Catching up with Derek Foster “Canada’s Youngest Retiree”

A few years ago, I got a chance to sit down and chat with Derek Foster, “Canada’s Youngest Retiree”.  Back then Derek shared his thoughts on the stock market, his investment strategy and much more.  I recently caught up with Derek and for this post I decided to playback the things Derek told me then and see what he thinks today.  First up, a quick bio:

  • Derek was born in Ottawa in 1970. He left the proverbial rat race at the age of 34 by using various investing strategies, many he believes any investor can emulate.
  • Derek is a 6-time National Bestselling author and when not writing books or giving speaking engagements (like at the World MoneyShow in Toronto this week) Derek spends time with his wife and six children in Ottawa (that must be a VERY busy house…)

In our last interview a few years ago Derek, after “The Idiot Millionaire: You Can Become Wealthy!” was released you said this about the economic downturn and getting out the market:

It was largely because of the 2008-2009 economic downturn. Because my personal situation had changed since I originally left the rat race at 34, (I was earning an income from other sources such as book sales, etc) I wanted to switch my portfolio to higher growing dividend-payers as this would save me tax and generate better returns over the long-term. BUT I wasn’t as smart as I thought I was; hoping to sell my stocks at one price and trying to get back in at a lower price. In some cases, it worked. I bought businesses like JNJ, Shoppers Drug Mart and Phillip Morris at reasonable prices. For other businesses, it didn’t work. For example, I waited too long for Canadian bank stocks. I missed the bottom and their subsequent run ups in price. Admittedly I missed that boat.  I guess the title of my book really applies to me, kind of tongue-in-cheek.

What’s new Derek?

Not much has changed since the last interview Mark – I still own most of the same stocks.  The approach has been very rewarding and the companies just keep raising their dividends every year.  The fact that the Loonie has come down from around parity to around 90 cents has also boosted the income, but this could change (who knows?), but I’ll take the extra income for the time-being.

Do you have any plans to write another book Derek?

Not right now.  We bought a camper and travelled around North America for a year with our family.  We got back a little over a year ago, and it’s been pretty busy with the kids because we homeschool.  I have an idea for a book that should be written, but right now I’m just too busy.

In our last interview Derek you said this about your investing strategy, on being primarily a dividend investor:

Before I was more focused on higher yields for income generation but my needs have changed. I mean the books generate income which was an unexpected surprise (because being an author or a writer is not usually the path to riches). Really though, I’m fortunate to have some other income streams with no debt and so things are different for me at 40 than 34 when I wrote “Stop Working” (Here’s How You Can Too!).

Are you still a dividend investor?

Absolutely – I love dividends!  I do have a few stocks Mark that don’t pay dividends such as Berkshire Hathaway, but overall my portfolio is pretty much full of dividend payers. Last year every one of my dividend stocks increased their dividends except one.  Why tinker with what is working?

When I first left the rat race, I was focused on high yielding investments, but now I am happy to have lower yielders with higher growth (more tax efficient if I don’t need the immediate income).  I would never have looked at a company like Visa 10 years ago, but am very happy I bought it while back.  The stock price has pretty much tripled, but the big story is that the dividend has grown 3-fold in the last five years – with more growth coming.  If history is any guide, we will see another healthy increase next month.  With a small 18% payout ratio and double digit earnings growth, this should continue to raise dividends for years.

I also like all the stodgy, idiot-proof stocks I’ve mentioned in the past…Colgate, P&G, J&J, Abbott, BCE, Imperial Oil.  I would like to mention an important point here.  Most companies retain a good portion of their earnings to grow their businesses and over time these retained earnings provide the foundation for future dividend growth as they help power earnings growth.  I discussed this concept in detail in my interview with your friend Million Dollar Journey Why the Second Million is MUCH Easier.

Uh, easy for you maybe Derek! 

OK, a few years back you mentioned this about your portfolio:

I have no bond component. Not that I think bonds are bad, simply, I’m a forty year old Derek Foster and I don’t see why I need bonds right now with my multiple income sources.

Are you still a 100% stock guy Derek?

Yes, I am.  Many people would say this is too risky, but really, are you going to stop brushing your teeth because of an economic downturn?  I want to point to an example to illustrate my thinking…  A few years back, the 10-year US bond was yielding something like 2% or so while J&J was yielding over 3%.  The US bond credit rating was rated ‘AA’, while J&J was one of the few companies in the US with a triple ‘A’ rating.  To top it off, J&J only paid out about 50% of earnings in dividends.  So, you had a higher rated security offering a higher yield with a lower payout ratio and future growth….so why would bonds make sense?

