I managed only one post in the past two weeks: Biggest Mistakes Retirees Make with Their Investments Here are some short takes and some weekend reading: Robb Engen explains one of the many predictable errors we make: the illusion of wealth. Preet Banerjee interviews Scott Terrio about the ins and outs of consumer proposals and bankruptcy. Scott has some crazy stories of how far people can get into debt. Canadian Couch Potato discusses robo-advisors with Professor Pauline Shum-Nolan. One of the themes is the fact that current robo-advisors aren’t very adaptable to the desires of clients in the types of stocks included in portfolios. I’m of two minds about this. On one hand, it’s good to give people what they want. On the other hand, when most of us act on our ideas about investing, it costs us money. Big Cajun Man appeals to people to apply for the Disability Tax Credit (DTC). There is a lot of money at stake.

I was reading an interesting article by Jason Heath titled Here are the six biggest mistakes retirees make with their investments . It made me think, but one of my thoughts isn’t what you might expect. I don’t want to pick on Jason because he’s a good guy who provides solid information in his articles. Like other Certified Financial Planners, Jason works primarily with wealthy people. Now, the definition of wealthy is different in each person’s mind. A person with a million dollars in investible assets might say the threshold of wealthy is $3 million. Someone with $3 million might say the threshold is $10 million. However, the typical Canadian would call the clients of CFPs wealthy. Jason’s thoughtful list of the most common mistakes he sees is based on his client base and not the typical Canadian. To be fair, it’s unlikely Jason wrote his own headline, and it’s the headline that I think is wrong. Here are a few of the biggest financial mistakes Canadian retirees have made...

Here are my posts for the past two weeks: Finance for Normal People Should You Delay Taking CPP and OAS? Leaving a Spouse to Pick up the Pieces Here are some short takes and some weekend reading: New securities will make it possible to short bitcoin . This is very tempting, but I have to consider the possibility that some government or major set of banks might choose to back bitcoin. I certainly don’t think this is likely, but it’s enough to stop me from shorting bitcoin. Jason Zweig interviewed Peter L. Bernstein. An important quote: “Survival is the only road to riches. You should try to maximize return only if losses would not threaten your survival and if you have a compelling future need for the extra gains you might earn.” John Bogle offers 7 rules of successful investing. Dan Bortolotti answers a question about fees for moving assets out of a brokerage. Will the new online brokerage cover these fees? Ted Rechtshaffen explains “two major [conflicts of in...

I’ve been helping an elderly relative sort out her finances and other matters since her husband died. I’ll call them Carol and Bob. This experience has made it very clear to me that both spouses need to at least be able to locate a record of account numbers and institutions, including banks, insurance companies, and utilities. For the first year or so after Bob’s death, a friend of Carol’s tried to help. They found a few paper bank statements, and wandered into branches asking for help locating all accounts. They were ultimately able to find several accounts and were able to get some of Bob’s accounts into Carol’s name. By the time I took over, I still had to get one of Bob’s TFSAs into Carol’s name, cancel some of Bob’s monthly automatic bank account payments, and get titles on the house and car fixed. It’s been months now and this is still ongoing. Of course, there have been many other things to sort out, but the most painful tasks involve doing battle with large organizat...

The default age to start collecting Canada Pension Plan (CPP) payments is 65. However, you can start anywhere from age 60 to 70. Less well known is that you can delay collecting Old Age Security (OAS) payments until age 70 as well. There are incentives for delaying these payments, and it’s not easy to decide whether to take lower payments early or wait for larger payments. Here I do an analysis that helped me make up my mind. OAS Let’s start with OAS because it’s simpler. The default starting age is 65. However, your payments increase by 0.6% for each month you delay starting to take OAS before age 70. So, if you wait until age 70, you’ll get $1.36 for every dollar you would have received when starting at 65. It’s important to understand that these amounts are indexed to inflation. Some people mistakenly believe that someone starting to collect at age 65 would have his payments catch up to the amounts received by someone taking OAS at age 70. This is not true. Consider...

Standard financial theory treats us as though we are all perfectly rational people who make no mistakes in maximizing our utilitarian benefits with each of our financial choices. In reality, we’re emotional creatures who have desires outside of utilitarian needs. We have limited time and ability to evaluate choices, and we make lots of mistakes. Many books have been written about how people fail to make the best rational choices. What sets Meir Statman’s Finance for Normal People apart is his attempt to unify real human nature into a realistic theory of finance. “We want three kinds of benefits—utilitarian, expressive, and emotional—from all products and services, including financial products and services.” We’re used to focusing on utilitarian benefits such as maximizing portfolio returns. However, we also seek “the expressive benefit of high social status, as by a hedge fund; and the emotional benefits of exhilaration, as by a successful initial public offering.” Sometime...

