Working after Retirement - It Can Be a Happy Reality

Working after retirement is the new reality. In Canada, the USA and the UK, it is the same. The reality arises from necessity for most people, a result of rising longevity, inadequate private and public pensions and insufficient saving. The on-going credit crunch market downturn, from which recovery is likely to take many years, has plunged a dagger into the hopes of many for a comfortable non-working retirement. A falling housing market puts another big dent into a supposedly safe store of personal wealth.

That's the negative view of life. Rather than bemoan our fate - and I say "our" because I am in that very boat, having only my investment portfolio and the meager CPP/OAS/GIS to live off in future - I think it is worthwhile to try making lemonade from those lemons life is handing us and look on the positive aspects of working after retirement.

And I don't think that is just pretending that the financial equivalent of cholera is a good thing. It isn't an accident that many people voluntarily continue working after their retirement, even when their rock solid (government) defined benefit pension is more than capable of supporting their lifestyle. A number of my friends are doing exactly that - working despite their financial security being assured.

Benefits of working after retirement:

• Sense of worth and accomplishment - isn't one of the most important sources of happiness a feeling that one is doing something worthwhile on this planet instead of just occupying space?
• Connection with people and social interaction - part of the rewards of work is talking with others and doing things with them; being isolated and lonely can be deadly in a very literal sense, particularly as one gets older
  
• Responsibility and obligation - the sense that others are relying on you and that you have to deliver something, is a valuable pressure; no deadlines, no responsibilities tends to turn people into mental and physical slobs
• Financial diversification - maintaining a work capability is the equivalent of having a revenue generating asset/investment that is likely fairly (you may still lose your post-retirement job if the economy goes too badly) uncorrelated to stocks or bonds
• Double effect on retirement finances - every dollar one earns can be spent on living expenses while at the same time avoiding the withdrawal from an investment portfolio; this is especially valuable in times of market downturn when portfolio withdrawals can dramatically lower how long a portfolio lasts (see this simple example from Wachovia)
• Equivalent to a large investment asset - if your part time job earns $20,000 a year, that is the equivalent of owning a bond yielding 5% that is worth $400,000.
• Health insurance, possibly - some employers offer health insurance for part-timers
• Double-dipping with the CPP and OAS - once you start receiving CPP, you can then begin to work again without losing the benefit (make sure you conform to CPP rules explained here); with OAS, paid after age 65, you can continue to work and receive it, though benefits are progressively taxed back when income goes over about $64k (see TaxTips.ca Seniors page)
  
• More, better sex! - if all the above is true, this will inevitably follow, right?
  

Authors like Sherry Cooper in the New Retirement (my review here) and Warren Mackenzie and Ken Hawkins in New Rules of Retirement (my review here) tell us how to prepare financially and mentally for the reality of retirement. There is also a book called Working after Retirement for Dummies but I don't think it is a dumb thing to do at all.

CPPIB Taking on Leverage and Risk

Everyone else is shedding debt and de-leveraging but the Canada Pension Plan Investment Board is planning to do the exact opposite according to CPPIB to Issue Debt in today's Globe and Mail. Especially interesting is the statement that they will use the money to invest in, among other things, private debt. In other words they want borrow money cheaply on the market to turn around and lend it out privately at higher return. It cannot be but at higher risk. Is that wise?

TaxChopper (formerly CuteTax) Living Up to Its New Name

The folks at TaxChopper are on the ball. They've read my review of web tax software packages posted earlier this week and contacted me to check my result using TaxChopper, which showed the least amount of tax owing. I had expressed my disbelief that TaxChopper could be right since it is the only package with a deduction on line 232 Other Deductions.

For those with an interest in the intricacies, here is the email explanation I received from Benjamin Gao of TaxChopper after I gave him permission and he looked at my account entries:

"I checked your account. Line 232 is the unused foreign taxes. You paid 596.80 in total to the U.S., however, you can only claim 209.74 federal foreign tax credits and 96.91 provincial foreign tax credits, so the unclaimed part (596.80 - 209.74 - 96.61 = 290.25) is deducted at line 232 of your return.

