A friend was asking for some financial advice.  It involved what to do with the proceeds of selling a rental property.  It turns out his sister’s financial guy made her a lot of money lately.  I tried to explain that she made money because the stock market went up.  A financial guy can help you find an appropriate mix of stocks, bonds, and cash, but whether you make or lose money in the short term has nothing to do with the financial guy.   People always look skeptical at this point.  They seem to firmly believe that whether or not their investments do well is 100% attributable to the “moves” their financial guy makes.  I always lose credibility by saying something that is true but the opposite of what is widely believed.  Such is life. Here are my posts for the past two weeks: Behavioural Issues with Variable Asset Allocation The Boomers Retire Here are some short takes and some weekend reading: Tom Bradley at Steadyhand says investors are danci...

It’s no secret that the interests of financial advisors and their clients are not well aligned.  Even financial advisors who mean well can believe that a choice is best for the client when it’s really best for the advisor.  That’s the nature of conflicts of interest.  These conflicts will shape how advisors use the book The Boomers Retire: A Guide for Financial Advisors and Their Clients , whose fifth edition was written by Alexandra Macqueen and David Field.  Lynn Biscott wrote the earlier editions. Throughout my review of this book, I will sometimes be commenting on the substance of its contents and sometimes on how financial advisors might use or misuse the contents, which is arguably not the fault of the authors. The book covers a wide range of important topics that financial advisors should understand, including government benefits, employer savings plans, personal savings, investing, tax planning, where to live in retirement, insurance, and estate planning....

I recently adopted a specific type of dynamic asset allocation for my personal portfolio.  I call it Variable Asset Allocation (VAA) .  It only deviates from my original long-term plan when the world’s stocks become pricey, but any time you change your long-term investing plan, there’s the possibility you’re just looking for a smart-sounding justification for giving in to your emotions. It’s certainly true that I’ve been concerned for some time that stock prices are high and that the chances of a stock market crash have been rising.  But I know better than to join the chorus of talking heads predicting the imminent implosion of the stock market.  I don’t know what will happen to stock prices in the future. I’m not tempted to just sell everything and wait for the crash.  It’s possible that stocks will keep rising, and when they finally do decline, it’s possible they’ll remain above today’s prices.  It must be sickening to wait for a crash that doesn’t happen...

My post describing my plan to shift slowly out of stocks as the CAPE exceeds 25 drew some good comments.  Only one comment indicated a lack of interest in such a plan, but I suspect the majority of readers with indexed portfolios intend to stick with a fixed asset allocation that doesn’t take into account the CAPE.  For these investors, I wonder if they would keep owning the same percentage of stocks even if the CAPE doubles from its current level into the range of Japanese stocks before 1990.  If there is some stock price level at which you’d take some money “off the table”, then the difference between your plan and mine is that I start shifting slowly out of stocks at a CAPE of 25, and your threshold is higher. I wrote one post in the past two weeks: What to Do About Crazy Stock Valuations Here are some short takes and some weekend reading: Mikhail Samonov explains why trying to use Shiller’s CAPE ratio to make hard switches between stocks and bonds is likely to fail....

The last time I had to put a lot of effort into thinking about my finances was back when I retired in mid-2017.  I had ideas of how to manage my money after retirement, but it wasn’t until a couple of years had gone by that I felt confident that my long-term plans would work for me.  I had my portfolio on autopilot, and my investing spreadsheet would email me if I needed to take some action. I was fortunate that I happened to retire into a huge bull market.  I got the upside of sequence-of-returns risk.  The downside risk is that stocks will plummet during your early retirement years, and your regular spending will dig deep into your portfolio.  Happily for me, I got the opposite result.  My family’s spending barely made a dent in the relentless rise of the stock market. However, stock prices have become crazy, particularly in the U.S.  One measure of stock priciness is Robert Shiller’s Cyclically Adjusted Price-Earnings (CAPE) ratio .  In the U.S...

