Here are my posts for this week: Leverage Quiz When Genius Failed Here are some short takes and some weekend reading: Jason Zweig gives a clear explanation of why fund managers tend to make their portfolios match the index fairly closely even if their investors would prefer bolder moves. Potato reviews several rent vs. buy calculators. He takes a much deeper look than writers of most such review posts and actually explains what’s wrong with some of them. Tim Stobbs explains his approach to early retirement in an interesting interview. His approach sounds very sensible. The one thing that concerns me in declaring my own financial independence is the possibility that when my health eventually declines somewhat, my expenses will rise. I might need to pay someone to mow my lawn, shovel snow, or clean eavestroughs. I may have more direct expenses such as physiotherapy. For this reason, I think early retirement enthusiasts should add a buffer to their current spending to...

What happens when smart guys including some Nobel Prize winners borrow $125 billion to invest with huge leverage, gain further leverage from derivative contracts, and rely on markets remaining rational and investments remaining mostly uncorrelated to avoid blowing up? This is the story of the hedge fund Long-Term Capital Management (LTCM). Spoiler alert: they blew up. Roger Lowenstein’s book When Genius Failed is an interesting account of LTCM’s seeming wild success starting in 1994 followed by its spectacular failure that threatened to take down the U.S. banking system in 1998. Apparently, “long term” is 4 years. Lowenstein does a good job of blending financial events with the personal interactions that were important to this story. In its first four years, LTCM total returns were a staggering 311%! Even after deducting stiff management fees, investors were up 185%. Unfortunately, when trades started going against LTCM’s huge leveraged portfolio, it took only 5 months to er...

When you borrow to invest, it is called using leverage. I’ll explain the basics of leverage and then hit you with a one-question quiz to see how well you understand its effects. If you have $100,000 and borrow $100,000 more so you can invest a total of $200,000, it’s called using 2:1 leverage. If you borrowed $200,000 to invest a total of $300,000, that’s 3:1 leverage. Once you’ve leveraged your portfolio, there are two ways basic approaches to maintaining that leverage. One is to rebalance periodically so that you maintain the same level of leverage. This means that if you’re leveraged 2:1 and stocks go up, you borrow to buy more shares to maintain the 2:1 leverage. If stocks go down, you sell shares and pay off some debt to get back down to 2:1. The other basic approach is to treat the debt and investments separately, just paying the loan interest. Your leverage ratio goes up and down as your investments go down and up. If you had invested in the exchange-traded fund of ...

Here are my posts for this week: TFSA Penalties Poised to Rise Test Driving Financial Rules of Thumb Here are some short takes and some weekend reading: Dan Hallett uses his expertise to pick apart the misleading aspects of a few ads for investments. The rule seems to be “if it’s misleading but legal, run it.” Eric Reguly does a great job of explaining executive pay abuses. Stock options do a terrible job of aligning the interests of shareholders and company executives. Tom Bradley at Steadyhand is advising retired clients to rebalance by topping up their cash reserves. He says “the general range used by our clients is 12 to 24 months” worth of spending in cash reserves. When I started looking at retirement income strategies , I chose 5 years of spending as a cash buffer. I think the difference is that Steadyhand’s client’s portfolios generally contain a significant allocation to bonds that reduces risk. My strategy was based on the cash buffer being the only safe ...

Taking a close look at some financial rules of thumb began with a post at Brighter Life and jumped to My Own Advisor . Here I give my take on some very common rules of thumb. Your retirement income needs to be 70% of your working income. This is obviously just an average or typical case. You should really look at your spending needs, including saving up for bigger items like replacing a car, windows, furnace, flooring, or roof. My family’s spending is currently about 40% of the combined take-home pay for my wife and me. It makes no sense for us to target a retirement income almost double what we need right now. Retirement needs are driven by your spending, not your income. Keep an emergency fund equal to six months’ income. I’m a big believer in liquidity. Access to credit may seem like adequate protection, but lenders may take away access to credit in tough financial times. If you lose your job when the biggest employer in town goes bankrupt, banks may not be in a hurr...

While the number of people mistakenly over-contributing to their TFSAs has been declining each year, the size of individual penalties is likely to grow. This is a consequence of a common type of mistake and growing TFSA balances. To illustrate the problem, consider our hypothetical hero Joe who dutifully fills up his TFSA every January. Like many Canadians, Joe doesn’t realize that his TFSA can be more than just a savings account collecting modest interest. It’s now January 2020, and after filling up his TFSA yet again he now has $75,000 saved. Then Joe sees an ad at another bank offering TFSA rates a half percent higher than he’s getting now. That would pay him an extra $375 per year. He decides to take action and withdraws the whole $75,000 and deposits it into a TFSA at the new bank. Unfortunately, Joe does not do a “qualifying transfer,” which is when the TFSA contents are transferred directly from one TFSA to another without Joe ever handling the money. He just does t...

Here are my posts for this week: Why Market Timing Fails Loan Pushers Too Big to Fail Here are some short takes and some weekend reading: David Chilton (the Wealthy Barber) explains in this video clip the secret to a happy financial life. Saving isn’t just about making a better future; it’s about making life simpler and better right now. His remarks at the end about math knowledge are interesting. I’ve definitely noticed that people with strong math skills tend to earn more money than the general population. Whether they’re better at handling and investing that money is another question. Canadian Couch Potato shows how to reduce transaction costs and optimize asset location by treating all family investment accounts as a single big portfolio. Doug Runchey explains how working past age 60 affects CPP benefits in a number of example cases. Dan Hallett takes a look at a market-linked GIC that seems good on the surface but wilts under Hallett’s scrutiny. Big Cajun...