Short Takes: Cryptocurrency Ponzi, Goods vs. Experiences Pushback, and more

Our dispute with VRBO continues.  We’ve been told 3 times now that our money has been returned and that we’ll see it reflected in our credit card account soon.  We haven’t seen anything.  These promises have alternated with claims that their “system is down” and that we should be patient.  We’ve now got the credit card company involved, which will hopefully fix things.  One thing is certain at this point: we will not be doing business with VRBO or their sub-entity, a property management company, again.

Here are my posts for the past two weeks:

Balance: How to Invest and Spend for Happiness, Health, and Wealth

Annually Recalculated Variable Annuity

Now is a Good Time to Decide Whether Your Portfolio is Too Risky

My Investment Return for 2021

Here are some short takes and some weekend reading:

Sohale Andrus Mortazavi explains why cryptocurrency is a giant Ponzi scheme.  No doubt there are differing opinions on this matter, but Mortazavi shows his work, so counterarguments would need to address the many supporting facts in his article.  For more thoughts on cryptocurrencies, Preet Banerjee has some advice for those who have cryptocurrency FOMO (Fear of Missing Out).

Harold Lee offers some interesting pushback on the mantra of buying experiences instead of goods.  I suspect there’s an appropriate balance between consumption of experiences and goods, and it’s worth thinking about which side of this balance we’re on.  I’ve had direct experience with hoarders, and this seems to be a much more serious problem than seeking too many experiences.

Preet Banerjee goes over the downsides of Buy Now Pay Later (BNPL) loans, even if you can always make the payments.

John Archibald tells a wild story about an out-of-control police force targeting drivers for profit in Brookside, Alabama.  My takeaway is don’t go to Alabama.

Justin Bender describes his “Plaid” asset location strategy that saves on taxes.  In an otherwise excellent article, I have a small quibble with the phrase “pre-tax risk”.  Only post-tax risk is real.  In pre-tax terms, there is only “apparent risk”.  A word of warning for those thinking of implementing this portfolio: this strategy is best for spreadsheet nerds like Justin and me.  It’s likely that most people who try to follow it will ultimately give up and try something easier like just holding the same all-in-one ETF in every account.

John Robertson reviews Dan Bortolotti’s book Reboot Your Portfolio (my review here), and contrasts it with his own book, The Value of Simple (my review here).  Robertson also reviews National Bank Direct Brokerage.  It’s refreshing to read a brokerage review that isn’t obviously a paid promotion.  He had another good take explaining the dangers of trading on a phone.

Robb Engen at Boomer and Echo goes through a retirement readiness checklist for those within 5 years of retirement.

Preet Banerjee interviews Andrew Hallam to discuss his latest book, Balance.

Canadian Couch Potato updates us on the TD eSeries mutual fund returns for 2021.  However, this will be his last update on eSeries funds for reasons he explains have nothing to do with the funds themselves, but have to do with the emergence of attractive alternatives and some brokerages charging new commissions on trading eSeries funds.

My Investment Return for 2021

My portfolio’s return for 2021 was 16.7%, which is the same as my benchmark’s return.  Even with higher inflation, markets delivered a double-digit inflation-adjusted return for my overall portfolio.  For a few years now I’ve been thinking that the probability of a correction in stocks has been rising, but that correction has never come.  Instead, the opposite has happened; stocks keep rising.  It’s a good thing I don’t act on my specific guesses about the future of markets.  I try to make sure I’m well positioned for a wide range of possibilities.

As stock prices grew to nosebleed levels, I thought about if and how I should respond.  However, I had no interest in making emotional portfolio decisions.  In the end I decided to use the blended Cyclically Adjusted Price-Earnings (CAPE) ratio of my stocks to make small adjustments to both my bond allocation and my expectations about future stocks returns.  These adjustments are simple formulas that are coded into my emotionless portfolio spreadsheet.  I don’t expect stock valuations to rise to ever crazier levels, but if they do, my spreadsheet is ready.

Below is a chart of my cumulative real (inflation-adjusted) portfolio returns since 1994.  Money I saved in 1994 has grown in purchasing power by a factor of more than 8.  In nominal terms it has grown even more.  The power of saving money in stocks for the long term is amazing.

