Canadians are nuts for home ownership, but with real estate prices soaring to unaffordable levels in many areas of the country it has become increasingly difficult to buy a home.

Still, the prevailing narrative around renting vs. buying is that renting is throwing away money and buying is a surefire path to building wealth. That has young Canadians in particular stretching their finances to buy a home, and relying more and more on the bank of mom and dad to help fund the down payment.

Speaking of mom and dad, where do you think this real estate obsession is coming from? Many parents put pressure on their young adult children to buy a home – citing their own anecdotal evidence of price appreciation from the time they bought their first home.

The problem is, we can’t go back in time and buy a house in 1984, or even 2004. Aspiring home owners need to buy at today’s prices, which are exceedingly unaffordable.

Meanwhile, there are approximately 5 million rental households in Canada (representing one-third of Canadians). Are they really throwing money away? Hardly. 

PWL Capital’s Benjamin Felix tackled the problem of renting vs. buying in Canada in the latest episode of the Rational Reminder podcast, and then bravely shared the findings in a Globe & Mail article (read the comments if you dare).

“In perfect equilibrium, renting and owning should cost the same because house prices and rents adjust such that the cost of paying for housing is the same either way. But it doesn’t work like that in the real world. A 2012 paper in Real Estate Economics suggests that demand for homeownership, fuelled by perceptions that renting is throwing away money, may make renting even more economically attractive.”

Predictably, criticism included someone who bought a house for $40,000 in 1974 and sold it for $2M. But while the dollar amount sounds impressive, it’s an 8% annualized return before factoring in all the phantom costs that went into owning that home for 50 years (namely maintenance and transaction costs). Meanwhile, the TSX returned 9.36% annualized during that time, and the S&P 500 returned 12.09% per year.

Ok, so I read some of the comments.

I couldn’t get through all of them, but here are some I found interesting.https://t.co/WWkuw5qIWn

— Benjamin Felix (@benjaminwfelix) September 21, 2024

I think one of the major takeaways is to answer the question of whether renting is “throwing money away” and the clear answer is no. Buying then becomes more of a personal lifestyle / happiness decision.

For some, renting provides a sense of freedom and lack of stress. For others, renting is a source of anxiety due to the threat of eviction and lack of control.

Homeowners, on the other hand, often feel a sense of pride and may benefit from the forced savings (mortgage payments). But others feel stress over maintenance and upkeep, and may find the total cost of home ownership leaves little cash flow left over for retirement savings and enjoying life.

Your mileage may vary.

This Week’s Recap:

Last weekend I shared four retirement mistakes to avoid.

The US Federal Reserve slashed its target interest rate by 0.50%, and Canada’s inflation rate for the month of August slid in under target at 1.95%.

The market widely expects similar rate cuts from the Bank of Canada when our central bank makes its next decision October 23rd.

With the inflation dragon slayed (or at least tamed), central banks have turned their attention to employment and will try to stave off a recession. Time to stick this soft landing.

Promo of the Week:

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Don’t forget to tell them I sent you. Use my referral code: FWWPDW and open your Wealthsimple account today.

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Weekend Reading:

Mortgage rates are falling fast and furious – including 5-year fixed rates that start with a 3.

Yes, a cottage is an investment property—here’s how to minimize capital gains tax.

Seniors seeking a decumulation strategy may be asking the wrong questions. Start with your spending plan, then model how you’re going to pay for it. Agree 100%.

The CPP death benefit of $2,500 is ripe for broader reform, like an increase or indexation.

Now for something I disagree with – Industry groups call on the feds to reduce or ditch RRIF mandatory withdrawals. Why?!?

Two recent CRA disputes show Canadians still don’t know TFSA contribution rules.

Morningstar’s personal finance expert Christine Benz says retirement is not a math problem:

“People might be surprised to see a book from me that is half nonfinancial — maybe not even half. But I feel like people are overly focused on the financial and not enough on the nonfinancial.”

After being told Freedom 55 was out of reach, this retiree changed his financial trajectory and retired at 51.

Finally, a great post by the Loonie Doctor on CIPF coverage and whether you should use more than one brokerage to mitigate risk.

Have a great weekend, everyone!

Retirement is often put on a pedestal – the pinnacle of achievement after a decades-long career. But the transition from full-time work to full-time leisure can be challenging, both financially and psychologically, if you’re not prepared to meet them.

