I received a thoughtful question from reader A.J. concerning how to index: “Hello. I love your website. I've read dozens of books on investing: Paul Merriman, Malkiel, Ferri, Ellis, Bogle, Swedroe, etc. All of these guys disagree on how to index! It is confusing. Some of them wholeheartedly believe in value and small stocks. I've seen their research, it seems very solid. On the other hand, how can anyone predict the future? In Bogle's book, He says that ‘if someone wants to tilt, it would be reasonable to do 85% total stock market fund, 10% value stocks, 5% small stocks.’ So that is what I've done with my US and International holdings. Can I get your thoughts on this? Thanks.” Thanks for the kind words. Without knowing more about your financial life, I can’t advise you directly, but I can tell you how I view my own portfolio. The truth is that we just don’t have enough historical stock information to make confident judgements about fine differences in st...

Having read several reviews touting the great importance of Thomas Piketty’s Capital in the Twenty-First Century , I decided to read it myself. While it does deal with important financial issues, it’s not a page-turner. What surprised me most was Piketty’s embrace of huge government. Much of the book consists of dry discussions of historical data on income and wealth inequality around the world. Given a choice between a picture and 1000 words, Piketty consistently chooses both. In one memorable discussion, the reader learned that there are 10 times as many people in the top 1% as there are in the top 0.1%. All the historical information is oddly disconnected from Piketty’s central argument. He says that because the rate of return on capital (r) is greater than the rate of economic growth (g), wealth is destined to become ever more concentrated in the hands of a small number of ultra-wealthy people. However, it’s not quite this simple. For one thing, the wealthy spend some o...

Here are my posts for the past two weeks: Excuses to Shop Reader Question about Non-Registered Accounts Pension Ponzi ETF Fear, Uncertainty, and Doubt ETF Tips I Don’t Follow Here are some short takes and some weekend reading: Maclean’s explains that TFSAs are being used primarily by older Canadians. This sensible article is a breath of fresh air compared to the nonsense I keep reading about how the $10,000 TFSA limit is needed to help the middle class. As far as I can tell, proponents of the higher TFSA limit want it because it will benefit them (or their clients) personally. Promoting self-interest isn’t so bad, but making up nonsense arguments is annoying. Higher TFSA limits help those with either high incomes or substantial existing savings. That’s the truth. I would benefit from higher TFSA limits; it would allow me to put even more of my savings into TFSAs belonging to me, my wife, and adult kids. But I don’t think more TFSA room would be good for our countr...

I came across an article promising 101 ETF investment tips from 57 ETF experts (but it appears to not be online any more). While debating whether I thought I could slog through such a long article, I decided to focus on just those tips that I don’t follow. If I have a good reason not to follow them, I should be able to explain it. And maybe I’ll find a gem among the tips that changes my mind about the way I invest. Talking about the tips I do follow is like having a meal with like-minded friends. It’s an enjoyable way to spend time, but that’s not my purpose here. So here are just those tips I don’t follow. 4. Allocate your age as your percentage in fixed income. I don’t have any bonds at all in my long-term savings. I only use safe fixed income investments for money I’ll need in less than 5 years. I plan to carry this approach into retirement by holding 5 years of my spending in guaranteed investments and holding the rest in stocks. I expect my allocation to fixed income...

There have been a number of prominent articles about the dangers of trading Exchange-Traded Funds (ETFs) over the past year. The latest ETF story is from the Wall Street Journal . I read each of these articles looking for some new concern, but they tend to be the same recycled fears along with a scary title. Here I’ll list the categories of concerns and what I do to try to avoid trouble. 1. Some ETFs stink. Yup, that’s right, not all ETFs are great. Some have high built-in fees and others are too narrowly-focused to be safely owned by the unwary. I stick to very low cost index ETFs. 2. Investors can lose money trying to actively trade ETFs. True. That’s why I don’t trade them actively. Apart from a rare need to rebalance my portfolio to my target asset allocation, I don’t plan to sell any ETFs until I need the money in retirement. I buy more ETFs when I have more savings to invest. 3. Sometimes ETFs trade for prices far from their Net Asset Values (NAVs). The NAV of...

