tag:blogger.com,1999:blog-54650159145893777882024-03-13T12:51:56.122-04:00Michael James on MoneyA quest for smarter saving, spending, and investingMichael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger2379125tag:blogger.com,1999:blog-5465015914589377788.post-24650816584204411562024-02-15T14:45:00.000-05:002024-02-15T14:45:22.515-05:00Private Equity Fantasy Returns<p>One of the ways that investors seek status through their investments is to buy into private equity. As an added inducement, a technical detail in how private equity returns are calculated makes these investments seem better than they are. So, private fund managers get to boast returns that their investors don’t get.<br /><b><br />Private Equity Overview</b><br /><br />In a typical arrangement, an investor commits a certain amount of capital, say one million dollars, over a period of time. However, the fund manager doesn’t “call” all this capital at once. The investor might provide, say, $100,000 up front, and then wait for more of this capital to be called.<br /><br />Over the succeeding years of the contract, the fund manager will call for more capital, and may or may not call the full million dollars. Finally, the fund manager will distribute returns to the investor, possibly spread over time.<br /><br /><b>An Example</b><br /><br />Suppose an investor is asked to commit one million dollars, and the fund manager calls $100,000 initially, $200,000 after a year, and $400,000 after two years. Then the fund manager distributes returns of $200,000 after three years, and $800,000 after four years.<br /><br />From the fund manager’s perspective, the cash flows were as follows:<br /><br />$100,000<br />$200,000<br />$400,000<br />-$200,000<br />-$800,000<br /><br />So, how can we calculate a rate of return from these cash flows? One answer is the <a href="https://en.wikipedia.org/wiki/Internal_rate_of_return">Internal Rate of Return (IRR)</a>, which is the annual return required to make the net present value of these cash flows equal to zero. In this case the IRR is 16.0%.<br /><br /><b>A Problem</b><br /><br />Making an annual return of 16% sounds great, but there is a problem. What about the $900,000 the investor had to have at the ready in case it got called? This money never earned 16%.<br /><br />Why doesn’t the fund manager take the whole million in the first place? The problem is called “cash drag.” Having all that capital sitting around uninvested drags down the return the fund manager gets credit for. The arrangement for calling capital pushes the cash drag problem from the fund manager to the investor.<br /><br /><b>The Investor’s Point of View</b><br /><br />Earlier, we looked at the cash flows from the investment manager’s point of view. Now, let’s look at it from the investor’s point of view.<br /><br />Suppose the investor pulled the million dollars out of some other investment, and held all uncalled capital in cash earning 5% annual interest. So the investor thinks of the first cash flow as a million dollars. Any called capital is just a movement within the broader investment and doesn’t represent a cash flow. However, the investor can withdraw any interest earned on the uncalled capital, so this interest represents a cash flow.<br /><br />The second cash flow is $45,000 of interest on the $900,000 of uncalled capital. The third cash flow is $35,000 of interest on the $700,000 of uncalled capital. The fourth cash flow is a little more complex. We have $15,000 of interest on the $300,000 of uncalled capital. Then supposing the investor now knows that no more capital will be called and can withdraw the remaining uncalled capital, we have a $300,000 cash flow. Finally, we have the $200,000 return from the fund manager. The total for the fourth cash flow is $515,000. The fifth cash flow is the $800,000 return.<br /><br />The cash flows from the investor’s point of view are<br /><br />$1,000,000<br />-$45,000<br />-$35,000<br />-$515,000<br />-$800,000<br /><br />The IRR of these cash flows is 10.1%, a far cry from the 16.0% the fund manager got credit for. We could quibble about whether the investor really had to keep all the uncommitted capital in cash, but the investor couldn’t expect his or her other investments to magically produce returns at the exact times the fund manager called some capital. The 10.1% return we calculated here may be a little unfair, but not by much. The investor will never be able to get close to the 16.0% return.<br /><br />Others have made similar observations and blamed the IRR method for the problem. However, this isn’t exactly right. The IRR method can have issues, but the real problem here is in determining the cash flows. When we ignore the investor’s need to be liquid enough to meet capital calls, we get the cash flows wrong.<br /><br /><b>Conclusion</b><br /><br />Some argue that we need to use the IRR method from the fund manager’s point of view so we can fairly compare managers. Why should investors care about this? They should care about the returns they can achieve, not some fantasy numbers. Any claims of private equity outperformance relative to other types of investments should be taken with a grain of salt.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
