Monday, December 18, 2023

A Hole-in-One Shows that Money isn’t always Fungible

My wife golfs with a ladies group in Florida sometimes.  They all chip in a few bucks for prizes, and some of that money goes to the golfer who is closest to the pin on a designated hole.

My wife’s group was last to play this hole, and they could see the best effort so far; a marker stood about 9 feet from the pin.  One of the ladies in this last group hit a shot that came to rest closer to the pin.  She now stood to scoop up some prize money.

Then my wife hit a shot she thought was off line, but it came off a banked part of the green and rolled all the way down to the hole.  A hole-in-one!

Her prize was $30.  That stack of U.S. singles sits on her nightstand.  Eventually, she’ll spend that money, but not yet.

For now, that money isn’t fungible.  One day it will become fungible, but right now it serves as a pleasant reminder of a fun day.

Friday, November 10, 2023

Stocks for the Long Run, Sixth Edition

Jeremy Siegel recently wrote, with Jeremy Schwartz, the sixth edition of his popular book, Stocks for the long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies.  I read the fifth edition nearly a decade ago, and because the book is good enough to reread, this sixth edition gave me the perfect opportunity to read it again.

I won’t repeat comments from my first review.  I’ll stick to material that either I chose not to comment on earlier, or is new in this edition.

Bonds and Inflation

“Yale economist Irving Fisher” has had a “long-held belief that bonds were overrated as safe investments in a world with uncertain inflation.”  Investors learned this lesson the hard way recently as interest rates spiked at a time when long-term bonds paid ultra-low returns.  This created double-digit losses in bond investments, despite the perception that bonds are safe.  Siegel adds “because of the uncertainty of inflation, bonds can be quite risky for long-term investors.”

The lesson here is that inflation-protected bonds offer lower risk, and long-term bonds are riskier than short-term bonds.

Mean Reversion

While stock returns look like a random walk in the short term, Figure 3.2 in the book shows that the long-term volatility of stocks and bonds refutes the random-walk hypothesis.  Over two or three decades, stocks are less risky than the random walk hypothesis would predict, and bonds are riskier.

Professors Robert Stombaugh and Luboš Pástor disagree with this conclusion, claiming that factors such as parameter and model uncertainty make stocks look riskier a priori than they look ex post.  Siegel disagrees with “their analysis because they assume there is a certain, after inflation (i.e., real) risk-free financial instrument that investors can buy to guarantee purchasing power for any date in the future.”  Siegel says that existing securities based on the Consumer Price Index (CPI) have flaws.  CPI is an imperfect measure of inflation, and there is the possibility that future governments will manipulate CPI.

Siegel continues: “Additionally, the same caution about the interpretation of historical risk that applies to stocks also applies to every asset.  All assets are subject to extreme outcomes called tail risks or black swan events.”

Rating Agencies’ Role in the Great Financial Crisis of 2008-2009

Siegel offered a partial defense of rating agencies who failed to see that mortgage-related securities were risky:

“Standard & Poor’s, as well as Moody’s and other ratings agencies, analyzed these historical home price series and performed the standard statistical tests that measure the risk and return of these securities.  Based on these studies, they reported that the probability that collateral behind a nationally diversified portfolio of home mortgages would be violated was virtually zero.  The risk management departments of many investment banks agreed with this conclusion.”

Standard statistical tests are notoriously unreliable when it comes to extreme events.  Flawed math might say an event has probability one in a trillion trillion when its true probability is one in ten thousand.  The world is full of people who use statistical methods they don’t understand, and there are others who use statistics to get the answer they want for personal gain.


I still agree with my conclusion in reviewing the previous edition: This book is very clearly written and offers powerful evidence for the advantages of investing in stocks. I highly recommend it to investors.

Friday, October 27, 2023

Going Infinite Doesn’t Say What People Want to Hear Right Now

Michael Lewis’ latest book Going Infinite: The Rise and Fall of a New Tycoon is an entertaining account of the journey of Sam Bankman-Fried and his cryptocurrency trading firm FTX.  Lewis’ many critics wanted the story to be a deep dive into Sam’s criminal activity and fraud within the cryptocurrency industry, but that’s not the story Lewis is telling.

Relative to social and business norms, Sam is an outlier of huge proportions.  So much so, that his meteoric rise in the cryptocurrency business world would have seemed impossible in advance.  This is the story Lewis told. However, Sam is currently on trial for (allegedly) swindling billions from traders and investors.  Those most interested in this story wanted to learn more details of the swindling.

Some critics accuse Lewis of having been taken in by Sam.  I didn’t get this from the book.  Lewis did discuss Sam’s seeming transgressions, he just didn’t dwell on them because they weren’t central to the story he was telling.  One example of the discussion of a potential crime is “FTX had simply loaned Alameda all of the high-frequency traders’ deposits … for free!”

In another example, Lewis at one point had done some simple accounting and had concluded that billions of dollars were missing.  He tried to press Sam about it, but “Either he didn’t know where the money had gone or he didn’t want to say.”  Note that not knowing where the money had gone is not the same as not knowing it had been taken in the first place.

Readers who don’t care much about cryptocurrencies or Sam’s guilt or innocence will likely find this story entertaining.  Lewis displays his usual skill at evoking vivid and funny images.  At a big media event “Sam emerged, looking as if he had fallen out of a dumpster.”

Going to a meeting with Mitch McConnell, Sam “carried what appeared to be a small pile of old laundry” which turned out to be a suit.  “[Sam] walked up the steps of the private plane and plopped the suit ball onto a spare seat.”  McConnell liked to be addressed as “Leader”, and Sam needed to practice to avoid saying “Dear Leader.”

“He tossed popcorn in his mouth, in a herky-jerky motion that resembled a clumsy layup.  He was shooting around 60 percent, and the popcorn was flying everywhere.”

After reading the book, I was left with the impression that Sam would very likely be convicted of financial crimes.  But the story was really about Sam Bankman-Fried and a cast of other implausible characters doing things that didn’t seem like they should have been possible.  However, it’s understandable if people who lost their life savings in FTX don’t want to hear about Sam’s interesting quirks.

Monday, October 23, 2023

What Experts Get Wrong About the 4% Rule

The origin of the so-called 4% rule is WIlliam Bengen’s 1994 journal paper Determining Withdrawal Rates Using Historical Data.  Experts often criticize this paper saying it doesn’t make sense to keep your retirement withdrawals the same in the face of a portfolio that is either running out of money or is growing wildly.  However, Bengen never said that retirees shouldn’t adjust their withdrawals.  In fact, Bengen discussed the conditions under which it made sense to increase or decrease withdrawals.

Bengen imagined a retiree who withdrew some percentage of their portfolio in the first year of retirement, and adjusted this dollar amount by inflation for withdrawals in future years (ignoring the growth or decline of the portfolio).  He used this approach to find a safe starting percentage for the first year’s withdrawal, but he made it clear that real retirees should adjust their withdrawal amounts in some circumstances.

In his thought experiment, Bengen had 51 retirees, one retiring each year from 1926 to 1976.  He chose a percentage withdrawal for the first year, and calculated how long each retiree’s money lasted based on some fixed asset allocation in U.S. stocks and bonds.  If none of the 51 retirees ran out of money for the desired length of retirement, he called the starting withdrawal percentage safe.

For the specific case of 30-year retirements and stock allocations between 50% and 75%, he found that a starting withdrawal rate of 4% was safe.  This is where we got the “4% rule.”  It’s true that this rule came from a scenario where retirees make no spending adjustments in the face of depleted portfolios or wildly-growing portfolios.  So, he advocated choosing a starting withdrawal percentage where the retiree is unlikely to have to cut withdrawals, but he was clear that retirees should reduce withdrawals in the face of poor investment outcomes.

We can see Benegen’s thinking in two quotes from his paper.  When a portfolio is depleting too fast, a retiree has the “option to improve the situation for the long term, and that is to reduce—even if temporarily—his level of withdrawals.”  When a portfolio’s growth exceeds expectations, “Some increase in withdrawals are probably inevitable.”