The deduction is allowed under Canadian tax law. I am not a lawyer, however, our consultant is a chartered accountant, he okayed this a few years ago. We also have some clients deducted this amount before and got questioned from CRA (because in NETFILE, there is no place to put descriptions, CRA don't know where line 232 came from), and after explanation, none of them got bothered any more.

You can check the tax guide at CRA's form T2209, at the second page, second last paragraph, which reads

Also, on line 232 of your return, you may be able to deduct the amount of net foreign taxes you paid for which you have not received a federal, provincial, or territorial foreign tax credit. This does not include certain taxes you paid, such as those on amounts you could have deducted under a tax treaty on line 256 of your return.

You can get the T2209 at

http://www.cra-arc.gc.ca/E/pbg/tf/t2209/t2209-08e.pdf

I have to admit the calculation is not that easy. For example, according to other calculations, you would have claimed 338.67 total foreign tax credits. But once you apply the unused amount, both net income and foreign income (used to calculate the credits) will also change, and you will find you can only claim a less amount so you will have more unused taxes to deduct. If you do it manually, you can go several rounds to make them balanced or almost balanced.

To comply with CRA's test data (which are not optimized), we have a page to disable this feature, you can find it at our software

General Credit => Foreign Non-business Tax Credit

You tick-check the very last box at that page and save, then you will find we have the same refund as others, but it is $35 less.

I have no idea why all other companies are not claiming this deduction automatically, there is an obvious difference between the foreign taxes paid and foreign credit claimed. and the tax guides are there in black and white."

TaxTips.ca in Foreign Tax Credit seems to say the same as TaxChopper but if there are any tax accountants reading this it would be good to see your comments.

Lessons:

• Canadian tax rules are crazily complicated - we'll have to replace the expression "he's no rocket scientist" with "he's no tax accountant" as the measure of intelligence
• it appears that the various tax packages are more or less competent at finding and applying rules that can minimize taxes
• NETFILE certification testing does not test all legitimate tax minimization action and optimizations - note how Benjamin says that the CRA test data does not cover this particular optimization! ... if CRA were to develop its own free plain-jane online service, which by definition would only present the forms in a passive state without active optimization routines (and thus this is not an accusation of nasty motives against CRA), many people would grab it not realizing that they could actually save on taxes with private software such as TaxChopper's, so I'm gonna backtrack and say, CRA, please DO NOT develop a free online tax package! People would unwittingly pay more in taxes than they would save from the software being free.
  
• CRA could and should add further explanation to its NETFILE Sotware page in the yellow box, something to the effect, "Certification testing does not cover all the ways that the software packages may claim deductions, effect transfers of credits and deductions or perform optimizations that may result in legitimate differences in the net amount of taxes owing by, or refund payable to, a taxpayer. The packages may produce different results and yet still be acceptable to NETFILE."
  
• I only tested using one set of data and circumstances, so the lowest tax for any individual may come out of another package ... therefore, shop around and take the trouble to enter your data into a couple of different packages to see which gives the best result - they all will give you a bottom line refund due or amount owing before you pay. I note that TaxChopper offers a Maximum Refund Guarantee or your service fee refunded if any package beats them. I especially like guarantees that are never used, like warranties on cars that never break down.
  

No news yet from CRA, which is looking into the wide variability of my testing results. My ratings will need to be revised when the most accurate / lowest legitimate tax-payable package is revealed. Suffice it to say for now that TaxChopper has a leg up on everyone else.

Book Review: New Rules of Retirement by Warren Mackenzie and Ken Hawkins

Well done Warren and Ken! You have a written a heck of a fine book. It is a straightforward, practical, readable, succinct, comprehensive, well-edited, topical, balanced, accessible and fair explanation of how to make the right decisions for those approaching retirement. It is an ideal retirement planning starting point for any Canadian.

