1. Stock markets in the US and Canada were up this year. The gains were small enough that some would call this a “sideways” market where only stock-pickers can make money. Of course, stock pickers can only make more money by taking it from each other. For every extra dollar that one stock picker made above this year’s average market return, some other stock picker made a dollar less than the average. 2. Apple stock more than doubled. Technical analysts who study patterns in stock price charts could no doubt show you how this could have been predicted by their methods. Personally, I think it has more to do with those little iPod things that everyone is buying. 3. The Canadian dollar overtook the US dollar. Only a few years ago the Canadian dollar was the butt of jokes. (What’s another name for the Canadian twonie? A US dollar.) I think Canadians told these jokes more often than Americans did. The higher Canadian dollar should have caused the price of goods imported into Canada to drop, ...

Typical advice on asset allocation is that you should put fixed percentages of your savings into each of stocks, bonds, and cash. Usually, the advice is that the percentage in stocks should go down as you get older. I’ve never understood this rigid approach to investing. It makes no sense to me. The theory is that this approach will reduce risk, particularly as you get older and closer to needing the money for retirement. I think the use of the work “risk” here is misleading. We are really talking about volatility. The asset allocation advice is designed to reduce the volatility of your year-to-year returns. But, you pay for this lower volatility with lower long-term returns. To illustrate what I mean, consider the following example. Suppose you win a raffle, and your prize is that you get to grab a fistful of cash out of one of two large buckets with your eyes closed. One bucket has just twenty-dollar bills, and the other has half tens and half hundreds. If we say that y...

Many people will need long term care at some point usually late in their lives, and this care is expensive. The insurance industry offers long-term care insurance to pay for this care. However, you have to be aware of the many possible abuses with this type of insurance. This Consumer Law Page article provides an excellent explanation of long-term care insurance and the types of abuse and fraud that are possible (the web page with this article has disappeared since the time of writing). Disclaimer: I have no affiliation with the law firm associated with this article. The abuses include such things as loopholes that allow the insurance company to deny benefits, lack of inflation protection, and targeting seniors by getting them to churn their policies. Churning refers to the practice of getting someone to buy a “new and improved” policy every year to boost premiums and boost the salesperson’s commissions. There is another problem that probably would never have occurred to me, but ...

My wife isn’t much of a shopper, and I shop even less. So, maybe retailers have been talking about “Boxing Week sales” for some time without me noticing. Until recently, I thought it was just “Boxing Day.” We seem to get whipped into a frenzy about post-Christmas sales. We also get very excited about trying to find certain toys (particularly video games) that are scarce. I can’t say that I’m an expert on the methods used to get people to shop, but it seems that this scarcity is created intentionally to generate excitement and keep prices up. The rise in the Canadian dollar relative to the US dollar has created a sharp rise in Canadians crossing the border looking for bargains. There is no doubt that US prices are usually lower, and the trip can be worthwhile when buying expensive items. However, most people seem to just buy a few small things. I hope they are enjoying the trip because not much money is saved, if any at all, once you factor in travel costs and time spent. On the...

Jim Cramer has a show called Mad Money on CNBC where he makes (or screams) numerous stock recommendations amid strange sound effects while jumping around. This can be entertaining for a while, but a more serious thought comes to mind. Can we make money from Cramer’s picks? Bill Alpert analyzed Cramer’s results in an interesting short article on page 34 of the December 2007 issue of “R News”. The main result of Alpert’s analysis is that Cramer’s stock picks jump quickly the day after his show, and then tend to trail off over the course of the next month. The earliest opportunity for the average investor to buy these stocks is the day after the show, and so it is clear that buying right away is not a good strategy. Alpert looked at various other strategies such as waiting an extra day or two or five, but none of these gave good results. I haven’t watched Mad Money enough to know whether Cramer’s picks are intended to make money in the short or long term, but it is clear from Alper...