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<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com2tag:blogger.com,1999:blog-5465015914589377788.post-24590455455909943602024-01-25T18:09:00.003-05:002024-03-13T12:50:54.703-04:00Retirement Spending Experts<p>On episode 289 of the Rational Reminder podcast, the guests were retirement spending researchers, David Blanchett, Michael Finke, and Wade Pfau. The spark for this discussion was <a href="https://www.youtube.com/watch?v=vQBWH7zfTXg">Dave Ramsey’s silly assertion that an 8% withdrawal rate is safe</a>. From there the podcast became a wide-ranging discussion of important retirement spending topics. I highly recommend having a listen.<br /><br />Here I collect some questions I would have liked to have asked these experts.<br /><br /><b>1. How should stock and bond valuations affect withdrawal rates and asset allocations?</b><br /><br />It seems logical that retirees should spend a lower percentage of their portfolios when stocks or bonds become expensive. However, it is not at all obvious how to account for valuations. I made up two adjustments for my own retirement. The first is that <a href="https://www.michaeljamesonmoney.com/2021/03/how-to-account-for-high-stock-prices-in.html">when Shiller’s CAPE exceeds 20, I reduce future stock return expectations by enough to bring the CAPE back to 20 by the end of my life</a>. These lower return expectations result in spending a lower percentage of my portfolio after doing some calculations that are similar to required minimum withdrawal calculations. I have no justification for this adjustment other than that it feels about right. <br /><br />The second adjustment is on equally shaky ground. When the CAPE is above 25, <a href="https://www.michaeljamesonmoney.com/2021/12/what-to-do-about-crazy-stock-valuations.html">I add the excess CAPE above 25 (as percentage points) to the bond allocation I would otherwise have chosen in the current year of my chosen glidepath</a>. Part of my reasoning is that when stock prices soar, I’d like to protect some of those gains at a time when I don’t need to take on as much risk.<br /><br />Are there better ideas than these? What about adjusting for high or low bond prices?<br /><br /><b>2. How confident can we be that the measured “retirement spending smile” reflects retiree desired spending levels?</b><br /><br />I find that the retirement spending smile is poorly understood among advisors (but not the podcast guests). In mathematical terms, if S(t) is real spending over time, then dS/dt has the smile shape. Many advisors seem to think that the spending curve S(t) is shaped like a smile. I’ve looked at many studies that examine actual retiree spending in different countries, and there is always evidence that a nontrivial cohort of retirees overspend early and have spending cuts forced upon them later. Both overspending retirees and underspending retirees seem to have the dS/dt smile, but at different levels relative to the x-axis. Overspenders have their spending decline slowly initially, then decline faster, and then decline slowly again. Underspenders increase their real spending early on, then increase it slower, and finally increase it quickly at the end.<br /><br />I don’t see why I should model my retirement on any data that includes retirees who experienced forced spending reductions. The question is then how to exclude such data. I saw in one of Dr. Blanchett’s papers that he attempted to exclude such data for his spending models. Other papers don’t appear to exclude such data at all. In the end, it becomes a matter of choosing how high the smile should be relative to the x-axis. If it is high enough, the result becomes not much different from assuming constant inflation-adjusted spending.<br /><br />Advisors tend to work with wealthy people who save well and may have difficulty increasing their spending to align with their wealth. So, it’s not surprising that good advisors would embrace research suggesting that retirees should spend more. However, it’s not obvious to me that all retirees should spend at a high level early with the expectation that they simply won’t want to spend as much later in retirement. It may be true that healthy people in their mid-80s choose to spend less, but I’ve seen the spending smile results applied in such a way that retirees are expected to reduce real spending each year right from the second year of retirement.<br /><br /><b>3. How can retirees deal with the gap between annuities in theory and annuities in practice?</b><br /><br />The idea of annuitizing part of my portfolio is appealing. Eliminating some longevity risk brings peace of mind. However, whenever I compare annuity examples from papers or books to annuities I can actually buy, there is a gap. Payouts are lower, and inflation protection doesn’t exist (at least in Canada where I live).<br /><br />In my modeling, I find the optimal allocation to annuities is very sensitive to payout levels. Further, when I treat inflation as a random variable, fixed payout annuities are unappealing. It’s possible to buy an annuity whose nominal payout increases by, say, 2% each year, but this is a poor substitute for inflation protection. If I had bought an annuity before the recent surge in inflation, I’d be looking at a substantial permanent drop in the real value of all my future payouts, and I’d be facing the possibility that it might happen again in the future.<br /><br /><br />I appreciated the thoughts of the three guests on the podcast. My guess is that my additional questions are not easy ones.</p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
