1. Big Cajun Man summarized what he saw as the important parts of the budget: A Budget for All (at Canadian Personal Finance) 2. Preet is giving away 4 books this week. You have until 11:59 pm Friday to comment on one of the 4 posts below to enter the draws. Findependence Day by Jonathan Chevreau No Hype! The Straight Goods on Investing Your Money by Gail Bebee New Rules of Retirement by Warren MacKenzie and Ken Hawkins RRSPs by Preet Banerjee

The latest federal budget promised to “propose new measures to ensure that Canadian consumers are charged no more for mortgage insurance than the true cost of obtaining that insurance.” When your down payment on a house is less than 20% of the purchase price, you normally have to pay for insurance provided by the Canada Mortgage and Housing Corporation (CMHC) . If you default on your mortgage, CMHC covers the bank’s losses. Like many items in the budget document, the meaning here is not entirely clear. My best guess is that the budget seeks to stop lenders from unreasonably marking up the cost of insurance provided by CMHC. CMHC provides a table of rates that makes it easy enough to check what you should be paying, but maybe few people actually bother to check. It never occurred to me that banks would do anything but add the exact amount of the CMHC premium to the mortgage principal. But, I guess that isn’t a very good way to run a business. Adding service charges are a core comp...

Along with income tax breaks and massive government spending, yesterday’s federal budget promises to “enhance consumer protection by limiting [credit card] business practices that are not beneficial to consumers.” Unfortunately, the budget is vague on what changes will be made. Here are some of the promises: 1. clear summary information on application forms and contracts 2. clear and timely advance notice of changes in rates and fees 3. minimum grace period on new purchases made with a credit card 4. improved debt collection practices The budget doesn’t contain much more detail than this. The third point about requiring a minimum grace period on new purchases could be interesting depending on what it means. The “grace period” is the time when no interest is charged on new purchases. My credit card agreement tells me that I get a grace period only if I paid my bill in full last month and pay it in full this month. The grace period extends from an item’s date of purchase until the pa...

I’ve explained before that Bell technicians were unable to make their internet service work on my telephone line. In a case of the left hand not knowing what the right hand is doing, Bell continues trying to win me back as a customer. The latest letter from Bell offers me internet service for only $17.95/month (in giant font). I suppose that would be a bargain if the service could be made to work, but I find the weasel wording around the giant numbers amusing. In front of the giant 17 is the word “from” written sideways in tiny font. This isn’t too surprising. The cheapest service costs $17.95.month, but higher levels of service cost more. There is also a tiny superscript “2” indicating that there is a footnote with additional information somewhere. However, I don’t see any notes on the page. A quick flip of the page shows about 130 words in 3 lines of text with characters less than a sixteenth of an inch tall all jammed into the bottom of an otherwise blank page. Nice. Fortuna...

A reader made an interesting observation about last week’s post on building your own market-linked GIC with stock options . Econstudent noted that using call options, you lose out on the stock’s dividends. So, let’s build an investment with principal protection that doesn’t lose out on the dividends. Recall that our earlier strategy was to invest most of our $100,000 in a 3-year GIC that matured to a value of $100,000, and used the left over money to buy call options on the TSX 60 stock index. This fully protected the initial principal, and gave some upside if the TSX 60 rose over the 3 years. Another approach is to actually buy the TSX 60 in the form of the exchange-traded fund XIU with most of the $100,000. Then buy long-term put options on XIU, and invest any cash left over in a GIC. The put options provide principal protection in case stocks drop, and you get to collect dividends during the three years you own XIU shares. The dividend rate on XIU is about 4.8% right now,...

1. Canadian Financial DIY explodes some myths about asset allocation . The oft quoted “asset allocation accounts for 90% of portfolio returns” makes little sense. 2. Preet makes a strong financial case for owning a basic car and renting a fancy one occasionally when you want to impress . 3. The Big Cajun Man sees that leverage is tempting right now, but isn’t interested in taking the risk . 4. Happily, this blog has been released from Google’s doghouse. I guess a human finally looked at my content and decided that this is a real blog. Search engine hits are ramping up again as well. It looks like I’m back in business!

A risk-averse friend was asking me about market-linked GICs as a possible investment. He believes this is a good time to own stocks, but wants protection against losing any money. Market-linked GICs seem to be a good fit, and so I decided to take a closer look. The particular GIC my friend mentioned was Royal Bank’s 3-year GIC linked to the TSX 60 index. The basic idea is that if the TSX 60 goes up after 3 years, you get a return, and if it goes down, you get your principal back with no return. However, if the TSX 60 goes up over the 3 years, you don’t get the full return. For example, if the TSX 60 goes up 50%, your $100,000 GIC won’t grow to $150,000. If it worked this way, it would be the same as owning the TSX 60 stocks with a side promise to give you back your full $100,000 if the index goes down. Banks aren’t in the habit of giving out free lunches like this. Enter the “participation factor,” or PF. The bank actually promises you a percentage of the TSX 60 return. S...