Christmas is approaching fast. You have only four days left to overspend your budget and run up credit card bills that will take months to pay off. Okay, okay, I’m sorry to sound so negative about the whole thing. It’s just that so much money is spent at this time of year, and it’s not clear that we really get our money’s worth. I’m all for buying gifts for children. I get a bigger kick out of watching a child open a gift than I do opening one myself. That’s not to say that I don’t want to receive gifts. I would be disappointed if I didn’t get anything. But, I would be happy to receive a thoughtful, low-cost gift rather than an expensive gift if it meant that the giver would have less financial stress when the credit card bills start arriving in January. I suppose that I’m not the first person to call for changes in the way we approach the holidays, but I’m not going to complain about commercialization and the lost meaning of Christmas. In fact, my advice applies even if you don’t cel...

I don’t waste a lot of time feeling guilty about things, but it wouldn’t be too hard to feel guilty about succeeding financially because others make poor financial decisions. Let me explain. I have saved my money and have put some of it into bank stocks. Many people get second jobs to pay the interest on their credit card balances, and some of these interest payments flow back to me in the form of bank stock dividends. Similarly, the value of my shares in retail stocks goes up because other people shop compulsively. We have all heard the sound financial advice to save some of your income and invest in stocks for the long term to get rich slowly. Once you have enough money, you can stop working if you like. But this advice only works because most people don’t follow it. If everyone saved and invested for 20 years, we couldn’t all quit working. There aren’t enough young people to do the jobs that keep our society functioning. If we all saved and invested, stock market returns would have ...

Do you still have some tech stocks lying around in your investment account from the boom days? Some of your stock positions might even be worth less than $100. What good could they possibly be now? The answer is that they might help out on your taxes. When you sell an investment for more than you paid for it, you have made a capital gain , and you will have to declare this gain on your taxes if it is not in a tax-sheltered account, like an IRA in the US or an RRSP in Canada. If you sell an investment for less than you paid for it, you have a capital loss . Fortunately, each year you pay taxes on your net capital gain, which means that you get to subtract all your losses from your gains. So, if you are going to have a net capital gain this year, you might consider selling one of those high-tech stinkers to create a capital loss to offset your capital gain. Take some time to think through all the relevant tax implications, though. For example, if your income is unusually low this yea...

An RESP is a Canadian tax-advantaged savings vehicle for funding a child’s education. I’ll leave most of the details of RESPs to others and focus on one aspect: the actual investments bought with RESP money. Back when my children were very young, I looked into RESPs and was disappointed to find that there were severe restrictions on how the money could be invested and what the money could ultimately be used for. For the plans I investigated, investments were restricted to mutual funds with MERs over 2%, and the rules for how the money could be used were more restrictive than was required by law. When the Canada Education Savings Grant (CESG) came along, things were looking up. The government was going to match 20% of RESP contributions (up to a maximum amount). Surely this would make up for the high fees charged by the mutual funds, right? Not so fast. Costs due to MERs accumulate year after year, but the 20% CESG is only added to each RESP contribution once. So each dollar that...

In an earlier post , I explained that stock trading costs consist of the visible commissions and the less visible costs due to stock spreads . In the case of commissions, it is obvious who gets the money – the brokerage. In the case of stock spreads, it is less obvious where the money goes. If traders lose money due to spreads, who gets this money? You could imagine a stock trading system where potential buyers and sellers each submit a price and a number of shares, and a computer tries to match them up. This sort of system might work well for a very liquid stock that trades millions of shares each day, but it wouldn’t work as well for thinly-traded stocks. Suppose that you are looking to sell 100 shares of little known XYZ stock, and for three days running there haven’t been any reasonable bids to buy the stock. You would be quite unhappy. To make the system run more smoothly, each stock has one or more market makers whose job is to create a market in that stock. Market ma...

Why are there so many different dates associated with dividends? Most companies that pay dividends do so every 3 months on a fixed schedule. They don’t have to do it this way, but shareholders like predictability, and companies want to keep their shareholders happy. You might think that the only important date is when you get your dividend money, but you would do well to understand a few more dates, the most important one being the ex-dividend date. Declaration Date . Just because a company has paid its dividend every 3 months for years, and they are highly motivated to keep the shareholders happy by continuing to pay dividends, there are no guarantees. On the declaration date, the company announces whether it will pay a dividend and whether there will be any change to the dividend amount. Ex-Dividend Date . When buying or selling a stock around the time that the company will be paying a dividend, you may wonder who will get the dividend, the old owner or the new owner. The ex-dividend...

