My short takes are a little late because I’m just back from a vacation. Apparently, I’m now on “island time.” Here are my posts for the past two weeks: How Beneficial is the Dividend Tax Credit Bad Arguments Against CPP Expansion When Does Permanent Life Insurance Make Sense? Deep Risk Here are some short takes and some weekend reading: Dividend Ninja interviews Dan Bortolotti to discuss index and dividend investing. From my point of view, Dan did a great job of explaining misconceptions many dividend investors have. Some of the dividend investors who commented saw it differently. Preet Banerjee interviews John Robertson who explains how to keep investing simple. Big Cajun Man has some trouble with a CRA request for documentation on expenses for his autistic son. This is a case where CRA shows it has a heart. Canadian Couch Potato interviews Larry Swedroe to discuss challenges new retirees face with their portfolios. Boomer and Echo looks at the various wa...

When it comes to finances, the definition of “risk” is tough to pin down. We sometimes refer to portfolio volatility as risk, but this doesn’t line up well with what people mean when they talk about stocks or other assets being risky. William J. Bernstein brings us some clear thinking about risk in his 55-page book Deep Risk: How History Informs Portfolio Design , the third of four books in his Investing for Adults series. Bernstein thinks of risk “in two flavors: ‘shallow risk,’ a loss of real capital that recovers relatively quickly, say within several years; and ‘deep risk,’ a permanent loss of real capital.” “Capital managed for near-term liabilities should be guided by shallow risk, while capital managed for very long-term liabilities should be guided by deep risk.” This book “provides a framework for thinking about deep and shallow risk as essentially an insurance problem involving probabilities, consequences, and insurance costs.” “The conventional ‘shallow’ risk of st...

The vast majority of people who need life insurance are best off with term life insurance. Salespeople have tried to sell me permanent life insurance (universal life and whole life), but I never got a good feel for when this type of insurance might make sense. Recently, the Rational Reminder podcast interviewed Glenn Cooke , an expert in insurance who communicates very clearly. Glenn’s explanations allowed me to understand when permanent life insurance may make sense. Before launching into my take on Glenn’s explanations, let me be clear that Glenn may not fully agree with me. In particular, he might find that the conditions I set out below are too narrow. Permanent life insurance only makes sense to me when all of the following conditions are met: You have maxed out both your RRSP room and your TFSA room. You definitely have more money than you’ll ever need, and you want to leave a legacy (which might include cash to pay off capital gains taxes on a property, such as a co...

The Canada Pension Plan (CPP) is set to start expanding in January 2019. Workers will begin contributing more of their pay to CPP, and those who contribute more will ultimately receive increased CPP benefits. There are sensible arguments for and against this change, but the most common argument I hear against it makes no sense at all. I saw a version of this bad argument in an article by Charles Lammam at the Fraser Institute calling on Doug Ford to opt Ontario out of CPP expansion . Lammam calls CPP expansion “unnecessary” because “most Canadians adequately prepare for retirement.” He then goes on to quote statistics on the total dollar amounts Canadians have saved in different asset classes. All this proves is that, on average, Canadians have enough savings for retirement. But averages are irrelevant in this discussion. Consider two sisters heading into retirement. One sister has twice as much money as she needs and the other has nothing. On average, they’re fine, but ind...

Many investors love Canadian dividends because they come with a tax break called the Dividend Tax Credit (DTC). Others look a little deeper and say that the DTC just prevents double taxation because the companies paying dividends already had to pay tax on their profits. They conclude that dividend income is no better than interest income, at least from a tax perspective. However, comparing the DTC to capital gains taxes gets more complex. Dividend Taxation in Canada The DTC is intended to prevent Canadian company profits paid to Canadian shareholders from getting taxed twice. Here’s an example to illustrate the idea: Suppose a company earns one dollar in profit per share, pays 27 cents in income taxes, and pays the remaining 73 cents in dividends to each shareholder. Canadian shareholders actually declare the full dollar as income (called the dividend gross-up), but they get to deduct the 27 cents from the taxes they owe. The idea is that the total tax paid by the company ...

I managed only one post in the last two weeks: Smart Couples Finish Rich Here are some short takes and some weekend reading: Dan Bortolotti has a very sensible take on dividend ETFs. Squawkfox tells us how to beat dynamic pricing where retailers change online prices based on what they know about you. Ron Lieber attends a steak dinner annuity pitch and makes the salesman unhappy. A lot of complex financial products look good if you compare them to stocks without their dividends. The Blunt Bean Counter explains the tax implications of renting out your property Airbnb-style. His explanation is more than enough to scare me away from becoming a casual landlord. Jason Heath explains the details of how to defer RRIF income taxes when a spouse passes away. There are a number of different cases to consider. Robb Engen lays out his financial goals for 2019. As usual, my favourite goal is “Don’t take on any new debt.” Without this goal, he could meet all the other goals...

