Imagine what life would be like if you saw all amounts of money in terms of constant year 2000 dollars. Because there has been about 28% inflation since the year 2000, if your friend saw a jacket on sale for $128, you’d see the price as $100. While other people would see prices rising over time, you’d see the average prices of the things you buy stay roughly the same. Any cash that you keep hidden in your sock drawer would shrink slowly over time in your eyes. This change in your perception would have a number of interesting effects including your perception of investment risk. While most people would see their pay stay constant for the year and then step up at raise time, you’d see your pay cheque drop by a little each pay period. At raise time your pay would go up, but not necessarily back to what it was at the start of the year depending on whether your raise exceeded inflation. If you had a $10,000 emergency fund in a regular savings account that pays 1% interest (which is...

In the aftermath of the 2008 stock crash, the title of Derek Foster’s latest book The Worried Boomer: No Pension? Not Wealthy? Here’s YOUR Plan is some good marketing. Despite the promise of novel solutions to the problem of not being prepared for retirement, Foster offers sensible but fairly standard advice: spend less, save more, and work longer. Those who don’t like long books will be happy with 170 pages of large text and generous white space. A couple of the most common themes in the book are a recommendation to invest in dividend stocks and repeated plugs of Foster’s previous books. An amusing contradiction is that Foster’s web site and a couple of his previous books are called “Stop Working,” but he devotes a chapter in this book to the financial benefits of continuing to work past retirement age. One interesting fact I learned is that the Saskatchewan pension plan is open to all Canadians and not just Saskatchewan residents. Some people may prefer this as a lower c...

Gordon Pape devoted a section in his book Retirement’s Harsh New Realities to couch potato investing. I was quite interested to read it because it’s important to pay attention to criticisms of your investing strategies. If I only read books by proponents of my way of investing, I won’t learn much new. Unfortunately, Pape’s criticisms of couch potato investing were disappointing. Pape “agrees that the couch potato concept is easy to understand,” that “ETFs and index mutual funds are cheaper,” and that “the savings go straight to the bottom line in the form of higher returns.” However, Pape thinks that passive investing fails on “how safe the investment is and how much you will end up earning on your money” because of time horizon and human nature. Pape claims that passive investing requires a long-term view and that retirees “need to see profits sooner ... especially for those who depend on their investments to generate income.” ETFs and index mutual funds can be used to match...

Almost everyone knows that the path to profits with stocks is to buy them at a low price and sell them at a higher price. Strangely enough, some smart-sounding advice amounts to the opposite strategy: buy high and sell low. In his book Retirement’s Harsh New Realities , Gordon Pape says “Moving some assets from an equity fund to a money market or bond fund during [periods when stock markets are going through a rough time] is only prudent.” This sounds smart until you break it down. “Stock markets going through a rough time” means that stock prices have dropped sharply in the recent past. “Moving some assets from an equity fund” means selling stocks. So, we can translate this advice into “Selling stocks after their prices have dropped sharply is only prudent.” So, we are told to sell stocks when their prices are low. Some may argue that a “rough period” refers to the near future of stock prices and the advice is actually to sell before prices drop. However, we don’t know wh...

I haven’t included any articles about the Facebook IPO because I don’t care much about it. I would only buy IPO shares if offered the “friends and family” discount. Even then I might not buy them.  The Blunt Bean Counter says that additions to your cottage’s adjusted cost base may be CRA’s new target. Where Does All My Money Go? explains the advantages and disadvantages of holding your own mortgage in an RRSP. I had no idea there were so many fees involved. The idea of having to pay CMHC premiums to protect your RRSP against yourself seems strange. Presumably you’d raid your RRSP to avoid defaulting. Big Cajun Man says that the only time you get taxed on the value of something you own rather than your income is with property tax. If MERs were a tax, then they would fall into this category too.