The first quarter of the book paints a picture of retirement as it actually is, knocking down myths and presenting the corresponding reality e.g. happiness in retirement depends less on income than factors such as health, the reason for retirement, family/friends and a purpose for living. This section covers non-financial issues and the main thrust of the advice is to guide thinking onto the key issues and present alternatives so people can make their own decisions for their own circumstances and desires.

The second quarter of the book gets more financial, though softer, non-quantifiable issues still enter the discussion, e.g. in examining whether or not to sell the family home. This part of the book leads one through the estimation of retirement income and expenses.

The last half of the book is about investing. It sets forth principles and methods for doing it successfully. It includes a sensible discussion on whether someone should DIY or use an advisor (with explanation of the difference between a salesperson "advisor" and a real one who operates in the client's interest).

Now as fine a book as this is, would CanadianFinancialDIY ever say it is perfect? Here are my humble (!) suggestions for improvement in a second edition.

• a little bit more detail on "how" one should do certain things to follow up the "what" one should do. 1) Rule 16 includes a good explanation of the incredible impact of the timing of different rates of return on a portfolio, about which I wrote last year in The Necessity of Monte Carlo in Financial Planning, but it would be very useful to have a link to one or two such planners; I could not find one in the online link references in the book's Bibliography. 2) there needs to be a discussion of how to generate cash to spend from a portfolio - my own view is that one should sell to maintain the target asset allocation rather than design an asset allocation to generate more cash but what do the authors believe is the right method? Tax considerations affect the correct design of a portfolio too as after-tax cash is what one spends.
• add some links to ETFs resources in the text or in the Online Resources section at the back; only iShares is listed there; I notice that the book's web page under the Resources tab has a few more ETF links, like one to Claymore. A link to a general ETF website such as Stock Encyclopedia, which lists all US and Canadian ETFs by category, would also be very helpful. This may seem trivial but the book is very favourable to ETFs so adding this detail is worthwhile.
• change the sub-title from "What Your Financial Advisor Isn't Telling You" to "Everything You Need to Know and What To Do". My reaction on reading this on the cover was "oh no, a negative rant, a bashing of the financial industry, financial advisors and mutual funds". I was pleasantly surprised to find that the book is not at all written in such a vein or with such a tone (that's why I called it fair). I think the negative impression undersells and diminishes the book. It is a wonderful, positive, helpful book for individual Canadians. Let it look that way from the cover onwards.
• replace the back cover "Praise for" quote because it looks stupid: "Street-smart advice from an industry veteran." Are there not TWO authors? Or is only one of the two street-smart or an industry veteran? You could put in "an ideal retirement planning starting point for any Canadian" - CanadianFinancialDIY, for instance ;-)
  

I highly recommend New Rules. My rating 4.99 out of 5 ... aw, what the heck, 5 out of 5.

... now that I have completed this review and my day's work in my semi-retired state, I will conform to the book's image of mixing work and leisure by heading off to the golf course.

Why Canada Revenue Agency Should Provide Free Tax Preparation Software

One would have thought that the computer and Internet age would make the annual chore of filing a tax return easier and cheaper than the days of paper-only. The Canada Revenue Agency's NETFILE (for self-filing) and EFILE (for filing through a professional prep service) certainly make it easy and I applaud that success as something government has done right. But cheaper it is not, since the only way to file a tax report electronically is through private companies and their software, which they charge for, naturally.

There are a good dozen private suppliers charging anywhere from $6 per return to $70, with market leaders QuickTax and UFile averaging a base price of about $15 (see Wikipedia's list of NETFILE suppliers and prices).

Why do we individual Canadians have to pay?