We can all think of times when we wasted money on things that didn’t matter that much to us and were left without enough money to do things that truly bring us joy. The question then is how do we fix this problem? David Bach offers a step-by-step guide in his book Smart Couples Finish Rich . This book is getting dated, but it offers surprisingly concrete steps to the hard to pin down task of aligning your spending with your values and dreams. This book is mainly aimed at people still in their working careers, so it’s tough for me to test out its ideas. However, I could imagine myself a decade or two ago being able to follow Bach’s nine steps. How much it would have helped me is hard to guess, but at least the steps are clear enough to go through the exercise. Parts of this book won’t be too useful to Canadians with the talk of 401(k)s, IRAs, and health insurance. It wouldn’t be too hard for Canadian readers to skip these parts. Some of the examples are becoming quite dated w...

Here are my posts for the past two weeks: The Value of Delaying CPP and OAS Is it Worth it to Hold U.S.-Listed ETFs? Rising Dividends in ETFs Here are some short takes and some weekend reading: James Cordier lost all his clients’ money and made this weepy apology video (that. He blames the failure of his option trading strategy on a “rogue” market. The problem is that markets go rogue in many different ways frequently. If you take on too much risk, a potential blow-up is just around the corner. Doug Hoyes interviews the Big Cajun Man to talk about what it was like to get laid off from Nortel and the lessons he learned. Canadian Couch Potato uses his latest podcast to take a swipe at investing courses that focus on price-to-earnings ratios, segregated funds, and stock options instead of the things DIY investors really need to know. Teaching beginning investors how to analyze stocks is like teaching a 5-year old to operate a chainsaw. For the purposes of this analog...

Reader ML asks the following good question (edited for length): I am relatively new to investing for dividends. Currently my strategy is to invest in high quality stocks and hold them for a long time. You are one of the bloggers who switched from buying individual stocks to buying ETFs. I get the strategy of ETFs in that it’s hard to beat the market with individual stocks. My question: Over years the dividend you receive from an individual stock continues to grow. If ETFs switch over their portfolio would they not miss out on this increase in dividends, year over year? It seems to me that the dividends stay pretty steady in the ETFs. Is that not a big chunk of money to miss out on? The short answer is that ETF dividends do grow. The dividends that low-cost index ETFs pay are mainly the dividends collected from all the individual stocks held within the ETF. There is a small deduction for the costs of operating the ETF and possibly a small increase from securities lending,...

Index investors in Canada who own Exchange-Traded Funds (ETFs) have a choice to make with their U.S. and international stock holdings. They can either buy an ETF that holds U.S. and international stocks but trades in Canadian dollars (such as Vanguard Canada’s VXC), or they can buy U.S.-listed ETFs that trade in U.S. dollars. This choice is a trade-off between cost and complexity. It’s certainly a lot simpler to own VXC. With U.S.-listed ETFs, you need to find an inexpensive way to exchange Canadian for U.S. dollars, such as Norbert’s Gambit . But, as Justin Bender explained, the cost of VXC is higher than the cost of owning U.S.-listed ETFs . This higher cost comes from a higher Management Expense Ratio (MER) and U.S. dividend withholding taxes. For the mix of U.S.-listed ETFs that I own (VTI, VBR, and VXUS), the blended MER is 0.09%, which is 0.18% lower than VXC’s MER. Less obvious, as Justin calculated, is the fact that U.S. withholding taxes of 0.35% cannot be recovered ...

Few people realize that you can delay receiving CPP and OAS until age 70 in return for permanently higher payments. Among those who know this is an option, very few choose to wait. I went through the exercise of calculating my safe level of annual spending when taking CPP and OAS at different ages and found that I can start spending more today if my wife and I wait until age 70 for our pensions. You can start CPP anywhere from age 60 to 70, and OAS can start anywhere from 65 to 70. I created a spreadsheet that calculates our CPP and OAS payments for chosen starting ages of these pensions. Then the spreadsheet calculates our estimated safe annual spending level throughout retirement. Consider two scenarios: Scenario 1: We both take CPP at 60 and OAS at 65 Scenario 2: We both take CPP and OAS at age 70 In both scenarios, we’re both retired now with no expectations of earning income in the future. The results were that Scenario 2 allows us to spend $3920 more per year (start...