Retirees face mandatory RRIF withdrawals, clawbacks, and increased clawbacks due to dividend gross-ups. Many retirees feel that the tax system is stacked against them, including Gordon Pape. Whether this is true or not comes down to expectations. In Canada, we have a number of programs designed to help subsets of the population financially. The favoured groups tend to be those with low incomes, children, and retirees. With OAS, GIS, and the age credit, it’s hard to argue that retirees have it worse than the typical working person under the age of 65. The only meaningful debate is whether retirees are favoured by an appropriate amount or whether they should be favoured more or less. In his book Retirement’s Harsh New Realities , Gordon Pape makes a number of points to justify his assertion that the tax system is stacked against retirees. Let’s look at each one in turn. Taxes on RRIF Withdrawals Many retirees who saved diligently in their RRSPs for years are unhappy about ...

Two people who each earn $100,000 per year generally pay less combined income tax than an individual making $200,000 per year. This creates a strong incentive for couples to find ways to balance their incomes. One way to achieve income splitting is to try to shift non-registered investments from a higher-earning spouse to a lower-earning spouse. The TFSA rules seem to permit a strategy for shifting assets between spouses. Let’s illustrate this with an example. Alice is a doctor making $200,000 per year. He husband Ted watches the children and makes no income. Over the years Alice has maximized her RRSP and TFSA contributions and in addition has built up significant non-registered investments that produce income. Unfortunately, this income is highly taxed in her hands. If the non-registered investments belonged to Ted, the couple would pay less income tax each year. However, if Alice simply gives the assets to Ted, CRA attribution rules say that the income derived from the i...

Perhaps I’ve been too hasty suggesting that people who spend too much are being foolish. Sometimes when I see people doing things that make no sense, I’ve later realized that I just misjudged their goals. Coaching and playing baseball and softball, I’ve seen plenty of players who ignore bunt signs and others who swing away on 3-0 pitches. I used to think that the remedy was to explain to them that their actions are reducing our team’s chances of winning. Sometimes this works, but often it doesn’t because some players don’t care much whether the team wins. They like hitting home runs and their actions are quite sensible once you understand that their goal is not team victory. Similarly, when I was young and naive, I would see the CEOs of the companies I worked for do things that were detrimental to the long-term health of the company. I thought maybe I was missing something or that the CEOs were misguided. Much later I realized that these CEOs were maximizing the near-term val...

Mark Cuban has a very interesting take on rising tuition costs and how the growth of student debt is affecting the economy. He believes that the current college system in the U.S. will melt down. Canadian Couch Potato explains why he has no faith in market timing strategies, even those that have tested well for decades. The Blunt Bean Counter explains the laws affecting the types of conditions you can attach to gifts in your will. It never occurred to me to try to manipulate mt children from my grave, but I suppose many try. Big Cajun Man came across an interesting TVO video with experts debating personal debt issues. Comments like “bite me” kept it lively. Money Smarts shows that the odds don’t look good trying to come out ahead by selling your home to avoid the coming crash and later buying a new home at a lower price. Preet Banerjee continues his podcast series Mostly Money Mostly Canadian .

Few investors understand how volatility in investment returns costs them real money. I did some simulations to try to explain where the lost money goes. In the hypothetical land of Volatilia, half of stocks return -70% each year and the other half return +80%. The problem for investors is that which stocks get each return changes randomly from year to year. There are a million active investors who each pick one stock every year and pile all of their savings into it. There are another million investors who use an index fund that owns all stocks in equal dollar amounts. Assuming that all investors add $5000 per year to their savings, each index investor will end up with $634,200 after 40 years. Mathematically inclined readers will realize that the active investors will end up with the same average result, but there will be winners and losers. On the surface, it seems like there is no real cost to trying the active route. You could end up with more money or less money, but the...

Joshua M. Brown paints an ugly but entertaining picture of the inner working of Wall Street and how they sell investments to retail investors in his book Backstage Wall Street . It’s illuminating to see how large firms can take fresh employees who start with an interest in helping their clients, and drive these employees to treat retail investors as marks and sell them bad investments. The book begins with a foreword and introduction that try to sell the book so hard that I almost stopped reading. The definition of terms up front along with a history lesson on Wall Street didn’t help either. Fortunately, I made it to Chapter 5 for a story about brokers enduring morning motivational speeches screamed by a 300-pound man dubbed the “Mountain of Misinformation.” In my opinion, this is where the book should have started. The rest of the book from this point was an entertaining and illuminating read. A particularly interesting chapter was on the “straight line pitch,” a set of scrip...

