I encounter people who have saved very little money, if any, over many years in some cases and decades in others. When we look back over long periods of time, it seems inexplicable that a seemingly intelligent person could fail to save any meaningful amount for the future. But there is a simple explanation. When we look to past failures to save for a long time, we look like fools. But when we look to the future, we see the rest of today, along with a magical time in the future when “I’m not so busy and everything isn’t crazy.” This makes it easy to not save today. After all, what difference can a single day make? The problem is that the last decade is made up of a few thousand single days. Of course, this magical time in the future when things are calmer will never arrive. So, it’s easy to keep putting off things like saving money, improving your diet, and exercising. In the end, the answer to the question “how can people fail to save any money for years?” is “they do it o...

My employer has a recognition system based on points. Just like Air Miles and other reward systems, we get to cash in our points for various types of goods and services. What hadn’t occurred to me until recently was the tax implications. When we cash in our points, the value of our rewards becomes a taxable benefit. So, for someone in a 50% marginal income tax bracket, getting a $100 reward actually costs $50 in additional income taxes. This is still a reasonably good deal, but the taxes have some implications. Just because a reward costs the company $100 doesn’t necessarily mean it’s worth $100 to me. Fortunately, we have a wide range of reward choices, so it’s likely that I’ll be able to find things I actually want. However, these points have expiry dates, and there is no guarantee the good selection of rewards will remain. Normally, if you have points that are soon to expire, you’d cash them in for something, even if that something isn’t exactly what you want. Not so in...

Certified Financial Planner Carl Richards, a.k.a. The Sketch Guy, writes “In all my years of working with clients, I can only think of two people who wanted to retire in the traditional sense.” His clients find some sort of work (paid or unpaid) they want to do for the rest of their lives, or at least well after age 65. This surprised me because it is at odds with my own experience. I sat down and wrote down the names of the first 20 people I could think of who have retired. All but four of them retired to a life of leisure, unlike Richards’ clients. Of the four, one does small contracting jobs on the side, one runs a small farm, one had to go back to work because his pension got chopped, and the last one is partnering with his son to get the son’s real estate career off the ground. Sixteen of them are enjoying their leisure. This speaks to how rarefied the clients of some advisors are. Virtually all financial advisors prefer rich clients. The best advisors have minimums in...

The mayors of five major cities across Canada have come together to call on the provinces to give them “increased revenue powers” to charge tolls on roads and bridges. The full text of open letter is reproduced below. The mayors complain they don’t have the money necessary to build the infrastructure Canadians need. They say “city governments have been required to rely on property taxes alone to support our growing operating budgets, with dollars stretched thinner and thinner as we serve the growing needs of the public.” Apparently, property taxes are not enough. I find it frustrating that the substantial property taxes I pay don’t seem to be enough. Over the past decade or two, city governments have added user fees to everything they can. So, I pay these fees in addition to my property taxes. The prospect of greatly “increased revenue powers” for the city isn’t a happy one for me. I believe it’s important to fix and grow infrastructure, but why can’t some of my property tax...

R.J. Weiss at The Ways to Wealth chose my post Aren't the Banks the Investing Experts as a top 100 post for 2016.  There are plenty of other good articles in each of his categories. Here are my posts for the past two weeks: How Life Can Mess Up the Best-Laid Financial Plans Why Do We Focus on Advisor Cost? Here are some short takes and some weekend reading: FAIR Canada has a clear and concise “wish list of investor protection initiatives it would like to see implemented in the upcoming year.” Dan Bortolotti has a smart take on whether to hold dividend stocks in a TFSA. In another article, Dan’s alter ego, the Canadian Couch Potato makes sense of Capital Gains Distributions from ETFs . Another contribution from Dan is his latest podcast exploring the difference between financial planning and investing . Boomer and Echo discuss the dangers that await when you work with a financial advisor who doesn’t have to serve your best interests. The Blunt Bean Counter ex...