Canadian baby boomers don’t have to look very far in their circle of friends to find people retiring in their 50s on very generous life-long public service pensions. In their book Pension Ponzi , Bill Tufts and Lee Fairbanks try to persuade readers that “public sector unions are bankrupting Canada’s health care, education and your retirement.” Of course, unions argue differently. As with most debates between sides with polarized views, there is lots of room for both sides to be wrong. While the authors make a number of excellent points, they hardly give a balanced view. This book is written to outrage you more than it is written to inform you. I’ll go through some of the book’s good and bad points before offering my own thoughts on public service pensions. The Good Parts Mounting public debt is a sign that governments at all levels in Canada have been overspending for decades. “There is really only one place that meaningful cutbacks can occur, and that is the size and cost ...

A reader, R.V., asked the following thoughtful question about investing in a non-registered account: “As I approach maxing my registered accounts, I need to start thinking about perhaps opening up a non-registered account. At present, I do the following: TFSA: TD e-series funds (25% each of Bonds, CAD Index, US Index, & Int'l Index) RRSP: 70% VXC and 30% VAB via a brokerage account For Non-reg, I was thinking of HXT. Benefits of a swap-based ETF is no dividend to worry about and only need to be capital gains tax upon selling. Do you have any comments and/or recommendation on some non-reg ETFs? What do you normally buy for your non-reg account?” To start with, R.V. is obviously handling his finances very well given that he has maxed out his RRSP and TFSA. He has also chosen good diversified low-cost index mutual funds and ETFs. If he can stay invested and not tinker too much with his asset allocation, I’m optimistic about his future. I don’t give financial advi...

My wife received some credit card spam that started as follows: “The year is almost over, but you can still build your January rebate! Use your [brand of credit card] to earn cash back on special gifts, last-minute holiday purchases and everything in between.” She laughed and showed it to me. My first thought was who would spend an extra $1000 now just to get $20 more back in January? Most people aren’t great at math but they’re not this bad. This message seems like it shouldn’t work on anyone. But credit card marketers can’t be this dumb. There has to be more to this than I saw at first. One possibility is they are aiming this message at people with multiple credit cards in an attempt to get them to use this particular card more often for things they were going to buy anyway. But I think there is a better explanation. I think this message is mainly aimed at shopaholics. Addicts will latch onto any excuse to scratch their itch. Compulsive shoppers need an excuse to shop ...

Here are my posts for the past two weeks: How Much Do You Need to Save to Retire? The Overconfidence Gap Value of a Public Service Pension Here are some short takes and some weekend reading: Ellen Roseman explains the trouble you can get into if you sell a car privately but the buyer doesn’t transfer ownership. A Wealth of Common Sense brings us an excellent list of faulty assumptions about investing. Dan Hallett gets riled up about income funds that trick investors with unsustainable monthly payments. It’s sad when people count on regular income that is certain to drop eventually. Big Cajun Man got an answer from CRA about whether his son continues to be eligible for the Disability Tax Credit. Kerry Taylor meets Sean Cooper, the millennial with a paid-off house, to find out if his critics are right about whether he received financial help from family and whether he lives an intolerably cheap life. Preet Banerjee explains how the new Canada Child Care Benefit...

At one time I considered taking a job with the federal government. I had a competing offer in the private sector and set about comparing them based on various factors such as how much I’d enjoy the work, the commute, and total pay. A tricky part was placing a value on a public service pension. The value of a pension is very sensitive to the investment return we assume. Let’s look at a simple example of a government worker: – Starts work at age 23 making $40,000 per year – Works for 35 years – Retires at age 58 with an indexed pension of 70% of best 5 years average salary – Pension is reduced by the amount of CPP benefits starting at age 65 – For first 20 years working receives raises of inflation + 4% – For final 15 years working receives raises of just inflation – Lives in retirement for 25 years until age 83 With the details in this example, we can calculate what percentage of this worker’s salary would have to be saved from each pay to cover the pension benefits. Of c...