CRA's answer is: "Development, distribution, and the subsequent ongoing maintenance of free tax software would represent a tremendous expenditure for the CRA. It would also require a continuous support network to assist users of the product. Regardless of our efforts to provide free software, some Canadians will always prefer to purchase products from the private sector market, as many of these products offer tax-planning tools and are often compatible with home accounting software."

My answer is, as the Scots say,rubbish! Here's why I think everyone would be better off, CRA and average Joe Canadian NETFILEr with free tax prep software provided by the CRA.

1) Paper tax forms are free and all it costs is a stamp to mail them in. The precedent, the starting point of the argument and the onus is on CRA to continue that way.

2) Private software makes tax calculation errors, as I pointed out in my previous two posts. This result happens with software that CRA has tested and certified. We and CRA cannot be sure tax reports are accurate. Let us keep in mind that CRA makes up and interprets the rules so private companies are necessarily using second-hand knowledge of tax rules with attendant misinterpretation possible.

3) Cost to taxpayers - CBC' Netfiling 2009 reports from a CRA source that 4.3 million returns were filed in 2008 using NETFILE. At $15 a return, that is c.$65 million every year. That's wasted money in an economic sense. No one is fed, clothed, housed or entertained in the process of filling in a tax return. On the other hand, the CRA could fund an awful lot of software development using that money. Anything less than $65 million a year would be a net gain. Some of the existing private software packages are built by what are obviously very small companies. A basic package should be very cheap to build.

4) Cost to CRA - The indirect costs to CRA of the present system include:

• extra resources to deal with the certification process, building and running test suites, communicating back and forth with the companies
• extra resources to fix returns that are incorrect despite the certification process
• lost revenue from higher non-compliance and effort to deal with non-compliance using private packages. CBC reported last August a CRA finding that people using NETFILE and software understated their taxes by almost $570 million. Though the apparent main cause of non-compliance - absence of receipts - would certainly not be eliminated by CRA-supplied software, there would certainly be a "big brother is watching you" deterrent effect. The vast majority of people who cheat, i.e. putting aside those who are saints or incorrigibly immoral, do so because they think they can get get away with it. If a person were to be using the official free CRA web browser program that they know is hosted on the CRA's own servers, I bet they would be a lot less likely to try overstating expenses. Even a 10% reduction in non-compliance would give the CRA $57 million more in annual funding for building a free tax prep package.
  

5) People want free software from CRA - Check out the comments on the CBC Netfiling report and see how many people give the thumbs up to suggestions that CRA do so.

6) Other countries offer free tax software - like the UK, Australia and the USA, though the latter program appears to be income-limited and offered jointly with private companies

7) Privacy and security vulnerability of web-based packages - Only the CRA has a right to an individual's tax data. Using a commercial web preparation service exposes that data to an extra step and an extra location where that data might be compromised. No doubt all the companies claim that their security procedures are 100% bullet-proof but one cannot be sure since CRA does not audit them and no one else does either in any systematic way. I can guarantee if it is not measured and tested it not as good as it can be.

In certain cases I discovered in doing my review of the various web packages, the license and corporate connections of the companies mean that a Canadian's tax data might end up being disclosed to US authorities. In its anti-terrorism efforts, the US government is not shy about going after financial data and US laws are far-reaching.

What a Free CRA Package Could Look Like:

• basic forms only fill in the boxes and add them up or calculate schedules and forms automatically from raw data
  
• could be fillable pdf or web package - to avoid desktop PC compatibility issues and support
• no optimization functions - if people want that let them use a private package, which I would see being allowed to continue being offered so that people have a choice to pay if they think it's better or easier than CRA's
  
• help consists of links to each line item in the CRA guides as a base but CRA should include links to its own suggestions for deductions and other assistance to help ensure people claim what they are due
  

Review and Ratings of Web Tax Software for NETFILE

Which is the best web-based income tax preparation software for Canadians? Below is my assessment based on four factors:

• Security & Privacy, i.e. how well is your data and privacy protected
  
• Flow, Readability, Layout aka user ease of use and friendliness
• Help, or how much and how good is it
  
• Responsiveness or speed of operation

I was going to rate the various packages on accuracy but did not include accuracy considerations in my ratings since I am not absolutely sure which package results are accurate and which not. As noted below, CRA is doing some testing. All packages have received the Canada Revenue Agency's NETFILE certification.