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<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com8tag:blogger.com,1999:blog-5465015914589377788.post-11186541412522171982024-01-18T07:00:00.001-05:002024-01-18T07:00:00.131-05:00My Investment Return for 2023<p>My investment return for 2023 was 13.0%, just slightly below my benchmark return of 13.2%. This small gap was due to a small shift in my asset allocation toward fixed income. I use a <a href="https://www.michaeljamesonmoney.com/2021/12/what-to-do-about-crazy-stock-valuations.html">CAPE-based calculation to lower my stock allocation as stocks get expensive</a>. This slight shift away from stocks caused me to miss out on a slice of the year’s strong stock returns. Last year, this CAPE-based adjustment saved me 1.3 percentage points, and this year it cost me 0.2 percentage points.<br /><br />You might ask why I calculate my investment returns and compare them to a benchmark. The short answer is to check whether I’m doing anything wrong that is costing me money. Back when I was picking my own stocks, I chose a sensible benchmark in advance, and after a decade this showed me that apart from some wild luck in 1999, the work I did poring over annual reports was a waste. Index investing is a better plan.<br /><br />The next question is why I keep calculating my investment returns now that I’m indexing. I’m still checking whether I’m making mistakes. As long as my returns are close to my benchmark returns, all is well. I investigate discrepancies to root out problems.<br /><br />Some don’t see the point of calculating personal returns. Perhaps they are very confident that they’re not making mistakes. In the case of those who pick their own stocks or engage in market timing, I suspect the real reason for not comparing personal returns to a reasonable benchmark is that they don’t want to find out that their efforts are losing them money. Focusing on successes and forgetting failures is a good way to protect the ego.<br /><br />I like to focus on real (after inflation) returns. The following chart shows my cumulative real returns since I took control of my portfolio from financial advisors.<br /><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEhxjJJn7Amz7gxd0yhuw7Hjckk_pKXecBC9lSukV6si34iihI4x6DkpW9h5EUo_Fm8HHz9cukabPKJ_URZXDHtED5oYhOTQan51A6uAwVy0INxfVkhbqj6teOSXCw0oIb5CcYRX14i2yJ_AbW4sBH76-ZbBaJ5lg-NLzwZ-SNsV2r1VU-pye22CzyZ2v_I" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="453" data-original-width="450" src="https://blogger.googleusercontent.com/img/a/AVvXsEhxjJJn7Amz7gxd0yhuw7Hjckk_pKXecBC9lSukV6si34iihI4x6DkpW9h5EUo_Fm8HHz9cukabPKJ_URZXDHtED5oYhOTQan51A6uAwVy0INxfVkhbqj6teOSXCw0oIb5CcYRX14i2yJ_AbW4sBH76-ZbBaJ5lg-NLzwZ-SNsV2r1VU-pye22CzyZ2v_I=s16000" /></a></div><br />I have beaten my benchmark by an average of 2.35% per year, but this is almost entirely because I took wild chances in 1999 that worked out spectacularly well. Excluding 1999, my stock-picking efforts cost me money. It was difficult to accept that I was paying for the privilege of working hard.<br /><br />So far, my compound average annual real return has been 7.61%. I don’t expect my future returns to be this high, but the future is unknown.<br /><p></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com0tag:blogger.com,1999:blog-5465015914589377788.post-55407400098755473582023-12-18T07:00:00.001-05:002023-12-18T07:00:00.130-05:00A Hole-in-One Shows that Money isn’t always Fungible<p>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.<br /><br />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.<br /><br />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!<br /><br />Her prize was $30. That stack of U.S. singles sits on her nightstand. Eventually, she’ll spend that money, but not yet.<br /><br />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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com0tag:blogger.com,1999:blog-5465015914589377788.post-79232019009646679372023-11-10T07:00:00.001-05:002023-11-10T07:00:00.132-05:00Stocks for the Long Run, Sixth Edition<p>Jeremy Siegel recently wrote, with Jeremy Schwartz, the sixth edition of his popular book, <i>Stocks for the long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies</i>. 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.<br /><br />I won’t repeat comments from my <a href="https://www.michaeljamesonmoney.com/2014/01/stocks-for-long-run.html">first review</a>. I’ll stick to material that either I chose not to comment on earlier, or is new in this edition.<br /><b><br />Bonds and Inflation</b><br /><br />“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.”<br /><br />The lesson here is that inflation-protected bonds offer lower risk, and long-term bonds are riskier than short-term bonds.<br /><b><br />Mean Reversion</b><br /><br />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.<br /><br />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.<br /><br />Siegel continues: “Additionally, the same caution about the interpretation of historical risk that applies to stocks also applies to <i>every </i>asset. All assets are subject to extreme outcomes called <i>tail risks</i> or <i>black swan events</i>.”<br /><b><br />Rating Agencies’ Role in the Great Financial Crisis of 2008-2009</b><br /><br />Siegel offered a partial defense of rating agencies who failed to see that mortgage-related securities were risky:<br /><br />“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.”<br /><br />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.