I’ve witnessed these challenges firsthand working with hundreds of retirees over the years. Here are four retirement mistakes to avoid:

1.) No Clue How Much You Spend

The most successful retirees I know have mapped out their spending plan well in advance of retirement. Rather than relying on rules of thumb, they tracked their spending in the years leading up to retirement to identify their true cost of living.

They’re not necessarily focused on hitting a certain portfolio milestone because they know it’s their spending that matters most. Who needs $2M if you only spend $50,000 per year?

This is one of the most critical pieces of your retirement plan. I often say that the best predictor of your future spending is what you’re spending today.

Indeed, most of my retired clients want to maintain their current standard of living, if not enhance it if they can with additional spending on travel, hobbies, and helping out their kids and grandkids.

Once you have a good sense of your desired spending you can determine which accounts to draw from, when to take government benefits, and how to fit all of your retirement income puzzle pieces together in a tax-efficient way. But it always starts with your spending.

2.) Not Considering One-Time Costs

Okay, so you’ve figured out your desired annual spending needs. But life doesn’t move in a straight-line.

Over a 30+ year retirement you can certainly expect to replace a vehicle, renovate or repair parts of your home, offer financial assistance to your children (post-secondary, wedding, house purchase, etc.), or take your own bucket list trip.

Some of these expenses can converge all at once during your earliest retirement years. You buy a new car, renovate the kitchen or backyard, take a dream vacation, and still pay your kids’ phone and auto insurance bills.

Many also find themselves paying out of pocket picking up prescriptions, mobility aids, in-home care, and groceries for their own aging parents. 

Meanwhile, a poor sequence of investment returns can wreak havoc on your retirement nest egg at the worst possible time – while you were counting on significant withdrawals.

Don’t go into retirement blind to these realities. Consider a 3-5 year plan of one-time costs and how you’ll fund these expenses. Ideally, take care of some of them in your final working years. Set aside a bucket of cash from which you can draw for lump sum expenses or emergencies.

3.) Not Switching From Saving to Spending Mode

This is a two-part issue. One, aggressive investors are often still focused on achieving the highest rate of return in retirement. They’re chasing stocks, concentrating investments in smaller niches, and ignoring that they’ve basically already won the game.

Now I’m not suggesting you need to sell all of your stocks in favour of bonds, GICs and cash. Not at all. I’m just saying to think more sensibly about diversifying away risks by investing more globally instead of concentrating on one country, sector, or a handful of individual companies. 

The risks that got you here might have paid off, but you’re playing a different game now that you’re retired. The stakes are much higher, with less room for error.

Two, investors have a hard time turning off the savings taps and turning on the spending taps. I’ve worked with retirees who have no plans to stop contributing to their TFSAs throughout retirement.

Hey, if you don’t need that money to fund your lifestyle, you want an extra margin of safety for potential poor health outcomes in your final years, or you want to leave a large inheritance to your kids then I say go for it – keep funnelling money into your TFSAs until you die!

But some retirees take this too far. They forgo vacations because they’d prefer to make TFSA contributions. Discussions around RRSP or RRIF withdrawals are often about where else to invest those funds (TFSA, non-registered investments) instead of using the funds to meet desired spending needs.

Retirement shouldn’t just be a shell game of moving money from one account to another. Ideally, you’re using your available resources to maximize your life enjoyment. Isn’t that what you saved for in the first place?

4.) Not Considering Your Home Equity Release Strategy

Most Canadian homeowners have seen an unprecedented rise in property values over the last 20 years.

It’s likely that your home is your largest asset in retirement, if not a close second. But you can’t eat your cupboards, so unless you have a plan to tap into that unproductive home equity you may end up living a smaller lifestyle than you’d like to in retirement.

For many Canadians who lack retirement savings, downsizing (or selling and renting) is the most obvious solution. You can add hundreds of thousands of dollars back into your savings pool that can be used to maintain your desired standard of living, or at least prolong it for several more years.

Even if it’s not necessary to tap into home equity to maintain your standard of living, for health reasons it simply may not be practical to remain in your home indefinitely.

A paid-off home is a nice back-stop to have for your later years, but selling earlier should not be overlooked if it would lead to a drastically improved retirement outlook.

