May 052016

The Pessimism in the Markets

Corporate profits have been disappointing lately. Apple (AAPL) recently said its revenue fell for the first time in 13 years due to a decline in iPhone sales compared to the same time last year. Apple shares are worth 26% less now than a year ago. Investors are warned the decline could continue. 🙁 Other publicly traded companies are experiencing similar challenges. Top line growth is slowing down, and its becoming harder to maintain profitability levels.

A recent article on suggests that future investment returns for millennials will be lower than prior years. It cites a study by consulting firm, McKinsey & Co, which proposes that “the forces that have driven exceptional investment returns over the past 30 years are weakening, and even reversing.” So maybe it’s time for investors to lower our expectations. 😕

Lower Investment Returns for Millennials

The last 30 years was actually a bit of an anomaly because on average we’ve had a couple of percentage points better annual returns when compared to the past 100 years in general. Falling inflation rate has helped drive real returns, and bond prices increased substantially as interest rates fell for the last couple of decades. 🙂 But going forward we may face secular stagnation and a lack of economic growth due to an older population. Let’s take a look at the study’s findings, and future return estimates.


Regarding U.S. equities for the time being, it appears growth in the following 20 years will be 1.4% to 3.9% lower than in the past 30 years. The director of the study, Richard Dobbs, warns that the people who will lose out the most are the millennials. Oh no. That’s me! 😱 It appears we’ll have to either work longer or find other ways to put more money in our retirement accounts. The alternative is to retire poorer and live off government cheese, which is actually a luxury in Canada considering the expensive tariffs we have on dairy products, haha. 😀

Preparing for the Next 20 Years

So here are a few of things I’m doing to deal with all this information. They may not work for you, but I will share anyway.

First, the most important thing is to lower the cost of investing. This is even more crucial if market returns will underperform in the future. Using the numbers from the graph above, the average return on U.S. equities over the last 30 years was 7.9%. So if our management fee and other combined costs were 1%, then our actual return would be 6.9% after fees. The 1% fee would effectively eat away 13% of our actual market return.

But the “slow-growth scenario” claims that over the next 20 year period the annual return of U.S. equities will be only 4%. If we still pay the same 1% portfolio fee as before, then this cost will eat away 25% of our future annual return, nearly twice as high in percentage proportion to a 7.9% market return. Bummer. 🙁

So how can we lower pesky fees and reduce the overall cost of investing? It’s simple. 🙂

How do we reduce the long term costs of plumbing? We learn some basic DIY plumbing skills. How do we reduce the cost of food? We learn to cook and meal plan. 🍗 How do we reduce the cost of car repairs? We learn some basic knowledge about car maintenance like how to check the tire pressure, change the oil and air filter, etc. We can reduce the cost of any aspect of our lives by simply educating ourselves on the subject. 😉


So if we want to lower our investment fees, we just have to better understand how to invest and manage our own money. With the advent of ETFs and robo-advisors, I hope everyone reading this blog is paying less than 1% management fee on their portfolio.

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Mar 212016

Retirement Account – Taxation

Many folks should use tax deferred programs such as the RRSP or 401(k). Contributions made into a retirement account is tax-deductible and can grow tax-free in the account. When it is eventually withdrawn and taxed the plan holder will likely be in a lower income tax bracket. I would personally try to keep investments that produce mostly capital gains or eligible Canadian dividends out of my RRSP. But that’s just my personal preference for tax efficiency. The picture in this link here definitely says otherwise. 😝

Most people expect to be in a lower tax bracket when they retire so contributing money into an RRSP to defer taxation to a later date when their tax rate is lower makes sense. But some experts say it’s probably not a good idea to use RRSPs if we expect to retire in either the same or a higher tax bracket as we are in now. However, there might be another way to look at it. 😀


What if it’s still smarter to contribute to an RRSP today even if our marginal tax rate will be higher in retirement? When we make a tax deductible contribution to our RRSP today, the immediate tax relief we get is based on our marginal tax rate. So if our marginal tax rate is 30%, then we would receive $300 by contributing $1,000 to a registered retirement account. But when we withdraw money from this RRSP (or RRIF,) the money we take out is only taxed at our average tax rate, not the marginal tax rate. For example, if we request 12 monthly withdrawals a year from our retirement account then these payments would be taxed similarly to receiving work income from a job where each payment reflects our average income tax rate.