<br /><br /><b>Conclusion</b><br /><br />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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com10tag:blogger.com,1999:blog-5465015914589377788.post-74851658654141060612023-10-27T07:00:00.001-04:002023-10-27T07:00:00.145-04:00Going Infinite Doesn’t Say What People Want to Hear Right Now<p>Michael Lewis’ latest book <i>Going Infinite: The Rise and Fall of a New Tycoon</i> 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.<br /><br />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.<br /><br />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!”<br /><br />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.<br /><br />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.”<br /><br />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.”<br /><br />“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.”<br /><br />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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com0tag:blogger.com,1999:blog-5465015914589377788.post-17330696745171171312023-10-23T07:00:00.001-04:002023-10-23T07:00:00.142-04:00What Experts Get Wrong About the 4% Rule<p>The origin of the so-called 4% rule is WIlliam Bengen’s 1994 journal paper <i><a href="https://www.financialplanningassociation.org/sites/default/files/2021-04/MAR04%20Determining%20Withdrawal%20Rates%20Using%20Historical%20Data.pdf">Determining Withdrawal Rates Using Historical Data</a></i>. 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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.”<br /><br />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.<br /><br />Bengen’s paper has its faults, though. Here are several articles I’ve written about the 4% rule:<br /><br /><a href="https://www.michaeljamesonmoney.com/2014/02/adjusting-4-rule-for-portfolio-fees.html">Adjusting the 4% Rule for Portfolio Fees</a><br /><br /><a href="https://www.michaeljamesonmoney.com/2016/04/revisiting-4-percent-rule.html">Revisiting the 4% Rule</a><br /><br /><a href="https://www.michaeljamesonmoney.com/2020/09/a-quiz-on-4-rule.html">A Quiz on the 4% Rule</a><br /><a href="https://www.michaeljamesonmoney.com/2015/07/4-rule-experiments-using-longevity.html"><br />4% Rule Based on Longevity Statistics </a><br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com4tag:blogger.com,1999:blog-5465015914589377788.post-13882289930700204702023-08-22T07:00:00.001-04:002023-08-22T07:00:00.162-04:00Misleading Retirement Study<p>Ben Carlson says <i><a href="https://awealthofcommonsense.com/2023/08/you-probably-need-less-money-than-you-think-for-retirement/">You Probably Need Less Money Than You Think for Retirement</a></i>. His “favorite research on this topic comes from an <a href="https://www.aspeninstitute.org/wp-content/uploads/2019/04/ebri_ib_447_assetpreservation-3apr18.pdf">Employee Benefit Research Institute</a> 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.<br /><br /><b>The study results</b><br /><br />Here are the main conclusions from this study:<br /></p><ul style="text-align: left;"><li>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.</li><li>Those with between $200,000 and $500,000 immediately before retirement had spent down 27.2 percent.</li><li>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.</li><li>About one-third of all sampled retirees had increased their assets over the first 18 years of retirement.</li></ul><p>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.<br /><br /><b>At what moment do we consider someone to be retired?</b><br /><br />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.<br /><br />From the study:<br /><b></b></p><blockquote><b>Definition of Retirement</b>: 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.</blockquote>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.<br /><br />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. <br /><br />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.<br /><br /><b>What is included in non-housing assets?</b><br /><br />From the study:<br /><b></b><blockquote><b>Definition of Non-Housing Assets</b>: 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 <i>minus</i> all debt (such as consumer loans).</blockquote>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. <br /><br />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.<br /><br /><b>What about an inheritance?</b><br /><br />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. <br /><br />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.<br /><b><br />Conclusion</b><br /><br />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.<br /><p></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com10tag:blogger.com,1999:blog-5465015914589377788.post-7518761670417355682023-08-12T15:54:00.000-04:002023-08-12T15:54:03.308-04:00Party of One<p>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 <i>Wall Street Journal</i> since 2014 and has written the book <i>Party of One: The Rise of Xi Jinping and China’s Superpower Future</i>. 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.<br /><br />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.<br /><br />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.’”<br /><br />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.”<br /><br />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.”<br /><br />“Xi’s insistence that entrepreneurs serve the party fostered what critics call a ‘hyper-politicized’ business environment, dampening enthusiasm to invest and innovate.”