Me : “Hello.” Unknown Caller : “Can I speak to whoever handles the gas bill?” Huh? This really threw me off guard the first time, but not the second or tenth times. I guess this saves them the trouble of trying to pronounce people’s names. These calls from 623-238-6131 have been quite persistent. When I was young, I used to talk to telephone solicitors as though they were people, but this took a lot of time, and it was hard to get off the phone. My next strategy was to yell at them, but by acting angry, it left me feeling angry for a while. Yelling at them didn’t help much anyway. The person on the phone is stuck in a low wage job and is not a decision maker with the telemarketer. The next strategy I tried was to say “just a minute” and set the phone down for a few minutes before hanging it up. This was amusing for a while, but sometimes I’d forget to hang up, and if my wife wanted to make a phone call, she would have to run around the house to find the off-hook phone. Now I jus...

The first things you’re going to need are six pillows and a waterbed. Oh, wait a minute, that’s something completely different. The Smith Manoeuvre is actually a method of deducting interest payments on your taxes. In case you’ve heard about this, but can’t make any sense out of it, let me try to simplify things. In the US, homeowners can deduct their mortgage interest on their income taxes. However, Canadians can’t. The Smith Manoeuvre is sometimes presented as a method of deducting mortgage interest for Canadians. This description is somewhat misleading. Let me explain. Ordinarily, Canadians can’t deduct any interest payments on their taxes unless the loan was taken out specifically for investing with the intent to earn investment income. Borrowing to invest is called using leverage and can turn out badly if the investments don’t do well. In an earlier post , I explained how some financial advisors like to recommend using leverage because it increases the amount their clients inv...

In an earlier post I discussed how using a limit order to beat the spread doesn’t really reduce spread-related trading costs. Does this mean that investors should always use market orders when buying or selling stocks? Definitely not. Let’s continue with the example of SPNS that had a quote of bid $1.45x200 and ask $1.60x2500, and we wanted to buy 6000 shares. In the earlier post we put in a limit order at $1.52. But there is a significant risk that this order won’t be filled. Maybe we really want to own this stock. (Please note that I don’t own SPNS, and I don’t know anything about it other than its quote worked well for my example.) We could just put in a market order and see what happens. One possible result is that we get 2500 shares at $1.60, and the rest at $1.61. Great. We get all the shares we want at a reasonable price. But what if we get the first 2500 shares at $1.60 and then 500 at $1.70, 1000 at $1.95, and 2000 at $2.40? This works out to $11,600 when we expected to p...

In my post about trying to use limit orders to beat the spread , I mentioned that the spread between a stock’s bid and ask prices can be worse when you are trading large blocks of stock. What we mean by large here depends on the stock you are buying or selling. When you get a quote on a stock, you get not only the bid and ask prices, but volume information as well. In our SPNS example in a previous post , the quote was bid $1.45x200 and ask $1.60x2500. This means that there were orders to buy 200 shares at $1.45 and sell 2500 shares at $1.60. If we had bought 6000 shares with a market order, the first 2500 shares would have cost $1.60 each, and the remaining shares would have cost more. So, in the case of SPNS, a $10,000 trade qualifies as a large trade that increases the spread cost. In a quick look at Microsoft stock (ticker MSFT) as I write this, the price is a little under $34, and the bid and ask volumes are both above 3000 shares. So, even a $100,000 trade in MSFT is small en...

In my last post , I explained what is going on with the tax amnesty granted to former JDS Uniphase employees who ran afoul of the rules for taxing stock options. I continue to read articles that are sharply critical of the government, but don’t accurately portray what happened. The main point that people I speak to about this situation don’t believe even when I explain it is that taxes are being charged on income never received. It is possible for employees with stock option plans to put $10,000 into their plans, later take $10,000 out of their plans, and then be expected to declare $500,000 in income on their taxes. See here for a full explanation. I disagree with those who say that these are high-tech high rollers who deserve what they got. I worked with people who were caught by these tax rules for smaller amounts. My colleagues were not high rollers or even particularly savvy with their money. Like most people they did their best to understand the benefits offered by the...