So, when experts think they are criticizing Bengen when they say the 4% rule is too inflexible, they are mischaracterizing his paper.  I’m not aware of any serious advocate for blindly following a fixed spending plan in retirement that ignores portfolio growth or decline.

Bengen’s paper has its faults, though.  Here are several articles I’ve written about the 4% rule:

Adjusting the 4% Rule for Portfolio Fees

Revisiting the 4% Rule

A Quiz on the 4% Rule

4% Rule Based on Longevity Statistics

Tuesday, August 22, 2023

Misleading Retirement Study

Ben Carlson says You Probably Need Less Money Than You Think for Retirement.  His “favorite research on this topic comes from an Employee Benefit Research Institute study in 2018 that analyzed the spending habits of retirees during their first two decades of retirement.”  Unfortunately, this study’s results aren’t what they appear to be.

The study results

Here are the main conclusions from this study:

  • Individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets.
  • Those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent.
  • Retirees with at least $500,000 immediately before retirement had spent down only 11.8 percent within the first 20 years of retirement at the median.
  • About one-third of all sampled retirees had increased their assets over the first 18 years of retirement.

The natural conclusion from these results is that retirees aren’t spending enough, or that they oversaved before retirement.  However, reading these results left me with some questions.  Fortunately, the study's author answered them clearly.

At what moment do we consider someone to be retired?

People’s lives are messy.  Couples don’t always retire at the same time, and some people continue to earn money after leaving their long-term careers.  This study measures retirement spending relative to the assets people have at the moment they retire.  Choosing this moment can make a big difference in measuring spending rates.

From the study:

Definition of Retirement: A primary worker is identified for each household. For couples, the spouse with higher Social Security earnings is the assigned primary worker as he/she has higher average lifetime earnings. Self-reported retirement (month and year) for the primary worker in 2014 (latest survey) is used as the retirement (month and year) for the household.
There is a lot to unpack here.  Let’s begin with the “self-reported retirement” date.  People who leave their long-term careers tend to think of themselves as retired, even if they continue to earn money in some way.  Depending on how much they continue to earn, it is reasonable for their retirement savings either to decline slowly or even increase until they stop earning money.  What first looks like underspending turns out to be reasonable in the sense of seeking smooth consumption over the years.

The next thing to look at is couples who retire at different times.  Consider the hypothetical couple Jim and Kate.  Jim is 6 years older than Kate, and he is deemed to be the “primary worker” according to this study’s definition.  Years ago, Jim left his insurance career and declared himself retired, but he built and repaired fences part time for 12 more years.  Kate worked for 8 years after Jim’s initial retirement.  

Their investments rose from $250,000 to $450,000 over those first 8 years of retirement, declined to $400,000 twelve years after retirement, and returned to $250,000 after 18 years.  Given the lifestyle Jim and Kate are living, this $250,000 amount is about right to cover their remaining years.  Although Jim and Kate have no problem spending their money sensibly, they and others like them skew the study’s results to make it seem like retirees don’t spend enough.

What is included in non-housing assets?

From the study:
Definition of Non-Housing Assets: Non-housing assets include any real estate other than primary residence; net value of vehicles owned; individual retirement accounts (IRAs), stocks and mutual funds, checking, savings and money market accounts, certificates of deposit (CDs), government savings bonds, Treasury bills, bonds and bond funds; and any other source of wealth minus all debt (such as consumer loans).
So cottages and winter homes count as non-housing assets.  This means that a large fraction of many people’s assets is a property that tends to appreciate in value.  Even if they spend down other assets, the rising property value will make it seem like they’re not spending enough.  It is perfectly reasonable for people to prefer to keep their cottages and winter homes rather than sell them and spend the money.  

Consider another hypothetical couple Ted and Mary who have generous pensions that cover their needs and wants.  Their only significant non-housing assets are a cash buffer of $25,000, and a nice trailer in Florida whose value rose from $40,000 when they retired to $200,000 18 years later.  By the methods used in this study, Ted and Mary appear to be continuing to save throughout retirement for no good reason.  In reality they’re not doing anything wrong.  Once again, people like Ted and Mary are skewing the study’s results.

What about an inheritance?

It’s not uncommon for retirees to receive an inheritance from a long-lived family member or close friend of the family.  When the amount of this inheritance is predictable, beneficiaries can account for it in their spending.  However, beneficiaries often don’t know much about when they will get money, how much they will get, or even if they will be named in the final will.  

It’s prudent for retirees to plan for the low end of a possible range.  When they finally get the inheritance, and it turns out to be more than they planned to receive, it might look like they’re underspending when we only compare their assets on retirement day to their assets two decades later.


It’s always possible for nitpickers to quibble with the methodology of any study.  However, it would make a material difference in this study’s results if we were to adjust its methodology to account for working income after retirement, cottages, winter homes, and inheritance.  The study’s conclusions don’t mean anything close to what they appear to mean.  They shed no light on whether retirees are spending reasonably.  We know that there are retirees who spend too much, others that spend well, and those who spend too little.  This study fails to tell us anything about the relative sizes of these three groups.

Saturday, August 12, 2023

Party of One

We’ve heard for some time now that China’s rise as an economic superpower is inevitable, and that China will surely surpass the U.S.  Extrapolating from the past few decades, this appears certain.  However, changes made by China’s current leader, Xi Jinping, have cast doubt on China’s ascendancy.  Chun Han Wong has covered China for the Wall Street Journal since 2014 and has written the book Party of One: The Rise of Xi Jinping and China’s Superpower Future.  His descriptions of the massive changes Xi is making lead me to believe that China’s growth will at least slow, if not falter altogether.

My take on China is hardly original, and does not come from a deep understanding of China.  It comes down to the simple observation that for a society to become wealthier over the long term, its most brilliant and driven citizens must have the freedom to innovate.  We can’t know in advance which citizens will make a big impact, so this freedom must be available to most citizens to get the benefits from the few who will do big things.

Until recently, China’s rise has been impressive.  “Deng-era decentralization had unleashed dynamism that helped China boost its gross domestic product by more than fiftyfold from less than $150 billion in 1978 to $8.2 trillion by 2012, and bring more than 600 million people out of poverty.”  After decades of increasing freedoms under previous leaders, Xi has reversed course.  “Where pragmatic innovation once flourished, Xi imposed ‘top-level design.’”

Bureaucracy “has grown even more pervasive under Xi, whose top-down governance has driven officials toward foot-dragging, fraud, and other unproductive practices—so as to satisfy their leaders’ demands and avoid his wrath.”

Xi is using technology to exert greater control.  Citizens were assigned green, yellow, or red codes based on “their potential Covid exposure.”  “What began as a disease-control mechanism became a handy tool for social control, as some security agencies started using health-code data to flush out fugitives and block dissidents from traveling.”

“Xi’s insistence that entrepreneurs serve the party fostered what critics call a ‘hyper-politicized’ business environment, dampening enthusiasm to invest and innovate.”

Under Mao Zedong’s “totalitarian control,” “productivity frequently suffered, as factories were often overstaffed and workers generally content to meet minimum output quotas without concern for the quality or marketability of what they made.”  Although things aren’t this bad in modern-day China, Xi is heading down the same path.

In one example, police detained an entrepreneur, and his daughter stepped in to run the business.  But after more than 18 months, the daughter “made a dramatic plea: inviting the government to run the company and take over its assets.  ‘It’s too bitter and too tough being a Chinese private entrepreneur.’”

Although it has little bearing on China’s future growth, Xi’s sensitivity about his schooling is interesting.  According to “Hu Dehua, a son of former party chief Hu Yaobang,” Xi “attended school only until the first year of junior high.”  According to “one princeling who has known Xi for decades,” “Xi is not cultured.  He was basically an elementary schooler.”  “He’s very sensitive about that.”  Apparently, to compensate, Xi “started raving about his passion for books,” claiming to have read the works of dozens of famous writers.

