From an investment point of view, most of us say good riddance to 2008. The economy for 2009 is shaping up to have a rocky start, but I’m optimistic that stocks will rebound at some point. Don’t take that as a prediction, though. I don’t want to be just another commentator whose predictions are wrong half the time.

For anyone fascinated by Warren Buffett and his extraordinary investing career, Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life is a must read. At over 800 pages, it adds much detail to the scattering of facts that most people have about Buffett’s life. Any attempt to summarize this book in a few paragraphs would be hopelessly superficial: he was young, then middle aged, and then old. So, I’ll focus on one aspect: the perception that he is a simple folksy person who doesn’t know much about newfangled things like computers and the internet. In some ways this perception is accurate. He does tend to live simply, except for flying around in private jets to meet the rich and famous. He also has the ability to explain things simply and briefly. However, the work he puts into his investing is neither simple nor brief. He has spent most of his life consuming and analyzing financial data. He is well-known for avoiding technology stocks. He explains that he ...

At the close of financial markets for 2008, mutual funds must take a snapshot of themselves and disclose it publicly. Here is a short list of the main information that they will disclose: 1. 2008 return (or loss in most cases). 2. Main investments held. 3. Comparison to a benchmark. You might not think that there is much that mutual funds could do to paint a rosier picture, but mutual funds have a few ways to paint over the rust. 1. Painting the tape. Mutual funds inflate returns by buying more shares of stocks they already own at the end of the last day of trading. The extra demand drives up the price that gets reported for the end of the year. The price usually drops back down on the first trading day of the new year so that the fund actually loses some money doing this, but it has the desired effect; the reported 2008 returns will be slightly higher. 2. Window Dressing Who wants to find out that their mutual fund bought a bunch of bad investments? Some mutual funds...

I’ve been a fan of Scott Adams’ Dilbert cartoons for many years. I spent most of my career in a small cubicle lined with cloth, and his cartoons captured the essence of my work-related frustrations and fears with humour. Many of his cartoon-based comments on financial crises over the years have been right on the mark. However, Adams’ latest blog post misses the mark by a wide margin. To be fair, Adams doesn’t always believe the things he says on his blog. He likes to throw out half-baked ideas and stir the pot. Consider my pot to be stirred. Here is the essence of Adams’ argument about stocks: 1. People aren’t smart enough to pick their own stocks. 2. People should be limited to investing in indexes or special regulated funds run by experts. He also wants stock prices to be set by “some sort of regulating board.” To borrow from a well-known quote about democracy, capitalism is the worst way to run an economy except for all the other ways. One of the core benefits of democra...

I haven’t had much luck with Bell’s customer service until recently. I’ve had some crazy battles with Bell including being made to pay the same bill twice many years ago and a more recent running battle to get their internet service to work. A problem with my telephone sent me back to Bell’s customer service. It all started Friday when I started getting calls where the caller would hang up after one ring. My first thought that some kid was just having fun proved wrong when a friend sent an email asking what was wrong with my phone. It turned out that callers got one ring followed by static. My strategy at this point was to “hope the problem goes away.” By Sunday, it was clear that I would have to try another solution. Ever since Bell “gave” every customer the wiring inside their homes, we have to pay for any repairs. I had visions of having a Bell technician in to mess with the wiring for $100 and not fix the problem. This is what happened the last time a Bell technician came t...

The U.S. Office of Thrift Supervision has developed new rules to put a stop to some nasty practices of credit card issuers. The fact sheet they put out describes the major changes. This is good news not only for consumers but also for the credit card issuers who were already following these rules because their competition will be forced to play on a more level playing field. Most of the new rules are self-explanatory. Interest rate increases must take place at defined times with adequate notice for card holders. Consumers must be given at least 21 days to make a payment. A fairly substantial change is the rule ending double-cycle billing where the average balance over two months is used to calculate interest. This practice causes interest to continue for another month after you pay your bill in full. Now interest will be based on just the current month. The last new rule places restrictions on predatory high-fee subprime cards. These are high-fee, low-limit credit cards gi...

