Among the many benefits of amassing savings, one of them is lower-stress moves. The last time I moved, my wife and I deliberately chose closing dates to create an overlap period where we owned both houses. This was only possible because we had enough savings that we didn’t need the proceeds from the old house as a down payment on the new house. An overlap period gives time for cleaning, painting, changing carpets, etc., at a leisurely pace. Other benefits are directly related to the problems Larry MacDonald described. On same-day closings, if the delivery of keys for the new house is delayed by a few hours, you might be paying professional movers $100 per hour while they wait. With an overlap period, any delay in getting the keys may be a little disappointing, but it won’t affect a move of belongings, because the move is still a few weeks away. If you choose to move yourself (with the help of friends and family), delays in getting moving vans can be accommodated more easily i...

It seems that the BCE takeover bid may force the Supreme Court of Canada to make a decision that will set an important precedent for future acquisitions of companies. It took an interesting set of events to get us where we are now. To understand what is going on, you need to know the various players and their motivations. As they say, “you can’t tell the players without a program.” Shareholders . These people own BCE, and the majority of them would be thrilled to receive the $42.75 per share of BCE stock promised in the buyout. Buyers . This is the consortium of players led by the Ontario Teachers’ Pension plan that wants to buy BCE for $42.75 per share. Presumably, they think BCE will be a good investment over time. However, they don’t have enough money to buy all of BCE. So, they need to borrow billions of dollars. This is why it’s called a leveraged buyout. After the takeover, BCE would be saddled with much more debt than it has now. Bankers . These are the compani...

The book “Free Parking” by Alan Dickson makes the contrarian case that for low-income Canadians, saving in an RRSP is futile. All it does is boost your income after retirement and cut into the various income supplements available to seniors. After factoring in the lost income supplements, some seniors will get to keep very little of their RRSP withdrawals each year. There are also other types of benefits based on income that make the situation worse. But, things are likely to change with the new Tax-Free Savings Accounts (TFSAs) . If the TFSA rules end up as advertised, even low-income Canadians will benefit from saving in a TFSA. It’s not clear that this will actually change people’s money saving behaviour, but at least the incentives are better. But, this will only last as long as TFSA withdrawals aren’t used to reduce income supplements and other means-tested benefits for seniors as I argued here . It would be interesting to see an updated version of “Free Parking” to se...

Edelman Financial is an investment management firm run by Ric Edelman who has authored several books. I have reviewed two of these books: “Building Wealth” and “The Lies About Money” . From one book to the other, Edelman went from being a fan of the mutual fund industry to a passionate critic. He explains in great detail all the costs associated with typical mutual funds and how investors don’t get anywhere near their money’s worth. Until now, I hadn’t looked at Edelman Financial’s fees. Thanks to an anonymous reader who sent a link to the fee schedule, we can take a look. Here are the yearly fees based on total assets: First $150,000: 2.00% Next $250,000: 1.65% Next $350,000: 1.25% Next $250,000: 1.00% Next $2 million: 0.75% Next $7 million: 0.60% Next $15 million: 0.50% As it turns out, this does not include fund expense ratios and other charges which add about 0.4% per year. None of these percentages look particularly big, but they add up. Over 25 years...

Apparently, the message that mutual fund fees matter is not getting through. In a recent paper , researchers Choi, Laibson, and Madrian describe an experiment where they give index mutual fund prospectuses to subjects and ask them to create a portfolio with $10,000. The experiment was carefully controlled so that the only variable was the fees charged by each of four fund choices. Each of the funds was designed to mirror the S&P 500 index, and the subjects were offered incentives to maximize future returns. Some subjects were offered one month worth of upside on their $10,000 portfolio. Others were offered more modest rewards for good performance. Before describing how the subjects performed, let me say a little about who participated. The subjects were Harvard staff members, Harvard students, and MBA students from Wharton. The students had SAT scores placing them in the top 2% of the population. So, you’d think that they would get above average results in this experimen...

