What Bruce Springsteen Can Teach Us About Investing

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For Christmas I received Bruce Springsteen’s autobiography Born to Run.  Not because I especially like Bruce Springsteen, but I’d heard it was a great read.  It is. Right now I’m learning about the early stages of his career.  It’s what you’d typically expect: poverty, partying and hard work.  He’s tasted a bit of fame at this point in the book, but mostly it’s been setback after setback.  Fortunately, we already know that in the end things work out pretty well for The Boss.

But success is loud, and failure is silent.  It’s the success stories we most often hear.  We don’t hear much about the ones that don’t work out.

Here’s another example, as told in Jordan Ellenberg’s book How Not to Be Wrong: The Power of Mathematical Thinking.  In World War 2, Mathematician Abraham Wald was asked to figure out which parts of American fighter planes should be more heavily armored.  It’s a problem because while armor is protective, it also makes planes harder to manoeuvre.  He was given statistics from the military showing that the planes coming back from Europe had more bullet holes in the fuselage, and not as many in the engine. Wald had a simple and elegant insight: the reason the planes didn’t have many holes in the engine is because the planes with holes in the engine never made it back.  The ones with holes in the fuselage did.  Success was loud, and the ‘failed’ planes – the forgotten ones that were key to the analysis – were silent.  Until Wald gave them voice.  Extra armor, it was decided, would go on the engines.

It’s this type of thinking we have to apply when we hear about successful investing strategies.  I read a persuasive article about a strategy called BTSX – “Beating the TSX”.  The BTSX strategy involves ranking the stocks in the TSX 60 from highest to lowest dividend yields and then investing equally in the top ten.  The results are intriguing as the strategy has indeed outperformed the index over the past 15 years.  I thought about the BTSX for a long while.  It’s simplicity and common sense appealed to me. I considered giving it a try, at least with part of my portfolio.

Then I remembered about the planes.  And Bruce Springsteen.

It’s only when something succeeds that we pay attention to it.  The military only kept statistics on the planes that succeeded in coming back. Bruce Springsteen is able to write a novel about his life because he is now a famous musician.  If BTSX wouldn’t have worked, there would be no article about it.

To quote Jonathan Clements from The Humble Dollar:

To be sure, there are investment heroes who beat the odds and come out on top. Berkshire Hathaway Chairman Warren Buffett, with his five-decade record of beating the market, is probably everybody’s favorite example. But in many ways, this is the power of anecdotal evidence: We remember big lottery-ticket winners, whose smiling faces make the evening news. We forget about the millions of losers, because they’re never mentioned.

I don’t know how BTSX will perform in the future.  Maybe it will end up beating the TSX index for all time!  But maybe not.  And it doesn’t matter, because investing is done best by sticking to a well-diversified asset mix that considers your goals, time frame, and risk tolerance. And for me, the BTSX strategy does not fit that bill.

So when you hear about about hot stock, a sure-fire investment strategy, or a friend who doubled her investment portfolio last year, remember to think critically.  Building wealth is not about finding the secret to beating the stock market. It’s about having a plan, saving regularly, making sacrifices, diversifying properly, respecting your risk tolerance, and committing to an asset mix that suits you.

Ugh, that sounds so boring when you put it that way!  Better go see what The Boss is up to in his book; it’s likely something more exciting.

Rich regards,

Morgan

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Are RRSP Loans a Good Idea?

 

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RRSP Express Loan.  On-the-spot RRSP Loan.  RRSP Maximizer Loan.  These are some of the names banks are using to promote RRSP loans.  It’s a win for them because they get to both make a loan and receive the proceeds in the form of an RRSP investment.

Can RRSP loans make sense?  Sure.  Are they for everybody?  No.

