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...

I got my first introduction to Eco Fees when I bought some paint at Canadian Tire on the weekend. Standing third in line at the cash, I decided to work out the final price. Let’s see ... $4.27 plus 13% sales tax ... works out to about $4.83. So, I was standing there with $4.85 in my hand and preparing to refuse the two pennies change. Cheerful Cashier: “That’ll be $4.86 please.” Me: “Oops. Here’s another nickel.” At this point I looked at the cashier’s screen to see where I messed up and saw a line that read “ECOFEE $0.03.” Me: “What’s an ECOFEE?” Cashier: “It’s for stuff that’s bad for the environment.” Poking around online I discovered that this Eco Fee has something to do with Stewardship Ontario and an organization called EcoFee.org. From the EcoFee web site: “The EcoFee is an ENVIRONMENTAL RECYCLING & RECOVERY FEE that businesses may add to invoices, billing statements, reminders, receipts, and document processing to help cover the costs that businesses inc...

How much are you willing to pay for life insurance that most likely won’t be paid if you die? Probably not much, if you know that your family won’t collect. I’ve always been suspicious of life insurance offered by employer benefits plans, and now I have a friend whose situation has confirmed my suspicions in at least one case. If you die suddenly in some way, there is no problem with life insurance from an employee benefit plan (apart from the fact that you’re dead!). The scenario that always worried me was what if I become terminally ill with cancer or some other horrible disease, and I’m unwilling or unable to continue working? Or maybe I develop a condition that prevents me from passing a physical to get life insurance, and then I get laid off. A friend of mine is in this last situation, laid off and unable to qualify for life insurance. Years ago, I asked about scenarios like this and was told by my employer that the life insurance is renewable. This means that employees ...

I don’t normally do a Friday round-up of interesting articles from other blogs, mainly because mine is still one of the newer blogs, but I found a couple of articles from yesterday particularly interesting. 1. Canadian Capitalist observed that yields in real return bonds show that investors are worried about deflation. His observation makes sense to me, but why investors are worried about deflation doesn’t make sense to me. I’m no economist, but I would have thought that the prospect of the U.S. government printing trillions of new dollars to cover debts would make inflation more likely. Maybe deflation is more of a short-term worry. Maybe this is a difference between Canada and the U.S. Maybe I need someone to explain this one to me. 2. Preet explained that the usual measures of liquidity don’t apply very well to ETFs . Normally, if a stock has very few trades each day, a single trade can cause a large change in the stock’s price. So, if you place a market order to buy shar...

To understand the significance of the Canadian federal election results, a good method is to look at which coalitions form majorities. The biggest difference between this election and the last election is that this time the NDP is relevant. When we have a minority government, for a party to win a vote in the House of Commons, they must form a coalition with other parties to control more than half of the votes. To get a picture of where power lies among the parties, we can look at the possible coalitions that make a majority. The results from the 2006 election were as follows: Conservatives: 124 Liberals: 103 BQ: 51 NDP: 29 Others: 1 The only coalitions that the Conservatives could form to make a majority were Conservatives + Liberals: 227 Conservatives + BQ: 175 The NDP were useless to the ruling Conservatives and this made the NDP mostly irrelevant until the numbers changed in later by-elections. Fortunately for the NDP, the riding counts changed so that the Conservatives could mak...

As we pick up the pieces from the end of the housing bubble, many investors who left the stock market are trying to figure out when to get back in. If they want to outsmart the market, maybe they should really be trying to anticipate the next bubble. We had a bubble in internet-related companies about a decade ago and then the recent housing bubble; another bubble of some type is sure to come along. The real money will be made by anyone who can anticipate the next bubble, buy in early, and sell at the height of the mania. Apart from the timing issues, a big challenge is to figure out where the bubble will be. Here are a couple of possibilities: Water . As global warming continues, fresh water may become scarce. Companies that buy up water rights or make grand plans to float giant icebergs through the ocean could attract crazy valuations. Alternative Energy . As China’s demand for oil continues to rise, supplies will be pushed to the limit, and prices are destined to rise much mor...

If last week’s stock performance was a “meltdown,” then Monday saw an “explosion” that erased half of last week’s losses as measured by the S&P 500 index. With Canadian markets closed on Monday, it will be interesting to see how they react in today’s opening. For some reason, the 11.6% recovery in the S&P 500 has not generated much excitement. Even if the rest of this week sees stocks prices fully recover from last week’s losses, it seems that many investors will still feel the stinging pain of loss. We’re wired to feel losses more strongly than gains. Our instincts often do not serve us very well when it comes to making investment decisions. We’re prone to being overly confident during good times and overly fearful during bad times like we’ve had lately. Do you really believe that our financial system and our way of life will crumble away? It’s time to tune out the hysterical ranting on pseudo-news channels and think for ourselves.

Today is Thanksgiving Day in Canada, and the main thing I’m thankful for is that the stock markets in Canada are closed. Unfortunately, our American friends won’t be celebrating Thanksgiving for a few more weeks and their stock markets will be open today. So, we won’t get a complete break from the barrage of panicky reports about stock prices. Maybe we would be better off if stock markets were only open one day per week. This might reduce panic and cause more investors to take a long-term view. In his 1993 letter to shareholders , Warren Buffett said “after we buy a stock ..., we would not be disturbed if markets closed for a year or two.” I’m not as confident an investor as Buffett, but I understand the idea. I own my current set of investments because I believe they will do well in the long term. I’m not gambling on short-term moves.

