people will get significant pay increases over the course of uninterrupted careers.  No doubt his assumptions are a reasonable guess at the average outcome, but there is a wide range of outcomes.  Some people get laid off and have to take lower-paying jobs after a very long job search (think Nortel).  Some people can’t stand their jobs and change careers.

Building some savings early leads to more choices.  Vettese is right that if you do have a successful uninterrupted career, you will have scrimped when your children were young and you could least afford it.  However, if you get laid off and need money to live on while retraining, you’ll be very happy to have some savings.  Building savings provides protection from many risks.

All that said, Vettese’s ideas are useful.  Perhaps those who want the security that comes with saved money could follow the Rule of 30 with a minor change to set some floor on the saving percentage like 5% or 7%.

Vettese had more interesting things to say on a number of topics not directly related to his Rule of 30.

Public Sector Pensions

Public sector pensions are aimed at replacing 70% of final average pay, which is more than it should be.  This replacement level jumps to about 80% when we count OAS.  To justify such large pensions, “The minister of Finance at the time stated publicly that public sector workers had lower salaries than their counterparts in the private sector.”  But that’s no longer true.

Little is likely to be done about these high pensions because “20 percent of [journalists’] readership work in the public sector,” politicians “are not keen to alienate the public sector unions,” and pension actuaries get “much of their business from the public sector.”

Typical Retiree Spending Pattern

“The typical spending pattern for retirees is to increase their spending in line with inflation until their early 70s, after which spending will continue to increase in nominal terms but by less than the inflation rate.  This tendency to spend less (in real terms) with age intensifies in one’s 80s but then may start to rise again very late in life when retirement homes and personal support workers enter the equation.”

I don’t find this appeal to what the average retiree does very persuasive.  The average Canadian smokes about 2 cigarettes a day.  That doesn’t mean I should too.  I prefer to model my behaviour on just the non-smokers.  Similarly, data on retiree spending is skewed by the subset of retirees who overspend early in retirement and are forced to cut back rather than doing so by choice.  I don’t want to model my own retirement on data that includes retirees who handled their money poorly.

I agree that it’s normal for people to spend less by choice at some point as they age.  My concern is that the timing and size of this decrease is hard to determine when we mix in data from people who spend less because they’re running out of money.

All that said, many researchers have determined that retiree spending begins to drop in real terms almost immediately after retirement begins.  So, Vettese has already made some adjustments by delaying the assumed decrease in real spending from a retiree’s 60s to his or her 70s.

Bull Market in Bonds

Looking to the past 40 years of bond returns to see what’s likely to happen in the future is a big mistake.  “Bonds made great capital gains because yields fell from 15 percent in the early 1980s to the present level of 1 percent.  To duplicate that feat, bond yields would have to fall by that much again, which would bring the yield down to negative 13 percent.  Obviously, that’s not going to happen.”

Since this book was written, bond yields have risen a little, and we’re seeing this hurt bond prices.


The idea of varying one’s saving percentage over one’s life isn’t new, but Vettese proposes a specific rule, The Rule of 30, and makes a number of projections to test it.  His rule fares well in the testing, and it should work well for anyone whose life and career conform to the testing assumptions.  It is clear that Vettese sought to create a rule that would work across a wide range of circumstances, but some Canadians’ careers won’t go smoothly enough to justify saving too little early on.  However, even readers who don’t adopt Vettese’s specific rule will benefit from his well-explained methods of analysis.