The winner by a good margin is UFile, which combines superb help, easy navigation, thoroughness and speedy operation with reasonable privacy and security. And I believe it provides the correct calculation of taxes, unlike some of the other packages. At $15.95 for one return, UFile isn't the cheapest but is good value for money.

Honourable mention goes to three packages tied in second place: H&R Block, TaxChopper (formerly named CuteTax) and WebTax4U. H&R Block is a clone of UFile re-branded in different colours but with additional license conditions that I consider unwelcome. HRB's license gives it permission to bombard a user with marketing offerings, not just from itself but also from its 3rd party partners. HRB also shares data with its US parent, possibly resulting in data ending up in US government hands.

TaxChopper(CuteTax) and WebTax4U are best on privacy and security and have a flow and readability I found generally easy to use, though they offer significantly less help. I have serious doubts about the accuracy of the tax calculation result of both programs. CuteTax says I have the lowest amount owing amongst all the packages, so maybe I should file through them and see how it flies at CRA ;-)

QuickTax Standard is a good package - you will be certain not to leave anything out - but it drove me nuts with its laborious one question at a time interview process combined with sluggish processing performance. It took me twice as long to complete my return with QT than any other package. QT is the package for the ultimate tax dummy, in the nice sense of the word, like the Dummy series books. QT also suffers from its constant pushing of other products in the corporate stable and the license allows for such marketing, including disclosure to 3rd parties. Opting out is possible but isn't a convenient process. The use of QT may also result in your data ending up in the USA and exposure to US laws.

The packages below that in my rankings all are characterized by much more limited help and not quite as slick or intuitive or well explained user interfaces. I found myself clicking and scrolling back and forth too much, even though I knew exactly what I needed to do ... after the third or fourth entry of the same data, it should go more smoothly, right? Perhaps if you have a very straightforward return and know how the tax forms work inside out, they may be ok. Only one of these lower rated packages produced the same bottom line tax owing as the #1 package UFile and market leader Quicktax, which I guess are most likely to pan out as correct in the CRA testing. That was FileTaxOnline.

Detailed Ratings and Comments
#1 - UFile

#2 (tied) - H & R Block

#2 (tied) - TaxChopper (CuteTax)

#2 (tied) - WebTax4U

#5 - QuickTax (Standard)

#6 - AceTax

#7 (tied) - MBO Tax



#7 (tied) eTaxCanada

#9 - EachTax

#10 - FileTaxOnline

#11 - Taxnic.ca

The Bottom Line Question of Accuracy
As I mentioned in my previous post Caution about Web Tax software, the different packages produced a wide range of taxes owing using the same input. I know I entered all the data because in every single package line 150 Total Income was identical. In every package but one - CuteTax which had a deduction at line 232 that none of the others did - they all had the same Net Income line 236 as well.

The problem lies in the tax credit parts of the return. Several packages calculated no line 479 credits - eTax Canada and EachTax. Others failed to give credits for Foreign Tax paid - WebTax4U and probably AceTax (I couldn't tell for sure since you don't see al the numbers till you pay and I'm too cheap to pay just to do a review).

CRA was concerned when they heard what I had found and is now testing the packages to try replicating this. So stay tuned, when they get back to me I'll pass along what CRA says.

Prices and Possible Free Return Preparation - Wikipedia has a great list of all the packages together at Canadian Tax Preparation Software for Personal Use.