Over the years, the many people I’ve worked with have had both good and bad traits. No doubt they’d think similar things about me. The one trait that I find most tiring is a high overconfidence gap, which I define as the difference between how good you think you are and your actual abilities. Confidence is a useful thing in many contexts, but it can be deadly for your finances. As a baseball coach, I routinely talk up players’ confidence before sending them to bat. Believing you can hit the ball improves how hard you try and leads to better outcomes. Confidence also leads to more improvement over time. Too much confidence can cause problems, but for the most part confidence is useful in baseball. I’ve watched the cycle many times. A batter goes to the plate with confidence and either gets a hit or doesn’t. Failing causes a short-term blow to the ego that fades before the next at bat. Confidence helps. Even overconfidence helps within limits. When it comes to investing, ...

Just poke around the internet for a while looking for answers to how much money you need to save before you retire and you’ll get answers ranging from next to nothing up to $3 million or more. It looks like some of them must be wrong, but it all comes down to your spending and pensions. Let’s take an example. A Canadian couple, Mary and Bill, are both 65, have no debts, have no workplace pension, and are about to retire. They both worked enough to get maximum CPP benefits. Together they can expect CPP plus OAS of $3200 per month rising with inflation. Suppose that $3200 is enough to cover their spending. Then the total savings they need is zero. Nada. Zilch. It can be dangerous to count on being able to work until age 65, to count on maximum CPP benefits, and to assume you can live on $3200 per month, but now that Mary and Bill have made it to 65, they need no savings beyond a modest emergency fund. What happens if Mary and Bill have a more expensive lifestyle? Let’s say...

Here are my posts for the past two weeks: Enough Bull Retirement Spending Stages Choosing Investments You Understand Taking My Investment Decisions Out of the Loop Here are some short takes and some weekend reading: Jonathan Clements explains why stock investors should expect about 6% return per year and 2% inflation for the next 10 years. A 4% real return sounds just fine to me. I’m not sure why we “need to save like crazy to compensate for the market’s likely modest gains.” However, I’m definitely with him that investors “should make sure they capture as much of those gains as possible, by opting for low-cost market-tracking index funds.” Canadian Couch Potato explains why certain criticisms of bond indexes are wrong. Tom Bradley at Steadyhand adds to my list of complaints about index-linked GICs. Jonathan Chevreau explains that Real-Return bonds aren’t as safe as they appear because it’s difficult to match their maturities to when you’ll need to spend your m...

All the evidence says that the vast majority of us aren’t good active investors. Our choices tend to be worse than random, and we pay investment costs on top of this. Even index investors can have these problems. Here I explain how I’ve tried to automate my investment decisions as much as possible to take myself out of the loop. Investors have many worries. Is now a good time to be buying stocks? Should I be selling now? Are there better mutual funds than the ones I own now? Should I shift more money into bonds? Less? Unfortunately, the evidence shows that most of us make worse than random choices when we try to answer these questions. It’s tough to admit that we can’t beat a coin flip. My response to this dilemma is to ignore my opinions on the market and invest in indexes. And as long as I’m not trying to beat the market, I maximize my returns with low-cost highly-diversified index ETFs. But even after making this decision, investment choices can creep back in. For...

Some very common advice is to only invest in things you understand. It’s certainly a good idea to avoid investments you don’t understand, but it’s all too easy for a salesperson to give you the illusion of understanding. For this reason, I doubt it helps people much to tell them to choose investments they understand. Let’s take the example of mutual funds. Suppose a financially naive young couple hear the following pitch: “A mutual fund is a pool of money invested by expert money managers in stocks and bonds. We have a collection of 5 diversified funds that returned 9% per year over the past 5 years. If you start contributing $500 per month into your RRSP and increase this as your pay increases, then a 9% return will give you over a million dollars in 30 years.” What’s not to understand about this? Our young couple will feel safe checking off the “make sure you understand the investment” item on their checklist. More experienced investors will know this couple doesn’t reall...

