In recent months I’ve encountered more investors than usual who see Canadian big bank stocks as safe investments. I guess the most recent one was one too many for me. I don’t believe that there is such thing as a safe stock, and as stable as Canadian banks have been, this applies to their stocks as well. Investors in Canadian banks have been rewarded with decades of stable dividends and fairly consistently rising stock prices. This may continue or it may not. The pressure of new online banks that don’t have the costs of physical branches may bite deeply into big bank profits. This isn’t a prediction. It’s just one possible future. I don’t know what will happen to big bank share prices or dividends. Investing substantially all of your investments in two or three bank stocks may feel safe, but it isn’t. I’m not saying to avoid bank stocks entirely. Approximately 7% of my portfolio is invested in Canadian big bank stocks indirectly through Vanguard’s exchange-traded fund VCN....

When I retire I’d like to be able to invest in a fund holding a low-cost index of the world’s stocks that addresses longevity risk. The idea is that it would be like a low-cost annuity based on stock returns rather than bond returns. The easiest way to describe this idea is first as a simple tontine structure. Imagine a large number of 65-year old women each placing $100,000 into a fund and the money gets invested in a low-cost index of the world’s stocks. Each month the fund sells some fraction of the shares and divides the money among the surviving women. The dollar value of shares the fund sells would be chosen based on expected stock market returns and mortality expectations. The payouts would be calculated so that if these expectations turn out exactly right, then the monthly payments would rise exactly with inflation. However, the actual monthly payments would be based on actual stock returns and the actual number of surviving women. No money would go to the estates of ...

Here are my posts for the past two weeks: Phishing for Phools How Much Do You Have to Learn to be a Good Investor? Replies to Emails I usually Ignore 4 Reasons to Pay Cash for Cars Here are some short takes and some weekend reading: Mr. Money Mustache describes his cross-country road trip in a Tesla that drove itself. He also takes a look at how this technology will transform our world. Canadian Mortgage Trends explains the top three complaints people have about their mortgages. Canadian Couch Potato offers some clear thinking about target date funds. Big Cajun Man has some ideas for tricking yourself into saving some money. Potato looks at the risks and rewards of the “hot potato” investing strategy. It’s not for me but it does illustrate how tempting such strategies can look. Boomer and Echo give a detailed example of one way to draw an income from your savings in retirement. My Own Advisor asks what your car says about you. To me cars are nothing mo...

I’ve long advocated paying cash for cars. This idea is completely foreign to many, but the advantages are compelling. You’ll buy a more reasonably-priced car It’s harder to hand over cash you’ve saved than it is to agree to future payments. Car salespeople are experts at spinning the numbers to steer you into a lease with payments that seem low. But you’re still giving away a huge pile of money when you total up the payments and future penalties. It’s much easier to understand what you’re really paying when save up for a car. And you’re much more likely to make a reasonable choice of car instead of burying yourself in debt. Get a better deal Buying a car is stressful and the salespeople have information advantages over you. When you’re paying cash, there are fewer ways to trick you. Car loans can seem cheap, but the reality of paying for many years may not be in the front of your mind. Things get worse with leases if the contract has clauses that will very likely have y...

The best part about running this blog is the feedback I get from readers. Learning about finances has definitely been a two-way street. However, I get a lot of less useful messages that I usually ignore. Today I respond to a few of them. Dear Grant, I just had a thought about your stock analyzer. Right now you want me to use my blog to help you sell access to it. But I think you can make much more money another way. Just hear me out. Suppose you just take your own money and invest it based on your stock analyzer’s recommendations? As you say, you can “make 5 to 15% in stock returns every month.” I know it’s a big departure from your current strategy, but it sounds way easier than trying to sign a bunch of people up to use it for a few dollars each. Enjoy your soon to be abundant wealth. You’re welcome, Michael -------------------- Dear Mat, I would love to publish your ad disguised as “an article about trading financial derivatives.” Unfortunately, it doesn’t q...