There are many times when you have to choose whether to “do it yourself” (DIY) or hire someone to do a job. This choice comes up with house repairs, investing, landscaping, to name a few instances. We tend to think of the choice as binary: either DIY or hire someone. However, there is a middle ground. Let me use an example to illustrate my middle ground approach. I have a large natural gas pool heater that became flaky after about two years. I have no training with these heaters and had little choice but to call a repair person. It turns out that fixing natural gas heaters is specialized work and calling in the repair person wasn’t cheap. I always had to pay for some minimum time plus the cost of some expensive part that had to be replaced. The repair person would get the heater working, but the flakiness never went away. During the fourth service call in two years I did my usual thing of watching the repair guy and asking questions. This guy happened to mention that the contro...

Alice Schroeder’s fascinating biography The Snowball: Warren Buffet and the Business of Life makes it clear that Buffett engages in market timing in the sense that he varies his allocation to stocks over time. If he does it, why shouldn’t we? Of course, Buffett’s market timing is different from the investor who makes short-term bets on whether stocks will go up or down. Buffett looks for attractively-priced stocks, and during some time periods he finds them and sometimes he doesn’t. This is still a form of market timing, though. It’s easy to show that market timers as a whole must make less money than buy-and-hold investors, on average. It’s simple mathematics that the extra trading costs along with investing in inferior asset classes like cash and bonds must hurt the average market timer’s returns. This doesn’t mean that all of them lose to the market averages, though. Buffett is a remarkable example of someone who has beaten the odds so convincingly that he must have talent th...

My family uses Rogers Cable for TV and internet, but we still use Bell for our telephone. Both companies work hard to get us to bundle all three services together. I’ve discussed the offers from Bell here and here , and now it’s Rogers’ turn. The mailing we received from Rogers isn’t just a generic mailing; it is addressed to us and contains specific details of which services we already pay for. Apparently, we can bundle Rogers telephone service in with everything else for $149/month, “all monthly service fees included.” This is only $5.27/month more than we pay right now which makes it seem like a great deal. There must be a catch, right? After reading further it turns out that there is more than one catch. I’m guessing that the $149 figure doesn’t include sales taxes. This makes the added cost of phone service close to $20/month. The list of services we currently have seems to be missing a service that costs close to $20, and so we’re up to about $40/month extra for the...

With the BCE takeover officially dead, BCE has announced that they will resume their dividend and start buying back shares. Just about everyone knows what a dividend is, but many investors may not understand what it means to buy back shares. After all, what sense does it make for a company to buy itself? For the uninitiated, it may be disturbing to learn that the number of shares in a company does not remain constant. Many companies issue new shares over time, and this dilutes each shareholder’s ownership in the company. There are many reasons why a company would issue new shares and they all have to do with paying for something. Stock options, when exercised, usually cause the company to issue new shares. A company might choose to raise money by making a secondary offering of new shares to the public. Corporate takeovers of other companies are often financed by issuing new shares. All of these things dilute the ownership of existing shareholders. Is this a bad thing? Wel...

It may seem obvious when you think about it, but the stock market and the economy aren’t exactly the same thing. Some commentators seem to confuse the two. There is no doubt that they are related to each other, but they don’t always move in the same direction. The stock market reflects the going price for businesses that are at least partially owned by the public. The economy includes these businesses plus privately-owned businesses, bond markets, currency markets, governments, jobs, etc. Stock prices are a consensus view of the expected future profitability of public businesses. This makes the stock market forward-looking. Sometimes the crystal ball is cloudy and stock market participants get it wrong, but stock price movements tend to precede changes in the economy. We have seen this lately in media stories. As stock prices dropped, we heard story after story of gloom and doom about the stock market. This has largely given way now to gloom and doom about the economy. Ap...

My wife and I have always maintained separate bank accounts. It never really occurred to us to do all of our banking with joint accounts. I’ve often wondered what it says about a couple when they make one choice or the other. It’s not that I have my money and my wife has hers. Since we were married it’s all been our money. If I happen to be short on cash, she’ll just give me $100 from her wallet without keeping track. If her bank account gets low for some reason, I’ll just write her a cheque. Sharing a bank account feels sort of like sharing a toothbrush to me. It can be done, but you’d have to be in quite a romantic mood to think that sharing a toothbrush is a good idea. It just seems like a pointless hassle to balance a chequebook when two people are making withdrawals. Misunderstandings with joint accounts must lead to the occasional bounced cheque. It’s possible that having separate accounts but not really keeping our money separate is only possible because we both tend to ...