The Bank of Canada dropped its interest rate by half a point to 1%, and the banks dropped their prime rates by the same amount to 3%. The banks have been criticized for not passing on lower interest rates to consumers, but they have this time. In some cases, mortgage rates have dropped by more than half a point. It’s interesting that in the aftermath of a financial crash brought on by too easy credit, particularly in the U.S., the fix is to make credit easier to get. I’m not saying that I disagree with this policy; it just seems a little ironic. Eventually we will pull out of recession, and it will be interesting to see how close we get back to the way things were. In theory, banks should have learnt some lessons and should maintain higher standards for lending money than they had before the crash. But, they face considerable pressure to loosen their purse strings right now. I’d like to think that lending policies in the future will be sane, but we may see lending standards ...

At a party recently, I listened to two people talking about stocks, or more accurately, talking about stock prices. This is harmless enough, but it became evident that these people owned some of these stocks and knew almost nothing of the finances of the underlying businesses. To too many investors who make direct investment in individual stocks, “due diligence” means little other than looking at stock price charts. Watching stock prices is like watching the score of a football game and ignoring the game on the field. Leading by 3 points with 10 seconds left in the game sounds great until you look at the field and see the other team on the verge of scoring a touchdown. For the investor with little interest in evaluating businesses, low-cost index ETFs are a great way to go after the long-term returns available from stocks.

Last week I wrote about QuickTax’s Audit Defence product where for $40 you get the services of a tax specialist if you get audited by Canada Revenue Agency. Some readers and I had questions about how Audit Defence would work, and Geoff at QuickTax replied with some answers: “Audit Defence, which is already a popular offering with Intuit’s US TurboTax customers, is designed to offer our Canadian QuickTax customers peace of mind. An independent research firm reported that 20 per cent of Canadians are fearful of an audit. While that might not be you or me, it’s a sizeable part of our population. “Audit Defence for the 2008 tax year can be purchased directly within QuickTax, and will be available from February onward. Should the QuickTax user be audited or subjected to a CRA review for this tax year, Audit Defence provides full-service representation by a third-party tax specialist. They will review documentation and correspondence, provide counsel, schedule and attend appointments,...

1. Preet put together 15 years of mutual fund indices compared to their benchmarks . The string of mostly negative percentages is a stinging indictment of the mutual fund industry. 2. This week brought us another amusing review of Garth Turner’s latest book, this time by James Daw at The Star. “Turner tells us to buy chickens to raise, buy several seasons worth of seeds to hoard in your safe and buy a gun to shoot squirrels for food.” Great stuff. 3. There were differing opinions on the current effort to set up a national securities regulator in Canada. On the pro side are Canadian Financial DIY and Gail Bebee who believe it will benefit investors. On the con side is the Money Grubbing Lawyer (the web page with this article has disappeared since the time of writing) who believes that the current system works well and gives a detailed legal argument that forcing a national securities regulator on the provinces is unconstitutional. 4. Big Cajun Man tells the story of getting ...

Some would paint Nortel as a company that was on the verge of making a big turn around, but was blindsided by the financial crisis. If only the credit markets were in better shape, Nortel wouldn’t have been forced into bankruptcy. There is some truth to this point of view, but not much. To draw an analogy, when a very old and weak man gets the flu or pneumonia and dies, we can say that he would not have died if he hadn’t become sick. But he was in such a weakened state that any added sickness would end his life. This is how it is with Nortel. As a shareholder myself, I used to hold out hope for Nortel to recover, but it’s important to be realistic. To see how weak Nortel had become, you just have to look at its earnings history. I dug through old Nortel annual reports and tried to resolve all the inconsistencies from the earnings restatements to produce this history: Nortel Earnings ($ millions) 2008 (first 3 quarters): -3664 2007: -957 2006: +28 2005: -2610 2004: -247 2003: +276...

Little League Baseball Canada is the latest sports organization to have its charitable status revoked because it participated in a tax-shelter program set up by Parklane Financial Group, according to Paul Waldie of the Globe and Mail. Investors who donate $2400 to a fund that pays royalties to sports organizations could get back $10,000 in tax receipts. For an investor in a 40% income tax bracket, this leads to a $1600 profit. It’s possible that the people running the sports organizations weren’t aware of the details of the arrangement and how fishy it looks. After all, their focus is on sports rather than finance. But, it’s hard to understand how an individual making a donation and ultimately turning a profit could be unaware that something is wrong.

QuickTax was widely criticized last year for limiting customers to filing only two tax returns per copy. They have fixed this problem for the 2008 tax year by now allowing eight returns per copy. However, the most interesting new QuickTax feature this year is Audit Defence. If you’re worried about being audited by the Canada Revenue Agency, for an extra $40 you can get “full-service representation by a tax specialist – not just support or tips.” Of course, you pay this up front before you know whether you’ll be audited or not. This is essentially a form of insurance. This new service has some restrictions. It’s not available to Quebec residents or users of QuickTax Business Incorporated, and it doesn’t cover GST/HST reviews or “detailed financial audits,” whatever that means. The biggest question mark is whether the service will actually be helpful to taxpayers who get audited. Many of us know at least one person who found out the hard way that extended warranties on consu...

