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moneysense.ca, 27/09/07
This and That
- Whether the government is blue or red, the surpluses keep piling up. The Globe and Mail reports that federal surpluses topped $14 billion last year or roughly $700 per taxpayer.
- Ellen Roseman warns about an audacious credit card scam.
- Rob Carrick writes that investors flock to high-fee funds because it isn’t easy to figure out how much they cost. I am not so sure. I think the vast majority of investors just aren’t aware of the importance of keeping investing costs as low as possible.
- As our currency stays strong, Jon Chevreau continues to stress the importance of going global.
- Larry MacDonald wonders if the Derek Foster story is too good to be true.
- Thanks to Red Flag Deals, our first major direct sponsor.
moneysense.ca, 27/09/07
Larry MacDonald’s article on the Derek Foster story is an interesting one. Thanks for the link!
I’ve read the posts he mentions on the Canadian Business Forums and there does appear to be ‘something missing’ but the different address on his TDW statements casts a bigger shadow on Derek’s story as well.
Personally I believe Foster’s story. The man certainly does not boast about anything, or claim to have extraordinary market knowledge or skills. He strikes me as a pretty modest guy who stuck to a strategy, took a few risks and is trying to live on less money than most people could tolerate…
What does a different address on his TDW statement prove?
Regardless of whether Foster is telling the truth or not, if, indeed his methods work for everyone why attack the man? Its focusing on the wrong issue. Even if he didn’t do what he claimed he did, if the method works just do it! If people spent more time following a solid and ethical method of achieving financial independence (regardless of which method it is) rather than trying to nit-pick and tear down people, I suspect this world would be a far better place to live in.
With respect to different address, try to find Donald Trump’s mailing address. The one key for credit-proofing is to be invisible to the public. If you had a large net worth, it would be quite silly to broad-cast to predatory litigation lawyers where you lived.
I agree with your assessment of Rob Carrick’s article. I used to buy mutual funds and the MERs were always easy to find (look at TD Mutual funds site for example, where you can easily see MERs for all their funds in a tabular format). I would look for low MERs like 1.5% vs 1.6%. When the e-series index funds came out I bought those because there were like 0.35%-0.5% range but still didn’t put too much thought into it and kept my high MER funds too. MERs were far from hidden, I was just too stupid.
I like Derek Foster a lot and I think that his books offer a lot of great advice. One complaint I have is that his book is very misleading in that he makes it sound like anyone who makes $30k / yr can retire in their thirties which I don’t believe is all that likely.
Regardless, someone who follows his basic advice ie save money, keep your expenses down, invest in div stocks will almost certainly retire well before someone who doesn’t save money or keep their expenses down.
Mike
For me, it is immaterial whether Derek Foster is telling the truth or not because I’ve had doubts about his method to begin with. It is simply a matter of math. I think that to be safe, you can withdraw 2%-3% of a portfolio in perpetuity and not deplete the capital. If you are optimistic and assume a 3% figure, for a $30,000 annual withdrawal, you’ll need $1 million or about 2-3 times the portfolio that Derek has.
Mike: You put it better than I did in my comment. It’s hard to disagree with advice like “be frugal”, “keep expenses low”, “beware of mutual funds” etc. but I do disagree with assumptions such as a 6% withdrawal rate or picking stocks is so easy that anyone can do it.
CC – do you not subscribe to the thought that 4% withdrawal (initially 4% then adjusted for inflation) is a reasonable withdrawal number?
I think if anything 4% is fairly conservative.
Mike
Mike
CC,
I’m no expert on Foster, but I always assumed he derived his income figures from what his equities pay him.
For example if he has a $600,000 portfolio of stocks and trusts yielding 5% (which is reasonable) his before tax income would be $30K. Whether or not this activity would deplete the capital is probably up for debate and I have never heard Foster discuss it…
TMW – I don’t think that questioning some or all of a book that someone wrote is “attacking” or “tearing down” the author.
I have yet to read a financial book where I agree with everything in it – that’s why I like to read lots of books so that hopefully I can piece together some knowledge and an investment/retirement plan that makes sense to me.
Mike
Mike: 4% is reasonable (not conservative) for someone retiring at age 65 because it is assumed that capital will be depleted. A person retiring in his 30′s needs to be far more conservative as his capital has to last much longer, practically forever.
MG: Derek said his income came from a mixture of dividends and CTTB payments before he published his book. Of course, he believes the capital will never be depleted. How else do you retire in your early 30s?
Dividends, as well as interest income, and return of capital…
If your portfolio yields 5% and you pull that 5% out every year, does your capital get depleted?
Depends on how the yield growth tracks inflation. If the yield growth is less than inflation, you’ll have to deplete capital to make up the difference. The last few years have shown unusually good dividend growth. I hope it persists, but who know how things will be in 10, 20 or 30 years.