Experts differ on which is the best approach to investing throughout your life. Some say to maintain a fixed percentage allocation in stocks, bonds, and cash regardless of your age. Others advise a lifecycle approach where you invest heavily in stocks while you’re young and shift to bonds and cash as you get older. Larry MacDonald reported on a recent study by researchers Basu, Byrne, and Drew titled Dynamic Lifecycle Strategies for Target Date Retirement Funds (full text of the study is available free). The title hints at a market-timing strategy which piqued my interest. The study compares fixed allocation strategies, lifecycle approaches, and a dynamic strategy the researchers devised. It turns out that the dynamic strategy doesn’t really involve market timing in the sense of trying to anticipate bull and bear markets. The dynamic strategy begins with a target yearly compound return expectation of 10% and makes the following choice each year: - If your compound average l...

Listening to financial experts can be both good and bad. Most of what I know about money has come from one financial expert or another. On the other hand, we need to be initially skeptical of anything new some supposed expert says. Evaluate new information before accepting it. For example, recent research suggests a link between poverty and brain function in children. The researchers believe that poverty is causing brain impairments. My first thought is that maybe some people have brain impairments which prevent them from making much money, and they pass these impairments along to their children genetically. I may be wrong about this, but I won’t accept the researchers’ theory until I see evidence, and I don’t care enough to pay $10 to see the full text of the study . I extend this way of thinking to all experts. Some people take anything their doctor says as gospel. My thinking is that like any other field, doctors have wildly-varying skill levels, and it pays to be skept...

1. Some algorithm at Google thinks this blog might be spam. This is silly of course, but it’s hard to argue with binary code. By contesting this, I’m now in a penalty box where to make a post I have to solve a CAPTCHA (one of those twisted up words you type into a box to prove you’re a person). I’m on some list to be checked out by an actual person at Google. If this blog ever disappears completely, you’ll know that something went completely wrong. 2. BluntMoney observes that it’s harder to spend money you’ve saved up . This is quite true. Found money often gets wasted quickly. 3. I had some plumbing problems this week and so did the Big Cajun Man . Fixing leaks yourself only saves money if you don’t end up calling a plumber anyway. 4. A carnival this week: Investing Carnival

My wife is quite frugal and often comes home from grocery shopping with a cut of meat sold at half price that has to be cooked within a day. We don’t seem to have had any problems eating these cuts of meat, but they leave me a little uneasy. I presume that the reason for the price discount is that these cuts are older than the full-price cuts. Presumably this means that the odds of getting sick from eating discounted meat are higher. I’m wondering how much higher. I’d like to say that we’ve never had a problem eating discounted meat, but it’s hard to know for sure. We don’t seem to have had any serious incidents of food poisoning, but minor bouts of stomach upset are common and hard to attribute to any particular cause. Most likely the risk from eating discounted meat pales in comparison to the risk of driving a car. I’ll probably continue to have a flicker of uneasiness when I’m told that dinner includes half-price meat, but only a flicker, and then I’ll dive in.

My natural gas supplier, Enbridge, has a program in place called TAPS where they give away some hot-water pipe insulation and efficient showerheads and kitchen and bathroom faucet aerators. My savings each year are supposed to be $45 on natural gas and $113 on water. But, plumbing often doesn’t work out very well for me. I started with the kitchen faucet. Swapping an aerator is easy, right? Unfortunately, our house is 19 years old and the parts were nicely fused. I got them apart, but a piece of the faucet broke. A consult with a plumbing expert confirmed the bad news: we needed a new faucet. Am I saving any money yet? Two more trips to the store for another consult and more parts plus a couple of hours on my back under the sink solved the problem. I think it will take a while to recover the total cost of $115.72 with my savings on natural gas and water. I’m afraid to try to install the other parts. This experience reminds me of the time my father-in-law got serious about savi...