In an extreme example of the suppression of human rights, “The United Nations human rights agency spent years reviewing” allegations of Beijing “committing cultural genocide against Uyghurs” and concluded that “Chinese authorities there may have committed ‘crimes against humanity.’”

According to “Wang Huning, a party theorist who joined the Politburo Standing Committee in 2017,” “American individualism, hedonism, and democracy would eventually blunt the country’s competitive edge.”  “Rival nations powered by superior values of collectivism, selflessness, and authoritarianism would rise to challenge American Supremacy.”  I think the opposite is true.  Rival nations can only catch up to the U.S. by freeing its people as China did to some degree in the decades leading up to Xi’s control.  Xi’s “top-down control suppressed initiative and flexibility, while encouraging rote compliance and red tape.”

“A decade into the Xi era, the party appears more in control than ever.  It embraces digital authoritarianism and maintains a high-tech security state.  It coerces and surveils its citizens with internet controls, big data, facial recognition, social-credit systems, and other state-of-the-art tools.  Civil society has been all but neutered; activists get imprisoned, muzzled, forced into exile, or coopted by the state.  Dissenting voices face police harassment, jail time, and a ravenous online ‘cancel culture’ fueled by party-backed patriotism.”

I’m not suggesting that China will collapse or that Xi will lose control of China.  China’s impressive economic rise to date could sustain it for decades even if its citizens are tightly controlled.  In a sense, the economy China has built is available to be spent by Xi in whatever way he sees fit.  He could also reverse course again and let capitalism grow its economy further.  As ever, the future is unclear.  What is clear from the evidence presented in this book is that Xi has made a hard break from the policies that fueled China’s rise.

Thursday, August 3, 2023

The Intelligent Fund Investor

There are many mistakes we can make when investing in mutual funds or exchange-traded funds.  Joe Wiggins discusses these mistakes from a unique perspective in his book The Intelligent Fund Investor.  He covers some familiar territory, but in a way that is different from what I’ve seen before.  Although most of the examples in the book are from the UK, the points of discussion are relevant to investors from anywhere.

Each of the first nine chapters cover one topic area where fund investors often make poor choices.  Here I will discuss some of the points that stood out to me.

“Don’t invest in star fund managers.”  There are many reasons to avoid star fund managers, but I never thought of lack of oversight by the fund company being one of them.  “Individuals working in risk and compliance have little hope of exerting any control – they are likely to be relatively junior and considered expendable.  If they go into battle against a star fund manager, there is only one winner.”

Wiggins claims that index funds perform best during periods when large stocks perform well, but that active funds are better when large stocks falter.  This first appeared to be an attempt to support expensive stock-picking fund managers, but late in this chapter he explained that by “active” funds he means “alternative index funds” such as smart beta or “funds tracking equally weighted indices.”  As for the problem of knowing whether large stocks are going to perform well or not, the author suggests mild shifts in index fund allocation based on the valuations of large stocks.

Investors like steady predictable returns, but “smooth fund performance conceals risk.”  The reported price of most funds is “marked to market,” meaning that the fund price is based on the current trading price of its holdings.  However, for funds holding illiquid investments, we usually don’t know what the current price would be if the holdings were traded.  In this case, the holdings are often “marked to model,” meaning that there is some price model that the holdings are assumed to follow, and these models tend to give smooth results.  “Private equity is another asset class that enjoys the benefits of mark to model pricing.”  “Unfortunately, both the return and risk measures commonly used are illusory.”

Simple investment approaches tend to give better results than complex strategies, but that doesn’t stop investors from seeking complexity.  We like to feel sophisticated.  “We don’t just buy complex funds because we believe they might give us better outcomes; we buy them because they make us look better.  The asset management industry is a more than willing seller.”  Wiggins gives two examples of complex funds: XIV and LTCM.  While they are examples of complex funds that cratered, they seem more directly to be warnings about using excessive leverage.

“Great stories make for awful investments.”  At some point, “a certain narrow area of the market will generate strong performance.  This attracts the attention of investors and the media.”  Then fund managers “launch concentrated funds tapping directly into this area.”  Such “thematic funds are perfect for asset managers as they come with built-in marketing.”  Some thematic funds “will wither and die, while others will raise assets and continue to outperform for a time.  There is no need to worry too much about the investors left experiencing losses or stumbling from one story to the next.”

In a chapter where the author argues convincingly that “investment risk is not volatility,” but “is the chance that we will fail to meet our objectives,” he makes a strange assertion.  “Most of us will have to draw on our investments at some juncture.  We should aim to make withdrawals as small and as late as possible.”  Making withdrawals at some point is the purpose of investing.  The goal shouldn't be to die with the largest possible portfolio.  There is nothing wrong with living well, as long as it doesn’t force us to scrimp late in life.

A lesson I learned the hard way was that “past performance is a terrible way to select a fund.”  Sadly, this is exactly how a high proportion of investors choose their investments.

The interests of the asset management industry are very poorly aligned with the interests of investors.  Wiggins does an excellent job of explaining this problem in both the cases with and without performance fees.  He even takes a run at explaining the problems with having a fund manager invest his or her own money in the fund alongside investor assets.  I found this argument much less compelling than the discussion of the other conflicts of interest.

In a discussion about focusing on the long term and not abandoning funds too quickly, the advice seemed to be to be patient, but not too patient if it turns out that the fund is being poorly run.  I found the whole discussion to be a strong argument for using simple index funds and not worrying about other types of funds.

In the last chapter before the conclusion, Wiggins explains the good and bad of investing in ESG (Environmental, Social, and Governance) funds.  Investors who want to just buy ESG funds to feel good about themselves might not be happy with what they learn in this chapter.

Overall, this is a thoughtful book about investing in funds intelligently.  Investors who choose their own funds will likely find useful discussion here.

Friday, July 14, 2023

Short Takes: Paying Cash, Breaking up Telcos, and more

I’ve noticed an increase in the number of businesses offering discounts for paying in cash.  I’m happy to see this for two reasons.  One is that those who pay in cash (or some equivalent)  have been subsidizing credit card users who collect various perks at others’ expense.  The second is that I’m happy to have some of my purchases not contribute transaction fees to Canada’s banking oligopoly.

Here are some short takes and some weekend reading:

has some advice for the CRTC aimed at improving competition among internet providers.  The most interesting one is to “Examine functional or structural separation, where large providers are split into two distinct companies. Under such an arrangement, one company owns and operates a network and sells wholesale access to it to all comers on an equitable basis. The other purchases that access on the same terms and rates as every other competitor, and then offers it to customers as retail internet service. Canada's big telcos currently do not want wholesale-based ISPs to exist so they are intent on killing them off – splitting them in two would change that.”

Tom Bradley at Steadyhand
makes the case for focusing on the fund returns that clients get (money-weighted returns) rather than funds’ time-weighted returns.  This puts the focus on helping clients improve their investing behaviour.

Robb Engen at Boomer and Echo explains the pitfalls in the ways people try to avoid probate fees.

Friday, June 30, 2023

Short Takes: Bank Accounts in the U.S., Investing in Retirement, and more

After only 10 short weeks, I’ve managed to open a checking account at a U.S. bank and move some money into it.  Some of the delay was due to misunderstandings on my part about what steps I was supposed to take next, and some of it was due to weird restrictions on the type of account in Canada that can be used to transfer money out of the country.  Mostly, though, it was the fact that there are many steps and each one seems to take a few business days.

I doubt that the specific details of my experience matter much.  The main takeaway is that if you’re considering opening a bank account in the U.S., consider starting the process long before you need the account to be in place.

Here are my posts for the past two weeks:

Bad Retirement Spending Plans

My Answer to ‘Can You Help Me With My Investments?’

Here are some short takes and some weekend reading:

Robb Engen at Boomer and Echo
describes a smart two-fund solution for investing in retirement.

