Here are my posts for this week: Rockin’ Your RRSP CPP at Age 60 Anchors Canadians’ Thinking Here are some short takes and some weekend reading: Boomer and Echo have an excellent quiz on TFSAs that illustrates misconceptions with example scenarios. You’ll notice a pattern in the true/false answers after a while. Million Dollar Journey says you won’t need as much money to retire as you think. I’d say it all comes down to how much you intend to spend. I’ve known people who can’t seem to get by on less than $10,000 take home per month, and I’ve known others who could comfortably get by on just CPP and OAS. The Blunt Bean Counter explains the tax implications of using a corporation to hold your investments. Potato looks at rules of thumb for the cost of house maintenance. It’s a tricky area, but one thing I’d bet is true is that maintaining a house is more expensive than most people realize. Canadian Couch Potato tells the story of one investor’s journey to inner p...

The option to take CPP starting at age 60 is not serving most Canadians well. Most people who have no defined-benefit pension do not have enough savings to retire comfortably when they turn 60. But since people know that CPP can start at 60, this creates an anchor in their minds for when they want to retire. The maximum CPP benefit for those starting at age 60 is about $8000 per year. Most Canadians will get quite a bit less than this. For a single person hoping for a modest $36,000 per year income in retirement, CPP isn’t adding much. This leaves at least a $28,000 per year shortfall until age 65, and once OAS kicks in, about a $21,000 per year shortfall thereafter. Covering this shortfall requires savings in the range of half a million dollars or more. I think I just heard some readers say “HA!” at the thought of having half a million dollars saved. The problem is that the lure of not having to work any more is powerful. But for the typical Canadian, discussing CPP at age...

Bruce Sellery’s book The Moolala Guide to Rockin’ Your RRSP takes a fresh approach to motivating people to save money. Saving and investing can be scary and boring, and requires self-sacrifice. Sellery’s five easy steps are aimed at helping those who feel overwhelmed by the process. This book contains many of the technical facts people should know about RRSPs, but these get slipped in while Sellery is telling some entertaining stories that explain his five-step process. The first step is the most important: find a reason for saving that has meaning for you. Sellery’s answer is adventure, but everyone has their own reason they find motivating. In the remaining steps, Sellery remains keenly aware of the emotional reasons why people don’t follow through on their savings plans. My biggest criticism of this book is that it tends to steer people to their banks to open RRSPs. Saving money in bank mutual funds with sky-high MERs is better than not saving at all, but there are better...

Here are my posts for this week: A Radical Idea about Asset Allocation for Novice Investors What to do about the Impending Stock Market Crash Here are some short takes and some weekend reading: Do These Look Even? has a take on lotteries that is one of the best I’ve read. Canadian Couch Potato explains why Canadian and U.S. versions of ETFs that hold exactly the same assets have very different dividend yields. Big Cajun Man does a few spreadsheet calculations to show just how devastating a high MER is to long-term portfolio growth. Potato agrees with Rob Carrick in broad strokes on the rent vs. buy debate, but he disagrees on some of the details on how much you save by renting and how much more money renter’s need to add to their long-term savings. The most important message to get across is that your parents’ advice to buy a house may not be the best idea in today’s real estate market. Once you accept this point, Potato goes to the next level of working out the num...

A stock market crash of 20% or more is coming. We all know it. Of course, it might not happen until the stock market triples first. So what do we do about it? It’s hard to believe that the right thing to do is nothing at all. From 2008 June 18 to 2009 March 9, the S&P/TSX Composite Index of Canadian stocks dropped by almost 50% (counting dividends). By simply selling at the beginning of this period and buying back at the end, anyone could have doubled the number of shares he or she owned. A market timer could have beaten a buy-and-hold strategy by almost 100%! All the available evidence says that nobody can reliably predict the beginning or end of a stock market crash. The problem with guessing wrong is that you’re left on the sidelines watching stock prices rise without you. All available evidence says that you should stick with a good investment plan and just ride out stock market crashes. I’ve known people who accept that the most profitable long-term plan is to ig...

There is no shortage of advice out there on how to find the right balance between the asset allocation that makes people comfortable (low volatility, but low return), and the asset allocation that makes people money (high return, but high volatility). I’m going to suggest a possible different approach for novice investors. Disclaimer: I do not recommend the following strategy in any way. These are just ideas to chew on. Think for yourself. Because high returns and high volatility go hand-in-hand, we’re advised to seek the most risk we can handle while still able to stick to an investment plan and sleep well at night. The most nervous investors end up with low returns either because they have few risky investments or because they bail out of their risky investments at the worst possible time. Even not so nervous investors can have these types of problems. Toss in some unreasonably high mutual fund MERs, and the end result is that their long-term savings grow to less than ha...