Before launching into this biweekly roundup, our friend the Blunt Bean Counter played a role in a BDO Canada survey of business owners and non-business owners about retirement and wealth . Here are some of their findings: Business owners plan more for retirement than non-business owners but feel less on track. Almost one-third of business owners plan to work part-time after retirement – compared to 12 percent of the general population. More than one in three business owners plans to retire in the next five years. Financial support for children was more common among the business owners than among non-business owners. Here are my posts for the past two weeks: The Dividend Puzzle Portfolio Optimization The Annuity Puzzle The High Cost of Paying Property Insurance Monthly  Here are some short takes and some weekend reading: Mr. Money Mustache describes his experience driving for Uber and Lyft. He has a number of suggestions for making the system exploit drivers l...

Update: An anonymous commenter says that when a down payment is charged on property insurance, contrary to what our insurance agent told us, monthly payments end after 10 months and not 12.  The article has been updated accordingly. Recently, I was helping a family member switch property insurance companies. The last thing to arrange was paying the premium. The insurance agent was steering us toward monthly payments instead of paying for the full year in advance. At first I was just going to dismiss the idea of paying monthly, but I decided to ask the agent what interest rate they charged. I think his exact words were “there is a 4% service fee.” For the purposes of this article, I’ll scale all the numbers to an annual insurance premium of $1200 to keep the math simple. I took the insurance agent to mean that they take the $1200 premium, add 4% to get $1248, and divide by 12 to get $104 as the monthly premium. This turns out to be only partially correct.  In additio...

A big challenge in retirement is spending enough to be happy without running out of money. The main problem is not knowing how long you’ll live. This is called “longevity risk.” We are forced to plan for a long life whether we’ll live long or not. One way to eliminate longevity risk is with an annuity. The idea is to hand your money over to an insurance company, who then promises to pay you monthly, even if you live much longer than they expect. According to Meir Statman in his book Finance for Normal People , “people are reluctant to annuitize, a reluctance we know as the ‘annuity puzzle.’” Statman identifies a number of “behavioral impediments to annuitization.” We are averse to “transparent dips in capital.” Seeing your portfolio take a big drop hurts, even knowing that you’ll get lifetime income in return. Also, the “money illusion” makes “a lump sum of $100,000 seem larger than its equivalent as a $500 monthly annuity payment.” “Availability errors deter people from...

Deciding what percentage of your portfolio to allocate to bonds, domestic stocks, foreign stocks, etc. can be challenging. Any attempt to optimize this allocation is necessarily based on assumptions. It’s dangerous to blindly follow optimized allocation percentages without examining the assumptions built into the optimization process. In his book Finance for Normal People , Meir Statman tells the story of investment consultants choosing asset allocation percentages for a large U.S. public pension fund. The consultants used Harry Markowitz’s mean-variance portfolio theory to calculate an optimal portfolio for the pension fund. But then they modified all the percentages. Statman’s explanation for why the consultants changed the percentages is that the managers of the pension fund wanted more than the “utilitarian benefits of higher expected return”; they wanted “expressive and emotional benefits, including the benefits of conformity to the portfolio conventions of this pension fu...

The strong preference many investors have for dividends over capital gains is known among economists as the “dividend puzzle.” Meir Statman offers a solution to this puzzle in his book Finance for Normal People . Statman says that many investors incorrectly “frame the capital of a stock as a fruit tree and dividends as its fruit. In that frame, collecting dividends and spending them does not diminish the capital of the stock any more than picking fruits off a tree and consuming them diminishes its size.” “Rational investors know the correct frame for dividends and capital. They know that $1,000 in ‘homemade’ dividends from the sale of shares is identical in substance to $1,000 from a cashed dividend check, even if different in form, and they care about their total wealth, not its form.” Because the “price of shares of a company declines when a company pays dividends,” “payments of dividends do not affect the total wealth of investors.” All that said, dividends do offer some a...

I managed only one post in the past two weeks, a review of two books: The Smartest Investment Book and Portfolio Here are some short takes and some weekend reading: Tom Bradley at Steadyhand is almost as cynical as I am about Amazon’s long, drawn-out “search” for a second headquarters location. I hope this whole PR event backfires for Amazon. In another article he discusses the elements of academic behavioural economics that he sees in practice . Squawkfox has some sensible advice about extended warranties. Gordon Pape shares important things you should know about traveling to Florida for the winter. His advice on this subject is far superior to his investment advice. Big Cajun Man clarifies some of the rules surrounding Registered Disability Savings Plans (RDSPs).