Canadian investors have a problem. The mutual funds they own typically charge 2-2.5% of their savings (not just returns) each year. Over an investing lifetime, these hidden costs can consume as much as half of their savings, leaving them with half as much retirement income. You’d think that investor advocates would be calling for lower-fee mutual funds instead of just focusing on the part of the cost that goes to financial advisors. But there is method to this madness. The second round of changes to the Client Relationship Model sets out rules, known as CRM2, mandating that reports to clients include, among other things, clear information about the dollar amount clients pay to their advisors. But there is no such requirement concerning the other fees that mutual funds quietly withdraw from investor savings. This may seem like an oversight, but it is actually a targeted measure. To see why, we need to back up a little. A great many mutual funds, particularly the largest ones,...

I frequently see people whose financial plans rest on a steady income. I’m not just talking about those living hand-to-mouth, never saving a dime. There are also the “spreadsheet planners” who have their financial lives all mapped out. They borrow large sums for a house or to invest, and rely on a steady income to keep up with the interest payments. As long as everything proceeds exactly as they planned, they’ll be multi-millionaires by the time they get close to retirement age. I’d like to introduce these people to Heather Von St. James. Heather had a great life going but was hit with mesothelioma, a cancer caused by asbestos. Her story about the personal and financial costs she faced is definitely worth a read. ( Disclaimer: I have no financial connection to Heather; I just found her story compelling. ) One takeaway from her story is that your income is not fully secure no matter how safe it seems. Heather’s story is a very specific case, but there are many different pro...

I attended the Canadian Personal Finance Conference (CPFC16) recently. Here are my favourite quotes: “A house is a forced spending plan as much as it’s a forced saving plan.” - Rob Carrick, columnist for The Globe and Mail on the CPFC Housing Panel “You don’t borrow money from a bank, you borrow it from yourself.” - Preet Banerjee on learning how to hate debt again Here are my posts for the past two weeks: The Real Reason Why a Big Mortgage is a Bad Idea Loyalty Points Battles Here are some short takes and some weekend reading: Brokers and insurance companies are desperate to preserve their right to deceive their clients. The latest effort to stop a fiduciary rule is an appeal to free speech . Jack Bogle always gives a good interview, but this one is great . One gem concerns the path to real learning: “I glance at anything favorable to indexing; I pore over anything unfavorable. You don’t need people to tell you you’re right all the time. You need people to tell you ...

The latest battle over expiring Air Miles prompted Robb Engen to call for a law banning loyalty point expiration similar to the ban on gift cards and pre-paid cards . This is sensible in that it removes one method loyalty point programs have to devalue points. However, it doesn’t solve the whole problem because there are many other methods. The most obvious way to devalue points is the slowly increase the number of points it takes to get rewards. Aeroplan has been doing this for years with their miles. Another commonly-used way to devalue points is to place arbitrary restrictions on when points can be redeemed. Clever businesspeople can certainly find other inventive ways to reduce their liability once the number of points they give out swells. One explosive way would be to set up a corporate structure so that the liability rests with a corporation starved for cash that goes bankrupt. This is similar to the way fitness clubs used to renege on multi-year pre-paid memberships. ...

We can try to justify taking on a huge mortgage by doing detailed projections of house price increases and accounting for various housing costs, but this isn’t the path to a useful answer. It’s unexpected factors that drive this decision. One factor that many don’t properly take into account is repair costs. We all know the furnace, roof, and other expensive items will need replacing, but we usually can’t predict when. This makes it easy to ignore such infrequent large costs in a budget. Some inexperienced homeowners may even forget about predictable costs like property taxes, house insurance, and condo fees. Another category of unexpected factors is reduced income. If you buy a house with a spouse right up to your joint affordability limit, any reduction in income can be devastating. We’ve all been told that we could lose our jobs, but in my experience, most people don’t think this will happen to them, even though it’s common. You may believe you could lose your job, but th...