BMO has expanded its marketing to me.  It used to just alternate between low-interest credit card balance transfer offers and offers to give me a few thousand dollars if I deposit a few million dollars in my account.  They seemed to figure out that I’m between those two extremes.  Now they want me to come in for a personalized financial plan because “Research shows that advised households accumulate 2.31 times more assets after 15 years!”  Of course, this research is deeply flawed .  Further, I’m not interested in their ridiculously overpriced mutual funds. I wrote one post in the past two weeks: A Conversation about Wealth Inequality Here are some short takes and some weekend reading: Morningstar Research says the 4% rule is now more like a 3.3% rule, but that we can spend more safely if we’re flexible about adapting to market returns.  One part of the report that I disagree with is too much reliance on spending less as you age.  It’s true that you’l...

Please welcome a person I’ll call John Doe.  The following “interview” is loosely based on a real conversation with an acquaintance. Michael James:  Hello, John.  Thanks for agreeing to discuss your ideas on wealth inequality. John Doe:  I’m glad to be here. MJ:  Let’s get right to it.  How can we solve the wealth inequality problem? JD:  Nobody should be allowed to have more than a million dollars. MJ:  Interesting.  Some people already have more than a million dollars.  What should we do about this? JD:  Take it away. MJ:  So, somebody should take away the excess above a million dollars.  Who should do that? JD:  The government. MJ:  I have some questions about how this would play out.  Let’s look at a specific case.  You work for the federal government, and your pension is currently worth about $1.2 million.  You also have about $400,000 of equity in your house.  It would be easy for the go...

It’s amazing how little that gets written about investing remains relevant once you’ve decided not to try to beat the market.  Even a great writer such as Morgan Housel has beating the market as the underlying motivation for much of his writing.  Once you choose indexing as an investment strategy, there’s little to do or say on a day-to-day basis other than enjoy other aspects of your life. Here are my posts for the past two weeks: Reboot Your Portfolio Invest As I Say, Not As I Do The Procrastinator’s Guide to Retirement Here are some short takes and some weekend reading: Preet Banerjee explains the good and bad parts of commission-free trading.  I definitely learned a few interesting things about how brokerages make their money. Justin Bender explains key concepts about asset location decisions, including the main one that it is your after-tax asset allocation that determines your portfolio’s returns and not your before tax asset allocation.  This means that Just...

David Trahair’s recent book The Procrastinator’s Guide to Retirement has a great title.  With so many Canadians fearful that they’re way behind on retirement readiness, this book seems like it could rescue them.  Unfortunately, the actual contents leave a lot to be desired. The main idea is that if you save a lot of money every year during your last decade of work, you can build an acceptable retirement.  There are detailed examples overflowing with numbers where people whose big mortgage and child expenses fall away in time for a decade-long sprint to retirement.  However, if you can’t suddenly save a lot of money every year, this book offers no magic for building wealth. Questionable Analyses and Advice A chapter on whether to contribute to an RRSP or pay down your mortgage begins with a question whose answer “is obvious”: “Should I contribute to my RRSP or pay down my credit card, which is charging me 20 percent interest per year?”  Trahair proceeds to expla...

When I answer investing questions for friends and family, I tend to steer them to simple solutions that are consistent with their level of interest in investing.  However, I run my own portfolio differently in certain ways.  In reading Dan Bortolotti’s excellent book Reboot Your Portfolio , I noticed that the advice I give usually matches his advice, and it’s my own portfolio choices that sometimes differ from what’s in the book.  Here I see if the differences between my portfolio and Bortolotti’s advice hold up to scrutiny. Before I go any further, I want to be clear that this isn’t a case of me having a “smarter” portfolio where I’m actively trading to beat the market.  I steer people to low-cost passive investing and that’s what I use myself.  The main difference between me and other do-it-yourself (DIY) investors is the degree to which I’ve built most of the complexity of my portfolio into an elaborate spreadsheet that alerts me by email when I need to take ...

