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.