Jose Canseco and an unnamed member of the opposing softball team prior to the charity challenge match. Jose Canseco accepted a home-run derby challenge from beer-league ball player Evan Malamud, and the event snowballed into a fundraiser for the autism unit of CHEO (Children’s Hospital of Eastern Ontario) held Saturday May 12th. In the warm up and home-run derby, Canseco wowed the crowd by knocking both baseballs and softballs a long way out of Ottawa’s baseball stadium. There were no official measurements, but even the softballs flew well over 400 feet. Following the derby, Canseco’s All Stars played a softball game against Malamud’s beer-league team (including yours truly). Despite falling behind early, the All Stars made a big comeback and won the game on a Canseco grand slam that flew so far over the 380-foot sign that guesses on its total distance ranged from 440 to 500 feet. Hitting a baseball that far is difficult enough, but blasting a softball that far is truly imp...

Larry Swedroe explains how public sector defined-benefit pension plans put taxpayers in the investment guarantee business. Don’t be fooled into thinking this is just an American problem. The U.S. has bigger problems, but Canadian taxpayers are in the investment guarantee business as well. The Wall Street Journal says that Americans are warming up to the idea of renting a home. It’s ironic that this should happen while housing prices are so low in much of the U.S. It’s Canadians who should be looking at renting because of high house prices, but we’re obsessed with home ownership. Big Cajun Man is no fan of the credit card cheques mailed to him every month. Retire Happy Blog has some good reasons why you should formalize the loans you make to your children even if you love and trust them. Where Does All My Money Go? says that the cost of smoking is equivalent to blowing up multiple Porsches. But can you really put a price on doing something that your parents don’t want ...

I recently had the pleasure of listening to an insurance company pitch a group RRSP to employees at my company. Some parts of the pitch were expected, but others were unexpected. One expected part of the pitch was that the presenters were pretty and tanned. They definitely looked the parts of successful salespeople. The main unexpected part was that they almost immediately launched into a discussion of the importance of fees and how much could be saved by minimizing fees. However, I think the real thinking behind this discussion of fees was “the best defense is a good offense.” Instead of trying to avoid fee discussions, they decided to meet the inevitable questions head on. The funds in the plan have fees in the 1.5% to 2% range, and because typical retail investors pay 2% to 2.5%, we were told that the proposed group RRSP would save us 0.5% per year. In one scenario the salespeople calculated that we could get an extra $300 per month in retirement payments due to this seemi...

When it comes to slicing a pie, the idea of a half is pretty simple, and most of us would agree on whether the pie has been cut roughly in half. But with long-term investing, our sense of scale can fail us, and we can easily disagree on what it means to have half as big a return. Suppose that a 25-year old receives a $10,000 gift from her grandparents and chooses to invest the money in a stock index and not touch it until she is 65. If the stock market returns 10% per year, she will end up with $452,600. Now what if she only got half of that return? What does “half” mean here? One interpretation is that she gets only a 5% return each year. We might think that she will end up with about half as much money. The real answer: $70,400! What a difference. To end up with half as much money ($226,300), she would have to make 8.1% per year. A little 1.9% gap over 40 years cuts her final savings in half. When it comes to making long-range investing plans, don’t place too much tr...

Your Total Debt Service Ratio (TDSR) is the percentage of your gross income that covers your basic housing costs (including mortgage) plus payments on consumer debts. Most lenders prefer this to be below about 40% of your income. But does it make sense for this to be based on your gross income? After all, your tax rate increases as your income increases. To illustrate what I mean, I calculated the percentage of gross income left over after taxes and 40% TDSR for various incomes. I assumed just the basic personal amounts for tax deductions for an Ontario resident. Here are the results: At a $20,000 income, you’re left with about 50%, but for a $150,000 income, you’re left with only 27%. On the surface, this doesn’t seem to make sense. Shouldn’t the TDSR take into account tax levels so that the maximum TDSR permitted is lower at higher incomes? To investigate this further, I produced a second chart that shows how many dollars are left rather than the percentage: This...