My personal experience with trips to hospital emergency rooms is that wait times have increased over the last 25 years. Numerous newspaper articles on the subject seem to indicate that the trend to longer waits exists across Canada. My latest data point came when my son broke a finger playing basketball. He made a nice play stealing a pass and drawing a foul and was rewarded with a finger not quite pointing in the right direction. My wife and I took a deep breath at the thought of a long wait at the hospital, but we had little choice. At least only one of us would have to wait with our son. Sadly, I couldn’t find my two-headed coin when we were deciding who would stay. The wait to see a doctor was less than I feared at just over 5 hours. However, I can recall trips to the hospital for my own injuries decades ago when I waited less than an hour to see a doctor. What has changed? In thinking about the root cause, I see the problem at ultimately coming from government debt. The Ca...

How bad have stocks been lately? Regardless of what the numbers say, what matters to people is how they feel about stocks. Two people can feel very differently about the same events. Here we have a couple disagreeing about stocks: Sue: “After all this excitement in the stock market, the last two weeks have been good.” Andy: “Are you nuts? Stocks have been brutal lately. Worrying about our savings is keeping me awake at night.” Sue: “But I’m talking about just the last two weeks. Look at this chart.” Andy: “That proves my point. The TSX went down below 8000. At this rate, we’ll never be able to retire.” Sue: “But we’re up 2.4% in these two weeks. That’s good for such a short period of time.” Andy’s reaction is more typical than Sue’s. The pink region in the chart measures Andy’s psychological pain of watching stock prices sit well below where he hoped they would be. It’s like watching your favourite sports team when they’re way down. Even if they close the gap somewhat, fans...

1. BluntMoney argues that we need to cover more than the bare minimum of expenses in our emergency funds because we will find it difficult to give up our lifestyle-related spending in a financial emergency. 2. Big Cajun Man doubts that most people are willing to pay fees to dispose of hazardous waste . 3. Preet explains different ways of weighting stocks in an index with some clear examples: cap-weighting and fair-value weighting part I and part II .

When I’m invited to a wedding, I usually buy the happy couple a gift from their wedding gift registry. Until recently, I just assumed that the list contained items the couple really want at prices they consider reasonable. Recent discussions with two couples cast doubt on my assumptions. In both cases, the couples’ attitude seemed to be “we might as well put everything on the list and see if someone pays for it.” It was clear that they didn’t concern themselves much with whether they really want the items, and they certainly didn’t care about price. In the case of one of the couples, I had a chance to continue the discussion a little further, and it became clear that the salesperson helping them create their list definitely encouraged the “put it on the list and see what happens” attitude. It seems obvious enough that this approach is bad for both gift buyers and the couple getting married. Gift-buying guests have a limited amount of money to spend. If the registry contains expens...

A reader had some thoughtful comments and questions about my analysis of the Manulife IncomePlus annuity . Here are his comments (edited for brevity) followed by my thoughts. 1. You describe the worst case scenario in which an investor makes withdrawals beginning in the first year. The product is best suited to the investor who leaves cash in the investment for at least 15 years so that the guaranteed income grows at 5% per year (albeit simple rather than compounded) for that period. An example will help here. Our investor Ida puts $400,000 into IncomePlus. In my earlier analysis of IncomePlus , I focused on the case where Ida draws a guaranteed income of 5% or $20,000 per year for the rest of her life. But, suppose that Ida is only 50 years old and doesn’t need any extra income until she is 65. IncomePlus rules permit Ida to defer payments for 15 years and then collect a guaranteed $35,000 per year for the rest of her life. This figure came from increasing the $20,000 by 5...

Before the recent financial crisis, hedge funds were generally known as mysterious investments that make outsized returns. Now they have a reputation for flaming out. The reason why so many hedge funds have failed is easier to understand once we see that hedge fund managers maximize their expected returns by taking more chances than are good for investors. The main differences between hedge funds and regular mutual funds are Types of investments. Hedge funds are less closely regulated and tend to make riskier investments than mutual funds make, such as shorting stocks and using leverage. Fees. In addition to a yearly management fee, hedge funds charge a performance fee, which is a percentage of any returns over a certain threshold. A “2 and 20” hedge fund would charge 2% of the full amount invested plus 20% of all returns above the threshold. The performance fee is supposed to align the interests of the money manager and the investors, but it does this quite poorly. On...