It’s definitely true that most people’s retirement spending declines as they age. Financial Planners tell a story of how this reduction in spending is natural and that you should plan for it in your own retirement. Here I tell a different story that leads to a different conclusion. Certified Financial Planner Roger Whitney captured the usual story of the three stages of retirement clearly: “In the ‘go go’ years of retirement, your spending may be at its peak. This is the time for travel, activities, adventures and family. In the ‘slow go’ years, your spending may slow as you become more settled. In the ‘no go’ years, you may spend even less as you settle in even more.” This sounds so logical that it’s easy to accept the advice to spend a lot in your early retirement years. But let’s analyze this a little further. Let’s call these stages, the 60s, 70s, and 80s. Will you really want to start cutting spending when you’re only 70? It’s true that, on average, people do begi...

David Trahair came out with a second edition of his book, Enough Bull , that makes the case for avoiding stocks by investing solely in Guaranteed Investment Certificates (GICs). Unfortunately, just about all of the criticisms I had in reviewing the first edition still apply. I won’t bother to repeat most of the points from my earlier review. The details Trahair gives about his own investing history show a person who invested more than half of his money in Labour Sponsored Investment Funds (LSIFs) and got burned. He has now retreated into the safety of GICs and recommends you do the same. The biggest problem with his argument is that he continues to ignore stock dividends. This isn’t just nitpicking. Over 28 years, reinvesting a 2.5% dividend will double your savings. This makes a real difference to how soon you can retire and how much you can spend in retirement. Trahair looks at the S&P/TSX Composite index in the 25 years starting on 1989 July 31 and finds the price i...

Here are my posts for the past two weeks: The Consequences of Keeping Bad Employees Timing Stock Market Peaks Financial Dictionary Here are some short takes and some weekend reading: Canadian Couch Potato explains changes taking place in Vanguard Canada’s ETFs. Preet Banerjee uses his latest Drawing Conclusions video to explain how Trudeau’s proposed new income tax brackets affect you. Kerry Taylor (a.k.a. Squawkfox) has some fun and practical ideas for introducing money concepts to young kids. One of the points made in the article is that a lot of financial lessons need to come from parents instead of leaving it to schools. I agree. Potato reports that he encountered some door-to-door salespeople pushing investments in condo construction. Anyone considering investing with a door-knocker might consider the merits of running with scissors first. Big Cajun Man says you pay too much for your telecom needs. Boomer and Echo defends the two ETF investment solutio...

It took me a great deal of life experience to get my far from complete understanding of the financial world. Here is my attempt to capture in as few words as possible the right way to think about some financial terms. Bank : An entity that aims to take you for about 3% of everything you own or owe each year. Bonds : Payday loans to governments. Car : The most expensive part of your self-image. Commute : The most underestimated cost of both time and money. Debt : A crushing burden that weighs down your life and dreams. Expenses : Anything a salesperson calls an “investment”. Government : An entity that transfers your tax money to its employees. Inflation : An invisible force that slowly makes your retirement income worthless. Insurance : Something sold using the illusion that it will prevent bad things from happening. Insurance Company : An entity that pays small claims and denies large ones. Investment Industry : All entities whose income comes solely ...

Active stock pickers like I was for many years often feel regret when they fail to sell a stock at its peak. We almost always leave money on the table. However, expecting to hit the peak just isn’t reasonable. As a case study, I look at the one stock that made me the most money. Despite my fantastic luck, I was still nowhere near selling at the peak. The stock market bubble in the late 1990s was a crazy time when even the dumbest investors felt like geniuses because just about everything they bought went up in a hurry. During that time I bet crazily on one stock and won. My portfolio return for 1999 was almost 200%! Every way I look at the numbers, I conclude that I was just plain lucky. I left a huge percentage of my net worth in one stock and it happened to pay off. But even so, I often think back to what could have been if I had held onto all of it and sold at the absolute peak. Instead of selling at the stock’s peak, I sold it off in blocks primarily between mid-199...