Leading up to my retirement in mid-2017, I worried about what would happen if stocks crashed shortly after I retired.  This is called sequence-of-returns risk.  To compensate, I waited until I thought I’d still have enough savings to retire if stocks dropped 25% to 30%.  Fast-forward to today, and my compound average real return over the 4.5 years since I retired has been just over 7% per year.  So, I now know that I worked longer than I needed to, but I couldn’t have known that at the time.

If I were retiring today with stock prices as high as they are, I might build into my plan as much as a 40% initial drop in stock prices.  This isn’t a prediction.  It’s just the way I think about whether I have enough savings to retire.  Among a reasonable set of possible outcomes is poor stock returns in early retirement.  Your mileage may vary.

Now is a Good Time to Decide Whether Your Portfolio is Too Risky

Back in March 2020 after stock markets had crashed, I expressed my disgust with the chorus of voices saying that this was the time to re-evaluate your risk tolerance.  That advice was essentially telling people to sell stocks while they were low, which makes little sense.  After the crash it was too late to re-evaluate your risk tolerance.

I suggested “we should record videos of ourselves saying how we feel after stocks crashed” and watch this video after the stock market recovers.  Well, the stock market has long since recovered.  Now is a great time to recall how you felt back in March 2020.  Did you have any sleepless nights?

Now that markets are near record levels, it’s time to consider whether permanently lowering your allocation to stocks would be best for you in anticipation of future stock market crashes.  Unfortunately, this isn’t how people tend to think.  It’s while stock prices are low that they want to end the pain and sell, and it’s while stock prices are high that they feel most comfortable.

Annually Recalculated Virtual Annuity

A very low risk way to handle your portfolio in retirement is to invest the whole thing in inflation-protected government bonds and choose a spending level that will have your money last for a very long life.  A related idea is the Annually Recalculated Virtual Annuity (ARVA) where you invest as you see fit and choose your retirement spending level as though your portfolio were invested in inflation-protected government bonds.  Then each year you recalculate your spending level based on your new portfolio size, your new age, and prevailing bond interest rates.

The ARVA idea was introduced by Waring and Siegel in their well written and accessible paper The Only Spending Rule Article You Will Ever Need.  Investors who use the ARVA idea will have annual retirement spending “that fluctuates with asset values, but they can never run out of money.”

The ARVA idea is broadly similar to my own retirement spending plan that is designed to adapt my retirement spending as my portfolio fluctuates.  The similarities between mine and ARVA are that they take into account the planned number of years of retirement left, and they use an assumed rate of return to calculate the amount to spend each year that will ultimately deplete the portfolio.  The differences are in the assumed lifespan and how we arrive at the assumed rate of return.

Very low retirement spending

The downside of ARVA is that it is very conservative and will have you spending very little.  One reason for this is low government bond yields.  In Canada, inflation-protected government bonds are called Real-Return Bonds (RRBs), and as I write this their annual yield is 0.21% above inflation.  A second reason is the authors’ retirement duration advice: “Whatever one’s view on the likelihood of living to extreme old age, it seems prudent to provide for oneself to at least age 105 if male or 110 if female.”

Consider the case of a 60-year old woman.  To provide for a 50-year retirement (until she’s 110 years old) making an investment return of only 0.21% above inflation, we can use the PMT spreadsheet function to find that she can only spend 2.1% of her portfolio in her first year of retirement.  This is a far cry from the widely-quoted 4% rule, particularly when we consider that the ARVA strategy adapts to portfolio fluctuations and can lead to future declines in spending.  Usually, when retirees are prepared to accept future reductions in spending (when portfolio returns disappoint), it increases their current safe spending amount.

To arrive at a rate of return assumption, I use 4% above inflation less costs for stocks, and 0% above inflation less costs for bonds.  I adjust my assumed stock returns downward when the blended Cyclically Adjusted Price-Earnings (CAPE) ratio of my stocks exceeds 20.  Unless the CAPE rises crazily, this gives me an assumed return that is higher than current Real Return Bond rates.  For the length of my retirement, I assume my wife and I will live to 100, rather than 110 and 105.