Most of us dream of living the life of a millionaire. Many of us regularly buy lottery tickets, and more of us buy them when jackpots get larger than normal. However, few of us have a good sense of what is truly a large amount of money. Imagine a young guy named Jack who is 25 years old and starting a new job. We look into a crystal ball and see that Jack will average an inflation-adjusted income of $50,000 per year for the next 40 years. If you’ve never done the math, it can be surprising to realize that this amounts to two million of today’s dollars. Now if Jack were to win $1 million in a lottery, this would be only half as much as his total 40-year income. Even with investment returns, Jack would risk running out of money if he were to quit his job and spend $50,000 per year. Even if he kept his job, he would risk running out of money if he spent $100,000 per year. So, unless Jack spends his winnings quite modestly, his good fortune will be temporary, and the money will be go...

1. Preet explains why bond returns have been strong for the last 28 years and why the next 28 years are highly unlikely to have such high bond returns. 2. The Big Cajun Man discusses some Canadian bank woes along with a funny “boot to the head” video clip by The Frantics.

There is a big difference between the financial crisis and the plight of U.S. automakers. The financial crisis affected all financial institutions everywhere. U.S. automakers are being crushed by foreign competition. The financial crisis is definitely making things far worse for U.S. car companies, but the fundamental problem is that Asian companies make better cars. I’m not necessarily arguing against some sort of assistance for the U.S. auto sector, but it has to be with an eye toward becoming competitive. Unless GM, Ford, and Chrysler start making better cars, they will keep coming back to government looking for more handouts. Some people dispute the fact that Asian cars are generally better than American cars. This is largely patriotism rather than reason, but let’s examine it anyway. It is actually quite challenging to find unbiased information about car quality. Almost everything written in magazines and newspapers about cars is heavily influenced by the auto industry...

I’ve been getting a lot of requests lately to place advertising on my blog. Unfortunately, most of it is completely inconsistent with my message about how to handle money. Many are from payday loan companies. It’s sad that some people have got their finances into such bad shape that they feel the need to take loans from these companies at such exorbitant interest rates. The latest advertising request came from a web site (that I won’t name) devoted to strategies for gambling with stock options. There are some sensible uses for options, but this web site was not promoting sensible strategies. The strategies were a long-winded version of the following: “If you think a stock will go up, buy a call option.” “If you think a stock will go down, buy a put option.” “If you think a stock will have a big move, but don’t know which direction, ...” And so on. There are dozens of option strategies for ever more specialized situations. The problem is that you can’t predict the future to tell wh...

It’s time to bring out the heavy artillery (by which I mean pictures) to explain the effects of the Management Expense Ratio (MER) charged by mutual funds. Fees charged to manage your money are a good example of a death by a thousand cuts. They are barely noticeable over short periods, but are devastating over long periods. For the charts we’ll use a MER of 2% per year. This figure is on the low side for actively-managed funds in Canada, and on the high side for funds in the U.S. I collected some data from 1950 to the present on the S&P 500 index, the 500 biggest businesses in the U.S. Any other index, including Canadian stocks, would have worked equally well and would give similar results. Our hypothetical investor, Harry, has $100,000 in a tax-sheltered account. He puts it all in stock funds that we’ll assume perform as well as the S&P 500 (including reinvested dividends) less the 2% MER each year. All returns in the examples below will be real returns, meaning tha...

Whenever I buy bonds through my discount broker, the commissions they charge me are hidden. When I want to buy a particular bond, they just quote me a price, and when I decide to sell the bond, they just quote me another price. There is never any mention of commissions. Of course, discount brokers don’t let you trade bonds out of the goodness of their hearts; they make money somewhere. With stocks it is more obvious. You pay commissions and lose some money on the spread between bid and ask prices. Right now I only have one bond. It is a British Columbia coupon for $14,000 coming due 2010 June 18. A “coupon” is a bond that is bought for a discount to the face value and pays no interest until the coupon comes due. So, I paid less than $14,000 for it, and will get $14,000 in June of 2010. To figure out the fees I’m charged for trading this bond I first checked what I could get for it if I sold it: $13,438.14. The cost of buying another identical bond is $13,532.82. So, the total ...