I don’t normally pay much attention to economic predictions mainly because I don’t believe the person offering the prediction actually knows what is likely to happen. However, when Warren Buffett makes a prediction, I usually think about it at the very least. Buffett’s latest prediction is some doom and gloom mixed with a small amount of hope. He says that the pain from the current global financial crisis will last longer than most people think, and that financial institutions haven’t been hit this hard since the Second World War. If I hadn’t heard any more than this, I would have thought that his recommendation would be to sell bank stocks. But, Buffett goes on to say that the pain in the financial sector has already been recognized and felt. Now, I’m confused. It seems that Buffett’s prediction is that we’re in for a long recession, but that bank stocks have already been beaten up enough to reflect this fact. So, what am I supposed to do then? I think I’ll just go on following my fin...

Madison over at My Dollar Plan runs an interesting credit card arbitrage scheme (described here ). She basically flips a large number of credit cards from one 0% interest introductory period to another. As of December last year, she owed $223,000 on her credit cards , but she pays less than $1000 per year in transfer fees. She once got hit with an interest charge, but it turned out to be a mistake that she got fixed . She puts most of this money against her mortgage and into high-yield savings. After factoring in the balance transfer fees, she comes out ahead about $11,000 per year! Before reading about this scheme, I would never have thought it was possible. Surely the credit card companies protect themselves against this sort of thing, right? Well, my guess is that almost everyone who tries credit card arbitrage would slip up. From what I can tell, Madison belongs to a very small group of people who could pull this off without mistakes. It’s not hard to come up with wa...

The latest news on the planned takeover of Bell Canada Enterprises by a group headed by the Ontario Teachers’ Pension Plan is that the deal is in trouble. Every few days the deal seems to swing between going ahead as planned and falling apart. The main possible outcomes are 1. The deal goes ahead as planned at $42.75 per share. 2. The deal goes ahead at some lower price. 3. The deal gets delayed (perhaps permanently). What amazes me is the number of people who believe they know which outcome will occur. I guess it’s normal for people to form opinions on matters they can only guess at, but it’s another thing to commit real dollars to these guesses. I suppose that someone with detailed knowledge about banking as it relates to financing acquisitions might have a better shot than the rest of us at guessing the outcome here. But, this isn’t the case with the investors I know who have bought (and in one case shorted) BCE lately. I count myself among those who don’t know what w...

Some lenders offer mortgage accounts that include features of chequing and savings accounts as well. The idea is that you can save money by combining all your bank accounts into a single flexible low-interest mortgage. An example we can pick (or pick on) is the Manulife One mortgage account. Thanks to a friend, Susan, for suggesting this topic. On the surface, this seems like a great idea. The money in your savings and chequing accounts goes on your mortgage so that they are effectively earning tax-free interest at your mortgage rate rather than the pathetic interest rate those accounts used to get. Your line of credit and car loan move to the mortgage at a lower interest rate. Even your high-interest credit card debt moves to the mortgage. Manulife illustrates their account benefits with a fictitious case study. Our heroes are Mike and Sarah who start with a mortgage, car loan, line of credit, credit card debt, and savings and chequing accounts. They save $46,980 in interes...

Today is Victoria Day in Canada celebrating Queen Victoria’s birthday. The cost of the monarchy can be a lively subject in Britain, but to be honest, I’m not sure what it costs Canadians. The Queen’s representative in Canada is the Governor General. This position is largely ceremonial, but it does cost us money. The amounts are not terribly large when spread out across all Canadians, but it is many millions of dollars. Our previous Governor General, Adrienne Clarkson, went on many trips with a few dozen of her favourite artists costing Canadian taxpayers millions. I was never too clear on what value this brought to Canada, but perhaps there were some diplomatic benefits. What are the benefits to Canada of the role played by the Governor General and the rest of the monarchy?

Imagine working for a company for years, participating in the company savings plan, taking $2000 out of the plan, and then getting hit with a tax bill for $50,000! This actually happened to a woman who worked for $14 per hour for JDS Uniphase. Sadly for her and her husband, she wasn’t one of the JDS Uniphase employees who had their tax bills forgiven late last year. There is an organization growing to fight to change Canadian tax law to stop the taxing of money that people never received. This organization is called Canadians for Fair and Equitable Taxation (CFET). I explained the problem first here and here . It’s hard to understand why the government would want to tax people on money they never actually received. The problem is related to how employee stock options are taxed. The gain in the value of the options can’t be offset against any losses on the stock acquired with the options even though both are taxed at the same rate. Many company savings plans are structured ...