Here are my posts for the past two weeks: Pandering to those with too much debt Helping students handle credit cards well Some financial policies to look for with a Trump presidency  Making arguments with made-up data Jobless Manufacturing Here are some short takes and some weekend reading: The Reformed Broker offers a funny piece satirizing the pressure on active management. I think the real pressure is on expensive management. I’d like active funds more if they were as cheap as the passive funds I own. Allan S. Roth gives a scathing indictment of the Journal of Financial Planning that once again published a flawed study claiming that active mutual funds outperform index funds and that fees don’t matter. One amusing conclusion of the study is that even index funds produce alpha. Tom Bradley at Steadyhand takes off the gloves in criticizing big banks that “accidentally” double-charged their clients. Canadian Couch Potato explains some benefits of reverse ...

Decades ago, well-paid manufacturing jobs were plentiful. Many people performing these jobs were solidly in the middle class. Recent protectionist talk in the U.S. has given voice to those hit hardest by the loss of these jobs. These people dream of returning to better times. Unfortunately, this won’t happen, but perhaps not for the reasons they think. Globalization has brought us cheaper goods and has shifted jobs to countries with lower-paid workers. On the whole, these changes have been positive for countries like Canada and the U.S., but localized areas have been hit hard by the loss of manufacturing jobs. Our modern economy has created many new jobs as well, but they require different skills and many of them provide less than middle-class pay. But it’s important to realize that globalization is only one reason why manufacturing jobs left. Another important reason is automation. Factories are now filled with machines to do jobs that used to be done by people. This tren...

Economic inequality around the world has been increasing in recent decades. It’s tricky to find the right balance between sharing the wealth and reducing the incentive to work and innovate. This is an important debate, but it is filled with nonsense arguments using made-up data. For some reason, people are impressed by arguments that include some sort of numerical evidence, even if the numbers make no sense. In a discussion of government spending and public debt, I once heard someone say that every dollar the government spends gets re-spent seven more times in the economy. The implication is that government spending provides a free multiplier effect, but just a little thought shatters this dream. If the government were to borrow and spent a few trillion dollars, it wouldn’t somehow grow and make us all rich. But this made up statistic seemed to win the argument at the time. A widely-cited web site is the Global Rich List (that has disappeared from the internet since this arti...

Donald Trump’s electoral victory came in part because he appealed to Americans who feel left behind in the modern economy. These people seem to believe Trump will improve their financial prospects. With this in mind, I’ll be watching for policy changes that affect American taxpayers and retail investors. Two in particular are a fiduciary rule and bank leverage. Fiduciary Rule When brokers and other financial salespeople sell investments to the American public, mostly for their retirement accounts, they are allowed to sell grossly over-priced investments. The high fees can consume one-third to one-half of an investor’s savings over an investing lifetime (these fees are typically even higher in Canada). The Department of Labor has been moving toward a fiduciary rule, which means the salespeople would have to put their clients’ interests ahead of their own and choose lower-priced investments. We’ll see if this rule gets abandoned now that Trump has been elected. Bank Leverage ...

Robert Brown has some ideas for how banks can help students learn to handle their credit cards without growing debt and paying interest. To deflect some obvious criticism, he concludes with “I honestly do feel that the big banks and other credit card providers are missing an opportunity to attract new customers – potentially very loyal customers for life – by treating them better while they are students. They will have plenty of time to profit from them once they have graduated.” Let’s start with a minor problem. Brown thinks he knows how banks should run their business better than they do. This is ridiculous. If his simple ideas for encouraging students to avoid debt and interest were profitable, the banks would already be using them. The truth is that hooking students on credit cards is profitable on multiple levels. For one, students rarely default because their parents usually pay if necessary. For another, setting a pattern of high-interest debt makes people more profitab...