Tom Bradley at Steadyhand explains the risks of owning liquid versions of illiquid investments.  This adds to what I’ve read about illiquid investments that convinces me to stay away.  Your mileage may vary.

Thursday, June 22, 2023

My Answer to ‘Can You Help Me With My Investments?’

Occasionally, a friend or family member asks for help with their investments.  Whether or not I can help depends on many factors, and this article is my attempt to gather my thoughts for the common case where the person asking is dissatisfied with their bank or other seller of expensive mutual funds or segregated funds.  I’ve written this as though I’m speaking directly to someone who wants help, and I’ve added some details to an otherwise general discussion for concreteness.

Assessing the situation

I’ve taken a look at your portfolio.  You’ve got $600,000 invested, 60% in stocks, and 40% in bonds.  You pay $12,000 per year ($1000/month) in fees that were technically disclosed to you in some deliberately confusing documents, but you didn’t know that before I told you.  These fees are roughly half for the poor financial advice you’re getting, and half for running the poor mutual funds you own.

It’s pretty easy for a financial advisor to put your savings into some mutual funds, so the $500 per month you’re paying for financial advice should include some advice on life goals, taxes, insurance, and other financial areas, all specific to your particular circumstances.  Instead, when you talk to your advisor, he or she focuses on trying to get you to invest more money or tries to talk you out of withdrawing from your investments.

The mutual funds you own are called closet index funds.  An index is a list of all stocks or bonds in a given market.  An index fund is a fund that owns all the stocks or bonds in that index.  The advantage of index funds is that they don’t require any expensive professional management to choose stocks or bonds, so they can charge low fees.  Vanguard Canada has index funds that would cost you only $120 per month.  Your mutual funds are just pretending to be different from an index fund, but they charge you $500 per month to manage them on top of the other $500 per month for the poor financial advice you’re getting.

Other approaches

Before looking at whether I can help you with your investments, it’s worth looking at other options.  There are organizations that take their duty to their clients more seriously than the mutual fund sales team you have now.

One option is a professional advisor who invests client money in low cost funds.  Another option is a client-focused mutual fund company that charges lower fees and provides some good advice for their investors.  Either option would save you money and give you better financial advice than you’re getting now.  It takes some knowledge to be able to determine whether some other financial advisor is really offering one of these better options.  I can help with this if you like.

Can I help directly?

Maybe.  I’m only willing to completely take over investments for my closest family members, and even then only if I think leaving it all to me is what they really want.  I can set you on a good path, but you may not be able to stay on it, and I may tire of trying to explain why you shouldn’t stray from that path when you decide to sell everything, or buy cryptocurrencies, or whatever idea you’ve come up with.

In your case, the good path I’m talking about would be to invest money you won’t need in the next few years in Vanguard’s exchange-traded fund called VBAL.  VBAL owns substantially the same stocks and bonds you have in your current portfolio.  The difference is that you’ll pay about $880 per month less in fees.  After a decade, you’ll save more than $100,000.

So, if the market goes up 10% one year, you’ll end up with about $10,500 more than if you keep your investments where they are now.  And if the market goes down 10% in another year, you'll still end up with about $10,500 more that year than if you stay where you are now.  Either way, the outcome is better.


The biggest risk I see will come when the market falls substantially at some point in the future, and you’ll decide that I should have foreseen this event and warned you to sell.  Nobody can predict market crashes reliably.  The best plan is to maintain a sensible risk level in your portfolio and ride out market pain.  But that’s much easier said than done.

Many people have a hard time believing that stock market crashes are inevitable and unpredictable, and some financial advisors promise to help steer you around market declines.  They may or may not be aware that the managers of the funds they sell can’t avoid losses.  If you don’t learn that getting caught in a market crash and having to ride it out is an inevitable part of investing, you’re doomed to jumping from one expensive advisor to another every time stocks crash.


So, the short answer to the question of whether I can help you with your investments is that it depends on how easily you can be distracted from a simple and successful investing path and how much energy I have for talking you back to that path.

Friday, June 16, 2023

Short Takes: BMO InvestorLine HISA Interest, Ford Breaking a New Vehicle Contract, and more

I mentioned a month ago that I was trying out BMO InvestorLine’s high-interest savings accounts (HISAs) that are structured as mutual funds (BMT104, BMT109, and BMT114).  They pay exactly the advertised rate of 4.35%, but I couldn’t tell this from the confusing list of transactions.  Looking at the month-end balances, I was able to determine that they pay 1/365 of the annual interest each day, accumulating as simple interest over a month, and the accumulated interest is paid each month.  So, longer months pay more interest than shorter months, which is different from most other interest-bearing accounts I’ve had in my life.

My most recent post is:

Bad Retirement Spending Plans

Here are some short takes and some weekend reading:

John Robertson signed for a new Ford vehicle, and now Ford is demanding an extra $4000.

Nathan Proctor says companies are using legal tricks to get us to pay extra in the form of subscriptions for products we’ve already bought.  He’s fighting back with right-to-repair legislation.

John Oliver’s takedown of Jim Cramer is hilarious, but it’s important to remember that Cramer is random, not consistently wrong.  I’d be thrilled to bet against his picks if he were wrong most of the time, but the truth is that his picks turn out well sometimes.  He spouts off with confident takes on matters he knows nothing about.  No matter how well you think you understand a company, only high-level insiders have any useful knowledge about its near-term stock movements, and they’re not supposed to use this inside information.

Preet Banerjee explains the history and consequences of the repeated debt-ceiling crises in the U.S.

Salman Ahmed at Steadyhand
explains how zero commission platforms make money off you.

John De Goey
points out that certain subjects aren’t covered by media aimed at financial advisors.  These subjects include the fact that some financial advice is bad, and that the cost of investment products matters.  Sadly, know-nothing advisors are usually the ones investing their clients’ money in expensive closet index funds that masquerade as actively-managed mutual funds or segregated funds.

Friday, June 9, 2023

Bad Retirement Spending Plans

A recent research paper by Chen and Munnell from Boston College asks the important question “Do Retirees Want Constant, Increasing, or Decreasing Consumption?”.  The accepted wisdom until recently was that retirees naturally want to spend less as they age.  This new research challenges this conclusion.

What we all agree on is that the average retiree spends less each year (adjusted for inflation) over the course of retirement.  However, averages can hide a lot of information.  The debate is whether this decreasing spending is voluntary or not.  However, it’s important to recognize that the answer is different for each retiree.  Some don’t spend less over time, some spend less voluntarily, and some are forced to spend less as their savings dwindle.

I’ve been saying for some time that not all spending reductions by retirees are voluntary and that this affects the average spending levels across all retirees.  I’ve discussed this subject with many people, including a good discussion with Benjamin Felix, who was good enough to point me to the new Chen and Munnel research.  (Larry Swedroe also discussed this research.)

Research Findings

“On average, household consumption declines about 0.7-0.8 percent a year over retirement.  However, consumption for wealthy and healthy households is virtually flat, declining only 0.3 percent a year over their retirement.  Thus, at least in part, wealth and health constraints help explain the observed pattern of declining consumption.”

“Retirees likely prefer to enjoy constant consumption in retirement.  The results suggest that a retirement saving shortfall exists since consumption declines are larger for households without assets.”


Some commentators want to believe that it is safe to assume declining spending in a retiree’s financial plan.  They dismiss involuntary reductions in observed retirement spending as insignificant.  However, this new research makes it clear that retirees’ preferred spending levels are much flatter than the observed spending data.  (For the record, Ben Felix says he assumes flat inflation-adjusted spending in his clients’ retirement plans.)

The idea that we’ll want to spend less as we age is seductive; it means we don’t have to save as much for retirement, can retire earlier, and can safely overspend in early retirement.  What’s not to like?  The problem is that average retirement spending data shows spending declines right from the first years of retirement.  Does it make sense that people still in their 60s suddenly want to just sit around inside their homes?  It’s plausible that retirees tend to become homebodies deep into their retirements, but not in the early years.

