I had a full week of posts: Treating Your Entire Portfolio like a RRIF in Retirement A Portfolio with 3 Different Returns Stocks for the Long Run Retirement Spending Experiment You can follow me on Twitter now ( @MJonMoney ). Here are some short takes and some weekend reading: The Atlantic has a very thoughtful (and likely controversial) take on youth football. The money in professional football blinds us to the damage young men do to themselves seeking a slice of the pie. Some of the same concerns carry over to youth hockey and basketball, both of which are more violent (and physically damaging) than they were when I was young. Canadian Couch Potato has a very interesting way of showing that diversification works, despite what some say. Andrew Hallam shows that some major RBC actively-managed mutual funds don’t fare well when their 10-year returns are compared to benchmarks. Big Cajun Man says that if you haven’t started saving for retirement by the time you h...

I decided to run an experiment to test a retirement spending strategy ( described here ) on actual stock returns over the past 100 years. The goal of the experiment is to see how well the spending strategy balances the need for stable income against the need to adapt spending to portfolio gains and losses. Along with the retirement spending strategy , I gave a spreadsheet to calculate the yearly spending amounts. My experiments used the default values in the spreadsheet (a 4% real return on an all-stock portfolio, low investment costs, target longevity of 100, and 5 years of spending kept in safe investments, among other assumptions). I used inflation-adjusted stock returns in the U.S. from 1913 to the present to simulate seventy 30-year portfolios for an investor retiring at age 60. The spreadsheet calculations set yearly retirement spending for a 60-year old at 4.17% of total retirement savings. This percentage rises to 9.74% by age 89. I chose a starting portfolio value...

Jeremy Siegel’s book Stocks for the Long Run is in its fifth edition and has so much fascinating information for investors that keeping this review to a reasonable length is a challenge. A major theme running throughout the book is how different stocks look in a long-term view versus a short-term view. Despite Siegel’s deep analysis, this book is very accessible for readers with an interest in investing. In the Foreword, Peter Bernstein asserts that “stocks must remain ‘the best investment for all those seeking steady, long-term gains’ or our system will come to an end, and with a bang, not a whimper.” Early in the first chapter, Siegel shows a remarkable chart of U.S. asset class returns adjusted for inflation over 210 years. A dollar in stocks grew to over $700,000 from 1802 to 2012 (even after subtracting out inflation). In contrast, bonds grew to only $1800 and gold to a measly $4.52. The swings in stocks feel large when you live through them, but on a 210-year chart, st...

The Canadian Securities Administrators (CSA) are making changes to reporting rules on client portfolio statements. Among the changes is the requirement to report clients’ yearly returns in dollar-weighted terms (also called the internal rate of return (IRR)). This gives clients a better idea of how their portfolios have performed, but opens the door to the amusing possibility of multiple return values. For an accessible explanation of the difference between time-weighted and dollar-weighted returns, see Neil Jensen’s excellent article . More mathematically-inclined readers can see Wikipedia’s internal rate of return (IRR) page . Dollar-weighted returns are a great idea because they give more weight to the returns you get when you have more money invested. After all, the return you get on a few dollars is much less important than the return you get on millions. However, dollar-weighted returns can have some mathematical quirks in rare circumstances. One of those rare quirks is...

Tax rules for RRIFs require you to withdraw a percentage each year that depends on your age. One thought for choosing how much to spend from your entire portfolio in retirement is to use the same table of RRIF percentages.  This idea makes sense to me, but I chose to work out my own percentages. A while back I proposed a possible retirement income strategy where you set aside a fixed number of years of spending somewhere safe (like a high-interest savings account (HISA)) and invest the rest of your savings with the same portfolio allocations you had before retirement. The strategy calls for using your current portfolio balance to choose a spending level. To determine the amount you can spend, you would assume a fixed investment return and calculate the yearly spending level that would deplete the portfolio by some fixed age. Then if your portfolio either gets higher or lower returns than expected, your spending level would increase or decrease. The HISA savings serve to sm...

For those who haven’t noticed, you can now follow me on Twitter ( @MJonMoney ). I had a full week of posts: How to Rack Up a $7000 Tax Bill on Excess TFSA Contributions Evaluating My 2013 Economic Predictions Liar’s Poker Long-Term TFSA Penalties Last week’s post on the financial side of replacing old toilets got a mention in Carrick on Money . Here are some short takes and some weekend reading: Rob Carrick says that more young people are abandoning the cult of home ownership. Boomer and Echo take on the Investment Funds Institute of Canada (IFIC) over mutual fund fees. Tom Bradley at Steadyhand looks at the reasons why ETFs have not been taking off as fast as he thought they would, despite the fact that “for the most part ETFs are a better option than high-cost mutual funds that do little more than shadow the index.” SquawkFox says that her drive to fill her RRSP has less to do with rational judgement and more to do with fear of cat food. Canadian Capitalis...