<br /><br />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.<br /><br />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.’”<br /><br />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.<br /><br />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.’”<br /><br />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.”<br /><br />“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.”<br /><br />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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com5tag:blogger.com,1999:blog-5465015914589377788.post-54966851088975147972023-08-03T07:00:00.002-04:002023-08-03T07:00:00.130-04:00The Intelligent Fund Investor<p>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 <i>The Intelligent Fund Investor</i>. 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.<br /><br />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.<br /><br />“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.”<br /><br />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.<br /><br />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.”<br /><br />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.<br /><br />“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.”<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br />Overall, this is a thoughtful book about investing in funds intelligently. Investors who choose their own funds will likely find useful discussion here.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com2tag:blogger.com,1999:blog-5465015914589377788.post-81326676816998120432023-07-14T07:00:00.001-04:002023-07-14T07:00:00.146-04:00Short Takes: Paying Cash, Breaking up Telcos, and more<p>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.<br /><i><br />Here are some short takes and some weekend reading:</i><br /><a href="https://blogs.teksavvy.com/savoing-internet-bills-in-canada-a-prescription-for-the-crtc"><br />Teksavvy</a> has some advice for the CRTC aimed at improving competition among internet providers. The most interesting one is to “Examine <a href="https://blogs.teksavvy.com/now-is-the-time-to-break-up-big-telecom">functional or structural separation</a>, 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 <b>not</b> want wholesale-based ISPs to exist so they are intent on killing them off – splitting them in two would change that.”<br /><a href="https://financialpost.com/investing/advisers-trained-look-inefficiencies-miss-client-behaviour"><br />Tom Bradley at Steadyhand</a> 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.<br /><br /><a href="https://boomerandecho.com/what-is-probate-how-to-avoid-probate-fees-and-should-you-even-try/">Robb Engen at Boomer and Echo</a> explains the pitfalls in the ways people try to avoid probate fees.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com2tag:blogger.com,1999:blog-5465015914589377788.post-81191334920750708242023-06-30T07:00:00.001-04:002023-06-30T07:00:00.139-04:00Short Takes: Bank Accounts in the U.S., Investing in Retirement, and more<p>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.<br /><br />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.<br /><br /><i>Here are my posts for the past two weeks:</i><br /><a href="https://www.michaeljamesonmoney.com/2023/06/bad-retirement-spending-plans.html"><br />Bad Retirement Spending Plans</a><br /><a href="https://www.michaeljamesonmoney.com/2023/06/my-answer-to-can-you-help-me-with-my.html"><br />My Answer to ‘Can You Help Me With My Investments?’</a><br /><i><br />Here are some short takes and some weekend reading:</i><br /><a href="https://boomerandecho.com/a-two-fund-solution-for-investing-in-retirement/"><br />Robb Engen at Boomer and Echo</a> describes a smart two-fund solution for investing in retirement.<br /><br /><a href="https://www.steadyhand.com/national_post/2023/06/26/why-liquid-versions-of-illiquid-assets-can-pose-problems-for/">Tom Bradley at Steadyhand</a> 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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com4tag:blogger.com,1999:blog-5465015914589377788.post-70977239514240770392023-06-22T09:02:00.004-04:002023-06-22T09:02:29.980-04:00My Answer to ‘Can You Help Me With My Investments?’<p>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.<br /><br /><b>Assessing the situation</b><br /><br />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.<br /><br />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.<br /><br />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.<br /><br /><b>Other approaches</b><br /><br />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.<br /><br />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.<br /><br /><b>Can I help directly?</b><br /><br />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.<br /><br />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.<br /><br />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.<br /><br /><b>Risk</b><br /><br />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.<br /><br />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.<br /><b><br />Conclusion</b><br /><br />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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com8tag:blogger.com,1999:blog-5465015914589377788.post-69865994752869250952023-06-16T07:00:00.003-04:002023-06-16T07:00:00.142-04:00Short Takes: BMO InvestorLine HISA Interest, Ford Breaking a New Vehicle Contract, and more<p>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.