If you’ve ever wondered whether you should be taking advantage of the historically above average returns of small stocks, value stocks, momentum stocks, and other types of market anomalies, Your Complete Guide to Factor-Based Investing , by Andrew Berkin and Larry Swedroe, is the book for you. It’s based entirely on “evidence from peer-reviewed academic journals,” and it helped me focus my thoughts on the degree to which I want to pursue factors. The authors begin with a treatment of the seven factors they consider “worthy of investment”: market beta, size, value, momentum, profitability and quality, term, and carry. For each of these factors they discuss persistence, pervasiveness, robustness, whether they are investable given real world concerns such as trading costs, and whether there are logical explanations for the existence of above-average returns. In the case of size and value factors, “While small-cap stocks as a whole have provided higher returns (the size premium), sma...

For years, a big personal financial focus for me and my family has been making annual RRSP contributions, but no more! I’m done with RRSPs. Or at least I’m done with contributing to them now that I’m retired. It’s a strange feeling to contemplate starting to withdraw from RRSPs/RRIFs. Long-time successful savers often have a hard time turning off the saving habit, and I’m no different. My spreadsheets that contain multiple layers of conservative assumptions tell me how much I should be spending each month, but I rarely get there. RRSPs are a great personal finance tool to reduce income taxes over a lifetime. But, barring unforeseen new sources of income, I expect that the RRSP room created by my 2017 income will go unused. Instead, I expect to make annual withdrawals starting at the end of 2018 to use up my lightly-taxed income room. I’m interested in hearing from others about how it felt to transition from being savers to spenders.

Over the decades it’s been getting harder to beat the average returns of purely mechanical investment strategies according to Larry Swedroe and Andrew Berkin in their book, The Incredible Shrinking Alpha . Looking for superior stocks may have been profitable many years ago for intelligent investors with the right temperament, but even the most brilliant money managers today usually fail to beat the markets. In this short book, the authors go through their reasons for why markets have been getting tougher: there is less “dumb” money to exploit, the market is being “overgrazed,” and “the level of competition is getting ever tougher as better data and technology are used by ever more skilled managers.” Then they go on to give their prescription for how you should invest your money. In the article Measuring Stock-Picking Skill , I explained the meanings of the terms alpha and beta in this context, and why I don’t fully agree with the authors when they try to prove that past successfu...

Here are my posts for the past two weeks: Dollars and Sense Measuring Stock-Picking Skill Underfunded Pensions My Investment Return for 2017  Here are some short takes and some weekend reading: The Blunt Bean Counter brings us a thoughtful and balanced discussion of the minimum wage hike. He also discusses the importance of executors advertising for creditors . Robb Engen at Boomer and Echo switched to index investing 3 years ago, and he explains how this has affected his life in terms of time, stress, and portfolio returns. Canadian Couch Potato gives the Couch Potato portfolio returns for 2017. He also has a new podcast out where he interviews Shannon Lee Simmons, a fee-only financial planner and author of Worry-Free Money . During the podcast he explains that while cryptocurrencies may take over the world eventually, there is no guarantee that Bitcoin will be the winner. I’d say it’s not even likely. Gail Vaz-Oxlade gives step-by-step instructions for g...

Stock markets gave us above-average returns again this year, even measured in Canadian dollars that rose in value relative to U.S. dollars during 2017. My internal rate of return (IRR) that takes into account cash flows was 12.17%. A big change for me this year is that at mid-year I retired from my job. It was a tough decision to walk away from a comfortable income, but the family portfolio sits at about 35% above what I calculate we’ll need to make it to age 100. This is a pretty healthy margin in case the stock market crashes, perhaps even healthy enough by my wife’s standards. I don’t know if I’ll stay retired, but I seriously doubt I’ll ever work full-time again. I may do consulting work if the mood strikes and the work is interesting. With retirement comes some fixed-income investments. I’ve written before about my intention to keep 5 years’ worth of family spending in safe investments . So, my portfolio that used to be 100% stocks now contains cash and GICs. The per...