Professor of economics at Carleton University, Frances Wooley, says that “ Financial literacy education is mostly ineffectual debt-shaming .” Her article makes a number of excellent points, but contains a dose of pandering as well. Most of what passes for financial literacy education doesn’t help people get out of debt. True enough. The forces that drive us to spend money are complex, just as the forces that drive us to gain weight are complex. Just telling a person to spend less rarely helps. Most people with too much debt already know their spending is a problem, so telling them again has minimal effect. There are possible exceptions with naive young people who haven’t yet maxed out their first credit cards, but just telling them to stop spending so much isn’t likely to help much either. Businesses do what they can to exploit our weaknesses and make it very easy to spend money with the tap of a credit card. Governments can certainly do more to help simplify people’s finan...

Here are my posts for the past two weeks: Crazy Mortgages Investing Lessons from Gambling on Coin Flips Faulty Investment Assumptions Here are some short takes and some weekend reading: Canadian Couch Potato has been running a long series about smart beta that ends with this post summing up his opinions. His fans who feared he’d gone to the dark side can rest easy. I appreciate his approach of keeping an open mind when looking into new ideas. We can’t learn anything new if we automatically reject all new ideas. I would never have taken up index investing if I hadn’t given it a chance. Although it seems unlikely I will make significant changes to my investing approach in the future, I won’t rule it out. One could argue that I have taken a small step toward smart beta by owning VBR (Vanguard’s U.S. small cap value ETF). However, nothing I’ve seen about smart beta has persuaded me to go any further than this. Barry Ritholtz quotes Bill Miller saying that the shift fro...

Ben Carlson wrote an interesting piece called Faulty Wall Street Assumptions where he goes through some misguided ideas financial professionals perpetuate about the way to investment success. What Carlson understands well, but may not show through to his readers is that it isn’t the financial professionals on Wall Street and elsewhere who are misguided. They are exploiting our faulty assumptions. Investors like you and me are making the mistakes. Let’s go through most of Carlson’s list of faulty assumptions and look at why financial professionals behave the way they do. Investing is about finding new opportunities and security selection. The very best investors with superior access to company information may be able do well looking for new ideas, but retail investors just jump from one dashed hope to the next. Click-bait screams “5 NEW INVESTMENT IDEAS!” to exploit our weakness. Why would anyone go to the trouble of finding great new hidden gems and then give them away to u...

Imagine you get to play a profitable game. You’re given $25 and get to gamble on the flips of a coin. Whatever amount you wager gets doubled or you lose the wager. The profitable part is that you’re told the coin is biased; heads comes up 60% of the time. After betting for a half hour (enough time for about 300 bets), you get to keep whatever money you have left. Your wagers have to be multiples of a penny, and you’re told there’s a cap on your winnings, but not the amount of the cap. If you bet enough to put you at or over the cap, you’ll be told at that point the amount of the cap. What betting strategy would you use? The experiment Victor Haghani and Richard Dewey ran this experiment on 61 “college age students in economics and finance and young professionals at finance firms.” Their very readable working paper is available here . Despite the financial sophistication of the subjects, they didn’t do very well with the betting. The experimenters capped winnings at $250,...

For anyone who got their first mortgage more than a decade ago, the reality of getting into today’s housing market can be an eye-opener. In describing the effects of the latest new government mortgage regulations, Rate Spy writes “Today, someone with 10% down who makes $50,000 a year can qualify for a $300,000 home purchase. That hypothetical maximum mortgage amount will plunge 18% to $246,000.” Mortgage experts have become desensitized to such numbers, but to me they look like there must be a typo. Someone earning $50,000 per year can get a $300,000 home with only $30,000 down! That leaves a mortgage of about five and a half years of gross earnings. It seems crazy for someone to dig such a huge financial hole. Dropping this mortgage size to about four and a half years of gross earnings isn’t enough better. Rate Spy goes on to write “This one regulation alone could shut out more buyers from the market than possibly any of the prior rule changes.” Good. I’d be horrified to...