Here are my posts for the past two weeks: Retirement Income for Life Bonds can Outperform Stocks for Very Long Periods The Problem with Bootstrapping Here are some short takes and some weekend reading: Dan Bortolotti answers a question from 60-year old Jerry W. about how he and his wife can generate $35,000 per year from their savings (combined $400,000 in RRSPs and $180,000 in TFSAs). Dan makes a number of excellent points, and concludes with “it would be worth considering whether it makes sense for you to take your CPP benefits before age 65.” We don’t know enough details about Jerry’s situation to make specific recommendations, but most people in this situation would actually be better off delaying CPP and OAS until age 70. It seems counterintuitive, but by shifting some longevity risk to the government, retirees who decide to take larger pensions at age 70 can safely spend more money when they’re 60. SquawkFox explains why you should stay away from credit card bala...

If you’ve ever had someone run simulations of your financial plan, the whole process looks wonderfully scientific. Some software takes your financial plan and simulates possible future returns to see how your plans work out. But what assumptions are baked into this software? Here I use pictures to show the shortcomings of a technique called bootstrapping. With monthly bootstrapping, simulation software chooses several months at random from the history of actual market returns to create a possible future. The simulator repeats this process many times to create many possible futures. Instead of monthly bootstrapping, some simulators choose annual returns at random. Other simulators collect blocks of consecutive years. All these methods have their problems. Here we show the problem with monthly bootstrapping, but this problem applies equally well to annual bootstrapping. I started with Robert Shiller’s online return data for total monthly returns of U.S. stock from July 1926...

It’s widely believed that over 30-year periods, stocks have always outperformed bonds. However, recent research says this isn’t true. U.S. bonds beat stocks over the 30 years ending in 2011, and it happened many times in the 1800s according to retired professor Edward McQuarrie at Santa Clara University. However, the important question is what should we do with this information? Jason Zweig at the Wall Street Journal reported on this research in his 2018 Nov. 2 article Sometimes, It’s Bonds For the Long Run , a play on the title of Jeremy Siegel’s excellent book Stock for the Long Run . It’s doubtful that Zweig is recommending that investors consider whether bonds are the best source of long-term returns, but his readers could be forgiven for thinking this. The next chart shows McQuarrie’s data on 30-year rolling periods. This means that the return shown in a given year is actually the average returns over the previous 30 years. So, near the end of the chart where it shows t...

If you don’t have a defined-benefit pension, odds are you’re losing some sleep worrying about saving enough money during your working years to retire well. You might even have a retirement savings goal in mind. With all this to worry about, you probably don’t think much about how to spend that money during your retirement. Probably something like the 4% rule will be good enough, right? Well, the 4% rule is better than no plan at all, but you can do a lot better. Frederick Vettese explains solid strategies for the “decumulation” phase of your life in his excellent book, Retirement Income for Life: Getting More Without Saving More . He starts off showing how the 4% rule can fail, and then makes a sequence of 5 enhancements that improve the decumulation strategy significantly. The five enhancements Reducing investment fees Deferring your CPP pension to age 70 Buying an annuity with about 30% of your savings Being prepared to adjust your annual spending if markets boom or cra...

Here are my posts for the past two weeks: Beat the Bank Getting Even by Owning Big Business Stocks Here are some short takes and some weekend reading: Dan Bortolotti discusses the “catch” with zero-fee index mutual funds. Dan says “there is no catch here,” but I’d like an expert opinion on the securities-lending practices of different index mutual funds and ETFs. Who gets the interest the funds collect from short-sellers who borrow stocks? How much hidden risk is there for investors? Dan Hallett analyzes the price levels of pot stocks. Squawkfox explains how social media and FOMO can make you unhappy and cost you money. The Blunt Bean Counter explains clearance certificates from CRA for a deceased person’s estate. Without one, the executor(s) could be held personally responsible for any taxes CRA comes looking for after a reassessment. This is timely for me because I’ll be filing tax returns for an estate next spring. I’m still on the fence about whether a clear...

Common advice to make up for high bank fees is to buy bank stocks to get your money back in dividends. We could extend this to the big telecommunications companies as well. I decided to look at how I stand in collecting dividends from these companies vs. what I pay for their products. On the dividend side, it’s not a good idea for your portfolio to be too concentrated. I own Canadian stocks through Vanguard’s Canada All Cap Index ETF (ticker: VCN). The part of VCN’s dividends that come from the six big banks plus Bell, Rogers, Telus, and Shaw amount to about 34 cents per share each year. So, suppose you add up what you pay to these businesses and it comes to $1000 per year. As I write this, you’d have to own $90,800 worth of VCN to collect $1000 per year in dividends. Of course, these businesses don’t pay all of their earnings out in dividends, so you could own a little less VCN than this to have the total profits cover your costs. You could also argue that these businesse...