There is little doubt that the vast majority of investors would be better off investing in low-cost diversified index funds than attempting to beat the market. However, the best writers explaining this fact, like Charles D. Ellis, tend to be calm and reasonable, while the loudest proponents of expensive active management say silly alarmist things like “index funds will destroy capitalism.” One voice on the index fund side that can take on hysterical active management proponents is Daniel R. Solin. His books The Smartest Investment Book You’ll Ever Read (Canadian Edition) and The Smartest Portfolio You’ll Ever Own pull no punches. While I prefer Ellis’s style, I like Solin’s chances of holding his own in a public debate. Solin refers to active portfolio selection as “hyperactive management.” He says “The securities industry adds costs. It subtracts value.” He devotes many pages to the numerous failings of the investment industry. While he overstates some of his points (e.g....

Here are my posts for the past two weeks: Cheerleading for Home Ownership Burn Your Mortgage Here are some short takes and some weekend reading: Ellen Roseman calls on credit card companies to do more to prevent “free-trial” credit card fraud. One problem I see here is that while some such offers are clearly deceptive, some aren’t as easy to identify. Another problem is the conflict of interest for credit card companies. My personal rule is that if it’s a free trial, then they don’t need my credit card number. Tom Bradley at Steadyhand says that even though the battle over banning trailer fees rages on, the writing is on the wall. I hope he’s right that “Trailer fees are going the way of the dodo bird.” Big Cajun Man isn’t very happy with the amount of his charitable contributions going to overhead. Robb Engen at Boomer and Echo monitors the progression of his human capital into financial capital. The Blunt Bean Counter summarizes planned changes to taxing priv...

Many people are familiar with Sean Cooper’s story of living extremely frugally for a few years while he saved up a large down payment, bought a home, and paid off his mortgage by age 30. Cooper built on the interest in his story by writing a book called Burn Your Mortgage . I expected to like this book because I believe paying off your mortgage and any other debts is a good idea (I paid off my first mortgage by age 28). However, despite many good parts of the book, there is too much cheerleading for home ownership for me to recommend it. A common theme throughout this book is treating rising housing prices as a permanent reality. “The last thing you want is to find yourself priced out of the market.” “It’s probably wise, if you’re in the financial position to do so, to buy now while you can still afford to.” Even though this book came out in 2017, it already has a dated feel now that home prices have been dropping in Vancouver and Toronto. Another part of this theme of rising...

I’ve been a happy homeowner for many years now. I prefer owning my home to renting. But I have no illusions that this is the better choice financially. Price to rent ratios today mean I’d very likely come out far ahead if I sold my house and started renting a comparable house. But I’m not going to sell because I choose to pay the price of ownership. Unfortunately, many homeowners need to believe they will win financially, and they come up with poor analyses to justify this belief. One such example comes from Sean Cooper’s book, Burn Your Mortgage : “Let’s say you bought a home a decade ago for $250,000, with only 10% down ($25,000). You later sold it for $400,000, making $125,000 in profit (for simplicity’s sake, we’ll ignore associated costs such as mortgage interest, mortgage insurance, property taxes and closing costs). Even though your home only went up in value by 60%, that’s a 500% return on your initial investment (down payment) of $25,000. Try finding that kind of ...

Here are my posts for the past two weeks: Stock-Picking Skill Liberating Your Losers The Success Equation Here are some short takes and some weekend reading: A new C.D. Howe Institute study concludes that Canadians whose incomes vary from year to year face an unfair tax penalty and that reforms are needed. I agree. My income is highly variable, and it seems unreasonable that during good years I’m incented to delay new work until January. John Robertson gives a thoughtful and balanced discussion of whether to buy or rent a home. Robb Engen at Boomer and Echo explains why he doesn’t hold bonds in his portfolio. Big Cajun Man liked Doug Hoyes’ book enough to lift a few ideas from it.