It’s possible for a combination of TFSA over-contributions and investment losses to lead to tax penalties that go on for years. Here I give the most plausible scenario I can think of that produces tax penalties that grow to six figures. Our fictitious hero, Kevin, just got an inheritance, and he’s got big investment plans. He just got a hot tip on a gold-mining company where a friend of a friend works. If this tip pans out, he’ll be set for life. But Kevin doesn’t want to have to pay any capital gains taxes. He’s never had a TFSA before, but he knows that the gains in a TFSA can be withdrawn tax-free. As of 2014, Kevin has $31,000 worth of TFSA room available, but this is nowhere near enough to shelter his inheritance of a little over five times that amount. Kevin misunderstands the TFSA limit rules and thinks they are similar to the $100,000 limit on CDIC protection on bank account deposits where you can just spread your money to different banks. So Kevin goes out and open...

Michael Lewis’s classic book Liar’s Poker is much more like a novel about life at Salomon Brothers than a finance book. However, along with the compelling story and the humour, he manages to mix in some financial lessons. The overriding lesson is how little regard Wall Street firms have for their customers. Summing up the attitude towards customers is “if it was a good deal, the bankers kept it for themselves; if it was a bad deal, they’d try to sell it to their customers.” To encourage one group of bond traders to sell more, they were blasted from a loudspeaker: “C’mon, people, we’re not selling truth!” Salomon made a lot of money from mortgage trading at a time when sleepy thrift banks were transforming. At one point, the typical thrift manager “became America’s biggest bond trader. He was also America’s worst bond trader. He was the market’s fool.” Success wasn’t necessarily glamorous. One very successful analyst was so hounded day and night for his opinions that “he r...

To start the year I made some random economic predictions that I have no confidence in myself. Let’s see how well I pin the tail on the donkey. 1. Interest rates will go up a little. Fail. The Bank of Canada target rate stayed at 1% for yet another year. Score: -1 2. Housing prices will come down a little. Fail. According to the Teranet - National Bank Composite House Price Index , house prices in Canada rose an average of 3.81%. Score: -1 3. Canadian and U.S. stock markets will have an above average year. Success. Libra Investments have a spreadsheet of historical investment returns . This year’s return of 13% on the TSX composite is above the 10.8% average since 1970. The U.S. S&P 500 was up 29.6% including dividends (measured in U.S. dollars). Score: +1 4. Bonds will have a below average year. Success. The Libra Investments spreadsheet says that Canadian bonds dropped 1.2%, clearly a below-average year. Score: +1 5. The 2013 U.S. governmen...

There is a scary scenario that can arise with TFSA over-contributions where you can’t stop tax penalties from building up for an entire year. It involves a situation where your TFSA investments lose money. I’ve hunted through the Income Tax Act for a clause that deals with this case, but found none. The scenario is best explained with a fictitious example. Ted was a big fan of Apple. When TFSAs first came on the scene, he made the maximum $5000 contribution in March of 2009 and put it all in Apple stock. Each January since then (including 2014), he has made a maximum contribution and bought Apple stock. His account now holds C$68,400 worth of stock. Ted’s success with Apple gave him the confidence to try his hand at more active trading. He decided to open a TFSA at a different discount brokerage offering better active trader tools. He then withdrew his money from the first account and deposited it into his new account. At this point, readers knowledgeable about TFSAs wi...

Support for my Friday Short Takes feature is stronger than I thought. Several people came forward to comment on the blog or send me email asking that I keep it going. And it wasn’t just the various bloggers whose posts I comment on! So, Short Takes live to see another day. I had a full week of posts: 2013 Update of My Personal Portfolio Returns History Currency Exposure is Partly an Illusion Crashing Another Stock-Picking Contest Literally Flushing Money Away Here are some short takes and some weekend reading: Michael Geist explains how internet service providers are boosting revenues by manipulating data caps to create a two-tiered internet that favours certain content. Morgan Housel at the Motley Fool wrote a very funny obituary for long-term thinking. Despite my past annoyance with The Motley Fool , I think Housel’s piece is great. Preet Banerjee interviews Bruce Sellery about his new RRSP book. Sellery is a very energetic guy. Canadian Couch Potato expl...