I’ve never been one to maintain a particular percentage balance between stocks and bonds like 70/30 or 60/40. However, many people do this on the theory that they are rebalancing buy selling something whose price is high to buy something whose price is low. The advantage of this approach is that it’s a disciplined way to buy low and sell high. On the negative side, it has investors holding low-return bonds for the long-term. However, for investors who can’t stomach an all-stock portfolio, the fixed ratio approach isn’t a bad one. Larry MacDonald wrote an interesting and amusing article titled the stock market hates you that does a good job of capturing our fears right now. We’re so nervous that many of us are abandoning our financial plans. Recent price drops in the stock market have thrown the stock/bond balance of investors’ portfolios out of whack. The percentage in stocks has dropped and the percentage in bonds has risen. So, my question is do you have the nerve to reb...

Canadian Financial DIY gave us a great summary of the Canadian political party platforms . As usual, the NDP have the most entertaining promises. The Green Party are a close second with their promises to raise the GST and legalize marijuana. Whenever I hear political promises, I tend to think about the side effects that will be caused. Charlie Munger, long-time business partner of Warren Buffett, illustrated the concept of second-order effects nicely in a speech at UCSB (pdf) : "A truck trailer business had a plant in Texas whose workman’s comp costs were 30% of payroll. This means that for every ten people working at the plant, the equivalent of three more were at home getting paid because they were supposedly unable to work. Workman’s comp is important for legitimate health problems, but 30% is ridiculous. When legislators created the workman’s comp rules, did they project costs based on existing sick-day rates, or did they anticipate the secondary effects of soaring n...

Lots of red ink has been flowing two days in a row now. According to Jason Zweig in his book Your Money and Your Brain , “after two repetitions of a stimulus ... the human brain automatically, unconsciously, and uncontrollably expects a third repetition.” If Zweig is right, then we must all be anticipating the end of the world. Stocks will keep dropping every day until there is nothing left. Things really are different this time. The sky is falling. All kidding aside, I do find myself looking for someone authoritative to explain that the world’s financial problems are now under control. I’m not sure who qualifies as sufficiently authoritative. President Bush does not. Warren Buffett might be good enough, but he’s too busy buying up businesses at fire-sale prices. For now, the financial system is still in surgery, and we’re in the waiting room hoping to hear from the surgeon soon.

Even after the U.S. government settled on its $700 billion bailout plan, markets continue to drop on Monday. Investors who sold out of the market before this latest drop are congratulating themselves. Unfortunately for them, they still need to make another right guess to come out ahead. Because I don’t believe we’re headed for anarchy, I expect recent stock market losses to reverse sometime in the future. It may not be for months or years, but I expect the sun to shine again. If I’m right about this, then any bears who sold before recent price drops will have to guess when to jump back into stocks. I suspect that most of them will buy back in at a higher price than their selling price. A curious thing about human nature is that many of those investors who end up paying more than their selling price to buy back in will be happy with themselves anyway. Even though they have lost on their market-timing gamble, these investors will cheerfully tell others about how they got out of...

We’re used to getting the hard sell for extended warranties on many of the things we buy. When I bought my latest television, I had to say no three times before the salesman finally gave up. It was the usual deal: the manufacturer warranty lasts for a while and I was offered a two-year extension for “only” $149. This magically dropped to $79 in less than 30 seconds. None of this is very surprising, but I did get a surprise while buying a replacement battery after my car key finally died. At first I could unlock my car from 50 feet away. This distance began to shrink until finally the battery in the key died completely. This is actually my second car key battery replacement, and I confidently got out a tiny screwdriver to remove some tiny screws to get at the battery. The guy at the electronics store had no problem finding a replacement battery after I handed him the old one. Store guy: “How long did your battery last?” Me: “What? Oh. Uh, 2 or 3 years.” Store guy: “That’ll be $5...

Whenever times are turbulent, we are tempted to say that “things are different this time.” While there are aspects of the current financial crisis that are unique, they also have much in common with past recessions and the great depression. In a moment of fear, we can begin to imagine that the current crisis won’t end and that we should all be buying bonds and gold in preparation for the breakdown of civilization. Our economy will either recover or there will be chaos. If there is chaos, then nothing will maintain its value. Even real estate will be worthless because titles will be insecure. The only sensible course of action is to plan for a recovery. Another lesson from the great depression comes from the fact that the government of the time did not attempt a bailout of the type that US lawmakers are currently working on. It’s easy to argue against a bailout. Why should we use public money to help rich bankers? As banks fail, the other institutions they owe money to will...

You’d think that if a mutual fund reported a 3-year return of over 24% per year, most of its investors would be quite happy. After all, any money kept in the fund over those 3 years would nearly double. Looks can be deceiving. Reported returns aren’t enough information to tell how the investors have fared. Suppose that ABC Explosive Growth Fund starts out with $10 million of investors’ money. To simplify our example, we’ll only allow money to enter or leave the fund at the start of each year. After one year, another $10 million of new investor money enters the fund. After another year, investors pour an additional $60 million into the fund. After the end of the third year, suppose that ABC fund holds $80 million. Note that this exactly equals the total amount of money contributed to the fund ($10 million twice and then $60 million). So ABC generated zero net return over those 3 years. Does this mean that their reported 3-year return will be 0%? Nope. In coming up with t...

After Monday’s big drop in stock prices over the failed vote on the financial bailout, Tuesday saw prices come most of the way back. Apparently, investors as a whole think that lawmakers will find some way to contain the financial problems. The net effect for diversified investors who sat tight through it all is minimal. Those who panicked and sold at the wrong time are facing real losses. When stock prices fall quickly and then immediately reverse course, it’s called a whipsaw. The same name is used when stock prices rise quickly and suddenly reverse course. The effect is reminiscent of the action of a saw going back and forth cutting through wood. Such whipsaws generate a lot of concern and discussion, but they really make little difference if you don’t do any trading. Unfortunately, many investors got caught up in the panic and sold their stock holdings near the low point of the whipsaw and plan to “wait until things calm down.” Unfortunately, these investors have alread...