Most people do their jobs well, but there are some who can’t or won’t do their jobs adequately. The most obvious consequence of keeping bad employees is that paying them is a waste. But there are follow on effects that are much more serious. In the private sector, these problems tend to take care of themselves, but not so in the public sector. There are many problems that come from allowing bad employees to stay in an organization: 1. They cost money but don’t produce their share of output. 2. They take up the time of other employees. 3. Some talented employees will become disgusted with having to work with incompetent employees and will leave. 4. Over time some bad employees will move up in management where they can cause more damage with poor leadership and bad hiring decisions. 5. An organization that goes too long without culling bad employees will eventually lose its ability to distinguish between weak and strong performers. Of all these problems, only the first o...

Here are my posts for the past two weeks: Credit Card Bill Typical Spending vs. Average Spending Contest Winners – Let’s Get Blunt about Your Financial Affairs How Dividends Affect Stock Prices Here are some short takes and some weekend reading: Morgan Housel writes a brilliant piece offering financial advice for his new son. The high quality of his 10 points is in sharp contrast to the embedded ad made to seem like part of the article at the bottom. Preet Banerjee explains how taking CPP early or late affects your monthly payments. Rob Carrick gives us one of his short videos explaining the Liberals’ tax plans. He hits the high points clearly, but I’m not sure why he refers to “high net worth earners.” I think he just means “high earners” because you get hit with this extra tax on high incomes whether you’re a millionaire or you owe a million. The most amusing part of this video was the preceding ad touting active management in investing. Apparently, the “power...

A few times now I’ve seen dividend investors claim that paying dividends doesn’t make stock prices drop. The claim is that investors know the dividends are coming and they are already built into the price of the stock. This isn’t true, but perhaps the reason isn’t obvious. After all, this type of reasoning does make sense with other types of news about stocks. This is best explained with an example. Consider two companies: Company A – will be paying a $1 per share dividend tomorrow Company B – won’t be paying a dividend – will be paying a fine tomorrow that works out to $1 per share In both cases, we assume that investors have known about these facts for a long time. In company B’s case, when tomorrow comes and they have to pay the fine, their stock price changes no more than usual because investors have known about the fine for a long time and have already factored it into company B’s share price. So, the question then is why doesn’t this logic apply to company A? A...

The winners of the draw for copies of Mark Goodfield’s book, Let’s Get Blunt about Your Financial Affairs (using a pseudo-random number generator of my own design) are Murray D. and David R. Congratulations to both winners who I have already contacted by email. The interest in this book was high judging by the large number of entries. Thanks to all who entered and for the kind words many included with their entries.

The gap between your typical monthly spending and your average monthly spending is what gets many people into financial trouble. I collected my family’s monthly spending since 2010 to illustrate how it’s human nature to get into financial trouble if you’re not wary. My family’s monthly spending is shown in the chart below. I’ve omitted the grid-lines for privacy reasons and because the absolute dollar numbers aren’t important to the points I’m making. (You may wonder about that very low month near the middle of the chart. In cases where I made a purchase and was reimbursed, I treated the reimbursement as a negative amount spent. That month my employer reimbursed me for travel expenses I had in the previous couple of months.) The main thing to see with this chart is the amount of variation from month to month. My family’s spending variation may be greater than most, but everybody’s spending varies somewhat. Some people are dedicated to using equal billing plans and paying f...

Credit card companies seem to be losing their patience with some of their less profitable customers: THE ESTIMATED TIME TO REPAY THE CURRENT STATEMENT BALANCE IS 0 YEAR(S) AND 0 MONTH(S) AND 6 DAY(S) BECAUSE YOU’RE ONE OF THOSE JERKS WHO PAYS THEIR BILLS IN FULL EVERY MONTH.