It can be frustratingly difficult to get the masses to understand how important it is to control investment costs. Ex-banker Larry Bates does an excellent job of explaining what he calls Simply Successful Investing in his book Beat the Bank . Canadians who hand their savings over financial advisors at banks or elsewhere need to read this book. Bates knows that people don’t want to become investing experts. “There are countless things about investing you don’t need to know: this book focuses on the few things you do need to know.” You don’t have to “listen to the daily tsunami of utterly useless media chatter about the financial markets.” As a career banker, Bates understands the harm that bank mutual funds do to people’s savings. This harm became personal after a conversation with his sister. He was left embarrassed and ashamed after learning that she was taken in by his employer’s high-fee mutual funds. “Fees are stealth wealth killers.” The book refers to “top banks, ins...

Here are my posts for the past two weeks: Managing a GIC Ladder in Retirement More Money for Beer and Textbooks My House vs. My Stocks Here are some short takes and some weekend reading: Gordon Pape takes Doug Ford and Vic Fedeli, Ontario’s Finance Minister, to task for “dumping cold water” on Canadian Securities Administrators’ mutual fund reforms “that would significantly benefit investors.” This position “flies in the face of everything the Premier claims he stands for.” The C.D. Howe Institute reports that the 4% increase in the top federal income tax rate didn’t produce the hoped-for $3 billion increase in tax revenues. Instead it resulted in a slight decrease in combined federal/provincial tax revenues. My own retirement made a small contribution to reducing tax revenues in the future. Canadian Couch Potato interviews Larry Bates who is trying hard to explain to Canadians just how much of their investment gains are getting consumed in fees. Check out his “T-R...

My wife and I bought our house in mid-1993. We’re at the young end of the baby boom, but we bought our house when we were fairly young. As a result, we’ve lived through the huge run up in house prices older boomers have enjoyed. In 25 years, the price of our house has gone up about 160%. So, how has this compared to our investment portfolio? Well, in that same period of time, our portfolio has had a cumulative return of 1030%. That might seem to end the comparison, but real estate is typically a leveraged investment. We paid off our home quickly, so we didn’t get much advantage from the leverage. But what if we had used leverage? The average discounted mortgage rate over that period was about 5%. Suppose we had put 10% down and made payments on a 5% mortgage for 25 years. The Internal Rate of Return (IRR) on our investment works out to 5.8% per year or a cumulative return over the 25 years of 307%. It might be tempting to add in a return from not having to pay rent, but...

When I headed off to university, I was pretty naive about money. It’s safe to say that this is true of most kids starting post-secondary education. There are lots of ways to get yourself into financial trouble at school. This is where Kyle Prevost and Justin Bouchard come in with their book More Money for Beer and Textbooks . These authors offer Canadian students and their parents solid information that I wish I had back when I was in school. This book isn’t purely about finances. Just because one choice is more expensive than another doesn’t necessarily make it a bad choice. The authors discuss cost differences and weigh them against other advantages and disadvantages. They start with how much school will cost and the relative costs of being on and off campus. They also offer a number of tips on finding one or more of the scholarships and bursaries available, many of which never even have one student apply. You’re not likely to find many other books that even devote a sect...

The following good question about managing a GIC ladder during retirement came from AT in Calgary (edited for length and privacy): I’m 100% FIREd and have no regrets about this. After working for 30+ years, I was just done. I spent the better part of a year learning about money, and your articles have been particularly helpful. I have put 3 years into GICs (1,2,3) and the '1' comes due 2019 May 1. Assuming I stick with the 3 year model, do I roll that one into a new 3 year GIC and then continue as before? That seems to make sense but here is my question that I can't quite wrap my head around. If I lock it in on May 1st, then what happens if the market crashes on May 2nd? Somewhere there has to be a cash cushion for that year unless I just have to bite the bullet and draw down my registered money. What do you think? First of all, congratulations on retiring! I know I felt great about retiring to my personal projects rather than doing what other people wanted ...