When I apply ARVA to my own portfolio, I find that it reduces my spending level by 34%.  This is a large reduction considering that most experts already find my approach too conservative.  However, many of these experts are financial advisors who feel the pressure from their clients to say that higher spending rates are safe and reasonable.  So, I’m comfortable that I’m not being unreasonably conservative.

Conflicting Desires

The authors observe that “most people are short on retirement savings to begin with and are anxious to convince themselves that their need for more assets to support desired spending is less than it really is.  Even otherwise thoughtful investors seem springloaded to reject out of hand the need to provide for one’s entire life—and yet they do nonetheless worry about the risk of running out of money.”  The ARVA approach appeals to the “worry” side of this contradiction.

Other spending profiles

So far, we’ve been discussing flat retirement spending over time (with inflation adjustments).  However, it is possible “to modify the shape of the payout, the relative amounts spent over time. There is nothing special about equal payments.”  However, it’s possible to take this too far.  If we decide we’ll spend twice as much in our 60s as in our 80s, we’re using the ARVA approach in name only.  When we get to our 80s and find we can’t cut our spending in half, the ARVA promise that we’ll never run out of money falls flat.

Insurance products

In theory, insurance companies should be able to make a profit for themselves and help retirees by pooling longevity risk.  Academics see the poor uptake of annuities as the “annuity puzzle.”  Unfortunately, there is a big gap between academic theory and the practical reality of the products that insurance companies offer.

“In its seemingly boundless desire to offer something—anything—to appeal to longevity risk hedgers without providing safe (properly hedged), simple, transparent, and fairly priced life annuities, the insurance industry has designed a number of strategies that guarantee a lifetime income (subject to the insurer’s continued solvency).”  As an insurance company customer, “it is hard to figure out whether you are getting a fairly priced deal, so you are probably not.”

Conclusion

The ARVA strategy for deciding how much to spend annually from a portfolio will appeal to the most conservative retirees who want to be certain they’ll never run out of money.  However, most retirees will find the ARVA spending level to be far lower than they were hoping for.  My own fairly conservative strategy calls for more than 1.5 times the spending that ARVA permits.

Balance: How to Invest and Spend for Happiness, Health, and Wealth

Andrew Hallam’s new personal finance book Balance is unlike any other financial book I’ve read.  He uses research to show us how to spend and invest in ways that create a happy and fulfilling life.  He uses vivid stories to illustrate his points that make the book a pleasure to read.  There’s a lot more to life satisfaction than just amassing personal wealth and owning fancy toys.

The book opens with the “four quadrants to a successful life”: “Having enough money,” “Maintaining strong relationships,” “Maximizing your physical and mental health,” and “Living with a sense of purpose.”  “I’ve met plenty of conventionally successful people (measured by money and career) who appeared less satisfied than, say, a family of Argentinians traveling through Mexico in a motorhome.”  I’ve had a similar experience seeing many executives with highly successful careers who are divorced and work so much that they do little at home other than eat, slump in front of a television, and sleep.

Stuff vs. Experiences

“What do you value more, your stuff or your life?”  This question has meaning for me having grown up with a parent who was a hoarder.  However, even non-hoarders often prioritize buying stuff over relationships and avoiding debt.  “If we want to live the best lives we can, we shouldn’t normalize credit card debts or auto loans.”  “Cars are the greatest personal wealth destroyer.”  Research shows that rich people often don’t drive fancy cars; when you see an expensive car, there’s a good chance its owner is in debt.

“Material things rarely boost life satisfaction.”  “Spend less money on stuff and more on memorable experiences.”  Experiences remain memorable for decades, but the stuff we buy is often quickly forgotten.   Some of the worst purchases are the ones we make solely to impress others.  “Before purchasing something, … Ask yourself, ‘Would I still buy this if nobody else could see it?’”

The things that affect happiness

Research shows that “we tend to be happier when we earn more than our neighbors.”  This leads to the advice to move to a neighbourhood where you have above-average income.  Unfortunately, that makes your new neighbours less happy.  It would be better if we could all be above such comparisons, but that’s easier said than done.

“Close relationships—far more than money—are the single greatest influence on a happy life.”  This resonates with me.  When I plan to travel somewhere warm for the winter months, my biggest concern is who I’m traveling with and what social activities we can get involved in.  For short trips, it’s good to go somewhere interesting, but for long trips, company trumps location.