Over the past two weeks I managed only one post on the difficult subject of how to determine the best way to invest your savings during retirement: Prime Harvesting in Retirement Here are some short takes and some weekend reading: Lasse Heje Pedersen explains how passive investors are forced to do some trading due to various types of index changes, which creates an opportunity for active investors to outperform. Thus, active and passive investors can reasonably coexist when there are few enough active investors that they can recover their costs from out-trading passive investors. Despite the academic look of the SSRN page, the paper itself is fairly short and very readable. The Blunt Bean Counter brings in an expert to discuss the Registered Disability Savings Plan (RDSP). Big Cajun Man has more trouble depositing money into his son’s RDSP. His musing about how difficult it will be to get money out is definitely food for thought. Boomer and Echo tries to explain to t...

There are many theories about asset allocation in retirement. Some say that your bond percentage should be your age. Others say it should be your age minus 20. Some even say your stock percentage should rise as you age in retirement (a so-called “rising glide-path”). In his book Living Off Your Money , Michael H. McClung recommends a strategy called “Prime Harvesting” that I examine here. The book is very technical and covers many retirement topics, but I’m going to try to be as non-technical as possible in this article and discuss only Prime Harvesting. I’ve been thinking about the best way to handle a portfolio in retirement for some time, and this book promises new ideas and a strong evidence-based approach. First of all, “Prime Harvesting” is a great name. If you ever get into a discussion about this subject, you’ll sound like the smartest person in the room if you say, “Well, I use Prime Harvesting.” Fortunately, Prime Harvesting can be described with a few simple rule...

Here are my posts for the past two weeks: Shrinking Bonds Selling off the last of my individual stocks Here are some short takes and some weekend reading: Jason Zweig explains the dangers of becoming bored with investing. Canadian Couch Potato wraps up his series on smart beta with a discussion of the quality factor. When you first start digging into smart beta, it seems like minor tweaks to index investing. But as this explanation of the quality factor makes clear, you can find yourself almost all the way into the world of stock picking swimming with sharks. Preet Banerjee explains some of the scary aspects of group RESPs in one of his Drawing Conclusions videos. A Wealth of Common Sense says “good riddance” to financial advisors in the U.S. who are thinking of quitting because of new fiduciary rules. Boomer and Echo looks at different areas where we may not make rational financial decisions. No doubt this annoyed some readers; few people react well to being to...

I can’t be accused of being impulsive when it comes to investing. It took me about 7 years to slowly shift from stock picking to just this week fully embracing index investing. We’ve finally sold off the last of our Berkshire-Hathaway stock. We held on to the last shares for tax reasons, but we’ve finally now realized the last of my wife’s capital gain on Berkshire. Our portfolio now looks as I described it a couple of years ago . We now own only 4 different ETFs, and I have a spreadsheet that alerts me if I ever need to rebalance or invest new money. It feels good to have a simple plan that eliminates almost all aspects of my own day-to-day decision-making. I still have to make some final decision about investing during retirement, but that’s a long, slow process. The total costs for my portfolio come to a little less than 0.2% per year. This includes ETF MERs, ETF internal trading costs, trading commissions, bid-ask spreads on trades, and foreign withholding taxes. Over...

As I write this, Canadian 30-year bonds yield 1.674% per year. If we assume that Canada will be able to maintain its 2% inflation target, these bonds will lose purchasing power for the next 30 years. Investors today are willing to tie up money for 30 years and get back less at the end of it all. This seems remarkable to me. Of course, investors can choose to sell these bonds before they mature, but if we follow the life of an individual bond, its owners will share the loss of purchasing power for 30 years. Some investors may hope yields will drop further creating a capital gain. Some may think inflation will drop or that we might even have deflation. Others may think that alternative investments, such as stocks or real estate, will fare worse. I don’t know if bond investors are being rational, but I find it hard to look past the apparent near certain loss of value. Over 30 years I’m hoping my stocks will roughly triple in real value and that my house will hold its value. I ...