Dan Bortolotti is well known as the creator of the authoritative Canadian Couch Potato blog and podcast.  His latest book Reboot Your Portfolio: 9 Steps to Successful Investing with ETFs is my pick for best investing book for Canadians.  The writing is clear, the advice is practical, and it anticipates the challenges readers will have in following through on his 9 steps.  Whether you work with a financial advisor or manage your own investments, reading this book will make you a better investor. Stop Trying to Beat the Market One of the many strengths of this book is that Bortolotti explains why his advice makes sense without being dogmatic.  While explaining the advantages of investing in index exchange traded funds (ETFs), he allows that “Some skilled (or lucky) investors have been able to” “outperform the overall market,” but “research reveals that the probability of beating the market over the long term is distressingly low.” “The first step in becoming a success...

I’m sometimes surprised by the things that make me happy.  Lately, whenever I look out at my pool and see that the water level is the same as it was the day before, I smile.  I didn’t realize it at the time, but a decade ago I had a repair done that left a small leak when some parts weren’t fitted together properly.  Each passing year the leak got a little bit worse.  It took me until three years ago to figure out what was wrong.  I began calling around to find someone who would replace the problem parts.  The job required cutting cement, a little digging, and patching the cement, so I needed someone with some skill and it wasn’t going to be cheap. So far this story isn’t too surprising.  A guy who knows little about pools takes forever to find a problem.  The next part still feels surreal to me.  All the pool repair places just said no.  I called dozens over the three years, and sought recommendations from friends.  They could have...

It’s no secret that Canadian house prices have been rising rapidly in recent years.  Many young people feel that they’ll never be able to afford to buy a home.  However, as fast as house prices have been rising, the stock market has risen faster. The following chart shows a decade of my cumulative investment returns compared to the rise in Canadian real estate prices.  There was nothing special about my returns over this period; the stock market was booming.  My investments were primarily in stock index ETFs, although my returns were reduced somewhat by the 20% or so I’ve had in fixed income since I retired in mid 2017. To measure real estate prices, I used Teranet-National Bank House Price Indexes for Toronto, Vancouver, and a composite index of all Canadian metropolitan areas. The chart shows that even high-flying Toronto real estate didn’t keep up with my investments.   Vancouver real estate growth is a little further behind, and Canada as a whole is eve...

If you’re thinking of retiring today on your own savings rather than a guaranteed pension, how do you factor in the possibility of a stock market crash?  If you’re like many people, you just hope that stocks will keep ticking along with at least average returns.  However, this isn’t the way I thought about timing my own retirement. I retired in mid 2017.  At the time, stock prices were high, so I assumed that the day after retiring, the stock market would drop about 25% or so, and then it would produce slightly below average returns thereafter.  By some people’s estimations, I over-saved, but I didn’t want to end up running out of money in my 70s and be forced to find work at a tiny fraction of my former pay. What actually happened in the 4+ years since I retired was the opposite of a stock market crash.  My stocks have risen a total of 60% (11.5% compounded annually when measured in Canadian dollars).  If I had known what was going to happen, I could have ...

Recently, I saw another example of magical beliefs about dividends.  Nick Maggiulli makes the claim that the bulk of investor returns over time come from reinvested dividends .  In one 40-year example, the total return is 791% without reinvested dividends and 2417% with reinvested dividends.  Unsaid is that if you withdrew all price gains periodically (and thereby failed to reinvest them), the total return from just dividends would be far less than 791%.   This isn’t hard to understand when you look at the situation clearly.  Suppose that over several decades dividends are responsible for doubling your investments twice, and capital gains are responsible for doubling your investments three times.  So, dividends alone would have given a 300% return, and capital gains alone would have given a 700% return.  But through the magic of compounding, reinvesting all returns gives five investment doublings, or a 3100% return.   Dividend lovers like to compa...

Here are my posts for the past two weeks: Class Action Settlement with BMO The Deficit Myth - Modern Monetary Theory Here are some short takes and some weekend reading: Jason Heath looks at reasons why it can make sense to withdraw from your RRSP in your 60s.  In my case, my simulations showed that it made sense to start withdrawing from my RRSPs shortly after retiring in my 50s.  This is true even though I have non-registered assets I could be living on right now.  The reason is that I’m best off spreading out the taxable income from RRSP withdrawals over many years. Justin Bender compares the two main global except Canada stock ETFs: VXC and XAW. Big Cajun Man is closing his TD mutual fund accounts after TD’s latest attempt to steer its customers away from its excellent e-series funds and toward their crappy high cost funds. The Blunt Bean Counter explains the implications of getting an inheritance.