“Research suggests we also narrow our social circles as we age.”  Focusing on those “we’ve formed deep connections with” works well for a time, but I think it’s a problem when these people start to pass away.  I wonder if this is part of the reason why we see so many desperately lonely older people living alone in a big house.

Hallam’s command of research on happiness and life satisfaction and his ability to use it to steer a good path in life are impressive.  The broad strokes of his lessons appear solid, but I wonder if some of the specific studies will fall to the widespread reproducibility crisis.  For example, there are “several large studies confirming that caring for others helps us live longer.”  Isn’t it necessarily the case that healthy people care for the weak?  It seems plausible that the causation is in the other direction: healthier people live longer and are more able to care for others.  Perhaps the studies’ authors found some way to prove that causation goes both ways to some degree.

Big purchases and budgeting

On the subject of stretching to buy a home, Hallam makes an excellent suggestion: “ask yourself if you could still afford the mortgage if the interest rate doubled or you were out of work for six months.”  I’d change the “or” to an “and”.  Too many people sign up for a decade or more of stress when they stretch to buy a house.  Renting is not synonymous with failure.  It’s possible to rent a nice place and get on with your life’s plans.

“To me, budgets are like diets.  Sometimes they work … but they usually don’t.”  Hallam advocates tracking your spending with a handy app, but he finds trying to set limits in advance on spending in various categories ineffective.  Just knowing how much you spend in each category will drive any needed change.

Investing

“Contrary to what many talking heads on YouTube, On TV, or in financial magazines may lead you to believe, you don’t need to follow the economy or know how to choose the best stocks to buy.”  “Banks, insurance companies, and investment firms … are filled with legally sanctioned crooks (and sometimes kind, naïve people).”

Hallam tells an interesting story to illustrate how savings accounts fail over the long- term because of inflation.  Many people pine for the days when savings accounts paid higher interest, but the story shows that the same inflation problem existed back in 1980.  One illuminating table shows how often U.S. savings accounts beat inflation over 5-year rolling periods from 1972-2020.  The answer: none!  The best place for long-term savings is stocks and bonds.

“Index funds are part of financial literacy.”  “If you learn to invest effectively, you could enjoy your chosen career instead of selling your soul for a higher-paying position you hate.”

One of my favourite sections is “Financial Advisors and Their Anti-Index Battle Plan.”  It shreds the many practiced arguments the pushers of expensive mutual funds use to persuade people to avoid indexing.  The funny thing is that financial advisors seem to believe the things they are trained to say by their organizations.  In their own portfolios, “researchers found that they performed almost as badly as their clients.  When comparing their performances to an equal-risk-adjusted portfolio of index funds or ETFs, the advisors underperformed by about 3 percent per year.”

The best plan is to choose some index funds or ETFs, and set some automatic contributions.  “The less you think about your investments, the more money you’ll likely make.”

Hallam lays out three choices for index investing: financial advisor, robo-advisor, or do-it-yourself (DIY).  Which you choose depends on your skills and interests.  He goes on to explain in detail how investors in different countries can succeed with index investing using each of the three approaches.

I enjoyed a story that began with “Do you believe in ghosts?” It explained why new investors should probably choose a slightly more conservative asset allocation than they think they can handle.  While I think it’s possible to learn to take market volatility in stride, if you haven’t had a chance to develop this equanimity, Hallam’s advice makes sense.

Social Responsibility

“Buy less of everything.  This should improve your happiness, your financial bottom line, and your children’s and grandchildren’s future.”  Buying less stuff isn’t just about saving the world; you’ll likely be happier as well.

“The UN Environment Programme has gone on record as saying fashion accounts for 8 to 10 percent of global carbon emissions.”  Wow.  It turns out that I’m not a weird-looking old guy dressed in decades-old clothes; I’m an environmentalist.

During the pandemic some airlines offered a “flight to nowhere.”  This wouldn’t appeal to me in any way, but some people actually boarded an 8-hour flight that just circled back to the same airport.  I like traveling, but it’s the being there that I like, not the flight.  It seems that some people disagree.  This would be harmless enough if it weren’t for the environmental impact.

