Friday, April 20, 2012

Why Swim With the Sharks: An Unconventional Guide to Early Retirement by Diana Salomaa and Henry Dembicki

Every once in a while you read a book that makes you think differently about about life. This is one of those books. In this easy to read work, some of the most common myths about retirement are debunked. Among the so-called "truths" that are shown to be false are the following: a) You need at least 70 per cent of your pre-retirement income to retire; b) You need a million dollars (or more) nest egg to retire; and c) Don't count on public pensions to meet the bulk of your retirement.

As made clear in this book, these "truths" are in reality myths that are perpetuated by financial institutions who have a vested interest in selling their products to the public. Consequently, instead of getting unbiased advice on how to save for retirement, Canadian's are constantly being bombarded by incorrect information.

For example, the 70 per cent rule quoted above is a common rule of thumb. Yet the problem with this rule is that it assumes that a retired person will have the same level of expenses when they stop working as during their wage-earning years. In reality, the daily cost of living for a retired person is much lower. To demonstrate this point ask yourself the following question: How much money do I currently live on once I subtract the mortgage, car payments and contributions to RRSPs, RESPs, CPP and EI? Now, what would my life be like if I didn't have any debt nor had to save? If you can pay off your house and car before you retire, then it's completely realistic to think that you can retire on less than 70 per cent of your pre-retirement income. This is even more true when we recall that a retired person can avoid spending money of CPP, EI, RRSPs and other savings.

Based on well-thought out arguments and practical advice, this book is a must-read for anyone who does not want to buy into the rat race. It also makes the indispensable point that money is only one component of retirement. Other factors, such as having strong relations with your family and friends, as well as having interests outside of the office, are critical to a happy retirement.

That said, I don't agree with everything in this book. For example, the suggestion to write down everything that you spend (even right down to the penny) seems excessive. I tried this technique and I found that it produces a lot of work for little return. Personally speaking, I find that a budget achieves the same ends without causing me to be overly anal. Overall, however, I found this book to be an excellent resource and recommend it.

4 out of 5 stars

Thursday, April 19, 2012

The Lazy Investor by Derek Foster

I don't want to be snide, but this book could have been called, The Lazy Author: How to write a sequel without making a new point.

For those who don't know, Derek Foster shot to fame when he published his first book, Stop Working: Here's How you Can!, in 2005. The book chronicled how Foster was able to retire at age 34 by investing in strong, dividend-paying stocks. The book was intriguing and containing several excellent investment tips.

The Lazy Investor is Foster's follow-up book and contains an explanation on how to enroll in SPPs (stock purchase plans) and DRIPs (dividend reinvestment plans). It also has a section on how to teach children about money. The section of SPPs and DRIPs is interesting, but by no means groundbreaking. The discussion on children, meanwhile, is highly questionable. For instance, Foster is not a proponent of registered education savings plans (RESPs) which is fair enough. His "analysis" of why his hold this position, however, is very weak, as his "calculations" of future education costs come across as blue-sky chit-chat rather than firm financial analysis. As a case in point: Foster predicts that it will be easier for young people to find part-time work in the future because of the impending retirements of the baby boomers. Consequently, his children should be able to partly-fund their education in the future, which reduces the need to invest in RESPs. This may or may not be true, but this "logic" is not conclusive proof of anything. This is something you would say while having a beer with friends, but not a rigorous financial analysis when making an investment decision.

The rest of the book contains a lot of information that can be useful, e.g. only investing in Canada, concentrating on dividend paying stocks, living frugally and only buying stocks for recession resistant companies. However, all of this information was already in his first book, so this discussion does not add anything new. Furthermore, I found the writing style to be grating at times. To use an analogy, reading this book is like reading the blog of a bright but self-centered high school student, i.e. while containing some interesting points, the tone is very casual, the simplistic explanations try to come across as expert advice, and the context is always self-referential. In fact, I got the sense that Foster wrote this book so he could tell the world how great he is, and how lucky we are hear his great investing tips.

Now, to be fair, I did enjoy Foster's first book, and as such am interesting in reading his other works. That being said, I would not recommend The Lazy Investor as it is, well, a lazy book.