I guess I have a hard time imagining a world where dividend growth exceeds inflation…but it is possible.
..meant to say ‘does not exceed inflation’…
I’m a lot more concerned about the admission that he didn’t include Christmas bonuses and the like in his calculations. To me, that just throws the whole thing into doubt. The obvious questions then are “how much do you really have to save?” and “what else did he leave out?”
I’m not saying I think he’s a complete fraud like Robert Kiyosaki, but he definitely is lacking credibility. If someone tells me I can retire in 12 years by saving $2000 a year, I want to know exactly how he did it, because it sounds like BS to me. If the explanation is “Actually, you have to save more than $2000 a year, and you have to invest with leverage and get lucky” I’m a lot less interested.
oh oh, sorry…I must have come across as a bigger doubter than I am. As others have mentioned, it’s not the method that I don’t believe (or believe in), it’s the missing information on how Derek came up with the ~$400k without ever really having a fulltime job. Time will tell how it will work out for him and so far so good but like Mike said, Derek makes it seem like anyone with a low to mid income can save up $400k in a short amount of time (with no real details of how) and that’s simply not true.
As Canadian Dream Free mentions on his blog, it took a fair amount of luck and Derek only really mentioned that when he was called out on in on the CB forums.
Overall, I think his 1st book was informative and definitely worth the read, but some things were left out. I’ve not read his 2nd book but I surprised to find out that he still doesn’t get into how he accumulated the capital. And yes, he has a right not to tell us, but we do have the right to question.
It’s not just the portfolio size that made me question the book, but also the fact that he had a house that was completely paid off as well as a rental unit (I don’t know how much mortgage was on the rental unit).
Alek – as I recall from the book he said he put some extra money in from time to time ie bonuses.
Mike
You really can’t judge without seeing 100% of the details….
What if he paid $60,000 for his house? What if he received a few large bonuses every year? Lot’s of what if’s when he does not disclose more…
Good point on the Rothmans bet Telly….
I guess in the end it is my opinion that he should have disclosed more to write such an instructive-type book. But I’m usually the type that will assume it to be true until proven otherwise.
meant to say Phllip Morris….gee I’m making a lot of mistakes today…my apologies.
MG – very true that we don’t have all the info.
As far as large bonuses go – I believe he said he never made more than $30k/yr while working – I had assumed that this included bonuses but obviously I can’t be sure.
Mike
I thought that Derek’s leveraged investments were common knowledge (in fact, I had talked about it in an old post here). I read it in a Star article even before I read the book and Derek himself confirmed in comments on this blog. I mentioned in my very first post on this subject that there is a huge element of luck in Derek’s success because the Star mentioned that he had invested his entire portfolio and a margin loan in one stock – Philip Morris (MO).
So, I never focussed on how Derek ended up with a retirement fund in the first place. In some ways, I didn’t (and still don’t) care. I am more concerned about if his method would work for everyone and in all economic conditions. I have doubts on that front.
Of course, if you believed that Derek’s method worked for him and would work for you as well, it is pertinent to ask if some information was left out or not disclosed fully.
Four Pillars- just for clarification; I think someone asking Foster about why the address on his statements are different than his home has a bit of a personal slant to it.
The discussion here about his methods are valid since they go to his underlying assumptions of his method and not to the man himself.
An actively managed strategy of buying blue chip stocks with appreciating dividend is a pretty sound one. I am not sure you can retire on it but its a fundamentally sound and strategy.
oops- that’s sound strategy not “sound and strategy”
Whenever I hear about someone who wrote a book about getting rich where the numbers and methods don’t seem to add up to the results described, I can’t help wondering if the real way they got rich was by writing a book about getting rich.
Aleks, it’s like the “stock pick” guys with hot tips about the next “10 bagger” etc. Why do they need to charge a fee? All they need to do is use their own investment advice! If Derek and these others have it all figured out and are doing so well financially, they should be happy to tell us how for free in a blog
Derek Foster’s story has also been published in MoneySense magazine, to which I subscribe. In fact, the latest issue has an update on his story and he also talked about how his book sales are helping to supplement his income. So, in a way, he’s not REALLY retired, so to speak.
I think it is feasible to stop working with $500K in the bank. I currently have about $350K in income paying investments and it almost covers all of my basic expenses (condo fees, utilities, etc). I am currently mortgage free, leverage free and if I were to get rid of my car, then it would be enough to cover my expenses. That said, I can see how an extra $150K in investments would get me to the point where it can truly cover my living costs. But for me, I would need to have some kind of safety margin in the event that a few of my investments tank. So, I wouldn’t be able to sleep at night until I got to about $700K in income producing investments.