The clever-sounding justification for planning for spending declines is that our retirements consist of “go-go years, slow-go years, and no-go years.”  However, this contradicts the observed early spending declines.  In reality, some unfortunate retirees have not-enough-money-left years.

Other Factors to Consider

Another important consideration is that once retirees do start slowing down deep into their retirements, the possibility of needing expensive care increases.  It’s not clear that we can ever count on wanting to spend less during retirement.

Yet another factor is the tendency for wage inflation to exceed price inflation.  Over time, society becomes slowly wealthier.  If you plan for flat inflation-adjusted spending through retirement, your spending level will slowly fall behind your younger neighbours.  If you plan for declining inflation-adjusted spending, you’ll fall behind faster.


Average retiree spending declines over time in part because some retirees spend too much early on and are forced to cut back.  It doesn’t make sense to me to plan my own retirement using statistics that include data from retirees who have overspent.  The end result for me is that I’ll assume my spending desires will grow with inflation over my retirement.  Anything less is risky.

Friday, June 2, 2023

Short Takes: Too Many Accounts, the Advice Gap, and more

I prefer to have as few bank accounts and investment accounts as possible.  However, there are RRSPs, TFSAs, non-registered accounts, and Canadian and U.S. dollars that drive me to open ever more accounts.  The latest reason I had to open a new account seems the silliest to me.  I have a U.S. dollar chequing account as part of an InvestorLine account.  It behaves like any other BMO U.S. dollar chequing account except that I can’t do a global money transfer from it.  So, I had to open a “normal” U.S. chequing account at a BMO branch.  So, now when I want to send money to the U.S., I have to move money from InvestorLine to my new “regular” U.S. dollar chequing account, and then from there to the U.S.  When I opened this new account, the bank employee asked what name I’d like to give it.  I was tempted to say “stupid,” but I settled on “USD.”

Here are some short takes and some weekend reading:

Jason Pereira has a strong take on the supposed financial “advice gap” in Canada.

Justin Bender tries to talk us out of ditching all-equity ETFs VEQT and XEQT to invest directly in their underlying holdings.  He makes a compelling case.

Robb Engen at Boomer and Echo discusses the advantages and disadvantages of outsourcing things you don’t want to do for yourself, such as house cleaning.  Some call it lazy, but I think it can make sense to pay someone else to do something you don’t like doing.  The key is to consider all relevant factors.  If you hire a housekeeper, the obvious advantage is not having to clean your own house, and the obvious disadvantage is the cost.  The less obvious disadvantages are having to manage the housekeeper, possibly having to tidy up clutter to allow the housekeeper to work, and having to hide anything sensitive you wouldn’t want your housekeeper to see.  If all relevant considerations net out to a positive, then go for it.

Friday, May 19, 2023

Short Takes: InvestorLine’s HISAs, 24-Hour Trading, and more

I recently moved some cash into BMO InvestorLine’s high-interest savings accounts (HISAs) that are structured as mutual funds.  Their designations are BMT104, BMT109, and BMT114, and they purportedly pay 4.35% annual interest (which they can change whenever they like).  However, the way they report the monthly interest payments is so baffling that I wasn’t able to sort it out in my first 15 minutes of trying.  A further complication is the following text in the HISA description: “The Bank may pay, monthly or quarterly, compensation to your Dealer at an annual rate of up to 0.25% of the daily closing balance in the BMO HISA.”  I couldn’t find any evidence of such a charge, but I haven’t been invested for a full quarter, and I can’t yet say that such a charge isn’t buried somehow in the confusing reporting.  I have more digging to do before I can recommend these HISAs.

Here are some short takes and some weekend reading:

Preet Banerjee explains the dangers of Robinhood’s new 24-hour stock trading.  “If you don’t know the difference between market orders and limit orders, you’ll lose your shirt in extended hours trading.”

Justin Bender compares the all-equity exchange-traded funds XEQT and VEQT.

Friday, May 5, 2023

Short Takes: Loosening up on Spending, What Advisors Know, and more

My most recent post is:

Finding a Financial Advisor

Here are some short takes and some weekend reading:

Mr. Money Mustache has decided that he has become too frugal and needs to loosen up.  He’s not alone.  I know many people who spend way below their means, although they are greatly outnumbered by overspenders.  I’ve been told by high-end financial advisors that a high proportion of their clients are underspenders, but that’s an extreme example of survivorship bias.  Underspenders need to learn to spend a little in ways that will make them and others they care about happy.  Sadly, because people tend to embrace arguments they already believe, Mr. Money Mustache’s article is likely to resonate with overspenders more than it reaches underspenders.  Given the reach of his blog hopefully he’ll help a few people with these ideas.

Tom Bradley
explains the many things that nobody knows, but people think financial advisors do know.  He goes on to explain the things that financial advisors should know.  If you have at least $500k invested, you have a chance of finding an advisor who meets Bradley’s standards.  If you have much less, your chances are very low.

The Blunt Bean Counter explains the importance of tracking and documenting the adjusted cost base of an inheritance.  There is a lot of money at stake in capital gains taxes, but not right away, which makes people complacent.  Unfortunately, by the time you’re in a battle with CRA over a 5- or 6-figure sum in extra taxes, it may be too late to find the necessary documentation.

Friday, April 7, 2023

Finding a Financial Advisor

After reading yet another article on how to find a good financial advisor, I was struck by how useless the advice is for most people.  The problem is that how you should proceed depends on your income and net worth.  There is no one-size-fits-all solution.

Let’s consider a couple of examples to illustrate what I mean.

Case 1:
  Meet Amy.  She’s in her 30s, earns $65,000 per year, and has $10,000 saved.  She’s learned that how she invests can make a big difference in how much money she will have saved by the time she retires.  She knows she needs good advice and would like to find a financial advisor.  She’s also read that it’s best to find a fiduciary.

How should Amy proceed?  To start, Amy should get some hockey equipment to protect her body from all the doors that will slam in her face.  She is nowhere close to the type of client fiduciaries want.

Case 2:
Susan is in her early 60s, earns $800,000 per year, and has $10 million saved.  She is looking for other options than her big bank’s wealth services arm.

Susan should hire a bodyguard to protect her from the onslaught of financial advisors fighting their way to the front of the line to pitch their services to her.

The main takeaway here is if you’re looking for advice on how to find a good financial advisor, ignore advice where you can’t tell if it’s intended for those at your level of income or net worth.

Friday, March 24, 2023

Short Takes: Empty Return Promises, Asset Allocation ETFs, and more

I came across yet another case of a furious investor whose advisor had promised a minimum return, but the portfolio lost money.  There is a lot wrong with this picture.  On the client side, they often believe that advisors have some meaningful level of control over returns and that advisors can somehow steer around bear markets, which is nonsense.  Advisors can choose a risk level.  The only way to guarantee a (low) return is to take little or no risk.  On the advisor side, I can only assume that many advisors are under so much pressure to land clients that they make promises they know they can’t keep unless they get lucky.  All the while, the management above these advisors know full well what is going on.

Here are my posts for the past four weeks:

Giving With a Warm Hand

The Case for Delaying OAS has Improved

Here are some short takes and some weekend reading:

Robb Engen at Boomer and Echo sings the praises of Vanguard Canada’s Asset Allocation ETFs.  Owning these ETFs is a great way to invest.  If only investors could focus on how many ETF units they own instead of the day-to-day price quote.

Squawkfox warns us about the downside of rewards programs.  “Canadians should be wary of loyalty programs — not enticed by them.”

New research shows that happiness increases for incomes up to $500,000 instead of only $75,000 as previously believed.  In this case, what I find interesting is how widespread the news of the $75,000 limit on happiness travelled.  Because most people make less than $75,000 per year, we tend to like the news that richer people aren’t happier, and news outlets make more money when they report news we like.  This is why I tend to be suspicious when a news story tells me something I’m happy to hear.

Justin Bender
explains foreign withholding taxes on emerging markets ETFs.