Signs of being a good RRSP loan candidate are:

  1. You are already making RRSP contributions.
    • You’ll see why below.
  2. You are able to pay back the loan within 12 months.
    • This keeps interest costs, which are paid with after-tax dollars, more reasonable.
  3. You are in one of the higher tax brackets.
    • Your refund will be proportionally larger.
  4. You do not have high-interest debt such as credit cards.
    • Any extra cash is better used paying down the card.
  5. You can easily afford your current debt payments.
    • If your debts are already stretching your thin, don’t add more.
  6. You are 100% committed to applying your tax refund to your loan.
    • Receiving a large lump sum can be tempting to spend elsewhere…
  7. You have a higher than average tolerance for risk.
    • If the investment you make with the loan proceeds decreases in value, you still owe the full amount of the loan.

From a hamster-wheel angle, there is absolutely nothing wrong with foregoing an RRSP loan and simply starting (or increasing) your RRSP contributions going forward.  This way you are ahead on your retirement savings instead of behind.  However, some people are more motivated to pay off a loan than they are to save.  Using an RRSP loan is better than not saving for retirement at all, as long as most of the statements above apply.

If you are going to borrow for your RRSP, the best case scenario is an RRSP Gross Up Loan.  Imagine that you already contribute $3000 annually into your RRSP, and that you take out a $2000 RRSP Loan for a total contribution of $5000.  Assuming a 40% tax bracket, you will receive $2000 as an RRSP refund which fully covers the RRSP Loan.

Another version is the RRSP Top Up Loan.  In this example you contribute $3000 to your RRSP already and borrow another $7000 for a total contribution of $10,000.  Assuming a 40% tax bracket, your refund is $4000 which partially offsets the RRSP loan.  You are still responsible for the remaining $3000.

Most major banks have RRSP Loan Calculators so Google yours.  If you have an Advisor, they will be able to run your numbers for you.

Don’t forget that tax brackets are graduated.  Depending on your income, your RRSP contribution could push you into a lower tax bracket meaning that you’ll receive a smaller tax break on some of the contribution.  This tax chart can help you, but simply be prepared that your refund may not be as big as you think it should be.

RRSP loans are one tool to consider and may be right for you.  There’s also nothing wrong with avoiding debt and saving in the good ol’ straightforward way of monthly RRSP contributions.  You do you.

Rich regards,

Morgan

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When Should You Start Talking to Your Kids About Investing?

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I want my kids to be investors.

In a 2015 BlackRock Inc survey, 51% of Canadians believe investing is like gambling, and only 44% believe investing is for “people like them”. Much of this sentiment comes from fear and misunderstanding of the markets. Bad news is, savings accounts and other safe products pay anywhere from basically nothing to a whopping 1.8%. To echo Rob Carrick, you can’t save your way to retirement if you’re not even keeping up with inflation.

What’s a great way to make Canadians comfortable with investing? Start talking about it really early.

Whenever you begin talking to your kids about money is the same time you should talk about investing. They are not separate concepts. The easiest way to start the money conversation is around age five and with an allowance. Many experts recommend splitting that allowance into the categories of Save, Spend and Give. There should also be a fourth right off the bat, which is Invest.

Whenever you begin talking to your kids about money is the same time you should talk about investing.

If you assume explaining investing to a child is too difficult, think again. First of all, your kids are learning sponges – look at how much they are absorbing every day at school! Secondly, investing is a simple idea at its core: Saving for something that is a really, really long time away. The difference from regular ‘Saving’ is simply a matter of time. Saving is for short-and medium term goals (like a video game or first car) and Investing is for long-term ones. We started by telling the kids that investing is so that they will have money to live on when they’re a grandma or grandpa. You can fill in more blanks as the kids get older.

Initially our kids’ investing money was held in a separate bank account. Now that our oldest is 12, we have introduced her to the concept of mutual funds and have opened an account in my name on her behalf. It’s a simple, low-cost balanced fund through Tangerine. She understands that she owns a small part of a whole bunch of companies, and we check every couple of months on the performance. Through these regular investing meetings, she’s learning about diversification, dividends, risk tolerance and being comfortable with the ups and downs of investing. These aren’t long complex meetings. We may chat for 5 or 10 minutes, then not again for two months.

In the end, I hope that my children never have to talk themselves into being investors. They’ll already be one.

Rich Regards,

Morgan

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