In one sense, you need to know almost nothing to be a good investor. However, in another sense, you need to learn quite a lot. The recipe for investing better than almost all other investors over the long run can be dead simple. Buy three low-cost index ETFs and rebalance mechanically based on some fixed rules. Within reason, these fixed rules don’t matter much as long as they remain fixed. We could teach this to a 12-year old. Where you need deep knowledge is to avoid screwing up the simple investing recipe. Imagine yourself balancing on a wobble board following this simple investing recipe and trying not to fall over. Unfortunately, most of the financial industry is trying to knock you off. First we have the never-ending media reports about an impending market crash. These are designed to turn you into a market timer. All the evidence says you are most likely to get out of the market at the wrong time, but the articles calling for a crash are very scary and convincing. ...

We’ve been taught that the invisible hand of the free market brings unintended social benefits. However, Nobel Prize-winning economists George Akerlof and Robert Shiller explain that we get more than just social benefits in their book Phishing for Phools: The Economics of Manipulation and Deception . Necessary parts of the market equilibrium are “tricks and traps.” The authors explain these ideas in a surprisingly easy read. “The free market system exploits our weaknesses automatically.” If one seller of unhealthy baked goods wasn’t there to catch us at our weakest moments, another would step into the void. The authors go through many examples of markets where we get “phished for phools” including cars, houses, credit cards, prescription drugs, tobacco, alcohol, and junk bonds. They make a strong case that phishing is a major part of our free markets. One interesting example of phishing is the way that credit cards affect us. Studies “show that credit cards get you to spend ...

Here are my posts for the past two weeks: Should We Plan to Spend Less as We Age in Retirement? Bonds vs. an Annuity in Retirement Revisiting the 4 Percent Rule   The Essential Retirement Guide: A Contrarian’s Perspective Here are some short takes and some weekend reading: Gary Belsky explains why we think we’re better investors than we are. This article gives some of the clearest explanations I’ve seen about how we screw up investing. Boomer and Echo bring us some expert takes on why index investing doesn’t mean settling for average returns. I may be biased in liking this article because I was quoted. Tom Bradley at Steadyhand gives an important lesson in where investors should focus their attention. The Blunt Bean Counter gives his take on the 2016 federal budget. Big Cajun Man explains why he doesn’t trust anyone claiming to show him how to get rich. My Own Advisor lays out how he plans to invest during retirement. Having an indexed pension certainl...

We all hear the steady drumbeat of fear-mongering about a retirement crisis and how we need to save more for retirement. Actuary Frederick Vettese aims to be a voice of reason with his book The Essential Retirement Guide: A Contrarian’s Perspective . He says we’re not nearly as badly off as banks and insurance companies would have us believe. I learned quite a bit about a wide range of financial aspects of retirement from this book. One example is that long-term care insurance is a bad deal for almost everyone. Another is the frightening fact that as we age our ability to manage our finances deteriorates, but our confidence in our abilities increases. So, we’re unlikely to seek help when we most need it. There were also some important parts of the book I disagreed with. Vettese begins the Preface pointing a U.S. study showing that 88% of people over 85 have some financial or housing assets. He presents this as evidence that people are doing reasonably well in their retiremen...

Many people have opinions about William Bengen’s 4% rule for annual retirement spending . William Bernstein said that 2% is “secure as possible,” 3% is “probably safe,” 4% is “taking real risks,” and at 5% “you had better like cat food.” However, Frederick Vettese says 5% is “relatively safe” and that 6% or 7% “might not be outlandish.” Here I examine Vettese’s reasoning for these conclusions in the chapter “Revisiting the 4 Percent Rule” of his book The Essential Retirement Guide . Bengen’s original 4% rule is based on a fictitious retiree with no spending flexibility at all. Upon retiring, the retiree chooses a yearly spending dollar amount and increases it by the cost of living each year without regard to how his or her portfolio performs. Bengen tried to figure out what percentage of your starting nest egg would give a safe spending level. Using historical U.S. stock and bond returns, he came up with 4%.  This inflexible approach is how he calculated his safe initial sp...