1 1/2 out of 5 stars

Monday, April 16, 2012

How to Pay Less and Keep More for Yourself by Rob Carrick

As the personal finance columnist for the Globe and Mail, Rob Carrick has been writing about about financial issues for almost two decades. The author of four separate books, including two on E-trading and investing, he is a renowned expert in his field.

In this book, Carrick provides practical advice on how Canadians can lower the fees that they pay on a wide rage of financial products, from chequing accounts, mutual funds and stock commissions, to interest rates on consumer debt and mortgages. By finding ways to lower these fees, the book shows how investors can increase their real rate of return, and in the process also find the best financial instruments for them.

Overall this book is very helpful and accessible to all types of investors. Whether you are a young, internet savvy stock trader, or an older, more conservative investor who prefers face-to-face meetings instead of online banking, you will find something useful in this book. As a person who does almost all of his banking online, I really liked the explanation on why TD's e-series mutual funds are an excellent investment option.

If I had one critic, however, it is that the book sometimes loses its focus by providing investing advice on how to allocate assets. While Carrick's recommendations are interesting, (e.g. there is a section on how investors can build a personal pension fund with exchange-traded funds), this side-discussion does not really advance the main point of the book, which is to educate investors on how to stop paying so much money in bank charges, commissions and other fees. That being said, this minor critique does not take away from the fact that this is an excellent book.

4 out of 5 stars

Friday, April 13, 2012

Personal Finance for Canadians for Dummies, 4th edition, by Eric Tyson and Tony Martin

This comprehensive book covers all areas of personal finance. Among the numerous topics covered (and there are many) are the following: how to pay down debt; cut back on expenses; save for retirement; invest in such financial instruments as the stock market, bonds, mutual funds and GICs; advice on purchasing insurance, whether life, home, auto or disability; how to decide if you need a financial planner, and if you do need one, how to go about finding the right planner for you; how to save for education; and how to assess financial information that you come across in newspapers, TV, the radio, newsletters and the Internet. In fact, this book is so complete, it could serve as a textbook for an introduction to personal finance class.

If you are looking for a good text that provides an overview of personal finance, then this book is for you. By explaining essential financial concepts and providing practical advice, this work is quite impressive. That being said, this book is less suitable for experienced investors, or those who are already well versed in the subject of personal finance. On the other hand, one cannot expect a "For Dummies" book to be written for experts!

5 out of 5 stars

Wednesday, April 4, 2012

Is Your Mortgage Tax Deductible: The Smith Manoeuvre by Fraser Smith

Would you like to make the interest on your mortgage tax-deductible? This book can show you how (or more precisely, how to convert your mortgage into an investment loan). Using a very creative approach, Fraser Smith explains how a reversible mortgage can be used to reduce one's taxes. In a nutshell, a reversible mortgage is a financial instrument that is comprised of two parts: first, the mortgage on the house; and second, a line of credit that allows a homeowner to borrow from the equity in their house. The line of credit increases as the principal on the house is paid down. For example, if you pay off $600 of principal in a month, then you can borrow $600 from the line of credit.

The trick to this strategy is found in the tax rule that allows Canadians to deduct interest from investment loans. Using this rule, if a homeowner uses their line of credit to purchase investments (e.g. stocks, mutual funds, investment properties, bonds, etc.), then they can deduct their interest payments on this line of credit from their taxes. As such, the strategy does not allow a person to deduct the interest on their mortgage per se from their taxes, but rather to deduct the interest on their credit line that is based on the amount of principal that has been paid off.

In the first step of the Smith Manoeuvre, a homeowner will use all of their tax refunds to pay down their mortgage as quickly as possible, and then borrows an amount equal to the paid-off principal to buy more investments. Through this process a person can convert their mortgage from a "bad debt" (i.e. a loan in which interest cannot be deducted) to an investment credit line that is a "good debt" (i.e. a loan in which interest is tax deductible).

