Enough Bull
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 increase (i.e., ignoring dividends) is 5.6% per year. He uses this to justify an assumption that stocks will average only a 5% return per year in the future. “Take off fees and you’ll only get 3%.”
The sad thing is that it is possible to make a reasonable case for GICs, at least for some investors. People pay high mutual fund fees, as Trahair points out. Another point that would bolster his argument is that people tend to underperform their own mutual funds because they tend to jump in and out at bad times. So, for some investors, GICs don’t look too bad. But any reasonable analysis has to include dividends.
As for me, I’ll happily accept the volatility of stocks. My portfolio of the world’s stock indexes costs me less than 0.2% per year, including fund MERs, other fund expenses, trading commissions, bid-ask spreads, and foreign withholding taxes on dividends. The gap between my average return and GIC interest rates has been substantial. Your mileage may vary.
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 increase (i.e., ignoring dividends) is 5.6% per year. He uses this to justify an assumption that stocks will average only a 5% return per year in the future. “Take off fees and you’ll only get 3%.”
The sad thing is that it is possible to make a reasonable case for GICs, at least for some investors. People pay high mutual fund fees, as Trahair points out. Another point that would bolster his argument is that people tend to underperform their own mutual funds because they tend to jump in and out at bad times. So, for some investors, GICs don’t look too bad. But any reasonable analysis has to include dividends.
As for me, I’ll happily accept the volatility of stocks. My portfolio of the world’s stock indexes costs me less than 0.2% per year, including fund MERs, other fund expenses, trading commissions, bid-ask spreads, and foreign withholding taxes on dividends. The gap between my average return and GIC interest rates has been substantial. Your mileage may vary.
So, once I was in a car accident, and now I refuse to leave my house, is a valid argument (kind of over the top, but valid). Speaking as someone who has been heavily singed (but not badly burned) by stocks, I understand the need to feel "safe", but I have also learned there are not many safe things in this world (especially if you want your money to grow).
ReplyDelete@Big Cajun Man: People are certainly free to do what they want with their money. Like you, I understand why some are fearful. But that's not a good reason to advise the whole world to dump stocks and only use GICs.
DeleteMy 82 year old mother also has all her money in GIC's and can't understand why I "gamble" in the stock market.
ReplyDelete@Marko: Being all in GICs probably makes sense for her, but you have a much longer time horizon.
DeleteMy 90 year old mother has all her money in stocks and REITs. She has never considered this gambling.
Delete@John: I help some older relatives with their finances, and they have very different volatility tolerances.
DeleteMy mother has been at this for 50 years. She has been through the ups and downs, including all the major crashes. While she doesn't like it, accepts it as the price for superior returns. She never really bought in to the "time horizon" idea. Some people ask, "What if she needs her money when the market is down?". The only investor that needs all their money at once is the one that just died. The rest of us need it a bit at a time. Sometimes the market is up and sometimes the market is down. It all works out.
DeleteGIC returns are more predictable then the markets.
ReplyDeleteIn retirement, you can draw down a lot more the principle.
Using the SWR,you always need to a lump sum available to guard against the next market down turn.
So in a die broke scenario at least,using GICs can make sense.
Of course there is no law that says that it needs to be either/or.
Personally,I have my GICs,but I also have some dividend paying blue chips on the side.
@Robert: I agree that GICs for short-term needs make a lot of sense in retirement. What Trahair wants you to do is use GICs exclusively. I hope you've got enough stocks to be reasonably diversified.
DeleteIt seems to me that an all GIC portfolio is trading financial security when one is old for safety of principle (no volatility) when one is young.
ReplyDelete@Grant: Well said. I try not to check my portfolio too often in the hopes of not seeing much of the volatility.
Delete@Grant But is your principal really safe in a GIC? If inflation rates go higher than nominal interest rates, safety is an illusion.
Delete@Garth: I see two sides to this. It's true that most people are under the illusion that if they still have the same number of dollars after a few years have passed that they haven't lost anything. This is not true. On the other hand, GICs are clearly far less volatile than stocks, even after factoring in inflation. So, when we choose GICs over stocks, we are lowering volatility, but not by quite as much as we think because of uncertainty in inflation.
DeleteCan using only GICs work? Yes, as long as one saves more (and, therefore, spends less). GICs are likely to just keep up with inflation in registered accounts. No fireworks, but it works.
ReplyDelete@Anonymous: This all comes down to what you mean by "works". It's certainly possible to save enough for retirement using GICs. For example, if you expect to be retired for about the same number of years you were working, then saving half of your after-tax pay will allow you to maintain your standard of living through retirement. Fortunately, you get to count CPP toward your savings as well as the portion of your taxes that will come back in OAS payments. So, you don't have to save half of your take-home pay. How much less than half depends on your income level.
DeleteVery few people with incomes over, say, $50k/year will ever save this high a fraction of their incomes.
You're right that CPP and OAS can make a difference.
DeleteFor someone with a 50k/year salary for 35 years, retiring for another 35 years, it would be sufficient to fill up his RRSP and TFSA with GICs:
Working years: 50k - 9k RRSP - 9k taxes - 5.5k TFSA = 26.5k net.
Retirement years: 12.5k CPP + 6.5k OAS + 9k RRIF - 5.5k taxes + 5.5k TFSA = 28k net.
I was initially so excited when I read David's book a few years back because I was going to take my power back from the bank (tired of the high MER mutual funds even then) but I was gutless and my bank talked me out of it.
ReplyDeleteBut then last year I found the coach potato concept... I got an online investment account and went to town.
@Anonymous: Getting our of expensive mutual funds is a good idea. The couch potato concept works well when we fully embrace it. "Don't just do something, sit there."
Delete@Garth: You are correct that your principle is not safe in a GIC in terms of purchasing power. By safe, I was meaning not changing in value from day today i.e volatility. In fact as Nick Murray would say "Bonds (and GICs) are a planned liquidation of purchasing power". Not that I have anything against bonds - they have other uses, but preserving purchasing power is not one of them.
ReplyDelete