Many people point to the 2008-2009 downturn as evidence that bonds will save you during downturns, but what about the 5 years since then?  Look at the long-term returns of stocks over bonds – I think the stats speak for themselves.

I would also like to add that we have been in a major bond bull market since the early 1980s where bonds yields reached historic highs – so for the majority of my lifetime, the secular climate has been great for bond investors with declining interest rates offering capital gains in addition to very generous interest rates.  Now we’re at historic lows in bond yields – so looking out a decade or more, even if yields don’t climb from here (seems unlikely but who knows?), where will the returns come from?  So stocks with higher yields (example BCE) seem to offer better return prospects with fairly low risk.

I keep some short-term money to cover expenses, but right now, I have no attraction to bonds.  This might change in the future, but not as things stand right now.

Here’s what you said before indexing Derek:

I think index investing is very safe way to go. The problem I have with index investing personally (and maybe you can help me on this since I read your blog, you own some ETFs don’t you?) is the cap weighting associated with some index funds or index ETFs. At one time, Nortel and JDS made up something like 30% or more of the TSX, that’s major over-representation if you ask me.   I told Derek about cap-weighted ETFs…  I know about those products but you are still overweighted in the “hot” sectors.  Do you think your dividend-payers with your dividends reinvested, compounding over time, dividend increases plus stock price growth, stock splits, etc. will do better in the long-run than those capped index products or worse?  I told Derek index ETFs won’t ever “hit a home run” but will ride market returns…  That’s precisely my point. Investors in stocks can. Not to discredit index investing, I think it’s good for those who don’t have or want to take any time to analyze stocks, but I like my strategy. It’s worked out pretty well for me so far.

Has your perspective on indexing changed?

No – I still prefer “idiot-proof” dividend stocks (especially in Canada).  Our market is really skewed towards a few dominant sectors (financial services, materials, energy).  I think you can get better returns picking your own stocks (if you have the time to do it).  Take a look at Jeremy Siegel’s book, The Future For Investors and you can see how the reliable dividend payers have outperformed the market for long periods of time.  In fact, even during the early 70s when the “Nifty Fifty” stocks were trading in the stratosphere compared to the general market, investors in the best companies almost matched the market returns (and this was an extreme case where quality stocks were WAY overpriced compared to the market).  In addition, you can tailor your holdings to where they fit best tax-wise (maybe put higher yielding stocks in your TFSAs) as an example.

What’s next for Derek Foster?

I’m not really sure right now…just keeping busy and enjoying life.  I’m not that great at planning too far in advance…

Thanks again for the interview I appreciated your time and have fun in Toronto.

What questions would you have for Derek?  What do you make of Derek’s investing approach?

37 Responses to "Catching up with Derek Foster “Canada’s Youngest Retiree”"

  1. i haven’t read any of derek’s books but he sounds very down to earth. i especially like his take on bonds. i have about a 12% allocation to bonds which i keep in case of a downturn (like right now) and i need cash in our retirement. our dividends and gov’t pensions don’t quite cover our yearly expenses so bonds are our back up.

    1. He is Gary. Derek and I have chatted a few times. Derek has always been a fan of dividend paying stocks and I believe him when he says he doesn’t care for bonds, at least right now 🙂

  2. If you’re reading this and thinking his point about bonds makes sense, you’re wrong.

    You don’t invest in bonds based on age or ‘performance’. You invest in bonds and other asset classes for diversification and rebalancing purposes. That increases your long term returns even if it apparently seems to decrease your short term returns.

    1. You raise a solid point Glenn, about bonds “rounding out” the portfolio and enabler for rebalancing: when stocks go down buy stocks and/or sell bonds.

      I have chosen not to own bonds in my portfolio for now because I have other assets that account for fixed-income. I think everyone needs to decide their comfort for risk and it appears Derek has done that for him.

      1. ‘Comfort for risk’ is the type of emotional sales pitches that the industry uses to sell stuff Mark. Avoid it. Stick to financial decisions.

        And besides -as you well know – you *decrease* volatility and risk through diversification including by investing in bonds. Fully invested in stocks is increasing risk, not decreasing it. That’s despite what your emotions tell you.