In the second step, once the mortgage is paid off, the homeowner can either use the tax refunds on their investment line of credit to buy more investments, or decide to use their now sizeable investment portfolio to pay off their line of credit.

I liked this book because it proposes a very creative approach to investing. As long as you are comfortable with having the same amount of debt, (this strategy doesn't reduce debt, but  rather converts it from a non-deductible mortgage to a deductible investment line of credit), you can use the Smith Manoeuvre to build up an investment portfolio much faster than you could have otherwise.

On the downside, I found this book to be very, very repetitive, with the same point being recycled numerous times. As well, the rates of return that are projected are highly unrealistic. In several parts of the book examples are given with a rate of return of 10 per cent. In this economic climate, it is highly unlikely -- if not delusional -- to expect an investment portfolio to grow by 10 per cent per year. It is also unfortunate that Fraser Smith does not acknowledge the risks in his strategy. For instance, in 2008, anybody using this strategy could have found themselves holding onto an investment portfolio that was worth less than the value of their house, while still having to pay interest on an investment line of credit. Most people in this scenario would not be calmed with the knowledge that interest paid on this line of credit is tax deductible. That being said, this is an interesting concept and the book does prevent food for thought.

3 out of 5 stars

Enough Bull: How to Retire Well Without the Stock Market, Mutual Funds, or Even an Investment Advisor by David Trahair

The 2008 financial crisis convinced David Trahair that the stock market is too risky for anyone saving for retirement. After watching the investment portfolios of too many people evaporate into thin air, he wrote this book to make the case that one can ignore the stock market altogether and still retire comfortably. With interesting arguments, Trahair counsels that one should first pay off all debt (and in particular mortgage-debt) before even considering to invest. Bucking conventional wisdom, he even advises people to stop making RRSP contributions until they are debt free.

But what about compound interest? Won't a person miss out on the slow accumulation of wealth if they wait until their late-40s or 50s to make RRSPs contributions? Not so, says Trahair, who is a chartered accountant. Relying on straightforward calculations, he points out that a person who is debt-free in their early-50s can: a) save significant more amounts of money than someone in their 30s or 40s who is paying off a mortgage and / or raising children; and b) because they are reaching their top earning years their tax refunds will be much higher. These refunds, in turn, can be used to make more RRSP contributions.

When analysed this way, the "tax turbo-charged RRSP" strategy is much better than the "start early" approach. To paraphrase the book, one can save $200 a month in RRSPs during their 30s, 40 and 50s, (and in the process pay off their mortgage more slowly, resulting in higher interest charges), or alternatively, one can focus on paying off their mortgage during their 30s and 40s and then, once debt free in their early-50s, save $1,500 a month in RRSPs for 10 years. At the end of the day, the latter approach will result in greater savings. (Note: This example is not in the book, it simply paraphrases the argument).

What should someone invest in when they have paid off their debt? The book's answer is clear: Guaranteed Investment Certificates (GICs). After watching the stock market plunge in 2008, Trahair is adamant that stocks are too risky. Furthermore, he argues that the rate of return on GICs are not that much different from stocks.

It is at this point that the book's thesis starts to weaken. Given the financial meltdown in 2008 and the ensuing recession, it is understandable why some people would want to swear off the stock market. However, Trahair's analysis is overly pessimistic. In order to make his point, he repeatedly mentions how the TSX crashed in 2008, and how this crash destroyed the rate of return for stocks. Unfortunately, this analysis ignores the partial-recovery that has taken place since then. As well, his analysis of the returns of GICs versus stocks tends to ignore dividends, which skews his argument.

Trahair makes a solid argument when he states that Canadians should first pay off debt before investing. He also makes a plausible case that GICs are a much better investment than people think. Where he starts to go off the rails, however, is in his claim that the rate of return for GICs are comparable to those of stocks. This is simply not true. Yes, stocks are risky (you can lose all of your money) but the returns can also be much greater. If you want to protect your investment then it makes sense to consider the GIC, tax turbo-charged RRSP strategy. If you are looking for stock-like returns with GIC safety, however, then you won't find that in this book because such a scenario does not exist.

3 1/2 out of 5 stars