Bruce Livesey paints a picture of the Canadian investment industry as a Wild West in his book Thieves of Bay Street . His detailed stories about the people involved in corruption among public companies, brokers, bankers, and regulators are a compelling read. I’m not prepared to declare our future doomed, but it is clear that we need more effective regulation. I didn’t always agree with the book’s characterization of problems. Livesey quotes William Lazonick complaining about companies “maximizing shareholder value” at the expense of “creation of jobs.” The purpose of a business is to make money for its owners. Creating jobs is a side effect. We need laws that govern how workers can be treated, but we can’t look to businesses to put worker interests ahead of the interests of owners. I think most of the problems we have are with attempts to boost short-term share prices. If we can find a way to discourage businesses from seeking the short-term gains that come with creative acco...

Raghuram Rajan has a very interesting essay on why the west can’t borrow and spend its way to recovery . He argues that for decades our prosperity has been driven by increasing debt and that this is unsustainable; we have to find a path to real growth. Hat tip to the Stingy Investor for pointing me to this one. Larry Swedroe has an excellent way to explain the problem with not owning enough stocks: “a few big winners (e.g., Google) cause the average return to be above the median return. As a result, there are more stocks that have below ‘average’ returns than there are stocks with above ‘average’ returns. This makes the purchase of individual stocks a loser’s game.” Tom Bradley at Steadyhand has a very interesting list of 5 things that need to change in the wealth management industry. Canadian Mortgage Trends gives a thorough discussion of Flaherty’s musings about privatizing CMHC. I don’t know enough about the issues here to have an opinion one way or another, but I am ske...

A reader directed my attention to Meridian Canadian Market Secure. This is a GIC whose interest payment is linked to the performance of the Canadian stocks making up the S&P/TSX 60 index. They claim that the “principal is guaranteed,” that “members participate in 100% of return,” and “the participation rate is currently set at 100%.” This sounds too good to be true. Before finding the fine print, the marketing claims make it seem like investors can’t lose money, but get 100% of the upside of stock investing. Savvy investors know there must be a catch somewhere because banks (or a credit union in this case) don’t give away free money. It turns out that the catch is in the “method of calculation” that I found after some digging. When you buy stocks and hold them for 5 years, what you pay is the stock price at the beginning, and what you get is the stock price at the end of the 5 years. With this GIC, what you get is the average price level over the 5 years. So, if the inde...

The majority of do-it-yourself investors that I know are stock-pickers. Among techies, the big debates are whether Apple stock will go much higher or just higher, whether Google has run out of steam, and where Facebook is headed. While they disagree on many points, one thing unites most of these stock-pickers: they protect their egos by never figuring out their investing returns. There are many ways to compare your returns to an index. I used to work out my returns on different subsets of my investments and over various non-standard lengths of time, and only recently I calculated my yearly returns on my complete portfolio and compared them to an appropriate benchmark . Another approach was suggested in a comment by reader Gene : “every time I make a purchase, I simulate an equivalent purchase in the S&P500 index.” Then he can just compare his real portfolio value to the simulated index portfolio value. The majority of stock-pickers carefully avoid all such methods of determ...

Investing can be very simple. In fact, all the decision-making can be coded into a spreadsheet. The complication comes when you decide that you want to try to make more money than your neighbours. Here is one formula for investing long-term savings. Pick a few broad low-cost index ETFs to cover the world’s stock markets and bond markets. Choose percentages for each ETF and how these percentages will change as you approach retirement. Code up a spreadsheet to tell you where to place new money to maintain your percentages and to when to rebalance if necessary. Then for the next few decades, do whatever the spreadsheet tells you to do. After the initial phase of setting this up, it’s hard to imagine an easier plan to follow: Friend: “What do you think about the crazy markets this year?” You: “Dunno. My spreadsheet hasn’t told me to do anything lately.” All the complications come into investing when you try to go for more than your “fair share.” One obvious attempt to ...