        Stick to the numbers. Otherwise,it’s a sales job. The sales job going on in this article is ‘go all in on stock/equities for high performance’. I thought that people had learned that lesson 5-6 years ago. I guess not. Well, probably some retirees that had their savings decimated learned the lesson. I remember the euphoria of a now-retiree telling me how much he’s earning and how happy he was years ago, as his equities did amazing. He wasn’t so happy after the last crash.

        1. I think if investors who might be 100% equity also “stick to the numbers” as in their plan, they will be fine.

          I do however feel for retirees or folks entering retirement who must live off the capital. They will be forced to withdraw from their portfolio in a declining market (this one or the next one). As such, they should almost certainly need bonds to buffer stock market declines. Your story about the retiree could be common-place if we see another 2008-2009.

          Retirees who don’t need the capital to live from, but are living off of dividends and distributions from stocks and/or ETFs, are likely celebrating these declines Glenn. Thoughts?

    1. Agreed, all equities for now Dan. This approach, as per my comment to Glenn, might not work for everyone but for some – it certainly can.

      Hopefully equities will tank now 🙂

  3. Mark,

    Always nice to hear from Derek. I know he has his detractors, but I largely agree with what he talks about. I was fortunate to interview him as well a while back.

    I’m definitely on the same page as him regarding the 0% bond allocation. I honestly don’t get the attraction to bonds at all right now.

    Thanks for sharing the interview!

    Best regards.

    *BTW – it took me like 20 CAPTCHA codes to get this comment through. Not sure if that’s working right, but what a pain. 🙁

    1. Sorry to hear about Captcha Jason, not sure what is up???

      Yes, I think Derek is very aware some folks don’t necessarily agree (or maybe believe) his take on stocks and investing but the facts are, at least with me, he has been honest about his approach (with me) and he is forthcoming that his approach might not be ideal for others. His approach has, as he has mentioned to me a few times in person but also via my site, worked out very well for him. I only wish him well as I do other investors.

      Thanks for the comment!

  4. AFAIK Derek cashed out and panicked in 2008 thinking that correction was something more and that he “got it wrong”. Deep value dividend stock investors got crushed, more so than those invested in a balanced portfolio during the great recession. After he sold out he wrote his “Lazy Investor” book and started selling options on some of his stock positions and collecting the premium. This is what he did to supplement his income besides government family subsidies.

    His “stop work” philosophy is NOT duplicatable for the average joe and jane out there. Why? because he made a leveraged bet, a big bet on a global US multi-national company. He never talks about risk or how you should borrow on margin like he did to get started, he conveniently, leaves these two important points out. It’s as if, it doesn’t exist in his investing life. I have no problem with Derek’s investing style or how he chooses to live his life it’s just that he never wants to talk about risk and gives readers the impression if you follow his strategy – BORROW BIG and live off dividends is the way to Stop Work. Most people would never take those risks and they should never be recommended. I haven’t checked lately, but you can read a lot of his past on Canadian Business Investor Forum and his defence of his investing philosophy. I know what he did then (2009) and he bailed big time on his strategy leaving a lot of his tribe confused and troubled when he admitted he was WRONG!

    1. His “stop work” philosophy is not for everyone, and Derek has said as much Peter. We agree 🙂

      I know for me, I could not repeat his approach to-the-letter and I’d like to think I know a bit about investing; that includes any leveraged investing he did do.

      I intend to live off some dividend income, but also ETF distributions as well. This where my approach works for me and is very different from Derek’s approach and likely many other investors.

      I appreciate your passionate comments Peter!

  5. Mark,
    Derek is not retired at all. He is a fulltime author. He uses his retirement angle to sell his books. He is a great self promoter with nothing new to say. I’m not a fan.


  6. Interesting to see his investment strategy after he has gained more experience doing it. I still think diversification is important, and have 20% of my investment portfolio in bonds is probably something that I aim for. On the other hand, he confirmed me once again that investing in dividend-paying companies provides a good return, especially the ones that produce daily products.

    1. He certainly reinforced the play to use dividend paying stocks for income. I see the power of it in my own portfolio with this recent market correction. The value of my stocks went down this month, the dividend income rose.