<br /><br /><i>My most recent post is:</i><br /><br /><a href="https://www.michaeljamesonmoney.com/2023/06/bad-retirement-spending-plans.html">Bad Retirement Spending Plans</a><br /><br /><i>Here are some short takes and some weekend reading:</i><br /><br /><a href="http://www.holypotato.net/?p=2708">John Robertson</a> signed for a new Ford vehicle, and now Ford is demanding an extra $4000.<br /><br /><a href="https://www.businessinsider.com/companies-software-legal-tricks-subscriptions-customers-money-pay-death-ownership-2023-5">Nathan Proctor</a> 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.<br /><br /><a href="https://www.youtube.com/watch?v=VAfGa5fsOm4">John Oliver</a>’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.<br /><br /><a href="https://www.youtube.com/watch?v=jvExyUBQA-k">Preet Banerjee</a> explains the history and consequences of the repeated debt-ceiling crises in the U.S.<br /><a href="https://www.youtube.com/watch?v=5EJaafU8hvo"><br />Salman Ahmed at Steadyhand</a> explains how zero commission platforms make money off you.<br /><a href="https://findependencehub.com/the-value-of-advice/"><br />John De Goey</a> 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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com2tag:blogger.com,1999:blog-5465015914589377788.post-64835361640733483762023-06-09T11:22:00.002-04:002023-06-09T11:22:25.406-04:00Bad Retirement Spending Plans<p>A recent research paper by Chen and Munnell from Boston College asks the important question “<a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3979740">Do Retirees Want Constant, Increasing, or Decreasing Consumption?</a>”. The accepted wisdom until recently was that retirees naturally want to spend less as they age. This new research challenges this conclusion.<br /><br />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.<br /><br />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. (<a href="https://www.wealthmanagement.com/retirement-planning/do-retirees-want-steady-increasing-or-decreasing-spending">Larry Swedroe also discussed this research</a>.)<br /><br /><b>Research Findings</b><br /><br />“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.”<br /><br />“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.”<br /><br /><b>Resistance</b><br /><br />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.)<br /><br />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.<br /><br />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.<br /><b><br />Other Factors to Consider</b><br /><br />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.<br /><br />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.<br /><b><br />Conclusion</b><br /><br />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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
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<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com11tag:blogger.com,1999:blog-5465015914589377788.post-56581200127411520892023-06-02T07:00:00.001-04:002023-06-02T07:00:00.140-04:00Short Takes: Too Many Accounts, the Advice Gap, and more<p>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.”<br /><i><br />Here are some short takes and some weekend reading:</i><br /><br /><a href="https://www.wealthprofessional.ca/news/industry-news/fpac-president-lets-stop-talking-about-the-non-existent-advice-gap-in-canada/376416">Jason Pereira</a> has a strong take on the supposed financial “advice gap” in Canada.<br /><br /><a href="https://www.canadianportfoliomanagerblog.com/should-you-dump-your-all-equity-etf/">Justin Bender</a> 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.<br /><br /><a href="https://boomerandecho.com/outsourcing-key-to-happiness/">Robb Engen at Boomer and Echo</a> 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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com0tag:blogger.com,1999:blog-5465015914589377788.post-87741095779401362792023-05-19T07:00:00.001-04:002023-05-19T07:00:00.139-04:00Short Takes: InvestorLine’s HISAs, 24-Hour Trading, and more<p>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.<br /><br /><i>Here are some short takes and some weekend reading:</i><br /><br /><a href="https://www.youtube.com/watch?v=YPYXSyJHnTk">Preet Banerjee</a> 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.”<br /><br /><a href="https://www.canadianportfoliomanagerblog.com/all-equity-etfs-xeqt-vs-veqt/">Justin Bender</a> compares the all-equity exchange-traded funds XEQT and VEQT.<br /><br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com9tag:blogger.com,1999:blog-5465015914589377788.post-35869465189833958962023-05-05T07:00:00.001-04:002023-05-05T07:00:00.163-04:00Short Takes: Loosening up on Spending, What Advisors Know, and more<p><i>My most recent post is:</i><br /><br /><a href="https://www.michaeljamesonmoney.com/2023/04/finding-financial-advisor.html">Finding a Financial Advisor</a><br /><br /><i>Here are some short takes and some weekend reading:</i><br /><br /><a href="https://www.mrmoneymustache.com/2023/04/27/why-buy-model-y/">Mr. Money Mustache</a> 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.<br /><a href="https://www.steadyhand.com/national_post/2023/05/01/investors-believe-advisers-know-more-than-they-do/"><br />Tom Bradley</a> 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.<br /><br /><a href="https://www.thebluntbeancounter.com/2023/04/the-importance-of-tracking-your.html">The Blunt Bean Counter</a> 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.