The Globe and Mail ran a poll to see which financial blogs their readers liked. The winner was The Fly . According to the Globe and Mail results article (no longer online), The Fly is “George (The Fly) Hamilton, a professional money manager who provides a hilarious running commentary to his trading day.” And sure enough, it’s a profanity laden commentary displaying supreme confidence in his opinions on stocks. This blog certainly has some entertainment value. The Fly actually says which stocks he is buying and selling, including price and number of shares. This comes with a generous helping of disdain for anyone who might disagree with his judgment. Does anyone actually trade based on what The Fly says? I was unable to find out what money George Hamilton manages. It certainly would be interesting to see his track record. I’d like to know whether he is a talented stock picker or just an entertaining blowhard. Either way, his blog is likely to remain popular. If any reader...

We’ve all heard about market averages. In the US, the big ones are the Dow-Jones Industrial Average, the S&P 500, and in Canada, we have the TSX. There are many other stock market averages as well. However, most investors get significantly worse results than these averages. There are many reasons for this: paying higher brokerage fees, paying high fees to investment advisors, paying high taxes due to overtrading, etc. Even when investors buy index funds that are designed to track a market average, they often underperform the average because of failed attempts to time the market; in trying to avoid market drops, they miss market increases. For these reasons, I think that “market averages” are misnamed. If you buy a stock index and hold on for two decades, you will get much higher than average results. Another problem with the word “average” here is that it turns off investors. Who wants to be average? Who doesn’t think he can do better than average? Maybe we should call the r...

A stop-loss order is an order with a broker to sell stock at a certain price. If you own 100 shares of ABC stock that is trading at $10 per share, you might place a stop-loss order to sell if it goes down to $9 per share. This limits how much you can lose on the stock. If the stock never goes down to $9, then the stop-loss order is never triggered. But, if something happens that causes ABC stock to fall very quickly, your stop-loss order may get triggered at a price below $9. But, most of the time the sale occurs at roughly the price level you pick. On the surface, this seems like a good idea. You are limiting your losses to 10%, and there is unlimited upside. Would a competent stock picker use stop-loss orders? I’ll show that the answer is no. A competent stock-picker is someone who is able to evaluate companies and identify one or more businesses whose future prospects indicate the stock is underpriced. Suppose that Carl is a competent stock picker and he has identified ABC C...

Mutual fund fees are very different from many of the other types of fees that we encounter in our financial lives. It’s important to understand the difference. Mutual funds charge investors yearly fees that are disclosed to the public as a percentage called the Management Expense Ratio (MER). To see the difference between MERs and, say, real estate fees, imagine the following exchange after the doorbell gets you out of bed on a Saturday morning: Agent: “I’m here to collect my $30,000.” You: “What!?” Agent: “My $30,000. The fee for selling your old house.” You: “But, that was last year. I already paid you.” Agent: “Right, but we’re into a new year. Your old house is worth $600,000. At 5%, that’s $30,000 this year. My fees are yearly. How do you intend to pay?” Of course, real estate fees don’t work this way, but MERs do because they are charged every year. In the case of income taxes, you only pay tax on new money you earn during the year. Your savings aren’t taxed. But M...

In many aspects of personal finance, you have a choice of whether to protect yourself with a safety margin or with some form of insurance. This won’t make much sense until we look at some examples. Mortgages Many homeowners worry that interest rates will rise and make their payments unaffordable. This can make long mortgage terms with fixed interest rates seem more attractive. However, long-term fixed rates are higher than variable interest rates. As Jim Somerville explains in this post , the extra interest is a form of insurance against future interest rate increases. Suppose that your bank says that you can get a mortgage for up to $300,000. If you get a mortgage this big, then you may need to lock it in for a long term because a spike in interest rates might ruin you. But, if you get a smaller house with a $200,000 mortgage, you’ll have a margin of safety that makes it possible to save interest costs by taking a variable-rate mortgage. If mortgage rates remain steady, then the...