Caution on Web Software Certified for NETFILE

Most of us Canadian taxpayers probably consider Canada Revenue Agency's NETFILE service, which allows electronic filing of annual income tax returns and a much quicker turnaround on refunds, a great convenience. However NETFILE has a significant weak spot about which folks should be wary.

The CRA certifies a number of software packages developed by private companies for use with NETFILE - listed on this page. What exactly does CRA's "certification" mean?

Certification does NOT guarantee that the package will correctly calculate your taxes! In testing all the certified web versions, about which I will be posting my assessment in the next day or so, I found large differences in the amount I owe the government. Of the ten packages, three gave the same result, another two matched each other but were different from the first three, three more gave unique results and the last two I gave up on. The calculation of taxes I supposedly owe ranged from $810 to $1680. I will be discussing how I think this comes about in my review but given that they cannot all be correct, the conclusion is that only a few certified packages actually do calculate taxes correctly.

Note the wording on CRA's webpage: ""Certified" tax preparation software or "certified" tax preparation Web application means that the developer of the tax package has gone through a process with the CRA to establish that their product is compatible with the CRA systems." Certification fundamentally only ensures that the data can successfully be transmitted, that line 485 coming out of the tax prep package will be received as line 485. The fact that line 485 may be garbage is not verified.

It is interesting to note in this context the report last August saying the CRA finds taxpayers using NETFILE are prone to cheating. Maybe taxpayers are just confused and misled by the chosen NETFILE package? Maybe they just try different programs and use the one that gives the lowest tax payable?

I asked the CRA about what checking they do on the package calculations before certifying and an official spokesperson (kudos to them to reply to a lowly blogger) sent me this by email:

"The CRA’s NETFILE certification process is the same for each product tested and includes testing to ensure that the data can be successfully saved and transmitted in the proper “.tax” format and is compatible with our systems.

It also includes testing for the most common tax calculations. However, it is impossible to test all combinations and calculations on all possible scenarios. If a discrepancy is discovered after certification the software developer is contacted and must correct his product."

Not enough testing is done it seems. I don't think my situation is especially unusual or complicated and I spent a lot of time ensuring I entered the data the same way with each package.

Amusingly, the package vendors all warranty that their calculation will be correct "if you enter the data correctly". Maybe they would still claim I did not do so. If the package's guidance is unclear and confusing, resulting in someone inputting incorrectly, legally it's still the taxpayer's problem. Certification is no assurance of package help and guidance quality, which can be misleading, absent or wrong. The CRA disclaimer that it does not check for spelling or grammar doesn't go near far enough - it needs to warn that package help and guidance may differ significantly, possibly resulting in an incorrect return. CRA should also add the warning it sent me in the quoted email above.

Right now I can identify with 19th century merchant John Wanamaker when he said, "Half the money I spend on advertising is wasted, but I can never find out which half." Same goes with my choice of web tax package.

Update March 23: CRA has contacted me and is going to test the packages using my data. The ultimate referee will give me an answer, at least they promised to do so, and I will pass it along.

US Insider Buying - the late 2008 Upsurge

This page at Insider-Monitor.com graphs insider buying against the DJ Average. It shows the big upsurge in insider buying amongst DowJones companies in December 2008. Those insiders must be stupid, huh, to be buying after such a big fall?

HSBC Lets You Trade Around the Clock

The title of my post is a bit of a teaser. HSBC InvestDirect Canada has actually just announced that it is adding direct online stock trading in the three major European markets - the London Stock Exchange, Euronext Paris and Frankfurt Stock Exchange. HSBC already offers direct online trading to the Hong Kong market as well as the usual Canadian and US market access. There's a market open somewhere to trade in 24 hours a day for you trading junkies.

The HSBC accounts offer the ability to settle trades and hold account cash in 10 different currencies. That is beneficial to avoid currency exchange costs and may be useful to Canadians like me in foreign lands who want to hold the local currency.

HSBC's action of enabling online DIY online access is a step in the right direction of making investing worldwide a level playing field. As I noted recently, the TSX is getting to be a thinner market all the time so diversifying internationally is necessary.