This Week’s Recap:

An important piece on the pitfalls of leaving your advisor to invest on your own. Yes, you can slash your investment fees to the bone. But you need to be able to stick with your investment plan, and seek out professional advice at key life stages.

A look at two types of overconfident investors and how they can self-sabotage their portfolios.

My latest for MoneySense: You’ve reached your 40s, are mid-way in your career and realize you’ll never have a pension. Here’s how to get ready for retirement.

Promo of the Week:

Many of you took advantage of Wealthsimple’s 1% transfer bonus promotion this summer. That promo has ended, but you can still take advantage of Wealthsimple’s zero-commission trading platform and they’ll reimburse any transfer-out fees (typically $150 per account) if you move $15,000 or more.

I’ve almost fully converted to Wealthsimple, starting with my RRSP and TFSA several years ago, and my LIRA earlier this year.

The in-kind transfer from TD Direct to Wealthsimple was completed in three business days.

The platform is so easy to use. Set up recurring contributions AND purchases of your favourite ETF right from the mobile app. You can also turn the dividend reinvestment feature on or off with a simple tap.

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Use my referral code: FWWPDW and open your Wealthsimple account today.

I’ve been told the addition of RESPs and corporate investing accounts are coming to the Wealthsimple Trade platform soon. Once added, I’ll move my corporate account from Questrade and my kids’ RESP from TD Direct.

Weekend Reading:

Canada is in the midst of the greatest wealth transfer of all time, as some $1 trillion passes from boomers to their millennial kids. 

Seniors’ scams are on the rise. Some advice – don’t pick up the phone.

Here’s Jason Heath on which types of pension income can be split with your spouse in retirement.

Michael James with an honest review of The Canadian’s Guide to Investing:

“The authors would need to put extensive work into this book to bring it up to date. As it is, I can’t recommend it to others.”

The Globe and Mail’s Erica Alini says that fixed mortgage rates of below 4% are being spotted in Canada for the first time in years.

Dr. Bonnie-Jeanne MacDonald and Doug Chandler are doing the lord’s work, tackling misconceptions around the decision to claim CPP early. Their latest research looks at the common narrative around taking CPP early to invest on your own.

“It concluded that holding on to RRSPs savings, instead of using them to finance a delay in receiving CPP/QPP benefits, carries more risk and less reward.”

A Wealth of Common Sense blogger Ben Carlson shares the success rate of the popular 60/40 balanced portfolio over the last 100 years or so.

Finally, Canadian seniors are wealthier than ever. Is it time to do away with the seniors’ discount?

Have a great weekend, everyone!

I started investing in individual stocks shortly after the Great Financial Crisis ended in 2009. I picked an investing strategy that closely resembled the Dogs of the TSX, buying the 10 highest yielding Canadian dividend stocks. As you can imagine, the share prices of these companies got hammered during the stock market crash so I was able to scoop up shares in banks, telecos, pipelines, and REITs on the cheap.

Stocks came roaring back right away and my portfolio gained 35% by the end of 2009. Investing is easy, right?

It took me a while to figure out that my portfolio returns had less to do with my stock picking prowess and more to do with market conditions, luck, and the timing of new contributions. The rising tide lifted all ships, including my handful of Canadian dividend stocks. 

I started comparing my returns to an appropriate benchmark to see if my judgement was adding any value over simply buying a broad market index fund. My portfolio outperformed for a few years until it didn’t. In 2015, I had enough and switched to an index investing strategy. Now I invest in Vanguard’s All Equity ETF (VEQT) across all of my accounts.

Related: Exactly How I Invest My Money

New investors who started trading stocks recently may have had a similar experience. After an “everything is down” year in 2022, stocks have rallied big-time over the past 20 months.

For the period of January 1st, 2023 to August 31st, 2024 the S&P 500 (represented by Vanguard’s VFV) is up 50% including dividends. The Canadian market (represented by Vanguard’s VCN) is up 28% including dividends. And a portfolio of global stocks (represented by Vanguard’s VEQT) is up 36%.

Those are specific market indexes, mind you. Over the same time period, individual stocks like NVIDIA and Super Micro Computer are up 717% and 433% respectively. Tesla (+74%), Microsoft (+76%), and Apple (+78%) continue to shine. Even meme stock darling GameStop is up 27%.