    1. I think living off investment income is ideal, but I suspect it’s a goal not many folks can or will be able to achieve, especially for my Gen X cohort. I suspect we’ll need $1 M or a bit more in invested assets to do that, live off our investment income. We have a LONG road ahead Daisy.

      1. The reason why Derek was able to do it wasn’t that he was the worlds greatest investor, obviously he was good, but that he was super frugal, anyone who can raise as family on abuot 30 grand a year deserves kudos in my book.

        I don’t know who originated this but the math to early retirement is simple, save 70% of your income and in ten years you can stop working

        good luck

        1. Interesting point Rob, I mean, he did live frugally for many years and still does. I don’t think he even owns a cellphone still nor has cable TV in this house. I recall he saved >50% of his salary for many years, that was one of his big keys beyond any lucky leveraged bets to early retirement. Dividend stocks helped him but they were just part of the equation.

  7. Ahhh yes Derek Foster, I remember him well, read his book when it first came out. I also followed him in a massive (300 plus post) flame war over on the Canadian Business Forums!

    I believe there are two reasons why he is so controversial. One is the math, it doesn’t add up. Memory’s a bit vague but basic gist is he set aside $200 a month and was able to retire in about 6 years. Secondly it’s supposed to be a how to guide but as many have pointed out; he didn’t even follow his own advice. Basically he made a few leverage bets on the stock market which paid off big time, complete opposite of what he professes. This came clear when he panicked and sold everything off in 2008.

    Now the real reason why he was able to retire early is very simple and rather boring (not enough to be a bestselling author). One he got into the housing market as it hit bottom and two and much more importantly he and his wife are super frugal. May be off a bit on the numbers but I believe his portfolio was worth around $400,000 and they lived on around 20 grand a year!

    Being a bestselling author simply was icing on the cake and complaints to that end are simply sour grapes.

    I personally see no value in paying him to teach me how to invest, not at least when there are hundreds of (extremely) good bloggers who are willing to do it for free! But having said that if I can get his books used than I’d be glad to read them.

    If you interested in investing, My Own Adviser is a great place to start. If you’re interested in early retirement than check out Financial Samurai, Mr Money Mustache Man or the ERE forums.


    1. Thanks for the kind words about my site Rob, I really appreciate that.

      Yes, Derek has fans but he also has skeptics and non-fans. I know he knows this and I think this is what the non-fans keep coming back to, is they wanted/desired? more transparency to align with what he was writing about in his books and such.

      You’re right about the math, he did make some big leveraged bets and it paid off for him. Others probably wouldn’t be as lucky.

      In the end, you’ve got to be able to live with the decisions you make for yourself and your family. If you can sleep at night based on that, this is a good thing. Derek’s investing approach is certainly not for everyone but there are some things investors can learn from him and for that, I do appreciate what he shares about his journey because I’ve learned from him; there are things I would do but also things I wouldn’t. I know you feel the same Rob.

      Thanks for your comment, always great to get honest and passionate perspectives!

  8. I’m definitely deep in the category of non-fan (and far past that).

    As other’s have pointed out, Foster utilizes the Canadian gov’t income assistance program for low-income families. This is an issue no interviewer will confront him with, nor will Foster openly address it. His actions are completely within the law, but perhaps when a millionaire can be assessed as low-income…things need to change.

    Yup, retired millionaire Foster feeds his family of six on $30,000+ a year, but he does so on the tax payer’s dime.

    You can decide for yourself what that says about his character.

    1. All fair points and valid questions SST. Derek’s way of living is definitely not for everyone, I will be the first to say that and I don’t think it’s for me. I do think he is right about many things when it comes to investing: blue-chip stocks work; reinvesting dividends work; try to live off dividend and distribution income, works.

      Thanks for your comment and perspective.

    2. Yeah that issue came up in the massive 300 post flame war I mentioned in another comment, basically his comment was that he’s paid way more in capital gains tax than he ever got in “welfare”. Personally I have no issue with him collecting money from the government as it’s no different from any asset rich cash flow poor senior or from a smart investor who makes a 6 figure income and pays almost no tax (link below)

      I do have two complaints, one he should have been more clear on how he made the money and secondly the importance of being frugal.

      $150,000 $150 tax

      Just love his thinking


      1. I’ll have to read that link, thanks Rob!!

        As for your comments, all very valid stuff and yes, that is probably true: “…he should have been more clear on how he made the money and secondly the importance of being frugal.”


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