Here are my posts for the past two weeks: Interest Tax Deduction When Borrowing to Invest What Does FIRE Mean? Here are some short takes and some weekend reading: James Clear explains why we cling to dumb ideas. Tom Bradley at Steadyhand draws five lessons from the financial crisis. My favourite: “In the depths of despair, I heard many investors say they no longer expected much from their stock portfolio. This couldn’t have been further from the truth.” The Rational Reminder Podcast interviews Robb Engen who has sensible takes on a number of investment issues. The Blunt Bean Counter has a lot of dealings with CRA on behalf of his clients, and he shares his recent experience with delays and CRA areas of focus for information requests. Boomer and Echo dig into Vanguard and Horizons single-ETF solutions.

The hugely popular term FIRE stands for Financial Independence, Retire Early. There are countless articles and blogs devoted to the FIRE movement. But what does FIRE mean? The answer is different from what many would guess. Financial Independence Let’s start with the FI part of FIRE: are those who say they’ve FIREd financially independent? Here’s my definition: You are financially independent if you have enough money or other assets to cover the costs of living the life you want for the rest of your life without having to earn more money along the way. You can be financially independent if you depend on truly passive income such as dividends, capital gains, interest, or a business you own but where you don’t work. However, there should be sufficient margin in your assets and passive income to cover possible market crashes or increased spending needs with reasonably high probability. Based on this definition, few people who have FIREd are financially independent. Some s...

Last week’s article on Smith Manoeuvre risk sparked reader RS to ask the following thoughtful (lightly-edited) question: Have a mortgage and have non-registered investments (mostly in XIC) that can cover a significant portion of my outstanding mortgage. Wondering if it will make sense to pay off the mortgage using non-registered investments and take a HELOC and buy the same (or similar to avoid attribution) assets. I will be in the same position as I am now, but now I will be able to write off interest (which will be about 25% more in HELOC). My marginal rate is 50%, so I guess it might be advantageous. I will also need to factor in any capital gains taxes (25% of gains) that I will incur now against the savings. But this thinking sounds too simplistic. Not sure if I am missing something here. I don’t think you’re missing much. Given that you have had a mortgage at the same time as building non-registered investments, it would have been better to have set things up to make your...

Here are my posts for the past two weeks: Avoiding the Stock Market Where Retirement Income Plans Fall Down 10 Ways to Stay Broke Forever Smith Manoeuvre Risk Assessment Here are some short takes and some weekend reading: Joe Pinsker has a very interesting article about lowering spending by increasing the pain of spending. In the end, I’m suspicious that making yourself feel pain about all spending isn’t sustainable. Somehow we need to feel fine about sensible spending and feel pain for dumb spending. Condo Essentials has a list of signs that will allow you to spot a bad condo before you buy it. I’m not a big fan of buying overpriced condos, but you should at least check for these problems before diving in. Canadian Couch Potato compares bond ETFs to GICs for retirees. Big Cajun Man explains why you might want to open an RESP for your disabled child instead of using an RDSP only. Boomer and Echo review Larry Bates’ new book, Beat the Bank: The Canadian Guide...

The Smith Manoeuvre is a tax-efficient way to borrow against your home to invest more in stocks. This increases your potential returns, but also increases risk. Periodically, it makes sense to evaluate whether you can handle the potential downside. It’s clear that if you can follow the Smith Manoeuvre plan through to near retirement without collapsing it at a bad time, you’ll end up with more money than if you hadn’t borrowed to invest. The important question is how likely you are to be forced to sell stocks to pay your debts at a bad time. It’s easy to decide you’re safe without really considering the risks. I find that employees, particularly in the private sector, underestimate the odds of getting laid off. Most of the time, they’ll say it can’t happen. But it can. You can lose your job, stocks can fall, real estate prices can fall, and all 3 can happen at once. In fact, a single event could trigger all 3 bad outcomes. Anything that could cause stocks to drop 30% coul...

One starting point for improving your personal finances is to look at what doesn’t work. This is the approach Laura J. McDonald and Susan L. Misner take in their book 10 Ways to Stay Broke Forever . The authors offer many suggestions for changing negative spending habits, but the book also contains a number of parts that make me question the authors’ numeracy. Financial education “tends to be technical, overly complex and written in obscure, jargon-filled prose. As a result, it often fails to reach the very people for whom it is designed.” This book is quite easy to read. However, some attempts to lighten the subject matter seem forced, such as starting an explanation of liquid assets with “This always makes us think of the bottle of Patrón Gold tequila stashed in our freezer.” Positive aspects of the book include discussions about cars. Rather than leasing, if you save up before you need a car “you could go buy that sweet ride outright, with cash .” Another section has some...