1. I think it’s funny that the day after CIBC predicted a market bottom (the web page with this article has disappeared since the time of writing), stock markets in Canada and the US dropped 4-5%. It seems to be human nature to listen to these predictions when all evidence shows that nobody knows what will happen to stocks in the short term. I believe those who say that current stock prices will seem low looking back 5 or 10 years from now, but that doesn’t preclude the possibility of another 20% drop in the short term. 2. The Big Cajun Man asks if Nortel is a dinosaur , and discusses its prospects and planned reorganization. 3. Ellen Roseman asks who will be responsible for credit card fraud when credit card companies start giving us “chip and PIN” cards. Credit card companies would love to make consumers responsible for fraud based on the reasoning that the system is secure and the customer must have done something wrong. However, it is impossible to use even a chip and PIN c...

In his book Money for Nothing and Your Stocks for Free , author Derek Foster offers two strategies for boosting investment returns: selling put options and leveraging your house. Let’s examine these strategies. 1. Selling Put Options Foster suggests finding a good dividend-paying stock that you’d like to own. However, instead of just buying the stock, he wants you to sell put options on the stock. How this works is best explained with an example. I’ll use some actual (approximate) figures for Royal Bank stock (ticker: RY). Let’s say you’d like to own 200 shares of RY that are currently trading for about $46 each. You could just buy the stock for about $9200 right now, or you could sell put options on 200 shares. Royal Bank December put options at $44 have a premium of about $3.50. This means that someone is willing to pay you $3.50 for the option to sell you a share of RY for $44 any time between now and the third Friday in December. Based on 200 shares, you can collect ...

In the book “Money for Nothing and Your Stocks for Free,” author Derek Foster asks why we force kids to spend so much time “calculating the hypotenuse of a triangle,” something he can no longer remember how to do, when skills like this “are never used by most people in the real world.” He advocates spending more time teaching kids financial literacy. I agree that schools could do more to teach financial skills. However, I’m not sure how to keep vested interests from influencing the curriculum. We may end up teaching our children to buy expensive mutual funds, hire expensive real estate agents, and pay transaction fees on all purchases. The first part of Foster’s argument is that much of the math he was taught wasn’t very important. A curious thing about discussions like this is that people who lack a certain skill are often the ones who assert that the skill isn’t important. For example, I might say that knowledge of Russian literature isn’t important in investing. In reality, I ...

Interest in investing in stocks is low right now, and interest in using leverage (borrowing money to invest) is even lower. This also applies to the Smith Manoeuvre , which is a leveraging technique for borrowing against your home’s equity to invest. I’ve never been a big fan of leverage because it magnifies losses. If your investments do well, then leverage will make them perform even better, but if stock prices have big declines, you can be left with a lot of debt and a shrunken portfolio that won’t cover those debts. Having said all that, using leverage now is far less risky than it was when stock prices were higher. Paradoxically, the average investor is less interested in using leverage right now. Let me reiterate that I’m not a fan of leverage, but if there ever is an appropriate time for it, now is probably that time. I give FrugalTrader at Million Dollar Journey credit for continuing his series on his Smith Manoeuvre portfolio after the big stock price declines. It would ...

Recent stock market declines forced Manulife Financial to borrow $3 billion from the Canadian banks. This brings to mind one of the risks of buying any type of annuity including IncomePlus: default by the insurance company. The main drawback of IncomePlus is the high fees and the likelihood of not keeping up with inflation . On the positive side is the protection from a prolonged decline in stock prices. If stocks perform poorly for a long time, customers of IncomePlus will get a steady income eroded by inflation, but at least it wouldn’t drop in absolute terms. But if this doomsday scenario for stocks plays out, all IncomePlus customers will be leaning on the insurance guarantee all at once. What happens if Manulife runs out of money? Existing regulations require Manulife and other insurance companies to maintain certain financial reserves, and this was the reason for the $3 billion loan. If stock prices really do decline for a long time, creditors will eventually stop lend...

1. The Wealthy Boomer reports that Canadians are dumping mutual funds but buying ETFs (the web page with this article has disappeared since the time of writing). This is encouraging news if Canadians stick to low-cost ETFs. High-cost ETFs exist, and more are likely to pop up. Much of the financial industry is willing to call their products anything as long as they can continue to collect fat fees. 2. The Big Cajun Man debates what to do with his pension after getting laid off from Nortel. He can either take the lump sum and put it in a retirement account or leave it where it is and draw a pension when he is old enough. An actuary can crunch all the numbers, but this will ignore the most important consideration: will the money still be there to draw a pension? Nortel’s pension plan is hopelessly underfunded right now, and business prospects aren’t good. 3. For fixed-income investors who want higher returns, two possible strategies are to choose higher-risk bonds or to choose ...