Here is a bonus post on some recent news. If you were looking for my promised post on trying to beat stock spreads, click here . The Canadian government has decided to forgive the tax bills of some JDS Uniphase employees who got caught by tax rules on employee stock options. The articles I have read on this so far haven’t explained things very well. I understand what is going on because I was caught by these same tax rules. When employees get stocks options, what they have is the right to buy a certain number of company shares at a certain price. This is different from owning stock. If employee Ed has 5000 stock options struck at $2, it means that he has the right to buy 5000 shares in his company for $2 each. When he exercises this right, the company comes up with the shares (usually by just creating new shares) and gives them to Ed in return for $10,000. At this point, Ed is holding 5000 shares in his company, and he can sell these shares if he wants to. Back when we were in th...

In my last post , I was explaining that the spread is the difference between the bid and ask prices on a stock, and that the spread contributes to the cost of trading stocks. Is there anything we can do to reduce the trading costs due to spreads? You can try to do this with what is called a limit order (rather than the simpler market order), but results are not guaranteed. A market order is an order to trade stock where you are saying, “just give me the best available price right now.” So, for a buy order you will get the ask price, and for a sell order you will get the bid price. Things get a little more complicated if you buy enough shares to exhaust the shares available at the current bid or ask price, but this is a subject for the next post. A limit order is an order to trade stock where you are saying, “give me the best available price as long as it is $X or better,” where $X is a price you specify. If there is no stock available at your price, then the order is held until ...

The buying and selling of stocks is a kind of auction. At any given moment, people are offering to buy a given stock at various prices, and others are offering to sell that stock at various prices. If a buyer and seller have the same price, then they get matched up, a trade occurs, and they leave the system. What is left is a list of buyers who are offering less than what the list of sellers are willing to accept. The highest price offered by the buyers is called the bid price, and the lowest price asked for by the sellers is called the ask price. The word “price” is often dropped, and people talk about the bid and ask on a stock. The difference between these two prices is called the spread . Let’s look at a real life example. As I write this, Microsoft (ticker MSFT) has a bid of $33.49 and an ask of $33.50. The spread is quite low at 1 cent. Such a small spread is typical of stocks that are traded a lot. So, if you want to buy Microsoft stock, someone is out there who will sell ...

As I mentioned in my last post on the cost of trading stocks, I pay a $10 commission for each stock trade. In most years I make between 5 and 20 trades. If I average one trade per month for 25 years, the commissions will add up to $3000 (ignoring inflation). This is low enough that it won’t have a serious impact on my returns. My strategy for buying stocks is to guess at the future prospects of the business, determine a fair price for the stock, and compare this to the current stock price. If I buy a stock one day believing that the business will be successful, it is unlikely that something significant will happen in the first week or month that changes everything. This is why I tend to trade infrequently. What happens if you trade more frequently than this? Suppose that day-trader Dave is playing with $10,000 and makes 2 trades a day, 5 days a week, for 50 weeks a year. (Even day traders need 2 weeks off, don’t they?) The commissions add up to $5000 per year. So, Dave needs to mak...

In my own portfolio, I choose to own several individual stocks. Even though I think that most people would be better off in index funds , I’m not against direct ownership of stocks. I happen enjoy tracking the progress of the businesses that I own, and I’m hopeful that I will prove to be slightly above average at stock picking.  ( Rereading this nearly 12 years later, I no longer own any individual stocks, and I realize that being above average doesn't mean being better than my neighbour; it means being better than most investment professionals. ) If you are not interested in analyzing businesses, and the time you spend following stocks consists mainly of checking current prices, then owning individual stocks probably isn’t for you. Over the long term it is the sales and profits of the business that determine your profits. Predicting the long-term future of a stock is best done by trying to predict the future success of the business rather than looking at wiggles in the chart of ...

The first time that I wanted to close an investment account with one company and move the contents to a new account with another company, I went about it in entirely the wrong way. You may have heard the expression “you can’t push a rope.” Well, the same seems to be true for money. Let me explain. I started by talking to my old investment advisor and giving him the bad news about my plans to make a change. He spent some time trying to change my mind, but gave up after it was apparent that my mind was made up. I asked him what I had to do to get the investments moved, and he told me that I had to contact some administrative person whose telephone number he didn’t have handy. After several telephone calls and some broken promises over the course of more than a month, I was getting quite frustrated. I didn’t realize it at the time, but my problem was that I was trying to push the money rather than pull it. When I spoke to the new company that would be handling my investments about m...