This is due to our progressive income tax system. In Ontario for example, the first $45K of income is taxed at roughly 21%, then the next $28K of income is taxed at 30%, and so on. So if we make $100,000, then we actually pay about $26,000 of income tax, which makes our average tax rate 26%, even though our marginal tax rate would be 38%.

So I’m going to continue maxing out my RRSP contributions each year even if there’s a chance my income will be higher in my 60s and 70s than it is now. 🙂

Random Useless Fact:

Some people on the internet can’t figure out how many girls are in this picture.



Jan 252016

Mental Contrasting

Mental contrasting is a visualization technique to help people get what they want. 🙂 It was developed by Gabriele Oettingen, a psychology professor at New York University. This technique has strong empirical support. 🙂 Over the last decade in studies conducted by Gabriele and other researchers, mental contrasting has been shown to increase attendance and academic performance for low-income school children in the U.S. and Germany. In other studies, people who practiced mental contrasting increased their fruit and vegetable consumption by 30%. Maintaining a healthy diet is very important. Some people like to preserve fruit and vegetables because they ‘can‘. 😆

Mental contrasting begins with creative visualization, thinking positively about the future and imagining the ideal outcome. 😀 But daydreaming alone won’t get us very far in reality. What we also have to do is mentally contrast where we want to be and where we currently stand. For example, maybe we want to increase our monthly retirement contributions by $300. We have to embrace our current reality and accept that we need to work hard to reach our goal. By focusing on this gap between where we are and where we want to be, we create a necessity to take action.

Here’s how to implement the mental contrasting technique.

  1. Think about an ideal outcome for yourself in the future.
  2. Determine the main internal obstacles that will probably get in the way of your desired outcome.
  3. Formulate a if-then plan for what you’ll do to overcome those obstacles.
  4. Follow through with the plan and don’t give up.

16-01-never-give-up-so-close mental contrasting

Exercising mental contrasting with implementation intentions means that we believe we can achieve our goals and also realize that we have to put in effort to make it happen. When determining potential obstacles in step 2 it’s important to focus on internal factors like laziness, procrastination, or other personal habits. External obstacles like what our boss does, or how the stock market performs are not things we can control the outcomes of. Strong motivation has to come from within. If we are not willing to improve, then no one can help us. On the other hand, if we are determined to improve, then no one can stop us. 😉

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Jan 112016

Here in my apartment, just got this new Hot Wheels here. It’s given me countless hours of fun and imaginary play time. 🙂


But you know what I like more than materialistic things? Knowledge. In fact, I’m a lot more proud of my library card, which gives me access to tens of thousands of books. It’s like the billionaire Warren Buffett says, “the more you learn, the more you earn.”

Now maybe you’ve read my post where I talk about how I read at least one financial news article everyday. You know, I read an article a day not to show off. It’s again about the knowledge. In fact, the real reason I keep this Hot Wheels here is that it’s a reminder. A reminder that dreams are still possible, because it wasn’t that long ago that I was deep in student loan debt and had less than $100 in my bank account. I didn’t have a college degree, I had no opportunities.

But you know what? Something happened that changed my life. I learned about people like me who became successful. They demonstrated what it took to become multimillionaires. Again, it’s not just about money. It’s about the good life; health, wealth, love and happiness.

A little knowledge and wisdom can go a long way. Recently Forbes released its 2016 edition of the top 30 under 30. These are bright individuals under 30 years old who have made it big in their respective fields.

16-01-forbes-30-under-30 Annie Lawless

Being in the same age category myself, I can relate to a lot of what they have to say. Below are some quotes from individuals who made it onto the list. The green words are my own reactions to their quotes. Let’s learn some knowledge!

I realized if I didn’t love the woman I saw in the mirror then there was no way I was actually going to be successful.” ~Ashey Graham, 28. Model-designer.
As a size 14, plus-size model, Graham landed five magazine covers in the last year plus a bikini ad in the 2015 Sports Illustrated swimsuit issue. She calls herself a “body activist,” advocating for the 50% of American women who wear a size 14 or larger, an $18 billion market.
What you tell yourself everyday will either lift you up or tear you down. Self acceptance and confidence can be the key to unlocking your true potential.