While driving for about 11 hours to bring my son home from university, I was struck by the fact that high gas prices don’t seem to have reduced the number of cars on the road very noticeably. You can’t tell much from one day, but I haven’t noticed much difference in day-to-day driving either. Gas prices have risen about 50% in my area over the last year and a half. Some days I imagine that there are fewer cars on the road, but other days I’m not so sure. It’s likely that more people are taking the bus, but the difference hasn’t been enough to shorten the duration of my commutes perceptibly. Either demand for gasoline is less elastic than I would have guessed, or the effect is delayed. Perhaps, even if gas prices were to stabilize at current levels, demand would continue to drop as people feel the cumulative pain of paying high prices for a long time. I had hoped that a small benefit of rising gas prices would be less congested roads. Has anyone else noticed a difference?

Warren Buffett’s company, Berkshire Hathaway, has sold put options on four stock indexes including the US S&P 500. These are essentially bets that the value of the stocks in the indexes will go up. This is curious considering that Buffett was quoted in the rest of the article saying that stock market returns will be less than people think. This isn’t necessarily contradictory, though. The put option prices may have simply been too good for Berkshire to pass up. In these transactions, Berkshire is providing insurance to stock investors. Berkshire has collected option premiums from the investors and has promised to cover these investors if their stock doesn’t rise to agreed upon prices at some point in the future (between 2019 and 2027). Given Buffett’s lifetime investment record, it seems safe to assume that these put options were mispriced and that Berkshire collected large enough premiums that these transactions are expected to be profitable for Berkshire. I wonder if ...

The Big Cajun Man over at the Canadian Personal Financial Blog asked for insights into his spending habits in this post . Like many people, he’d like to spend less and save more, but reality is not exactly matching his wishes. The best way I know of to do this is to shorten the time from spending money to when you realize that you’ve spent too much. Most of us know the futility of yelling at a dog hours after it misbehaves. Controlling the way a dog behaves requires that rewards and punishments come right away. People are more sophisticated than dogs, but similar principles apply. When using credit cards, people can overspend for about a month before the statement arrives giving feedback on what they’ve done wrong. Even then, the minimum payment is manageable and the real problem can be ignored. Many young people go for years overspending until various interest payments build up to the point where they can’t keep up. Most people need negative feedback about their overspend...

The question of whether the economy is in recession always seems to be more confusing than it should be. Can’t someone just add up all the right numbers and tell us? According to Wikipedia’s Recession page , the standard definition of a recession is when a country’s gross domestic product declines for two or more successive quarters. This means that we can’t say for certain whether we are in a recession until 6 months after the recession starts. This gives pundits and experts at least 6 months to speculate on whether we are in a recession before the matter is settled. This is like having 9 innings to argue about which team is going to win a baseball game. No amount of careful study can say for certain who will win the game until it is over. Similarly, no amount of careful accounting can say for certain that the economy is in recession until the 6 months of decline have happened. The U.S. Commerce Department says that the economy grew by 0.6% (annualized) in the first quarter. Thi...

Yesterday I asked why anyone would get a mortgage with one of Canada’s big 5 banks considering that their advertised interest rates are much higher than other lenders . I got some useful responses from readers. Like most things in life, the price of a mortgage is negotiable. The big banks do give mortgages at rates much lower than their advertised rates, but you have to negotiate to get these low rates. Using the ideas from the reader responses, here is one possible strategy for getting a good interest rate on your mortgage: 1. Go to a financial institution that offers low advertised interest rates and negotiate a mortgage rate. Choose an institution that you would be willing to actually use for your mortgage; you may end up coming back if you can’t get a better deal anywhere else. 2. Armed with a firm offer of a low rate, go to your preferred big bank and try to negotiate a better deal. But, be willing to walk away if you don’t get what you want. 3. If you get confused, walk a...

Thanks to everyone who commented on yesterday’s post with their unsecured line of credit interest rates. The results are hardly scientific, but I have enough data to give people some idea of how their own interest rate compares to others. The average interest rate was prime+1.7%. Most of the interest rates were between prime+1.5% and prime+2%. There were outliers at prime+0.5%, 1%, and 2.5%. (I didn’t count the response from the anonymous reader who has a line of credit at prime because it seemed to be connected to a brokerage account and I wasn’t sure if it was for margin.) I didn’t get any responses pointing me to resources to explain what rates consumers can expect. Maybe such resources don’t exist. I suspect that consumers would get better deals if they had some way to compare lending institutions on the interest rates they charge for unsecured lines of credit. Mortgages It’s a different story for mortgage interest rates. There are many sources for advertised mortgage...