Retirement

Numerous studies have shown that good health and working past normal retirement age are correlated.  I’ve always been suspicious of the implication that working causes good health.  It’s clear that poor health increases the chances of being forced to retire or simply choosing to quit because the work has become difficult.  This must be responsible for at least part of correlation findings in studies.  I agree that facing new challenges is important, but not everyone needs a boss or paying client to provide such challenges.

“Research suggests that, for most retirees, costs continue to drop as they age.”  This is another study I find questionable.  It’s true that retirees’ real spending declines, on average, as they age.  The numbers don’t lie.  However, averages hide a wide range of experiences.  Certainly, some retirees spend too much early on and are forced to spend less later.  These retirees skew the average.  No doubt some spend less by choice.  The question is, do you want to model your retirement on data consisting partially of people who screwed up their own retirements?  To me this is like saying, “The average Canadian smokes two cigarettes a day, so you should too.”  I’d rather model my smoking habits on those who don’t smoke, and my retirement on the set of retirees who didn’t have spending reductions forced on them.

Conclusion

I was only able to give a taste of the important and entertaining topics covered in this book.  So many of the ways we earn, save, and spend our money don’t increase our happiness and life satisfaction.  Hallam teaches us how to change this for the better.

Short Takes: 2021 Investment Returns, Tax-Efficient Asset Location, and more

Before the pandemic, my wife and I used to travel south with a group of friends to somewhere warm during part of the Canadian winter.  In 2020, the pandemic cut this trip short a little, and we didn’t go in 2021 at all.  We were hopeful for 2022 and booked a place through VRBO under the terms that we could cancel for a full refund any time before Jan. 2.  When Omicron emerged we waited for a while to be sure, but most of our group decided against traveling, so we cancelled our booking on Dec. 29.  

Since then, VRBO and some sub-entity of theirs has put us through the wringer as we try to get our money back.  We’ve heard all the excuses: the woman who handles this is sick, she’s not in right now, we’ll have her call you back later.  They appeared to be screening our calls, so we started calling from different phones.  When we did get to speak to the woman who could help us, we got other excuses: the app I do this on isn’t working, our server is down, it will be done sometime in the next couple of days.  Somehow they were able to take our money on time but can’t manage to return it.

After 15 days of this nonsense, we’re about ready to give up on VRBO and dispute the charge on our credit card.  It’s disappointing that the goodwill of a repeat customer appears to have so little value to them.

Here are some short takes and some weekend reading:

Robb Engen goes over 2021 investment returns and mixes in some good lessons about sticking to a plan and not chasing past winners.  Canadian Couch Potato brings us the couch potato returns for 2021.

Justin Bender goes into even more detail on investment returns of different index ETFs.  I love the Charles Ellis quote, particularly the part about making portfolio changes with a sense of urgency: “Benign neglect is the secret to long-term investing success. If you change your investment policy, you are likely to be wrong; if you change it with a sense of urgency, you’re guaranteed to be wrong.” — Charles Ellis

Justin Bender explains his “Plaid” asset location strategy.  It is genuinely tax-efficient on an after-tax basis and resembles my own portfolio.  It’s main features are that it seeks to hold stocks in RRSPs and TFSAs, and bonds in taxable accounts (when there is no additional RRSP or TFSA room available).  However, this strategy is only suitable for a small minority of DIY investors willing to do a lot of initial work to automate their portfolios.  Unless you enjoy spreadsheets or programming, odds are you’re better off holding the same mix of stocks and bonds in each account using an all-in-one ETF.  My spreadsheet calculates my annual savings from using low-cost U.S. ETFs and a tax-efficient asset location strategy compared to just using the same all-in-one ETFs in every account.  These savings are currently 5% of the annual amount I can safely spend from my portfolio.  This amount isn’t trivial, but it wouldn’t be hard to lose more than this by implementing a Plaid-like portfolio poorly.

John Robertson gives us a thoughtful review of Fred Vettese’s book The Rule of 30.

Big Cajun Man chronicles his challenges moving an account from TD to TD DirectLine.  This is consistent with my experience where banks maintain a wall between their expensive “regular” services and their discount services.

Andrew Hallam explains a dumb investment mistake even smart (and rich) people make.