“People perceive investing in the market as risky. The bigger mistake is leaving a lot of money in your savings account.” ~ Vlad Tenev, 28. Finance. Co-founder of Robinhood.
Tenev dropped out of UCLA’s math Ph.D. program to build high-tech trading software for hedge funds and banks. 
Investing too conservatively can backfire and actually lead to less financial security down the road due to opportunity cost.

 “When I found out that 0.1% of actors are working, I was like, ‘You know what? I’m going to go for it anyway.’ You only live once.” ~ John Boyega, 23. Entertainment. Actor.
As the new male lead in “Star Wars: The Force Awakens,” Boyega should get used to seeing his likeness on action figures and lunch boxes.
Nobody gets a second chance at life so seize any opportunity you come across.  

“I’m very much a risk taker. I don’t have experience on my side, but I have persistence.” ~ Tyler Haney, 27. Retail and E-Commerce. Founder of Outdoor Voices.
Haney created an activewear apparel company based on minimalism, and technical aesthetics.
This is pretty much my investment philosophy in a nutshell.

“My biggest moment? Maybe yesterday. Seriously, man, I’m 17, so I’m still doing it for fun.” ~ Shawn Mendes, 17. Music. Electronic musician.
The Canadian singer follows the path of countrymen Justin Bieber and Drake, parlaying an online fan base into a major-label record deal.
Remember to have fun. Nothing will ruin your teens or even 20s more than thinking you should have your life figured out already.

“To actually have something that we created on a Whole Foods shelf was so unbelievable. I still get chills just thinking about it.” ~Anne Lawless. Food & Drink. Co-founder of Suja Juice.
Suja Juice is a brand that is valued at $300 million. It has surged in popularity thanks to its rejection of added sugar, genetically modified fruit and other manufactured chemical additives.
Use the satisfaction of prior accomplishments to motivate future plans. 

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Jan 072016

Learning About Incentives From The Big Short

An incentive is something that motivates us to do something. The study of incentive structures can help determine economic activities. If our goal is to have money then we are motivated to work and get paid. 🙂

Understanding how incentives and disincentives work is important to analyzing the financial markets. The subprime mortgage crisis of 2007 in the U.S. was largely predictable for anyone who understands the incentive structures in the world of high finance. 🙂 In the early 2000s the banks started to securitize riskier and riskier mortgages. They sold these mortgages to other investors and claimed the loans were safe when in fact they were filled with toxic and sub-prime mortgages. Sub-prime refers to a borrower with poor credit history and has a relatively high probability of not paying back their mortgage. Around 2007 the entire house of cards collapsed which lead to a global financial crisis. All of this happened because of incentives.

  • Bank executives made a lot of money by underwriting risky mortgages. They lacked the incentive to guard against such risks because they were protected from the negative consequences thanks to insurance and the high probability of government bail outs.
  • Mortgage brokers earned higher compensation from selling variable rate loans than fixed rate loans, even though floating rate loans were more risky.
  • Potential homeowners were motivated to apply for variable rate mortgages because the introductory rates were lower than fixed rate loans.
  • People who didn’t even have jobs or steady incomes still received home loans because some mortgages offered a delayed payments program.
  • The credit rating agencies who were suppose to assess the financial risk of these mortgages gave these funds triple “A” ratings despite the high probability of default because rating agencies are funded by the banks who put together the mortgage funds. That’s like if a health inspection agency was paid by a restaurant to conduct a health and safety inspection on that same restaurant. 🙈 What are the chances the health inspector is going to write up a negative report? lol. If a credit rating agency such as Moody’s decided to not comply with the bank’s self interest, then the bank will just pay some other agency such as Standard & Poors to rate their mortgage funds instead and Moody’s will lose out on that paycheque.

So in every part of the system people were motivated to take unsubstantiated risks due to the incentive programs that were in place. There’s a book called The Big Short written by Michael Lewis which explains how the sub-prime mortgage crisis unfolded. Lewis says that people see what they’re incentivized to see. If you pay someone not to see the truth, they will believe your lie. Wall Street is organized in a way where sometimes people will pay to see something other than the truth.


The handful of individuals who understood how financial incentives work were able to predict the great recession. In 2006 a trader from Deutsche Bank paid $11 million to insure against $4 billion of triple A rated bonds from a U.S. bank. About 11 months later his bet paid off to the tune of a mind-blowing $3.7 billion! Holy ham sandwich! That’s an annualized return of more than 30,000%. 😲

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