Thursday, March 16, 2023

The Case for Delaying OAS Payments has Improved

Canadians who collect Old Age Security (OAS) now get a 10% increase in benefits when they reach age 75.  The amount of the increase isn’t huge, but it’s better than nothing.  A side effect of this increase is that it makes delaying OAS benefits past age 65 a little more compelling.

The standard age for starting OAS benefits is 65, but you can delay them for up to 5 years in return for a 0.6% increase in benefits for each month you delay.  So, the maximum increase is 36% if you take OAS at 70.

A strategy some retirees use when it comes to the Canada Pension Plan (CPP) and OAS is to take them as early as possible and invest the money.  They hope to outperform the CPP and OAS increases they would get if they delayed starting their benefits.  In a previous post I looked at how well their investments would have to perform for this strategy to win.  Here I update the OAS analysis to take into account the 10% OAS increase at age 75.

This analysis is only relevant for those who have enough other income or savings to live on if they delay OAS.  Others with no significant savings and insufficient other income have little choice but to take OAS at 65.

OAS payments are indexed to price inflation, and the increases before you start collecting are also indexed to price inflation.  So, the returns that come from delaying OAS are “real” returns, meaning that they are 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%.

In many ways, the OAS rules are much simpler than they are for CPP, but two things are more complex: the OAS clawback and OAS-linked benefits.  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.  Low-income retirees may be eligible for other benefits once they start collecting OAS.  These factors are outside the scope of my analysis here.

A One-Month Delay Example

Suppose you’re deciding whether to take OAS at age 65 or wait one more month.  For the one month delay, the OAS rules say you’d get an additional 0.6%.  So, for the cost of one missed payment, you’d get 0.6% more until you reach 75.  After that, you’d be getting 0.66% more.

The real return you get from delaying OAS depends on your planning age for the end of your retirement.  To choose a planning age of 80, 90, or 100, people often imagine when they might die, but this is the wrong way to think about this choice.  If you're going to spend carefully in case you live a long time, then your planning age should reflect this.  It shouldn’t be “might I die before I get to 80.”  It should be “am I so sure that I’ll die before 80 that I’m willing to spend down all my savings before I turn 80?”  Viewed this way, I choose a planning age of 100.

For a planning age of 100, the real return from the one-month delay is a little over 7%.  So, your investments would have to average 7% plus inflation to keep up if you chose to take OAS right away and invest the money.

All the One-Month Delays

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 and delaying additional benefits don’t apply.  The returns are slightly higher than they were before CPP payments rose 10% at age 75.

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 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 68 or 69 makes sense.  However, those whose health is poor enough that they plan to age 80 or less should just take OAS at 65.

Wednesday, March 8, 2023

Giving with a Warm Hand

I expect to be leaving an inheritance to my sons, and I’d rather give them some of it while I’m alive instead of waiting until after both my wife and I have passed away.  As the expression goes, I’d like to give some of the money with a warm hand instead of a cold one.

I have no intention of sacrificing my own retirement happiness by giving away too much, but the roaring bull market since I retired in mid-2017 has made some giving possible.  Back then I thought stock prices were somewhat elevated, and I included a market decline in my investment projections to protect against adverse sequence-of-returns risk.

Happily for me, a large market decline never happened.  In fact, the markets kept roaring for the most part.  As it turned out, I could have retired a few years earlier.  A large market decline in the near future is still one of several possibilities, but the gap between our spending and the money available is now large enough that we are quite safe.  

Our lifestyle has ramped up a little over time, but not nearly as much as the stock market has risen.  We just aren’t interested in expensive toys.  Owning a second house or a third car just seems like extra work.  Our idea of fun travel is to go somewhere with nice hiking trails.

So, we have the capacity to help our sons with money, but there is another consideration: what is best for them?  I’m no expert in the negative effects of giving large sums of money to young people, but I’m thinking it makes sense to ease into giving.

This is where the new First Home Savings Account (FHSA) is convenient for us.  Our plan is to have our sons open FHSAs, and we’ll contribute the maximum over the next 5 years.  This will give them an extra tax refund each year, and if they choose to buy a house at some point, they can use the FHSA assets tax-free as part of their down payment.  If they don’t buy a house, they can just shift the FHSA contents into their RRSPs without using up any RRSP room.

This FHSA plan is just the beginning of a journey that I expect to enjoy a lot more than hoarding money I don’t need to be handed over after my death.  My sons will benefit more from getting some money now instead of waiting until they’re on the verge of retiring themselves.

Friday, February 24, 2023

Short Takes: Rental Real Estate, Example TFSA Uses, and more

I’ve lost count of the number of real estate agents and mortgage brokers in Canada and the U.S. who’ve told me that right now is a fantastic time to buy a rental property.  Usually, they don’t own any rental properties themselves and have no plans to buy one now, but they’re sure that it would be a great time for me to buy.

When I say that I’m not interested in using my capital to buy the part-time job of being a landlord, they tell me to hire a management company.  When I tell them I’ve heard from landlords that management companies soak up most or all of the profit from being a landlord, they usually give up on me.

I guess my message here is that I’ve found a fairly short path to ending an uninvited sales pitch about real estate.  You’re welcome.

Here are some short takes and some weekend reading:

Robb Engen shows that TFSAs can be very useful for smoothing out life’s financial bumps without creating a big tax bill.  This gives you time for the necessary next step of restoring TFSA savings.  RRSPs don’t work as well for this purpose.

Andrew Hallam has some news for people who think we’re living through especially bad times for our finances.

says Canadians shouldn’t be in a hurry to buy a house.  The reasoning makes sense to me, but I find it hard to believe that these things can be predicted with any certainty.

Friday, February 10, 2023

Short Takes: Behavioural Economics, Monty Hall, and more

I find behavioural economics and other aspects of psychology interesting, but I often get lost between a study’s results and the conclusions people draw from these results.  A good example is the oft-repeated fact that most people believe they are above-average drivers.  I have no doubt that a large majority of people will consistently report that they are above-average drivers.  However, the tidy conclusion that these people are overconfident isn’t obvious to me.

There is no single measure of the quality of a driver.  Imagine two brothers where one believes that it is crucial to observe the speed limit at all times, and the other believes it is prudent to always stay up with the flow of traffic to minimize relative speeds.  These standards of driving skill are in conflict, and each brother judges the other to be a poor driver.  Each brother believes he is the better driver based in part on his view of what makes a driver good.

It may be that both brothers are overconfident as well, but we can’t necessarily draw this conclusion from the fact that each brother believes he is better than the other.  In the general case, it’s hard to say whether a high fraction of people think they are above-average drivers primarily because of differences in the standards they apply or primarily because of overconfidence.

This was just a single example, but I find such gaps come up often between a study’s results and the conclusion people draw from those results.

Here are some short takes and some weekend reading:

Annie Duke
has a plausible explanation of why people can’t learn to get the Monty Hall problem right but pigeons can.

Andrew Hallam looks at the mutual fund with “the best performance record of all American mutual funds” and makes a surprising comparison.

helps you control your spending with ideas from behavioural science.

Justin Bender
explains the two levels of foreign withholding taxes on dividends from international equity ETFs.

Friday, January 27, 2023

Short Takes: Podcasts, 2022 Returns, and more

I haven’t had many people ask me whether I’d consider hosting a podcast, but it’s come up enough to make me think about it.  I have some solid reasons for not doing a podcast: it’s way more work than I’m willing to do, and my voice isn’t good.  To illustrate the best reason, though, consider this hypothetical exchange:

MJ: Welcome to the podcast, Dr. G.

: I’m happy to be here.

MJ: Let’s get right to it.  Please describe your research interests.

Guest: I work on retirement decumulation strategies, safe withdrawal rates, and risk levels of equities.

MJ: From what data do you draw your conclusions?

: I use worldwide historical returns of stocks and bonds.

MJ: How do you deal with the challenge that we don’t have enough historical return data to directly draw statistically significant conclusions?