Here are my posts for the past two weeks: Irrationally Yours Giveaway – Let’s Get Blunt about Your Financial Affairs Here are some short takes and some weekend reading: Jason Zweig brilliantly explains why it is important for investors to stop caring about the future of stocks. One good quote: “One functional definition of a bear market is that it is simply a period that separates the people who don’t care from those who merely say they don’t.” Preet Banerjee uses one of his great Drawing Conclusions videos to explain when credit card reward programs aren’t rewarding. Big Cajun Man came to the realization that his biggest purchase in life was not his house. The Blunt Bean Counter has a guest expert explaining the top reasons why people and corporations get audited by CRA related to GST and HST. Boomer and Echo explains why he dumped his dividend stocks in favour of a simple indexed portfolio. His investing path mirrors mine quite closely except that it took me 12...

Mark Goodfield, known as The Blunt Bean Counter, is an accountant who knows his stuff and can explain things clearly. He’s written a book, Let’s Get Blunt about Your Financial Affairs , that collects some of his best writing together into a range of areas that matter to Canadians. I’m giving away two physical copies of his book (see below for details of the giveaway). Some of the topics Goodfield covers are executors, wills, audits, taxes, RRSPs, RRIFs, retirement, and cottages. Goodfield draws from his extensive experience working with his clients to give insights about human nature to go along with solid accounting information. The book’s style is very conversational, which makes it much easier to read than you’d expect from an accountant. It’s tempting to say it could use more editing. One of the more amusing parts talks of the tail wagging the “dodge” instead of “dog”. However, the meaning remains clear, and these little things give a feeling of authenticity. My favour...

I love reading Dan Ariely’s blog where he answers reader questions about human behaviour. His answers are very entertaining in addition to giving insight into our irrational responses and giving us ways to compensate for our irrationality. Ariely has collected many of his best questions and answers into a wonderful book, Irrationally Yours . Not much of the book is directly related to personal finance, but understanding your own irrationality is important in investing. On the subject of deciding whether your financial advisor’s services are worth the cost, Ariely recommends imagining sending a cheque every month instead of having the money taken away without your notice. Picturing yourself in the painful position of having to write that cheque, you’re in a better position to “ask yourself if you would pay your financial advisor directly for these services.” When Ariely answers a question about making sure people have enough retirement savings, he makes a joke with a commentary ...

Here are my posts for the past two weeks: Reader Question: Leveraged ETFs The Little Book of Common Sense Investing Personal Finance Election Issues Here are some short takes and some weekend reading: The Blunt Bean Counter , our favourite accountant, has written a book. It’s too late to enter his giveaway, but look for a review and giveaway on this blog in the next couple of weeks. Canadian Couch Potato explains why your ETF’s trading volume is likely higher than it appears. Tom Bradley at Steadyhand explains why the Steadyhand team is strongly incented to generate good returns for their clients. Big Cajun Man has noticed that just the act of examining his spending seems to automatically cause him to spend less. My Own Advisor takes a look at some of the things wealthy people do better than he does. Boomer and Echo gives a real life example of how leveraged investing can go horribly wrong.

Recently, Mark Seed at My Own Advisor called on Canadians to turn three personal finance issues into election issues . It certainly makes sense to take personal finance policies into account when you vote. Unfortunately, I mostly disagree with Mark on all three of his points. Here are Mark’s preferences in bold followed by my thoughts. 1. Keep the Tax Free Savings Account (TFSA) contribution limit at $10,000. On the surface, the choice is between a $5500 TFSA limit and a $10,000 limit. But that misses a crucial point. When the government increased the limit, they eliminated inflation indexing. So, the real choice is between $5500 with automatic cost-of-living increases or a fixed $10,000 limit whose value declines each year with inflation. It can be difficult to imagine that $10,000 will become a much less valuable amount of money at some point in the future, but it will happen. Just 5 or 6 decades ago, $10,000 could buy a nice house. Now it’s not much of a used car. F...