If you follow investment information on social media, you’ve seen a variant of the following chart many times: U.S. stock prices are very high (as measured by the Shiller CAPE in this case), and we are near the right side of the chart today.  The intended message is that we are sure to have terrible U.S. stock returns for the next 10 years.  The R-squared value of 79% means that the correlation is strong.  All the points are close to the line that’s been fitted to them. But what’s the reality here?  Are we doomed?  The first thing to observe is that the chart covers 39.5 years.  That's close to 4 decades.  Doesn’t that mean there should be only 4 dots?  What they’ve done is collect monthly data so that there are 475 points.  But that means that one point overlaps with the next in 119 out of 120 months. With so little data, statistics are completely unreliable.  It could be that the correlation is much weaker and we just happen to be in a...

One of the talking points of financial advisors is that even if right now you’re able to handle your own investments, tax planning, and other aspects of personal finance, you may face cognitive decline later in life.  The implication is that maybe you should get a financial advisor now before it’s too late. The challenge here is that many people who hold themselves out as financial advisors are little more than sellers of expensive mutual funds.  Some might even be inclined to take advantage of your cognitive decline to churn your account and generate excess fees. What you may need is a good financial advisor.  Some financial advisors are excellent.  They range from those who charge by the hour for advice only to those who manage your investments directly for you.  However, if you’re in cognitive decline, it won’t help to just get the occasional portfolio checkup.  The advisor would have to directly manage your investments.  But it’s hard to get this ...

Over a lifetime, investment costs take a huge bite out of people’s savings, but many investors don’t understand how they work.  It’s not that they’re complicated, it’s that the final answer seems unbelievable.  How could it be that these fees nearly cut my retirement nest egg in half? Let’s go through some of the misunderstandings. I don’t pay investment fees Some people think that because they never swiped a credit card or wrote a cheque to pay investment fees, they didn’t have to pay them.  This isn’t true.  If you own mutual funds or exchange traded-funds (ETFs), then fees are quietly deducted from your savings.  The total of these fees for the year is called the Management Expense Ratio (MER). The investment returns you see on your statements are net of fees in most cases.  An exception is that some group RRSPs report before-fee returns.  The fact that you see net returns is good in the sense that you see represent what you actually got.  On t...

David Chilton, The Wealthy Barber, has a great podcast with amazing guests, and I was thrilled to be invited to chat with Dave.  He’s done so much to help Canadians with their finances, most recently with his updated book The Wealthy Barber . Years ago I wrote a positive review of his book The Wealthy Barber Returns , and Dave left a message asking for a phone call.   At the time, I didn’t know Dave was a good guy who just wanted to thank me.  At first I thought I might have said something to upset him.  So, I spent the first minute of the conversation giving two-word answers.  As it became clear Dave wasn’t upset, I relaxed a little, but Dave must have come away with the impression that I can’t talk to people.  Fortunately, we got past that first impression years later, and I was human enough for Dave to invite me on his podcast. Over the coming weeks, I intend to write blog posts or point to existing blog posts giving fuller answers to Dave’s excelle...

I liked Charles Ellis’ book Winning the Loser’s Game so much that I had to read his latest: Rethinking Investing .  It is very short at just over 100 small pages, but is packed with good advice.  Some of it is specific to U.S. tax laws, but most of it useful for Canadians. Ellis takes on three huge areas of personal finance.  The first is your portfolio allocation, or what you should invest in.  The second is your savings plan, and the third is your “spending rule,” or how to spend your assets during retirement.  A detailed treatment of these areas could easily run to thousands of pages, so this book is necessarily at a high level.  Ellis wants you to get the broad ideas right, so that you won’t make big mistakes as you fill in the details. Ellis calls compounding investment returns “your power curve.”  He explains that most of your investment growth comes at the end, which provides motivation to begin early.  Saving is “your first priority.”...