Job losses continue for middle-aged workers who have put in many years with their employer and had planned to stay until retirement. The loss of savings caused by the big drop in stock prices during 2008 only adds to the stress felt by people now losing their jobs. There is a small silver lining, though. Many laid-off workers receive severance packages including several months’ pay as well as a payout of the accrued value in their pension plans. They need some of this money to live on while searching for a new job, but a big chunk of this money can often be saved for retirement. All this means that laid-off workers find themselves suddenly with a pile of cash to invest in some way. The currently low stock market prices make an interesting place to invest this money. There is no guarantee in the stock market just as there are no guarantees in life, but lower prices increase the chance of good returns in the future. It would be interesting to know what choices laid-off workers are m...

1. Rob Carrick reports that the Supreme Court has ruled against the Lipson’s in the mortgage-interest deduction case . The Lipsons were using what could be called a very aggressive version of the Smith manoeuvre. 2. Kelly McParland’s review of Garth Turner’s latest book is hilarious (sadly, the web page with the review has disappeared since the time of writing). I have a hard time throwing away books; it just feels wrong. I made an exception for one of Turner’s books several years ago. 3. BluntMoney has some blunt words about thinking in terms of monthly payments . I particularly liked the advice about cars.

The book Money for Nothing: One Man’s Journey Through the Dark Side of Lottery Millions is Edward Ugel’s story of his life as a salesman buying lottery annuities. Ugel tells entertaining stories that expose the character flaws of not only the lottery winners, but also the salespeople (including himself) who chase these winners. To understand the business Ugel was in, you first have to know that often big lottery prizes are paid out over time like an annuity. So, a prize advertised as $5 million may actually be $250,000 per year over 20 years. For the entrepreneur who understands how people react to winning a lottery, these annuities create a business opportunity. To see this, let’s imagine a couple, Frank and Ann Beck, who win $250,000 per year for 20 years. In January of the first year they get their money and buy a big house, planning to make the mortgage payments with future years’ lottery payments. Then Frank’s deadbeat brother moves in with them, and several other family memb...

Governments are starting to do scary things with the auto and financial sectors. As Terence Corcoran of the National Post points out, there are risks in the auto bailouts (the web page with this article has disappeared since the time of writing). Our current financial mess was caused by banks lending money to people who couldn’t pay it back. It’s ironic that governments are now pressuring banks to lend money to individuals more liberally. The thinking seems to be that banks should lend money to people who are poor credit risks so that they can buy bad cars. That should solve our problems. The only way I can see for the banks and car companies to be run any worse would be to have the government taking an active role. Any step toward a planned economy is a bad step. The role of government in the economy should be to set the rules, enforce the rules, and reign in market participants who wield too much power. If the government wants to encourage greener cars, it should do this ...

The Tax-Free Savings Account (TFSA) is a reality in Canada now that we’re in 2009, and there are some questions that you should have answered before opening a TFSA. Costs of a TFSA can offset its tax advantages. The TFSA differs from an RRSP in that contributions cannot be deducted from your income. On the plus side, all growth in a TFSA (interest, dividends, capital gains) are tax-free and can be withdrawn tax-free. Before leaping in and opening a TFSA at your bank, it pays to think of the bank’s motives. Banks are in the business of making money. How will they make money from your TFSA? Here are two big areas: 1. Fees 2. Interest rate spreads on cash and fixed income investments. The TFSA is new territory for banks. You can bet that they have put considerable effort into deciding the best way to make money from TFSAs. Here are some possible approaches: 1. Offer TFSAs with similar terms and fees as RRSPs. 2. Offer TFSAs with better terms and lower fees than other accounts and t...

Outrageous CEO compensation is a serious problem. Many CEOs manage to create incentive structures for themselves that make them rich even while investors lose money. I’m usually happy to see media reports that shine the light on this issue, but a recent article is so silly that it distracts from the real issue. On the weekend, I read the following headline: CEOs beat employee's annual wage in 4 minutes, study shows by Eric Beauchesne (the web page with this article has disappeared since the time of writing). This sounds fishy. Only 4 minutes? I know these CEOs make a lot of money, but this is crazy. Before reading the article, I did some simple mental calculations. Let’s say the employee makes $40k/year. If the CEO makes this much in 4 minutes, that’s $10k/minute, or $600k/hour. Based on a 40-hour week, that’s $24M/week, or about $1.25 billion per year! I doubt that very many CEOs are paid his much. Beauchesne’s article contained enough statistics that I was able to ...

It’s been another quiet week on the blogs, but there were a few interesting articles: 1. Preet speculates about the possible motives of investment managers who give free advice on television . 2. Big Cajun Man recounts his experience setting up a TFSA . He’s trying to work around some fees that caught him off guard. 3. Most stock pickers only talk about their success stories, but FrugalTrader admits to some unlucky timing in his latest Smith Manoeuvre update . 4. This blog continues to be held in the doghouse by Google software. I still have to fill out one of those annoying CAPTCHAs to post an article. Google bots promise that an actual human will examine the situation within a few days, but it has been weeks. Sigh. Hopefully, the bots won’t just summarily wipe me out.

Here’s to celebrating the start of 2009 and not thinking about money for just one day!