The plight of Sears Canada pensioners has been in the news lately . After reading about the hardships created by pension cuts, it’s natural to think about what we should do to prevent this in the future. Some, like Jen Gerson , question whether pension plans should have higher priority than they do now when divvying up the assets of a bankrupt business like Sears Canada. However, the side effect of doing this is that suppliers would be less willing to extend credit to any business with an underfunded pension, and this would drive struggling businesses into bankruptcy sooner. This is a difficult choice to make when you’re still hoping that a weak business can get back on its feet. However, the Sears Canada case looks far different from a plucky business doing all it can to survive. “While Sears’ shareholders pocketed payouts of $3.5 billion, the chain’s pension plans remained underfunded to the tune of $270 million.” Why are owners allowed to pull assets out of a business that ...

Deciding whether someone has skill in picking stocks that will give higher than average returns is a tricky business. You’d think that having a long-term track record of beating the market would be proof. However, some have found ways to argue that such records aren’t proof at all. I have my doubts about the arguments. When investment managers have the ability to pick superior stocks, we call this alpha . If they beat the market averages by 2% per year, we say that they have an alpha of 2%. When we just invest in market index funds, we call the source of these returns beta . These returns come from putting your money at risk, but they don’t come from investment skill. Complicating the situation is the existence of types of stocks that give superior returns. It’s well known that stock in small businesses and low-priced businesses have given superior returns over the long run. Such categories of stocks are called factors . These two examples are called the size factor and v...

If you think you spend money rationally and that businesses can’t manipulate you into spending more than you should, you probably haven’t read a recent book by Dan Ariely and Jeff Kreisler, Dollars and Sense: How We Misthink Money and How to Spend Smarter . The authors explain many of our financial “quirks” and offer ways to compensate for or even harness our irrational tendencies. One of our common errors is to make spending decisions based on irrelevant comparisons. A good example is sale prices. Just because a crappy shirt has a $100 price tag on it and is marked down to $60 doesn’t mean it’s worth $100 or that anyone ever paid that price. It may still be a terrible deal at $60, and you definitely aren’t saving $40 by buying it. The comparison we really should be making is whether owning the shirt is better than the other things we could buy for $60. But that’s harder than looking at the $100 “regular price” and deciding we’re getting a deal. “When we can’t evaluate someth...

I wrote one post over the holidays: DALBAR’s Measure of Investor Underperformance is Wrong  Here are some short takes and some weekend reading: Warren Buffett says “most American children are going to live far better than their parents did.” His sensibly optimistic essay is a good antidote to the pessimistic hand-wringing over lost jobs due to automation. However, he does warn that we have to make sure people at all economic levels share in the gains that are certainly coming. Doug Runchey at Retire Happy explains the 5 proposed changes to CPP agreed to by the federal and provincial Ministers of Finance. Mr. Money Mustache explains why you shouldn’t invest in bitcoin. He shows that he understands the issues very well. The Blunt Bean Counter looks at the revised rules on taxing income sprinkling. Big Cajun Man makes some financial predictions for 2018. I find it interesting that Canadians love to predict that the Canadian dollar will rise against the U.S. doll...

Every year market research firm DALBAR reports how investors’ mutual fund returns compare to market benchmarks. The results get reported widely and are always dismal. In one example, Seeking Alpha says “Investors Suck at Investing” (see the comments for a link). A few people have criticized DALBAR’s methodology, which isn’t surprising given the large number of people who see their reports. What I did find surprising is that this criticism isn’t just nitpicking; DALBAR’s calculations significantly overstate investor underperformance. According to DALBAR’s 2016 Quantitative Analysis of Investor Behavior, In 2015, the 20-year annualized S&P return was 8.19% while the 20-year annualized return for the average equity mutual fund investor was only 4.67%, a gap of 3.52%. So, for the 20 years from the start of 1996 to the end of 2015, equity mutual fund investors’ actual returns were supposedly 3.52% per year lower than the stock market average. Over the full 20 years, this works...