When it comes to big questions about saving and investing, author Nick Maggiulli is critical of the answers given by the financial industry.  In his book, Just Keep Buying , Maggiulli brings data and evidence to answer these questions in interesting new ways.  I find myself agreeing with most of his conclusions, but not always with how he arrives at them or expresses them.  Whether you agree or disagree with his conclusions, Maggiulli adds to the discussion with thoughtful points of view. This book is organized around 21 questions that many people ask, including “How much should you save?”, “Should you ever go into debt?”, "Should you rent or should you buy?”, “What should you invest in?”, and “How soon should you invest?”  The discussion and answer to each question is its own chapter. In the rest of this review, I’ll examine some of these answers. Save what you can How much money should you save?  Maggiulli says to “save what you can.”  On its own, this is...

The high MERs charged by some employers’ group RRSPs can be frustrating.  But these fees seem small compared to the employer matching of employee contributions.  A recent guest on The Wealthy Barber podcast said “those [group RRSP] fees aren't going to eat that [contribution matching] up over time.”  Challenge accepted!  People, including experts,  consistently underestimate the corrosive effect of high MERs over long periods of time. It’s not my intention to be overly critical of David Chilton or his guest Brian Orlando.  They gave some great information for helping Canadians with their finances.  But I do want to explain how high fees can consume an employer match faster than we might expect. An example The podcast segment began with the example of 2.5% MERs in the group RRSP.  So, let’s compare two scenarios for a hypothetical employee Evan: Group RRSP Evan’s contributions are invested in a crappy closet index global stock fund with 2.5% MER....

Lately, I’ve heard a few references to Dalbar’s measure of how much retail investors underperform the investments they hold due to poor behaviour.  I suspect that if the people making these references understood how Dalbar calculates this measure, they’d be embarrassed at having mentioned it.  There can be legitimate academic debate about the best way to measure investor underperformance, but Dalbar’s simple method is just nonsense. A simple example to illustrate the problem Ann has invested in ABC fund for the past 5 years.  Her initial investment was $10,000.  Over the first 4 years, she left her investment alone and it grew 50% to $15,000.  Ann then got an inheritance of $20,000, which she put into ABC fund to give her a total of $35,000.  In the final year, ABC went up 6%.  Ann now has $37,100. By any reasonable method of analyzing Ann’s investment behaviour, she exactly matched the performance of her fund.  She was always fully invested with ...

The 2025 investment return for my overall portfolio measured in Canadian dollars was 13.7%, which is below my 2025 benchmark return of 16.0%.  There are two main reasons for this difference.  The first is that we made a large financial gift, and the timing of our stock sale to raise cash for this gift was unlucky.   The second reason is my decision a few years ago to shift gradually away from stocks when stock prices are high as measured by the cyclically adjusted price-to-earnings ratio (CAPE) of world stocks.  This shift is tied to my rebalancing plan that is automated in a spreadsheet.  My benchmark doesn’t do any automated shifting away from expensive stocks. This year, stock prices were high but they gave good returns anyway, and my slightly lower than usual allocation to stocks cost me money.  This has happened two years in a row now.  But I’m content with this outcome.  By shifting modestly away from stocks when they’re expensive, my p...

When Canadians are just getting started managing their own investments at an online broker, their pre-existing ideas create a lot of confusion.  Here I go through several of the most common misconceptions I encounter in a conversation format. Novice Investor:   Ok, so I’ve opened a TFSA with my online broker, and I’m ready to put my $50,000 in. Michael James:   Great.  We just have to transfer the money to your new TFSA from some external account, like a chequing account at your bank.  Just a few clicks and we’re done.  The money will be there in a day or two. NI:   Wow! That was easy. So, we’re all done? MJ:   Not quite.  All we’ve done is fill your TFSA with dollars. NI:   That’s all I did with the TFSA I used to have at the bank.  It’s closed now. MJ:   Yes, but that TFSA was just a savings account earning a little bit of interest.  You said you want to put this $50,000 away for the long term in an all-in-one ETF. ...