Success in most endeavours is a combination of skill and luck. As Michael L. Mauboussin explains in his book The Success Equation: Untangling Skill and Luck in Business, Sports, and Investing , we have a tendency to decide we were skillful when we succeed and unlucky when we fail. We make many other mistakes as well when it comes to recognizing the role of luck in our lives. Mauboussin teaches methods of measuring skill and luck. Some activities involve little or no luck, such as chess or checkers. If a chess master beats me soundly at one game of chess, he or she is likely to beat me another 10 times in a row. Other activities involve to skill at all, such as roulette and lotteries, unless you count not paying as a skill. A test of “whether an activity involves skill: ask whether you can lose on purpose.” If you can lose on purpose, there must be some skill involved. Most activities, like sports, business, and investing, combine luck and skill. It turns out that there are ...

Recently, Jonathan Chevreau wrote about a way to try to save money on taxes called “liberating your losers” from your RRSP. It’s no fun owning a losing investment, and when it’s in your RRSP, you don’t even get a capital loss for your taxes. Chevreau offers a way to reduce the sting. Unfortunately, it doesn’t work. The idea is to withdraw a losing investment from your RRSP so that when it rebounds, you’ll only pay capital gains taxes on 50% of the increase. If you leave the investment in your RRSP you’d end up paying taxes on 100% of the increase when you eventually withdraw the assets from your RRSP/RRIF. According to Chevreau’s broker friend, this makes sense “when you have had bad timing in your RRSP/RRIF investment choices; when you're confident your investment will return to its previous higher value; and if you prefer to pay tax on 50 per cent of a capital gain rather than 100 per cent of income.” The first condition just means you’ve made an investment that lost mon...

When researchers talk about someone having skill at stock-picking, they are using the word “skill” differently than we’re used to. I might be impressed that a stock-picker seems very smart and knows far more than I do, but this is far from having skill in the technical sense. To illustrate what we typically mean by “skill,” let’s consider golf. Over the years, I’ve golfed with many people whose abilities impressed me. There are dozens I’ve played with who I’d say have golf skills. Worldwide, there are millions of people who I would judge to be skillful at golf if I saw them play. But what if we define “golf skill” differently? What if we decided that only those who have an expectation to earn more in prize money and endorsements than they spend on travel and equipment count as being skilled at golf? By this definition, I’ve never golfed with a skillful player. Worldwide, there are perhaps a few thousand players who have skill in this sense. Does this strict definition of g...

Here are my posts for the past two weeks: The Wealthy Renter What We Need on Credit Card Statements Straight Talk on Your Money Here are some short takes and some weekend reading: Frederick Vettese makes the case for changing federal civil servants’ pensions to a target-benefit plan to save taxpayers a lot of money. The government could save even more money by eliminating employees they don’t need. Andrew Coyne does some clear thinking about taxes and the middle class. He shows that when there is a raging debate, it’s possible for both sides to be very wrong. Squawkfox explains the steps necessary to open a Registered Disability Savings Plan (RDSP). It’s work, but the substantial free government money available makes it worth the effort. Big Cajun Man was on his best behaviour for a podcast with Doug Hoyes. He even explained how he got his nickname (but left out the profanity).

There are many writers offering financial advice to the typical Canadian, but Doug Hoyes, author of the book Straight Talk on Your Money , is a licensed insolvency trustee. He’s seen enough to have good insights into the kinds of financial mistakes we make. Unlike many writers who offer black-and-white opinions, Hoyes sees the shades of gray. The book promises to dispel 22 financial myths that are holding us back and that “Everything you know about money is wrong.” But the contents are actually more thoughtful and nuanced than advertised. Even the section titles are somewhat out of sync with the book’s contents. One section title declares “pay yourself first” to be a myth. The rest of the section then goes on to explain that paying yourself first is a good idea unless your finances are so dire that you can’t afford to start saving immediately. The contrast between section titles and the contents gives the book somewhat of a newspaper feel where reporters write articles and th...

The most prominent parts of my credit card statements are two numbers: my money-back rewards for the current month and the total rewards I’ve received since I got the card. This gave me an idea for “improving” credit card statements. What if the most prominent part of a statement was the total interest you’ve paid since you got the card? For many of us, that would be zero or close to zero, but for too many it would be a nauseatingly big number, perhaps a 5-figure sum. I’d be interested to see what effect this would have on people’s credit-card spending. It would likely be a slap in the face at first, and later there would be some numbness to it, but it might help some people control unnecessary spending. Another possible effect would be for people to spend with a different card. If seeing the total interest we’ve paid over the years is painful, it makes sense that people would avoid this pain by using a different card. Sadly, this will very likely remain just a thought expe...

