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...