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.