No doubt, unless they’ve done something disastrous, new investors participating in this market have seen incredible returns so far. 

This can lead to overconfidence – when people’s subjective confidence in their own ability is greater than their objective (actual) performance.

Overconfident Investors

Larry Swedroe says the biggest risk confronting most investors is staring at them in the mirror. This is the first type of overconfident investor.

Overconfidence causes investors to trade more. It helps reinforce a belief that any investment wins are due to skill while any failures are simply bad luck. According to Swedroe, individual investors tend to trade more after they experience high stock returns.

Overconfident investors also take on more uncompensated risk by holding fewer stock positions.

Furthermore, overconfident investors tend to rely on past performance to justify their holdings and expectations for future returns. But just because stocks have soared over the past 20 months doesn’t mean that performance will continue over the next 20 months.

In fact, you should adjust your expectations for future returns – especially for individual stocks that have increased by 100% or more. No stock, sector, region, or investing style stays in favour forever. If you tilt your portfolio to yesterday’s winners (US large cap growth stocks) there’s a good chance your portfolio will underperform over the next decade.

The second type of overconfident investor is one who makes active investing decisions based on a strong conviction about how future events will unfold.

Related: Changing Investment Strategies After A Market Crash

Think back to the start of the pandemic. As businesses shut down around the world it seemed obvious that global economies would suffer and fall quickly into a massive recession. The stock market crash reinforced that idea. Investors hate uncertainty, but this time it seemed a near certainty that stock markets would continue to fall and remain in a prolonged bear market.

Markets quickly turned around as central banks and governments doled out massive stimulus to keep their economies afloat and their citizens safe at home. Now it became ‘obvious’ that investing in sectors like groceries, cleaning supplies, online commerce, and video technology would produce strong results.

Fast forward a year or two when high inflation became a chief concern. Some investors, overconfident in the outcome of sustained higher inflation, shifted their portfolio into so-called inflation hedges. These could include gold, cryptocurrency, inflation-protected bonds, commodities, or real estate. 

But as Ben Felix pointed out in this episode of the Rational Reminder podcast, the ultimate inflation hedge is a globally diversified and risk appropriate portfolio (and even that’s not really a hedge).

Finally, there are the perma-bears who claim the next great crash is right around the corner. These overconfident investors aim to avoid losses and protect their downside by making active bets with their portfolio. This could include selling stocks and moving to cash, using alternative investments that have low correlation to stock performance, buying put options, or short selling stocks.

The point is, they claim to know what’s coming and how to avoid it. 

Reasonable critics (like me) would agree that stock valuations, especially US stocks, are high. We would agree that there’s always the possibility of a stock market crash. What I’d disagree with is what to do about it. If you’re invested in a globally diversified and risk appropriate portfolio, the answer is to lower your expected future return assumptions and do nothing else.

Final Thoughts

Overconfidence is something that most investors have to deal with at some point in their journey. I argue that there are actually two types of overconfident investors.

The first type is when you believe your past investing performance has more to do with your skill and decision making than with luck, timing, and market conditions. 

The second type is when you believe you can correctly predict a future (macro) outcome and you make active decisions with your investments to support that belief.

You can avoid the first type of overconfidence by diligently comparing your investment returns with an appropriate benchmark index. I did this with my Canadian dividend stocks by comparing the performance to the iShares Canadian Dividend Aristocrats Index ETF (CDZ).

This process helped open my eyes to how difficult it is to actually beat the market on a consistent basis. I eventually gave up stock picking and switched to indexing – accepting market returns in exchange for a tiny fee.

The second type of overconfidence is much more difficult to overcome. We can’t help but make predictions about the future, or listening to pundits who make a living sharing their predictions. Even if we don’t have strong convictions about the future, we can easily be swayed into doing something with our investments to stickhandle around future outcomes.

This is where I find comfort investing in an asset allocation ETF. When I invested in individual stocks I could see plain as day which ones were in the red (looking at you, oil & gas stocks). Even with a multi-ETF portfolio you can see which one(s) are underperforming and you can easily second guess your holdings or target asset mix.

With an asset allocation ETF you don’t see the underlying holdings. It all moves together in a perfectly balanced and targeted mix. This way, I find myself less likely to want to tinker with my portfolio when it’s all rolled up into one investment.