Before U.S. President Nixon abandoned the gold standard in 1971, anyone with U.S. dollars could exchange them for gold at a fixed price.  Now that the U.S. government (as well as other governments including Canada) can issue new money at will, we call it “fiat money.”  Stephanie Kelton, former chief economist on the U.S. Senate Budget Committee, claims that this ability to create money at will has profound implications that she explains in her book The Deficit Myth: Modern Monetary Theory and the Birth of the People’s Economy .  Modern Monetary Theory is certainly a different way to think about government finances, but whether it really has profound implications is less clear. Under the gold standard, government finances resembled a family’s finances.  To run a deficit, the government had to borrow.  However, today the government can just create new money.  Governments typically choose to issue bonds (treasuries) to cover deficit spending, but such bonds ar...

BMO was sued in a class action lawsuit for charging undisclosed fees on foreign exchange conversions in customers’ registered accounts between 2001 and 2011.  Customers of BMO Nesbitt Burns, BMO InvestorLine, and BMO Trust Company will get their share of the settlement before Oct. 8. A decade ago I calculated that I had spent $7374 in currency exchange costs while trading U.S. stocks since I had opened trading accounts at BMO InvestorLine .  When I heard about the class action settlement with BMO, I figured I’d only get back a tiny fraction of this money.  However, my wife and I are pleased to be getting a total of $2051 plus $955 in interest. It would be nice if BMO’s response to this lawsuit was to charge sensible foreign exchange fees, but they are much more likely to simply be more careful about meeting some legal standard of disclosure.  Unwitting customers will continue to rack up unreasonably high foreign exchange costs.

The word “millionaire” is frequently used to mean a person who doesn’t have any financial concerns and whose wealth is much greater than what the rest of us have.  However, imagine a couple whose house is now worth $750,000, they have a $300,000 mortgage, they owe $50,000 on their cars, and one has a public service pension now worth $600,000.  On paper, this couple has a million dollars, but they are hardly rich, and they definitely still have financial worries.  It’s time to start using “decamillionaire” to mean a very wealthy person.  Maybe $5 million is enough, but we don’t have a common word for that level of wealth. Here are my posts for the past two weeks: Debunking a Bogus Stock Market Prediction Wilful Blindness Here are some short takes and some weekend reading: Andrew Hallam explains how European banks sell some horrific “investments” to unsuspecting consumers.  He also exposes the huge downside of index-linked investments that promise no down years ....

Reporter Sam Cooper tells a remarkable story of the British Columbia provincial government profiting from Canada’s epidemic of fentanyl deaths in his book Wilful Blindness: How a Network of Narcos, Tycoons and CCP Agents Infiltrated the West .  Cooper’s evidence is strongest for B.C.’s cooperation in laundering money for the drug trade in return for a cut of the profits.  However, he demonstrates connections to trans-national organized crime, Canada’s housing bubble, and China’s communist party. The book begins by carefully explaining that the evidence presented is not intended as an indictment of the people of Canada or China but rather criminal organizations within these countries and parts of government. Cooper paints a picture of massive amounts of drug cash being laundered through B.C. casinos, and authorities happy with the huge “gambling profits” thwarting RCMP efforts to stop illegal activity.  There was a “rapidly growing narco-economy that B.C.’s government was ...

It would be much easier to plan for the future if we knew what stock prices were going to do.  Bank of America has a chart with seemingly solid evidence that stocks will lose a total of about 8% over the next 10 years.  I’m going to show why this evidence is nonsense.  But don’t worry; I’ll do it without making you try to remember any of your high school math. The Bank of America chart looks intimidating to non-specialists, but I’ll summarize the relevant parts in easy-to-understand language.  The basic idea is that for each month since 1987, they looked at how expensive stocks were that month and compared that to stock market returns over the 10 years following that month.  They found that the more expensive stocks were, the lower the next decade of returns tended to be.  The hope is that we can just use the chart to look up today’s stock prices to see what stock returns we’ll get over the next 10 years. In the chart below, each dot represents one month fr...