How much money can you save replacing an old high-flow toilet with modern low-flow toilets? My house is old enough that we still have toilets that use about 13 liters per flush 1 instead of the modern standard of 6 liters or less. (I bet some readers landed here hoping to catch me using “literally” incorrectly. Maybe they have caught me. I’m literally flushing away something I have to pay for (water), but I’m not literally flushing coins or bills. It’s an important debate to have while I’m somewhere else.) New dual-flush toilets use either 6 liters or 3.8 liters per flush depending on whether it is a big or small flush. This makes the water savings either 7 liters or 9.2 liters per flush. In my limited experience, low-flow toilets need more second flushes than my old toilets require. Combining this with the fact that small flushes are more frequent, I’ll call the savings an average of 8 liters per flush. For my 4-person family, I estimate that we flush about 20 times per...

I like to crash stock-picking contests by entering the returns of my personal portfolio. I include all of my stock investments – no cherry-picking. Last year I showed how I had well above-average results in each of 4 years of contests among one group of bloggers . However, this isn’t much of a reflection on me because my portfolio is mostly indexed; it’s the collective results of the other bloggers that was sub-par. A commenter on my post last year (Robb at Boomer and Echo ) observed that if I had entered a different 2012 stock-picking contest run by Financial Uproar, I would have come in last place. In fact, the average results were 20.7% ahead of my real-money portfolio. I decided to take a peek again this year to see if they have more magic. For 2013, Financial Uproar’s stock-pickers got an average return of 21.6%. However, my real-money return for 2013 was 26.7% . So, we have a mean reversion of 4.1% 1 . I’m in fifth place out of 14 entries. This still doesn’t come clo...

When Canadians own U.S. assets, they usually think they are exposed to U.S. dollar fluctuations. This is only partly true. Our tendency to think of dollars as an absolute measure of value muddies the water. Let’s choose a very simple fictitious example to help illustrate these ideas. Sandy bought 100 shares of a U.S. stock ETF trading at US$100 per share at the start of a year when the Canadian and U.S. dollars were at parity. So, her investment started out with a value of C$10,000. By the end of the year, the ETF shares rose in value to US$120, and the U.S. dollar finished the year worth C$1.10. Sandy’s 100 shares are now worth US$12,000, or C$13,200. We would normally say that the ETF rose 20%, and Sandy made an extra 10% on the U.S. dollar for a total (compounded) return of 32% when measured in Canadian dollars. Based on this example, it appears that Sandy’s investment had full exposure to the relative value of U.S. and Canadian dollars, but this isn’t the case. Her rea...

2013 would have been a great year in the stock market if I were retired. Unfortunately, I’m paying higher prices for the stocks I continue to add to my portfolio. However you look at it, 2013 was a roaring year for the stock market. My overall internal rate of return (IRR) was 26.74%. So how does this compare to a benchmark return? My portfolio is almost completely indexed; the only exception is that I still own some Berkshire Hathaway stock. I chose the Vanguard ETF of U.S. value stocks (ticker: VTV) as an appropriate benchmark for Berkshire. If I had invested in VTV instead of Berkshire, my 2013 IRR would have been 25.92%. This makes the difference between my return and the benchmark return, called my alpha 1 , 0.66%. So owning Berkshire worked out well for me this year. Here is my full history of personal and benchmark returns since I started investing in equities in 1995: My compound average alpha over this 19-year period is 3.59% per year. Some may wonder why I wo...

I’m reconsidering the usefulness of my Friday short takes. When I have something substantive to say about someone else’s article, I’m thinking of just writing a full article on the subject instead of collecting together several links and a few thoughts. If you have any opinion on this, feel free to comment on this post. I’ll make a decision next week. I had a full week of posts: Stop Over-Thinking Your Money It’s Time that Renting Got a Little Respect Common Sense on Mutual Funds A Chance to Mouth Off Here’s some weekend reading: Preet Banerjee’s new book Stop Over-Thinking Your Money is out, and he interviewed me for his podcast , all in one week! Andrew Hallam has a very interesting hook for getting kids interested in investing. SquawkFox reviews Preet’s new book Stop Over-Thinking Your Money . Potato has had it with Bell and is considering a jump to Primus for a home phone. I’m interested in feedback about customer experience with Primus home phones (regu...