I managed only one post this week where I examine how the number of stocks you own affects the returns you can expect: The Cost of Portfolio Concentration Here are some short takes and some weekend reading: Tom Bradley at Steadyhand has some sobering thoughts for those contemplating borrowing to invest. Andrew Hallam debunks the claim that actively-managed funds are less risky than index funds. Canadian Couch Potato reports that Vanguard Canada is coming out with some new global ETFs that give some interesting new choices to Canadian investors who prefer not to trade in U.S. dollars. The Blunt Bean Counter answers readers’ questions about rental properties. Big Cajun Man has something on his mind that he thinks will solve all his problems. Try to guess what it is. He may be right.

An oft-quoted statistic is that you only need about 20 stocks to make a well-diversified portfolio. Here I attempt to quantify the benefit of diversification. The result is that losses due to portfolio concentration are still quite high at only 20 stocks. Meir Statman wrote a useful paper called How Many Stocks Make a Diversified Portfolio? In it he gives a table showing portfolio volatility values for varying number of stocks in the portfolio. The data is based on the portfolio having equally-weighted stocks. From this table we can simulate a 30-year portfolio to see how much more volatility drag there is on returns for concentrated portfolios. I assumed that an investor would start with a lump sum and invest for 30 years. I set the starting lump sum so that a portfolio owning all stocks would finish at $1 million. The following chart shows how smaller numbers of stocks fared. I call the difference between a portfolio of all stocks and a more concentrated portfolio th...

Here are my posts for this week: Why Don’t More Bank Machines Give out $50 Bills? The Power of Saving When You Invest Well Here are some short takes and some weekend reading: Tom Bradley at Steadyhand warns about the shift to riskier bonds in bond funds. My Own Advisor thinks the fact that pension funds and insurance companies are willing to buy Canada’s new 50-year bonds could be a sign that big investors know that growth could be low for a long time to come. That’s one possibility. Another is that nobody really knows what will happen in the long term. Canadian Couch Potato reviews William Bernstein’s short book If You Can: How Millennials Can Get Rich Slowly . Big Cajun Man asks whether you’d be willing to work less to avoid surtaxes on high income earners. I’d be willing to work less for less pay, but tax advantages would be just a bonus. More free time would be my goal. Several extra weeks of vacation would be wonderful.

We all know that the point of investing is to grow your savings. But how much benefit do we actually get from saving and investing well? Here I try to quantify this benefit. For any analysis of this kind to make sense, we have to think in terms of inflation-adjusted dollars. So, instead of talking about dollars, let’s talk about saving and spending baskets of goods. When the government comes up with inflation figures, they are basing them on the price of a standardized basket of goods. Imagine a hypothetical saver Sarah who begins saving at age 25. She saves some number of “baskets” per year, and she increases this number steadily until she is saving triple this amount per year by the time she is 50. The actual number of dollars she saves at age 50 will be more than triple what she saved at age 25, but the number of baskets of goods she could buy with the saved money triples. Sarah’s saving level then stays steady from age 50 to 65. Then she begins drawing her “baskets” ste...

The average income in Canada works out to a little less than $1000 per week. Take off some deductions and you’re still left with enough $20 bills to choke most wallets. I realize that most people don’t want to carry a week’s take-home pay around in cash, but those who choose to do so should be able to do it without bursting their wallets. Many people prefer to make all their purchases with credit and debit cards. That’s fine. To each his or her own. For those of us who prefer to make some cash purchases, it would be nice to be able to get a few $50 bills from bank machines. There was a time when it was more difficult to spend fifties and hundreds, but this was always overstated. It’s fairly rare to have a problem with fifties now, but you need to hold a couple of twenties just in case. I’ve never had a large retailer or grocery store even bat an eye at a fifty or hundred dollar bill. It’s possible to get cash in the denominations you want from a teller, but this is inconve...

Here are my posts for this week: The Downside of Naked Put Options Anti-Rebalancing Here are some short takes and some weekend reading: Andrew Hallam finds that a mutual fund company that claims to have outperformed the market actually didn’t fare all that well. Big Cajun Man didn’t find much good news when he checked into whether students can claim moving expenses on income taxes. My Own Advisor updates his progress toward his 2014 financial goals. I’m pleased to see that he is on track while avoiding taking on any new debt. The Blunt Bean Counter has a new look or his blog, and he promises more humour and sarcasm.