A member of my extended family I’ll call Don has been hit with a hard sell to buy into a Manulife Financial’s IncomePlus annuity. IncomePlus is essentially a portfolio of mutual funds with very high MERs combined with an insurance component that adds even more fees. For an overall cost of about 3.5% each year, Don is guaranteed payments each year for the rest of his life of at least 5% of his original investment. For the first 20 years, this is just a guaranteed return of his inflation-ravaged capital. If Don’s portfolio happens to grow despite the 5% withdrawal and 3.5% fee each year, there are defined times every three years when the portfolio locks in the gains, and Don’s guaranteed yearly income rises to 5% of the new portfolio size. Don would be counting on such gains just so that his income would keep up with inflation. For Don’s income to match inflation, the mix of investments in his mutual funds would have to grow in value each year by inflation plus the 5% withdrawal...

A Barack Obama presidency is now confirmed. So, what effect will this have on the stock market? Whatever happens to stocks, we can expect the press to link it to Obama’s victory. One theory is that Democrats are bad for business, and stocks will drop in value. Another theory is that Republicans are responsible for driving the U.S. debt to dizzying heights, and the stock market should respond positively to a Democrat as President. Or maybe the market was anticipating an Obama win, and investors will “sell on the news” driving stocks down even though they think Obama will be good for the economy. Or maybe the opposite will happen because of some sort of double-reverse psychology. I don’t know what will happen to stock prices for the rest of this week, but whatever happens, it will be portrayed as the inevitable effect of Obama’s victory. Surely some stock price movements will come as a result of random buying and selling that has nothing to do with the election. Short term p...

The Better Business Bureau reports a scam that has worked on grandparents from California to New Hampshire. The scam is a variant of the loved one in trouble. In this case, a caller claims to be a grandchild traveling in Canada, in trouble, and needing a few thousand dollars. What makes this scam so effective is a combination of factors. Grandparents are very likely to want to help a grandchild. Voices can be difficult to recognize on the phone, especially if the grandparent hasn’t seen a teenage grandchild in a while. Traveling in Canada is quite plausible for a young American. Lastly, Canadians are far too nice to run a scam like this. I’m disgusted with these thieves, but somewhat impressed at the same time. This scam is quite clever. If these criminals put their abilities and some hard work into an honest venture, they probably would do well. Some people are willing to work very hard to avoid having to do any work.

1. Million Dollar Journey gives us a handy summary of planned TFSA (Tax-Free Savings Account) offerings from the major Canadian banks and brokerages . 2. Have you ever heard of a carry trade, but didn’t know what it was? Preet explains carry trades and the possible ramifications of Yen carry trades . 3. Blunt Money has some useful suggestions for getting out of cell phone contracts .

This week I got my notice from the government about how much they think my house is worth. They clearly didn’t spend much time on my house because my assessment went up by exactly the average amount in my area, 13%. Fortunately, this doesn’t mean that my property taxes will go up by 13%. City governments don’t collect more taxes when property values rise and less when property values fall. What actually happens is the city decides on the total amount they will collect from homeowners, and then divides that amount among homeowners in proportion to assessed property values. For example, if the city needs $1 billion from us, and the total value of all houses is $80 billion, then the tax rate is set at 1/80=1.25%. A house worth $320,000 would pay $4000 in property taxes. If property values had plummeted to a total of $50 billion, then the tax rate would have been set at 1/50=2%. The house that was worth $320,000 in good times is probably worth only $200,000 in bad times, but would st...

Seniors who pay property taxes in Ontario can look forward to a tax break starting next year. The maximum amount of the tax break for 2009 is $250, and for subsequent years it is $500. The tax reduction won’t come off the city tax bill directly, though. This program is part of the Ontario Tax Credits. Seniors who qualify and submit form ON479 at income tax time will get a tax deduction or rebate on their income taxes. In 2009, a senior couple with a combined income under $45,000 will get the whole $250, and the amount of deduction drops off to zero for combined incomes over $60,000. Single seniors in 2009 whose income is under $35,000 will get the whole $250, and the amount of deduction drops off to zero for incomes over $50,000. It’s hard to disagree with a policy like this when you imagine an elderly widow living in near poverty being forced from her home because she can’t afford the property taxes. However, this does shift the tax burden slightly from seniors to younger people,...