It is possible to diversify internationally using index ETFs through US markets but purchasing individual company shares is limited to a few ADRs. (It is interesting that the US ETF for the UK FTSE index, symbol EWU on NYSE seems to do as good a job tracking the index as the one in pounds sterling traded in London under symbol MIDD.)

HSBC needs to do one thing to make their offering more compelling and competitive - lower the trading fees. The minimum trade commission is £55, or about $100 for the London exchange. That is steep for a "no advice" service. I find it strange that their UK arm can offer trades for a flat price of £11.95. Why not in Canada too?

CRA Investigating Canadians in the UK

Canadians in the UK beware. A note on the TopTenTaxTidbits web page - see the 3rd bullet down - updated in February 2009 says that the CRA has obtained the UK bank records of Canadians in the UK and is checking whether they have declared the interest income. Too bad my bank hasn't actually paid me any interest that I could declare.

Using Emotions and Psychology to Investing Advantage

Emotions generally receive criticism when it comes to investing. People are constantly exhorted to banish their emotions - to be dispassionate at all times. Wrongo, pal! Just as in other areas of life, emotions can be good or bad.

Enter the idea of emotional intelligence (EI), which in similar fashion to intelligence quotient, is a measure of how "good" you are at emotions, how well you handle and harness them to advantage. More precisely, "Emotional intelligence is a person’s ability to recognize and interpret emotions and to use and integrate them productively for optimal reasoning and problem solving."

A new CFA Institute sponsored research study Emotional Intelligence and Investor Behavior by financial economist John Ameriks , and psychologists Tanya Wranik and Peter Salovey (free download here) studied several thousand investors from Vanguard to see the effect on investing behavior of EI, personality and impulsiveness.

Among the interesting findings:

• being neurotic can be beneficial: neurotic investors avoided the error of holding too much equity (which they define as over 90% allocation) in their portfolio
• using emotions to enhance thinking and problem solving caused people to shift their asset allocation out of stocks as did greater age, higher educational attainment and having an interest in math, finance and statistics; the authors judge portfolios with less than 50% allocation to stocks to be bad, calling it under-allocation, but that is debatable n'est-ce pas?
  
• investors good at using and managing their emotions and whose personalities were less driven by urgency traded less frequently, a good thing
• the split between investors who chose only index funds and those only in actively-managed funds showed some puzzling and seemingly inconsistent results - all types of people invest both ways!
• although investors who were motivated by urgency achieved better returns (more urgency = high returns) the effect disappeared when adjusted for volatility/risk. The authors say, "... no single character trait dramatically increases or decreases IRRs." It depends on the situation and circumstances.
• investors high in EI were "... somewhat more conservative and less aggressive in risk taking", less likely to trade often, more likely to use index funds but didn't achieve better returns!
• "... being anxious can have positive as well as negative effects. If anxious individuals worry about their financial future, they may spend more time searching for information and choosing the best options."
• "Impulsiveness is the only psychological construct [trait] that seems to have clearly negative relationships with the chosen financial indicators." Being impulsive - acting without thinking things over or feeling compelled by a sense of urgency - is bad for your investing health.
  
  

One very good suggestion of the authors is that companies should be careful in setting the default option for fund choice(s) in defined contribution pension plans. A lot of people are agreeable and they just go along with the default and may end up investing all their retirement savings in shares of the company they work for, a high risk situation - if the company ever has problems the value of the savings go down while the investor/employee may simultaneously face layoff. I think regulators should assert their power and dictate a very middle of the spectrum asset mix using low-cost index funds as the default to protect such people.

TD Bank Estimates Future Long Run Returns of T-bills, Bonds and Stocks

A couple of weeks ago, TD Bank Financial Group published the six page report Evaluating Long-run Returns in Uncertain Times. The report suggests to expect the following annual rates of return for a time horizon (holding period) at least a decade beyond the next three years of "uncertain times".