It seems that everyone wants you to buy a house: your parents, real estate firms, mortgage brokers, and even the government. Alex Avery decided to make a case for renting in his book The Wealthy Renter: How to Choose Housing That Will Make You Rich . His reasonable and balanced analysis contrasts sharply with the usual cheerleading for owning a house. We’ve all heard people say something like “renting is just throwing money away,” or “why pay your landlord’s mortgage when you can own your own house?” This advice is based on the mistake of comparing rent to a mortgage payment. Typically, renters pay for little other than their rent – maybe a few utilities. Homeowners pay property taxes, maintenance costs, utilities, insurance, and an opportunity cost on home equity. It’s the total of all these costs that we should be comparing to rents. Avery goes through an example of an $850,000 home and concludes that the cost for an owner to occupy the home is between $4000 and $8000 a mon...

Here are my posts for the past two weeks: What’s Your Income Payoff Here are some short takes and some weekend reading: Scott Terrio, a licensed insolvency trustee explains why low mortgage delinquency rates aren’t a good sign. He says “the low delinquency rate will catch up with the reality of Canada’s overburdened households.” Lawrence B. Siegel explains why “indexing doesn’t distort anything.” Reporter Sara Mojtehedzadeh went undercover working in food production for a temp agency. Her story contrasts sharply with the claims made by her employer about working conditions. Strangely, she had to collect her pay from a payday lender. Patrick McKenzie has some interesting and authoritative advice on what to do if someone creates credit accounts in your name. These things can lead to long-lasting problems if you don’t handle them correctly. Unfortunately for Canadians, some aspects of this advice are specific to Americans. I’d be interested in comparable advice for...

Employers would like to know the secret to motivating their employees to give their best effort. According to Dan Ariely, author of Payoff: The Hidden Logic That Shapes Our Motivations , the answer to what motivates us is complex, but his research has yielded some interesting results. I find just about everything Ariely writes to be fascinating, and this short book is no exception. The book isn’t just about what motivates us at work. Ariely also tackles our attachment to our own ideas and creations, the importance of money (and sometimes lack of importance), and the urge for symbolic immortality. In short, “this book is about what we really want out of life before we die.” One seeming contradiction Ariely points out is that happiness and meaning often don’t go together. A marathoner is strongly motivated to run hard for hours and finds deep meaning in the effort, but it’s hard to say that a person whose face is twisted in pain is happy, at least while still running. Some of ...

The raging debate over the federal government’s plan to change certain tax rules for corporations has a glaring contradiction. The government insists that the changes only affect those making more than $150,000 per year. Opponents say it’s hitting middle-class business owners. Who’s right? Consider the example of a professional whose efforts earn $250,000 per year. This professional has a personal corporation. So, it’s actually the corporation that has an income of $250,000. The professional draws a personal income of $100,000 from the corporation, leaving what’s left after taxes within the corporation. He plans to continue drawing an income from the corporation throughout his retirement. So, what is the professional’s income? The government would say the professional’s income is $250,000, and he uses his corporation to spread his income over his lifetime to reduce his total tax bill. Many opponents of the government’s tax plans say the professional’s income is $100,000, a...

Here are my posts for the past two weeks: Email Replies Small Business Here are some short takes and some weekend reading: Preet Banerjee interviews John de Goey who says “there are way too many advisors in the business,” and “we could easily get rid of one-third of all advisors in Canada and not make a ripple in terms of access to advice.” I agree with this. Most financial advisors are paid for their sales effort and not for their advice. The only way to lower Canada’s unreasonably high cost of investing is to lower the total amount of money that goes to advisors and fund managers. This necessarily means there will be fewer advisors. Jason Zweig has 19 questions to ask your financial advisor along with the “correct” answers. While this is an excellent list of questions, few advisors would have the best answers, and those who do would likely only handle wealthy clients. Canadian Couch Potato explains the upcoming change to stock-trading settlement periods. Boomer ...

What do you think of when you hear “small business?” Maybe you think of a roofer who has enough work to employ three helpers. Or maybe you think of a hair-cutting place. Do you ever think of lawyers who make half a million dollars per year and incorporate themselves to defer and reduce their income taxes? Opponents of the Trudeau government’s planned income tax changes for private corporations have been vocal lately. They have a lot to lose. The “tax planning” opportunities using private corporations are very effective at reducing taxes. There are some good arguments on both sides of this debate, but one part of it irks me: referring to incorporated professionals as “small business.” It’s not that this is technically wrong; it’s that it’s deliberately misleading. The public has sympathy for the types of businesses they think of when they hear “small business.” This sympathy dries up quickly if we talk about highly-paid professionals reducing their income taxes. Getting in...