It was my pleasure to be a guest on Preet Banerjee’s Mostly Money Mostly Canadian podcast this week. If you’re looking for entertainment value, at one point I managed to connect investing to Charles Barkley. Many thanks to Preet for taking the time to talk to me. A big welcome to those who’ve landed here for the first time after listening to the podcast. (I’m in a good mood; welcome to everyone else too.) Every week I write somewhere between one and five articles on any subject to do with money. I tend to focus on personal finance rather than macroeconomic issues, and I use mathematical analysis to (ironically) simplify things as much as possible. My biggest benefit from writing this blog is interaction with readers. I’m always happy to learn something new about how the financial world works. The best ways to ask a question or speak your mind are to leave a comment on one of my posts (scroll to the bottom of the relevant post) or use Twitter where I’m @MJonMoney . Down t...

I wish I had read John Bogle’s book Common Sense on Mutual Funds when the first edition came out in 1999. I might have saved myself a lot of the time and money I wasted trying to beat the stock market. Instead I’ve read Bogle’s updated 10th anniversary edition long after I accepted the wisdom of trying to capture market returns at the lowest cost possible. If any readers are finding their commitment to indexing being poisoned by thoughts of purportedly market-beating strategies, this book is a great antidote. Bogle amasses overwhelming evidence of the mutual fund industry’s failure to help investors capture anything close to the full returns of the market. He lays out so much statistical evidence to back up his case that the reader could benefit from notes at the bottom of pages such as “if you’re already convinced of the current point, skip ahead 10 pages.” The book isn’t just a litany of complaints, though. Bogle lays out his ideas of how a fund company should be run. Thes...

I like owning a house. I’ve become very accustomed to the freedom and autonomy that come from not having a landlord. But I can’t pretend that owning my house is the best move from a purely financial point of view any more. My current home would sell for about 2.5 times what I paid for it. Even factoring in inflation, its value has gone up over 70% in real terms. So homeownership has worked out well for me. But that’s in the past. What about the future? I don’t know what will happen to house prices, but if we look at the likely range of possibilities, the future looks very unlikely to match the past couple of decades. Interest rates are at historic lows and Canadians are deep in debt. I’d have to be delusional to think that my home is likely to increase another 70% above inflation. It’s not impossible, but hardly likely. I have little doubt that I’d be better off financially to sell my house and rent. So far my wife and I have decided to leave this money on the table and...

Most people believe that doing well with personal finance and investing is complicated. Preet Banerjee shows why this isn’t true in his new book, Stop Over-Thinking Your Money: The Five Simple Rules of Financial Success . He says that while it can be a lot of work to get an A+ in how you handle your money, you can get an easy A with his 5 rules, and right now “most people are somewhere near a C–”. ( Disclosure: Preet is a friend of mine. However, as my long-time readers have likely figured out, I say what I really think, even if it involves criticizing a friend’s work or praising a foe’s work. ) The book is written in a conversational style that’s very easy to read. Banerjee explains that while the money rules are easy to understand, they can be challenging to follow the way that it can be challenging to stick with healthy eating and exercising. But the good news is that “getting physically fit is much harder than getting financially fit.” Financially, you only need “disciplin...

I managed a few posts during the holidays, including my (late) jump into Twitter as @MJonMoney : Your Unused TFSA and RRSP Contribution Room is Shrinking! Dragged Kicking and Screaming Study Distracts from Message about High CEO Pay Things have picked up a little compared to last week. Here’s some weekend reading: Loopholes in the U.S. tax code has allowed the wealthiest Americans to save over $100 billion in gift taxes and estate taxes since the year 2000 . These loopholes “make the estate tax system essentially voluntary”. Thanks to the Stingy Investor for pointing me to this one. Canadian Couch Potato reports on another active investment strategy that showed promise initially and then floundered. So often these strategies succumb to reversion to the mean, eventually. And that’s when high investment costs show themselves. Big Cajun Man lists his most read posts from 2013. Million Dollar Journey gives an end-of-year net worth update. Of particular interest t...

Yet again, the Canadian Centre for Policy Alternatives released a study of CEO Pay in Canada that misleads readers. A quote: “Just as most Canadians are wrapping up lunch break on the first official work day of the year — 1:11 p.m. on January 2 — the average of the 100 highest paid CEOs will have already pocketed what it takes the average Canadian an entire year to earn. All in a day’s work.” If you thought that meant that the average Canadian CEO earns in about 4 hours what the average worker earns all year, you’re mistaken, but I don’t blame you. In reality, the average CEO pay is 171 times higher, which means that it takes CEOs about a day and a half to earn what the average worker earns in a year. The idea is that the CEO was paid for Jan. 1 as well. I don’t see the point of being unclear about this. CEO pay is extreme enough that there is no need to make it look worse. Perhaps the mention of “January 2” was meant to add some clarity, but it doesn’t help much. Only more...