4% - Cash / T-bills
5.25% - Bonds
8% - Stocks

These returns are before inflation, which they assume to be 2%, or around the average of the last 15 years or so, and before taxes, fees and foreign exchange effects.

Within stocks, TD estimates that the US will slightly outperform Canada and EAFE countries (rest of the developed world) by 0.5% or so.

TD also presents how this would produce a combined total return of 5.8% to 8% for several sample portfolios with various mixes of cash, bonds and the three equity classes.

It is interesting that these are more optimistic, especially for Cash, when compared with other estimates I have found:

• Review: Bradford Cornell in his book The Equity Risk Premium - Cash was only 0.5%, Bonds only 2.5%, Equities 5 to 7.5%
• Post: Credit Suisse Global Investment Returns Yearbook 2009 - Equities for Canada 5.9% and USA 6%
• Post: Canada Pension Plan (after inflation) - Canadian Equity 4.6%, Foreign Equities 5.0%, Bonds 3.4%, Cash 1.5%; US Social Security Administration Chief Actuary - Long Term Treasury Bonds 3.0%, Equities 3.0 to 6.5%; Author Richard Ferri / Portfolio Solutions LLC (after inflation) - USA Cash 0.5%, Long Term US Treasury Bonds 2.0%, US large cap 5.0%, Foreign Developed Market Equity 5.0%

It is always worthwhile to get a different perspective on what is a critical assumption for long term investment planning towards a sustainable retirement. My own view is to use the lower figures and hope the higher ones come about.

Book Review: The Uncommon Investor III by Benj Gallander

This book is about value investing in individual stocks. It supposedly tells you how to buy low and sell high. But I'm not too sure who author Benj Gallander of the Contra the Heard newsletter had in mind as the audience for this book because it falls in a no man's land. It is too simple to be of real use to someone seeking to become a stock investor according to the principles the book itself espouses, which are primarily those of fundamental analysis. As Gallander says on page 127, "Learn to understand financial statements. If you're not willing to do this, then leave stock picking to the experts." I am sure he would not advise anyone to actually buy stocks based on the very elementary introduction to income statements and balance sheets in the book and I am also sure that his own stock picking success is based on a far deeper understanding of financial statements.

Similarly his use of the actual Contra the Heard newsletter stock picks as examples falls short of providing real insight. The buy-sell decisions are explained in a few lines but again, I am sure he sifted through loads of information and data before deciding what could be ignored and what were the critical factors. My own feeble attempts to do such analysis inevitably encounter conflicting information that cast doubt on the attractiveness of a particular stock. It sure ain't easy or simple to do. The investing rules he lists throughout the book, most of which are quite mainstream, frequently will give different signals. So which do you accept as being predominant and which do you ignore?

The text is in the form of a narrative where a family and friends have gathered in a home to watch the final game of the baseball world series. One of the people is a financial advisor named Joan who explains the Contra philosophy using baseball analogies as the game unfolds. Maybe some will enjoy that approach but it got very annoying a hundred pages on. Arrgghh! There's only so far one can stretch an analogy! Besides, as my wife discovered again Saturday ("Her: Did you hear what I just asked you? ... Me: Huh?" - I think it's one of those "men are from Mars, women are from Venus" things) while watching Scotland beat Italy in rugby (!) it is kinda hard to pay attention to other things during a good game. "Joan, will you let me watch the game!"

I did enjoy reading that one should call up company management to ask questions and get a feel for their capabilities. Sounds like fun, must give it a try. Some of the Contra newsletters from the past, reproduced in an appendix make interesting reading today as a number of comments were spot on. It seems they are all available on the Contra website for free, so have a look.

Given the intelligence and insight of the author, evident in those newsletters and in the success of the investment returns stated on the same website, the book is disappointing. My rating is 2 out of 5 stars.