: Uh … I perform simulations drawing from the available pool of data.

MJ: So, you create seemingly plausible return histories to extrapolate from the small pool of available data.

Guest: Yes, … but I use methods widely accepted in the literature.

MJ: Isn’t it true that you have to make assumptions about the distribution of market returns, such as autocorrelations and the size of tails, to be able to perform simulations?

Guest: Well, yes, but I preserve the properties of the original data as much as possible.  In some simulations I draw blocks of returns selected at random.

MJ: Yes, I can see that you’re trying to preserve autocorrelations that way, but it still destroys long-term autocorrelation and the tendency for long-term valuation-based reversals.  For example, consider one block that ends in the depths of the great depression, and another that ends at the peak of the year 2000 tech boom.  Your simulation will make no distinction between these two states for the next block it draws.

Guest: There’s a limit to what I can do with the small amount of data available.

: Yes, that’s my point.

Guest: In other simulations, I treat the expected return over the next year as a random variable that drifts over time.

: Yes, and you assume a particular probability distribution for this drift.

Guest: I have to assume some kind of distribution.

MJ: Aren’t there many other possible sets of assumptions we could make about market return distributions that would ultimately lead to completely different conclusions about retirement decumulation strategies, safe withdrawal rates, and risk levels of equities?  In fact, aren't all your conclusions primarily attributable to your underlying return distribution assumptions rather than the actual historical return data?

Guest: [Fuming] Do you have a better idea?

MJ: Perhaps not.  We could try multiple approaches and see if they give similar results.  For example, we could use a model where the current stock market price-to-earnings ratio affects the distribution of the upcoming year’s return.  Another idea is to model corporate earnings growth separately from investor sentiment as expressed by the price-to-earnings ratio.

Guest: Good luck with that. [storms out]

Successful podcasters let their guests make arguments without challenging their ideas in any serious way.  Listeners might enjoy some fireworks, but few interesting guests would want to participate in a podcast like my example above.  My first guest might be my last.

Here are my posts for the past two weeks:

My Investment Return for 2022


Here are some short takes and some weekend reading:

Justin Bender
goes through model portfolio returns for 2022.  The losses in long-term bonds aren’t pretty.

The Blunt Bean Counter has some advice on doing a 2022 financial clean-up and a 2023 financial tune-up.

Monday, January 23, 2023


In his book Bullshift: How Optimism Bias Threatens Your Finances, Certified Financial Planner and portfolio manager John De Goey makes a strong case that investors and their advisors have a bias for optimistic return expectations that leads them to take on too much risk.  However, his conviction that we are headed into a prolonged bear market shows similar overconfidence in the other direction.  Readers would do well to recognize that actual results could be anywhere between these extremes and plan accordingly.

Problems in the financial advice industry

The following examples of De Goey’s criticism of the financial advice industry are spot-on.

“Investors often accept the advice of their advisers not because the logic put forward is so compelling but because it is based on a viewpoint that everyone seems to prefer. People simply want happy explanations to be true and are more likely to act if they buy into the happy ending being promised.”  We prefer to work with those who tell us what we want to hear.

Almost all advisers believe that “staying invested is good for investors -- and it usually is. What is less obvious is that it's generally good for the advisory firms, too.”  “In greater fool markets, people overextend themselves using margin and home equity lines of credit to buy more, paying virtually any price for fear of missing out (FOMO).”  When advisers encourage their clients to stay invested, it can be hard to tell if they are promoting the clients’ interests or their own.  However, when they encourage their clients to leverage into expensive markets, they are serving their own interests.

“There are likely to be plenty of smiling faces and favourable long-term outlooks when you meet with financial professionals.”  “In most businesses, the phrase ‘under-promise and over-deliver’ is championed. When it comes to financial advice, however, many people choose to work with whoever can set the highest expectation while still seeming plausible.”  Investors shape the way the financial advice industry operates by seeking out optimistic projections.

“A significant portion of traditional financial advice is designed to manage liabilities for the advice-givers, not manage risk for the recipient.”

“Many advisers chase past performance, run concentrated portfolios, and pay little or no attention to product cost," and they "often pursue these strategies with their own portfolios, even after they had retired from the business. They were not giving poor advice because they were conflicted, immoral, or improperly incentivized. They were doing so because they firmly believed it was good advice. They literally did not know any better.”

De Goey also does a good job explaining the problems with embedded commissions, why disclosure of conflicts of interest doesn’t work, and why we need a carbon tax.

Staying invested

On the subject of market timing, De Goey writes “there must surely be times when selling makes sense.”  Whether selling makes sense depends on the observer.  Consider a simplified investing game.  We draw a card from a deck.  If it is a heart, your portfolio drops 1%, and if not it goes up 1%.  It’s not hard to make a case here that investors would do well to always remain invested in this game.

It seems that the assertion “there must surely be times when selling makes sense” is incorrect in this case.  What would it take for it to make sense to “sell” in this game?  One answer is that a close observer of the card shuffling might see that the odds of the next card being a heart exceeds 50%.  While most players would not have this information, it is those who know more (or think they know more) who might choose not to gamble on the next card.

Another reason to not play this game is if the investor is only allowed to draw a few more cards but has already reached a desired portfolio level and doesn’t want to take a chance that the last few cards will be hearts.  Outside of these possibilities, the advice to always be invested seems good.

Returning to the real world, staying invested is the default best choice because being invested usually beats sitting in cash.  One exception is the investor who has no more need to take risks.  Another exception is when we believe we have sufficient insight into the market’s future that we can see that being invested likely won’t outperform cash.

Deciding to sell out of the market temporarily is an expression of confidence in our read of the market’s near-term future.  When others choose not to sell, they don’t have this confidence that markets will perform poorly.  Sellers either have superior reading skills, or they are overconfident and likely wrong.  It’s hard to tell which.  Whether markets decline or not, it’s still hard to tell whether selling was a good decision based on the information available at the time.

Elevated stock markets

Before December 2021, my DIY financial plan was to remain invested through all markets.  As stock markets became increasingly expensive, I thought more about this plan.  I realized that it was based on the expectation that markets would stay in a “reasonable range.”  What would I do if stock prices kept rising to ever crazier levels?

In the end I formed a plan that had me tapering stock ownership as the blended CAPE of world stocks exceeded 25.  So, during “normal” times I would stay invested, and during crazy times, I would slowly shift out of stocks in proportion to how high prices became.  I was a market timer.  My target stock allocation was 80%, but at the CAPE’s highest point after making this change, my chosen formula had dropped my stock allocation to 73%.  That’s not much of a shift, but it did reduce my 2022 investment losses by 1.3 percentage points.

So, I agree with De Goey that selling sometimes makes sense.  Although I prefer a formulaic smooth taper rather than a sudden sell-off of some fraction of a portfolio.  I didn’t share De Goey’s conviction that a market drop was definitely coming.  I had benefited from the run-up in stock prices, believed that the odds of a significant drop were elevated, and was happy to protect some of my gains in cash.  I had no idea how high stocks would go and took a middle-of-the-road approach where I was happy to give up some upside to reduce the possible downside.  “Sound financial planning should involve thinking ahead and taking into account positive and negative scenarios.”  “Options should be weighed on a balance of probabilities basis where there are a range of possible outcomes.”

As of early 2022, “the United States had the following: 5 percent of global population, 15 percent of global public companies, 25 percent of global GDP, 60 percent of global market cap, 80 percent of average U.S. investor allocation, the world's most expensive stock markets.”  These indicators “point to a high likelihood that a bubble had formed.”  I see these indicators as a sign that risk was elevated, but I didn’t believe that a crash was certain.

When markets start to decline

“If no one can reliably know for sure what will happen, why does the industry almost always offer the same counsel when the downward trend begins?”

Implicit in this question is the belief that we can tell whether we’re in a period when near future prices are rising or falling.  Markets routinely zig-zag.  During bull markets, there are days, weeks, and even months of declines, but when we look back over a strong year, we forget about these short declines.  But the truth is that we never know whether recent trends will continue or reverse.