I managed only one post in the past two weeks looking at the Air Miles fiasco: Thousand-Foot View of Air Miles Here are some short takes and some weekend reading: The New Yorker cracked me up with a piece on “fact-resistant humans.” There’s not much of a connection to money, but it’s a good read nonetheless. Mr. Money Mustache does an interesting case study of a young man’s finances and spending. A great quote: “it is impossible to out-earn the habit of spending all your money.” Potato discusses the problem of companies such as Valeant and Nortel growing to dominate Canadian stock indexes. It’s true that when such companies topple, they bring the index down. But the flip side is that when they soar, they bring the index up. It’s only market timers who are harmed over the long run by stocks that inflate and deflate. Million Dollar Journey looks into tax-efficient non-registered investments for children. Canadian Couch Potato continues his series on “smart beta” w...

Many collectors are upset that their Air Miles are set to expire and choices for cashing them in are slim. Boomer and Echo’s open letter sums up the current situation well. Ellen Roseman has even started a petition calling on LoyaltyOne to help collectors save their Air Miles. Sadly, this conflict was quite predictable. Air Miles resemble a currency. In many ways it’s as though LoyalyOne minted their own money, and they control the exchange rate of cashing in Miles for flights and other goods. Collectors of Air Miles got used to one exchange rate, but it was inevitable that as the Air Miles “money” supply grew, LoyaltyOne would have a growing incentive to tinker with expiration rules and change the exchange rate. In some ways, this reminds me of when my son was young and held onto cheques, thinking they were as good as money. I had to explain that cheques sometimes bounce and that they expire after about 6 months. It’s best to deposit them as soon as possible. Similarly, ...

Here are my posts for the past two weeks: Thinking Differently about Investing Adventures in Credit Reports Here are some short takes and some weekend reading: CBC News reports that Advertising Standards Canada will be cracking down on sponsored posts on blogs. This sounds great to me. I’m tired of getting part way through a blog post and realizing that I’m reading paid-for dreck. Boomer and Echo explain why Echo made the switch from dividend investing to index investing. The comments are civil, and in a few cases they illustrate some dividend investors’ beliefs that can only be true if dividend stocks earn higher total returns than other stocks. One example is “In an upcoming age of slower growth, I believe it’s important to own birds in hand (dividends) vs. two in the bush (capital gains). If I’m correct, dividend investing will be more beneficial.” Another example is “it’s simply not true to generalize that a dividend stock’s price will be held back by its dividend....

Equifax and TransUnion are required to provide Canadians with free copies of their credit reports once per year, but you only get these reports if you ask for them. Fortunately, asking for these reports by automated telephone system or online is fairly easy as long as you can get past the authentication questions. Here I describe my experience getting these reports. It’s not too difficult to search for “Equifax free credit report” or “TransUnion free credit report” and find ordering instructions, but don’t be distracted by their attempts to divert you to reports that aren’t free. Find the word “free” on the web pages. TransUnion Request TransUnion offers a way to order free credit reports online that seemed easy enough, but didn’t quite work for me. The problem was that one of the questions they used to authenticate me was based on errors in my file. They crossed up my home address with that of one of my family members. I know what TransUnion thinks my address was 13 years ...

When I look back at the way I thought during my first several years of investing, I realize that my thinking is very different now. I started out too conservatively and quickly evolved to looking for big wins. Now I seek good returns while avoiding big mistakes. That’s not to say that I’m now scared of volatility. I go for the best returns I can get with the constraint that I try to keep the odds low that I’ll permanently lose a significant amount of my capital. To illustrate what I mean, I’ll go through some examples of ways to lose capital and examine how my thinking has changed. Any individual stock can drop 90% or more Over the years I’ve owned several stocks that have dropped 90% or more. Before this happened to me, I didn’t think about this possibility. I once owned a stock that grew to well over half my net worth. Fortunately, I sold most of it before it dropped by more than 98% at the end of the tech boom of the late 1990s. With different timing, I could have lost...