<br /><br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com0tag:blogger.com,1999:blog-5465015914589377788.post-56369881055972593502023-04-07T16:49:00.000-04:002023-04-07T16:49:01.869-04:00Finding a Financial Advisor<p>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.<br /><br />Let’s consider a couple of examples to illustrate what I mean.<br /><b><br />Case 1:</b> 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.<br /><br />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.<br /><b><br />Case 2:</b> 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.<br /><br />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.<br /><br />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.<br /><br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com0tag:blogger.com,1999:blog-5465015914589377788.post-28900170888180834672023-03-24T07:00:00.001-04:002023-03-24T07:00:00.250-04:00Short Takes: Empty Return Promises, Asset Allocation ETFs, and more<p>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.<br /><br /><i>Here are my posts for the past four weeks:</i><br /><br /><a href="https://www.michaeljamesonmoney.com/2023/03/giving-with-warm-hand.html">Giving With a Warm Hand</a><br /><br /><a href="https://www.michaeljamesonmoney.com/2023/03/the-case-for-delaying-oas-payments-has.html">The Case for Delaying OAS has Improved</a><br /><br /><i>Here are some short takes and some weekend reading:</i><br /><br /><a href="https://boomerandecho.com/vanguards-asset-allocation-etfs-five-years-later/">Robb Engen at Boomer and Echo</a> 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.<br /><br /><a href="https://www.squawkfox.com/airmiles/">Squawkfox</a> warns us about the downside of rewards programs. “Canadians should be wary of loyalty programs — not enticed by them.”<br /><br />New research shows that <a href="https://www.cbsnews.com/news/money-happiness-study-daniel-kahneman-500000-versus-75000/">happiness increases for incomes up to $500,000 instead of only $75,000 as previously believed</a>. 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.<br /><a href="https://www.canadianportfoliomanagerblog.com/foreign-withholding-taxes-emerging-markets-equity-etfs/"><br />Justin Bender</a> explains foreign withholding taxes on emerging markets ETFs.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com2tag:blogger.com,1999:blog-5465015914589377788.post-78389895216788267232023-03-16T12:26:00.002-04:002023-10-31T10:52:02.097-04:00The Case for Delaying OAS Payments has Improved<p>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.<br /><br />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.<br /><br />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. <a href="https://www.michaeljamesonmoney.com/2022/05/taking-cpp-and-oas-early-to-invest.html">In a previous post I looked at how well their investments would have to perform for this strategy to win</a>. Here I update the OAS analysis to take into account the 10% OAS increase at age 75.<br /><br />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.<br /><br />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%.<br /><br />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.<br /><br /><b>A One-Month Delay Example</b><br /><br />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.</p><p></p><p>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.<br /><br />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.<br /><br /><b>All the One-Month Delays</b><br /><br />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.<br /><br /></p><div class="separator" style="clear: both; text-align: center;"><a href="https://blogger.googleusercontent.com/img/a/AVvXsEj932myXKIu1OBeclEQWXwxo2M5YlRO7LU216msd8cWORbOaRI2v07du9Y9yIUPhyd9JoAPb6ak0mZ1jY3G-ZycoDyYsuaxJE6Ht2jJ20iIrAuXoCMZkrXP850wRrO0KT9JnZwkdUyciqxTbUYNdUcuQmvulVzk4yLCv6VZybl5HlfUFi93eG60y5il" style="margin-left: 1em; margin-right: 1em;"><img alt="" data-original-height="432" data-original-width="479" src="https://blogger.googleusercontent.com/img/a/AVvXsEj932myXKIu1OBeclEQWXwxo2M5YlRO7LU216msd8cWORbOaRI2v07du9Y9yIUPhyd9JoAPb6ak0mZ1jY3G-ZycoDyYsuaxJE6Ht2jJ20iIrAuXoCMZkrXP850wRrO0KT9JnZwkdUyciqxTbUYNdUcuQmvulVzk4yLCv6VZybl5HlfUFi93eG60y5il=s16000" /></a></div><br />The case for delaying OAS isn’t nearly as compelling as it is for <a href="https://www.michaeljamesonmoney.com/2022/05/taking-cpp-and-oas-early-to-invest.html">delaying CPP</a>. 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.<br /><br />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.<br /><p></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com8tag:blogger.com,1999:blog-5465015914589377788.post-42094151229812000092023-03-08T09:16:00.002-05:002023-03-08T09:16:19.361-05:00Giving with a Warm Hand<p>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.<br /><br />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.<br /><br />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. <br /><br />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.<br /><br />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.<br /><br />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.<br /><br />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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com11tag:blogger.com,1999:blog-5465015914589377788.post-71001662879341778312023-02-24T07:00:00.001-05:002023-02-24T07:00:00.515-05:00Short Takes: Rental Real Estate, Example TFSA Uses, and more<p>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.