De Goey’s question above assumes that we know markets are declining and it’s just a question of how low they will go.  I can see the logic of shifting away from stocks as their prices rise to great heights because average returns over the following decade could be dismal, but I can’t predict short-term market moves.

Conviction that the market will crash

‘In the post-Covid-19 world, there was considerable evidence that the market run-up of 2020 and 2021 would not end well.  Some advisers did little to manage risk in anticipation of a major drop.”

I’ve never looked at economic conditions and felt certain that markets would drop.  My assessment of the probabilities may change over time, but I’m never certain.  I have managed the risk in my portfolio by choosing an asset allocation.  If I shared De Goey’s conviction about a major drop, I might have acted, but I didn’t share this conviction.

Back on 2020 Jan. 6, De Goey announced on Twitter that “I’m putting a significant portion of my clients’ equity positions into inverse notes.”  Whether this was the right call based on the information available at the time is unanswerable with any certainty.  Reasonable people can disagree.  However, the results since then at least show that market timing is a difficult game: in the past 3 years, my unleveraged portfolio is up an annual compound average of 6.1% nominally, and 1.9% in real terms.  If De Goey had reversed his position near the bottom of the short-term market crash, he could have profited handsomely.  On the other hand, those who simply held on fared reasonably well.

“Advisers, like everybody else, need to be more humble.”  This is inconsistent with DeGoey’s 2021 May 11 call to “Get Out!”.  Staying invested because we don’t know what will happen is more consistent with being humble than making a high-conviction call that markets will crash.

CAPE as a market predictor

“CAPE readings are often extremely accurate in predicting future long-term annualized returns.”  This isn’t true.  What little data we have shows some correlation, but it is weak.

We should listen when “Shiller says his cyclically adjusted price earnings (CAPE) calculations are not useful for the purpose of market timing.”


The author discusses DALBAR’s annual analysis of investor behaviour.  DALBAR's methodology is so shockingly bad that most people find it hard to believe when it’s described.  Using DALBAR's methodology to analyze your returns over the past decade, if you got an inheritance 5 years ago, you’d be judged a poor investor for missing the returns in the first half of the decade.  In fact, all the money you've saved from your pay to invest should have been invested on the day of your birth.  Anything less is a sign that your lifetime investment behaviour is poor.

“I have asked their representatives for a breakdown between the performance of investors with advisers and investors without. DALBAR says the research does not offer that degree of granularity.”  De Goey is right to be skeptical of DALBAR’s results, but the problems are far worse than a lack of granularity.  DALBAR’s flawed methodology would unfairly make adviser results look bad too.  If you had handed your inheritance over to an adviser, that adviser would have missed the returns in the first half of the decade as well.

Other bad outcomes

“The concern is how people might react to what could go down as the biggest, deepest, longest downturn of their lives. What if the drop was more than 60 percent and the markets were nowhere close to their previous levels five years after the drop started?”  

I can play that game too.  What if governments start printing money like crazy causing massive inflation and making hoarded cash and other fixed income products worthless?  What if the only things left with value are businesses, real estate, and physical objects?  In this scenario, being in the stock market is what will save you.

It’s not that I believe this scenario is likely.  It’s that we can’t go too far down the road telling ourselves a single story.  There are many possibilities for what will happen in the future.


In parts of the book, it becomes apparent that De Goey feels strongly that he made the right calls and that he was somehow cheated out of being proven right.  The following quotes illustrate this feeling.

“Even before anyone ever heard of Covid-19, many felt a recession was possible or probable. The pandemic merely hastened what these people felt was inevitable when markets tumbled in early 2020. Then, like fairy-tale heroes, central bankers came riding to the rescue.”

“By rights, the world should have entered a recession in early 2020, but central bankers delayed that recession.”

“Instead of allowing for the traditional ebb and flow of market cyclicality, central bankers and finance ministers seemed determined to keep the good times rolling for as long as possible using whatever means they had.”

These quotes make the following observation seem ironic: “Individuals low in self-awareness might attribute failure externally.”


At its best, Bullshift warns investors about their own biases as well as biases in the investment industry.  At its worst, it is an extended attempt to justify a market call that didn't work out.  Readers would do well to be wary of their preference for rosy predictions, but they should also be wary of doomsday predictions.

Monday, January 16, 2023

My Investment Return for 2022

My portfolio lost 4.9% in 2022, while my benchmark return was a loss of 6.2%.  This small gap came from my decision to shift to bonds based on a formula using the blended Cyclically-Adjusted Price-to-Earnings (CAPE) ratio of the world’s stocks.  After deciding on this CAPE-based approach, all the portfolio adjustments were decided by a spreadsheet, not my own hunches.  I started the year 20% in fixed income, it grew to a high of 27% as the spreadsheet told me to sell stocks, and now it’s back to 20% after the spreadsheet said to buy back stocks.  This cut my losses in 2022 by 1.3 percentage points.

My return also looks good compared to most stock/bond portfolios because I avoided the rout in long-term bonds.  My fixed income consists of high-interest savings accounts (not at big banks), a couple of GICs, and short-term bonds.  If long-term bonds ever look attractive enough, I may choose to own them.  My thinking for now is that I prefer the safe part of my portfolio to be very safe, and I certainly didn’t want to own long-term bonds back when yields were insanely low.

Another thing that helped my results look a little better is that I measure my returns in Canadian dollars, and the U.S. dollar appreciated relative to the Canadian dollar during 2022.  Even though my U.S. stocks lost money, they appeared to lose less money when measured in Canadian dollars.

One measure that doesn’t look very good this year is that my real return (after adjusting for inflation) was a loss of 11.0%.  I prefer to think in terms of real returns because what matters to me is what I can buy with my money.  So, while I hope to achieve somewhere close to a 3% average annual compound return, I fell behind significantly this year.  However, stocks have performed well since I retired, so I’m still on the upside of sequence-of-returns risk.

The following chart shows the cumulative real returns for my portfolio and my benchmark since I started investing on my own rather than working with financial advisors.  Each dollar I had in my portfolio in 1994 that remained invested over this entire period has doubled in purchasing power three times now.  The power of compounding shows itself over long periods.

Through all of the recent market turmoil, my calculated safe withdrawal rate (adjusted for inflation) has remained amazingly stable.  This is because I adjust the assumed future stock market returns based on the current blended CAPE of the world’s stocks.  As stocks rose, my spreadsheet assumed lower future returns, and as stocks fell, the assumed future returns rose again.

I try not to look at my portfolio spreadsheet too often, but when I do, I rarely look at my net worth.  I focus on the monthly dollar amount of my after-tax safe withdrawal rate.  I find this amount much more meaningful than the net worth figure that feels disconnected from day-to-day living.

Friday, January 13, 2023

Short Takes: Private Equity Volatility Laundering, Problem Mortgages, and more

What a difference a year makes.  During the COVID-19 lockdowns, many people saved a lot of money, either from their pay (if they were lucky enough to keep their jobs) or from government payments.  As the world opened up, people started spending this money and businesses couldn’t keep up.  These businesses still can’t get all the new employees they want but the problem has eased considerably compared to a year ago.  I saw a small example in Florida recently.  I was in a burger chain restaurant and saw a sign saying they were looking for employees at $12 per hour.  Last March, the sign in this same restaurant offered $18 per hour and implored workers to “START RIGHT NOW!”

Here are some short takes and some weekend reading:

Cliff Asness accuses private equity investors and managers of “volatility laundering.”  Failing to value private equity frequently and accurately creates the illusion of smooth returns.

Scotiabank’s new President and CEO Scott Thomson explains how they identify potential problem mortgage customers.  Currently, he sees about 1 in 40 as being “vulnerable.”  It’s not clear how many of these vulnerable customers are likely to default under different interest rate scenarios.

Robb Engen at Boomer and Echo
tells us what type of investing headlines to ignore.