We often see debates about whether or not volatility of returns is a good measure of risk.  This debate is related to what I think is a bigger issue: the difference between perceived risk and actual risk.  Perceived risk is influenced by observations and “dollar bias,” but actual risk comes from the full range of what might happen and its influence on buying power. Dollar bias and buying power In some contexts we forget about inflation and view dollars as constant over time.  For example, we tend to focus on nominal returns and think that it’s okay to spend gains as long as we leave the principal intact.  But the principal will erode with inflation if we spend all the nominal gains. Another context where we see this bias is with mortgages.  We can calculate that with a 30-year $400,000 mortgage at 4%, the first year’s payments will only reduce the principal by about $7000.  But even with only 2% inflation, the buying power of the principal will erode by abo...

There is no shortage of studies showing that average investors underperform the market averages, often by 2-3% per year.  However, Barry Ritholtz’s excellent book How Not to Invest says that average investors underperformed by 5% per year one decade and only 2% per year the following decade.  How could this be?  It doesn’t appear to make sense.  So, I started digging. The Data Here are simplified version of the chart I saw on page 382: So, average investors trailed a basic 60/40 portfolio by 2.4 percentage points per year.  This is plausible.  Investors pay expenses, and some of them do some market timing.  Here is what I saw on the next page: This time the behaviour gap is 3.8 percentage points per year for 20 years.  Ritholtz makes the point that “The longer the holding period, the greater the impact of errors that disrupt compounding.”  This is true as it applies to the final dollar value of your holdings.  After all, 20 years of mis...

The 2024 investment return for my overall portfolio measured in Canadian dollars was 18.0%, which is below my benchmark return of 19.0%.  The difference is primarily due to my choice a few years back to adopt an automated plan that shifts gradually away from stocks when stock prices are high as measured by the cyclically adjusted price-to-earnings ratio (CAPE) of world stocks .  My benchmark doesn’t take CAPE into account. In years when stock prices are high but they give good returns anyway, this automated plan costs me money.  That’s what happened in 2024.  But I’m content with this outcome.  By shifting away from stocks when they’re expensive, my portfolio risk is lower at a time when stocks are riskiest.  I don’t expect my strategy to pay off during normal times.  I’m reducing my losses if we have a scenario where stock prices are high, and then they crash.  This is a kind of insurance, and it has a price during normal times. The method I use ...

Inflation is a risk we have to face in financial planning, particularly in retirement.  We need to measure inflation risk correctly to be able to make reasonable financial plans.  The best guide we have to the future takes into account past inflation statistics.  But the field of statistics is full of subtleties, and even Dimensional Fund Advisors (DFA) can make mistakes. DFA creates good funds, and their advisors tend to do good work for their clients.  I’d prefer to find errors in the work of a less investor-friendly investment firm, but they provided a clear example to learn from.  They misapplied a statistical rule, and as a result, they misinterpreted the history of inflation over the past century. I discussed this issue with Larry Swedroe in posts on X.  I respect Larry and have followed his work as he tirelessly explains evidence based investing to the masses. A Simple Example To explain the problem, let’s first begin with a simpler example.  So...

As we’ve learned in recent years, inflation can rise up and make life’s necessities expensive.  Despite the best efforts of central bankers to control inflation through the economic shocks caused by Covid-19, inflation rose significantly for nearly 3 years in both Canada and the U.S.   Uncertainty about future inflation is an important risk in financial planning, but most financial planning software treats inflation as far less risky than it really is.  This makes projections of the probability of success of a financial plan inaccurate.  Here we analyze the nature of inflation and explain the implications for financial planning. Historical inflation Over the past century, inflation has averaged 2.9% per year in both Canada and the U.S.(*)  However, the standard deviation of annual inflation has been 3.6% in Canada and 3.7% in the U.S.  This shows that inflation has been much more volatile than we became used to in the 2 or 3 decades before Covid-19 appeared...