<br /><br />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.<br /><br />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.<br /><br /><i>Here are some short takes and some weekend reading:</i><br /><br /><a href="https://boomerandecho.com/weekend-reading-best-uses-for-your-tfsa-edition/">Robb Engen</a> 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.<br /><br /><a href="https://www.aesinternational.com/blog/if-2022-wasnt-the-worst-year-for-investors-when-was">Andrew Hallam</a> has some news for people who think we’re living through especially bad times for our finances.<br /><a href="https://www.morningstar.ca/ca/news/231397/canadians-dont-rush-to-buy-a-house.aspx"><br />Morningstar</a> 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.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com4tag:blogger.com,1999:blog-5465015914589377788.post-49861815472482322222023-02-10T07:00:00.001-05:002023-02-10T07:00:00.255-05:00Short Takes: Behavioural Economics, Monty Hall, and more<p>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.<br /><br />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.<br /><br />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.<br /><br />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.<br /><br /><i>Here are some short takes and some weekend reading:</i><br /><a href="https://annieduke.substack.com/p/beaten-by-pigeons"><br />Annie Duke</a> has a plausible explanation of why people can’t learn to get the Monty Hall problem right but pigeons can.<br /><br /><a href="https://www.aesinternational.com/blog/if-investment-durations-represented-a-lifetime-the-index-fund-portfolio-would-be-a-champion-in-any-era">Andrew Hallam</a> looks at the mutual fund with “the best performance record of all American mutual funds” and makes a surprising comparison.<br /><a href="https://www.squawkfox.com/costly-trends/"><br />Squawkfox</a> helps you control your spending with ideas from behavioural science.<br /><a href="https://www.canadianportfoliomanagerblog.com/foreign-withholding-tax-international-equity-etfs/"><br />Justin Bender</a> explains the two levels of foreign withholding taxes on dividends from international equity ETFs.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com0tag:blogger.com,1999:blog-5465015914589377788.post-21543805654134553912023-01-27T07:00:00.001-05:002023-01-27T07:00:00.271-05:00Short Takes: Podcasts, 2022 Returns, and more<p>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:<br /><br /><b>MJ</b>: Welcome to the podcast, Dr. G.<br /><b><br />Guest</b>: I’m happy to be here.<br /><br /><b>MJ</b>: Let’s get right to it. Please describe your research interests.<br /><br /><b>Guest</b>: I work on retirement decumulation strategies, safe withdrawal rates, and risk levels of equities.<br /><br /><b>MJ</b>: From what data do you draw your conclusions?<br /><b><br />Guest</b>: I use worldwide historical returns of stocks and bonds.<br /><br /><b>MJ</b>: How do you deal with the challenge that we don’t have enough historical return data to directly draw statistically significant conclusions?<br /><b><br />Guest</b>: Uh … I perform simulations drawing from the available pool of data.<br /><br /><b>MJ</b>: So, you create seemingly plausible return histories to extrapolate from the small pool of available data.<br /><br /><b>Guest</b>: Yes, … but I use methods widely accepted in the literature.<br /><br /><b>MJ</b>: 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?<br /><br /><b>Guest</b>: 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.<br /><br /><b>MJ</b>: 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.<br /><br /><b>Guest</b>: There’s a limit to what I can do with the small amount of data available.<br /><b><br />MJ</b>: Yes, that’s my point.<br /><br /><b>Guest</b>: In other simulations, I treat the expected return over the next year as a random variable that drifts over time.<br /><b><br />MJ</b>: Yes, and you assume a particular probability distribution for this drift.<br /><br /><b>Guest</b>: I have to assume some kind of distribution.<br /><br /><b>MJ</b>: 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?<br /><br /><b>Guest</b>: [Fuming] Do you have a better idea?<br /><br /><b>MJ</b>: 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.<br /><br /><b>Guest</b>: Good luck with that. [storms out]<br /><br />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.<br /><br /><i>Here are my posts for the past two weeks:</i><br /><a href="https://www.michaeljamesonmoney.com/2023/01/my-investment-return-for-2022.html"><br />My Investment Return for 2022</a><br /><br /><a href="https://www.michaeljamesonmoney.com/2023/01/bullshift.html">Bullshift</a><br /><br /><i>Here are some short takes and some weekend reading:</i><br /><a href="https://www.canadianportfoliomanagerblog.com/model-portfolio-returns-for-2022/"><br />Justin Bender</a> goes through model portfolio returns for 2022. The losses in long-term bonds aren’t pretty.<br /><br /><a href="https://www.thebluntbeancounter.com/2023/01/2022-financial-clean-up-and-2023-tune-up.html">The Blunt Bean Counter</a> has some advice on doing a 2022 financial clean-up and a 2023 financial tune-up.<br /></p><div class="blogger-post-footer"><p style="font-size:smaller;"> To comment, click on the post title and scroll to the bottom.<br />
© 2007-2024
<a href="http://www.michaeljamesonmoney.com/">Michael James</a>. All rights reserved.</p></div>Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.com2