A group of regulators of the Canadian mutual fund industry have come up with a proposed new set of rules for disclosing information to potential investors using mutual fund fact sheets. Don’t look for any big differences to help investors understand what is going on. These fact sheets don’t even have to include a fund’s trading costs. As explained in an Ontario Securities Commission article Understanding Mutual Fund Fees, “brokerage charges, which are the fund’s cost of buying and selling securities in its investment portfolio, are paid by the fund but are not included in the MER.” These costs are buried in other disclosure documents as a Trading Expense Ratio (TER). To those of us who have an interest in financial details, the disclosures about fees in the fact sheets seem clear enough. But, I doubt that the average investor could make a meaningful connection between this information and actual fees paid. When friends and family show me their account statements, they are usua...

Former Federal Reserve Chairman Alan Greenspan was grilled by a U.S. House oversight committee about his role in creating the rules for the banking system that failed. All the bickering about who is at fault was less interesting than Greenspan’s suggested fix: “I see no choice but to require that all securitizers retain a meaningful part of the securities they issue.” In case that didn’t make much sense to the average reader, let’s break it down. A securitizer is an organization that collects loans into a big pile and then sells fractions of this pile to others. This doesn’t mean that they sell off each loan individually. If someone buys 1% of the pile of loans, that person will own 1% of every loan in the pile. Greenspan is suggesting that the securitizer should not be allowed to sell the whole pile of loans, but should have to keep some fraction of it. This leaves the securitizer with some meaningful fraction of every loan. How would this help? Well, the assumption is tha...

1. Rogue Clients Falling stock prices mean that financial advisors need to beware of lawsuits from “rogue clients” according to Gowlings’ Ellen Bessner in her interview with the Wealthy Boomer (the web page with this article has disappeared since the time of writing). She defines a rogue client as an investor who claims to have a high capacity for risk but says something different when markets decline. I prefer “insurgent clients” or “terrorist clients” to really drive home the imagery. Perhaps the real reason these clients are angry is because various marketing efforts gave them unrealistic expectations about the advisor’s ability to beat the market and protect their portfolios from loss. Just a thought. 2. Bank Prime Rate The Big Cajun Man added his voice to the many others observing that reductions in the central bank rate are not being fully passed on to borrowers. On one level this makes sense because the banks are recovering from a period where they lent money to borro...

We’ve watched as credit markets have seized up and world governments have pumped trillions of dollars into the banking system. Many of us want to know whether these efforts are working, and when we’ll get back to normal. According to Business Week, bank-to-bank lending rates in the US have dropped eight straight days (the web page with this article has disappeared since the time of writing). This doesn’t mean that the problem is solved, but we are headed in the right direction. This is as close as I can get to answering the question of whether government intervention is working. As for the question of when we’ll get back to normal, I don’t think we will get back to normal. For many years, “normal” was to lend money to people who couldn’t pay it back. It was normal for investors to buy packaged loans for much more than they were worth. Until we have another bubble that leads once again to lending madness, we won’t go back to the way things were before. There is nothing susta...

At least in a few areas Canada was declared number 1 in the 2008-2009 Global Competitiveness Report from the World Economic Forum. Overall, Canada was 10th out of 134 countries, up from 13th last year. And now let’s see the areas where Canada is number 1. Drum roll, please: 1. Soundness of banks This is a big one. We often complain about our banks for good reason. Their wide array of fees catches us coming and going. But, at least we don’t have to worry about whether our money will be there when we want it. Canadian banks are much less likely to go bankrupt than banks in most of the rest of the world. 2. Number of procedures required to start a business This one surprised me. Although I recall that starting my own business was a fairly easy exercise, I just don’t think of Canada as being business-friendly. I guess our fairly high tax levels are a separate matter from the amount of paperwork needed to register a new business. 3. Personal Computers Apparently, Canad...