Here are my posts for the past two weeks: Mouths to Feed in the Financial Industry Avoiding Trudeau’s Tax Increase Why Not Rent? Here are some short takes and some weekend reading: Tom Bradley at Steadyhand warns us about index-linked notes such as the BMO Growth GIC. These investments are so bad that Tom said “these products are an embarrassment to the wealth management industry” and “DON’T BUY THESE PRODUCTS!” Give Me Back My Five Bucks explains that being rich is about how much you save rather than how much you spend. Boomer and Echo tells a personal story of the pitfalls of prioritizing retirement savings above all else. At first I wasn’t sure where this was going, but it illustrates the problem of using the wrong type of account (RRSP in this case) as well as the illusion of saving when you’re really growing debt at the same time. Preet Banerjee uses this video to explain when RRSP contributions make sense and when they don’t. Million Dollar Journey lays o...

I’ve been rolling around ideas for what my retirement will look like for some time now, and I like to look at what other people further along than I am have chosen to do. For some reason there is an overwhelming tendency to buy a second property instead of renting. I’m most interested in the strategies of those who split their time between Canada during the nice months and somewhere warm in winter. The ones who avoid winter for only a month or less usually rent, but the ones who avoid the whole winter tend to buy. When I run the numbers, renting makes a lot of sense. Buying requires a large initial cash outlay followed by ongoing property taxes, condo fees, and maintenance costs. Monthly rental costs may seem high, but I would only pay them for a few months per year. The costs of owning are year-round. It’s possible that many retirees get the cost comparison wrong, but I suspect there are reasons other than costs that dominate. Renting has the advantage of flexibility. Own...

If every Canadian changed nothing about their income from 2015 to 2016, Trudeau’s tax increase on high incomes would have brought in significant extra tax revenues. But things won’t stay the same. Some people find ways to adapt. I’m among these people. For some time I’ve found my yearly vacation to be less than I wanted. This year is the first time I’ve done something about it. I’m a little past the midway point of an unpaid vacation. I wouldn’t say that the new higher tax bracket is the only reason I’ve taken extra time off, but it doesn’t hurt to know how much income tax I’m avoiding. I certainly don’t expect anyone to feel sorry for me. And I don’t even have strong feelings about whether the new tax bracket is the right thing to do or not. But if my choice is any kind of example, we can expect some high earners to find ways to avoid the higher taxes. Some will use corporations and other tax manoeuvres, and others like me will just work less. No doubt many will change n...

Among the many pitches I get for story ideas, one company promises a new approach to investing that will benefit everyone including investors, financial advisors, and fund managers. However, this just isn’t possible. Very roughly speaking we can divide the investment industry into investors, advisors, and fund managers. Among advisors, fund managers, and their supporting consultants and other staff, there are a lot of mouths to feed in Canada. And the money they get comes out of investors’ pockets. As long as the investment industry continues to employ as many people as it does now, investors must continue to pay the same high fees they pay now, on average. In kindergarten we learned that 5 blocks are still 5 blocks when they are moved around. Similarly, no amount of rearranging costs can keep all the financial helpers employed while lowering investors’ costs. The only way the average investor can get lower costs is for the fees going to helpers to shrink. This means lower ...

It’s easy to lose track of the days while on vacation. But a day late is better than never. Here are my posts for the past two weeks: The (Honest) Truth about Dishonesty The Way I Think about Insurance Understanding Bank Profits Portfolio Turnover Here are some short takes and some weekend reading: Boomer and Echo comments on the things advisors say to discourage people from pursuing DIY index investing. Big Cajun Man talks about the brain drain that happens when baby boomers retire. I’ve seen this effect where I work due to people leaving the company for new jobs. Suddenly there is nobody left who knows how certain systems work. The Blunt Bean Counter updates us on the latest patterns in CRA audits for individuals and corporations. Preet Banerjee has a video explaining the basics of RRSPs. Million Dollar Journey explains how capital gains taxes apply to currency conversions. My Own Advisor lays out some resolutions for dividend investors. These resolut...

We know that true couch potato investors who just buy and hold indexes are rare . One indicator of deviation from couch potato investing is the percentage of a portfolio invested in individual stocks or other non-index securities. Another such indicator is portfolio turnover. High portfolio turnover can be a sign of market timing. Even investors who think they are just changing their minds about asset allocation percentages may be doing it so often that they are effectively making active market timing decisions. I decided to look back at my own trading history to examine my portfolio’s turnover since I switched to mostly indexing nearly six years ago. It turns out to be surprisingly difficult to decide how to measure portfolio turnover for this purpose. To show what I mean, I’ll go through the different categories of trades I’ve made. 1. Adding new money By far the most common trade I’ve made is to buy more of the index ETFs I own with new money I’ve saved or with dividen...

Every 3 months we get to hear again about how Canada’s banks made billions of dollars in profits for the quarter. Most Canadians are disgusted by it all. But there are a few simple things we need to know to understand why banks behave as they do. Suppose a normal person, call her Jen, comes into a large inheritance, say $500,000. Jen would likely use the money in some way to try to improve her life. If she’s near retirement, she might retire a little earlier. She might change to a more fulfilling job that pays less. Whatever she does, it will likely consume the money over time. Few people like Jen would react by trying to find a way to get even more money the next year. We tend to carry this thinking over to banks. If banks made so much money this year, why don’t they give us a break on interest and fees? Why do they need even more money? The answer is that almost all of those bank profits get paid out to the bank’s shareholders as dividends. And shareholders want more ...

There are a tremendous number of different types of insurance. It can be difficult sometimes to decide which types to buy. Here I describe the way I think about insurance and how it guides my choices. I encourage my readers to come up with their own ideas to guide them when it comes to insurance. The core of my thinking about insurance is that it is a way to protect myself and my family from low-probability events whose costs would be devastating to our finances. This means I specifically exclude high-probability events and low-cost events. An example of a high probability event is needing dental work. As it happens, my employer gives me “insurance” to cover this, but I don’t consider it insurance because it is capped at a low level. It’s just extra pay because it’s not protecting me against a large loss. After I retire, I would never buy typical dental or health insurance. Insurance companies employ smart people. They would never let me buy coverage that costs less tha...

We know people lie and cheat sometimes, but can we predict when and why? Dan Ariely has researched this question and reports the results in his entertaining and enlightening book The (Honest) Truth about Dishonesty—How We Lie to Everyone—Especially Ourselves . This book is very accessible, yet gives deep insights into dishonesty. The most important thing to understand about cheating is that it involves a tension between our self-image and the benefits of cheating. “We are all capable of cheating, and we are very adept at telling ourselves stories about why, in doing so, we are not dishonest or immoral.” “We cheat up to the level that allows us to retain our self-image as reasonably honest individuals.” I would have thought that lying and cheating involved conscious evaluations of trade-offs at least some significant fraction of the time, but Ariely says this isn’t so. “There are rational forces that we think drive our dishonest behavior—but don’t. And there are irrational for...