The Canadian Association for the 50-Plus (CARP) is lobbying government to expand the Canada Pension Plan to a new Universal Pension Plan (UPP). CARP’s vision for this UPP is so ridiculous that they should not be permitted to participate in any serious discussion of pension reform. The proposed UPP would pay retired workers 70% of their pre-retirement income up to the salary limit for registered pension plans ($116,667 for 2009). This sounds wonderful. Because people tend to have higher incomes late in their careers, the 70% level would give retirees roughly the same income as working people, on average. This means that the average retiree would get to enjoy a middle class lifestyle without having to work or live off savings. But, how can we pay for this? CARP suggests adding additional payroll taxes of 9.9% of your first $46,300 and 15.4% of the rest up to $116,667! This is an enormous tax increase, but maybe not impossible. However, this is based on the current Canadian dem...

Former president of Nortel Canada, Robert Ferchat, made an impassioned plea to save Nortel. His arguments are long on emotions, but short on specifics. Ferchat bemoans the potential loss of a 114-year old company with “a stellar reputation as a telecommunications industry leader.” He calls for public support of both the company and its current and former employees. Unfortunately, he is vague about what he means by “public support.” How many billions of dollars would it take to pay off all of Nortel’s creditors and fill up its pension plan? There is a good chance that the reason public officials at all levels have been silent on this issue is because the dollar amounts are simply too large. If public money were used to save Nortel in some form, I’m not sure what management should be put in place. It’s doubtful that public officials could handle the task, and existing management at Nortel for the past 11 years have managed to lose over 40 billion dollars! I share Ferchat’s d...

A recent headline caught my attention: “Pandemic threat rocks economy.” Wow! First we had the financial crisis and now this. Maybe we’ll sink into a full depression. How will this affect your portfolio, and what can you do to protect your money? Okay, that’s enough sarcasm. I didn’t bother to give a link to the article because its body was quite disappointing after reading the blazing headline. It says that there is no evidence that the swine fly will turn into a pandemic, but if it did, the economy would suffer. Thanks for the pointless panic. Here is my approach for protecting my money from this “pandemic threat”: 1. Do nothing. If my investments made sense before, they still make sense now. If a pandemic does affect the economy, equity prices will adjust too quickly for me to take advantage or protect myself. 2. Avoid news outlets with sensational headlines and little to back them up. Getting all frothed up with fear may cause me to make rash decisions. Buying and selli...

My former employer Entrust Inc.’s stock is trading for $1.90 even though they have agreed to let Thoma Bravo buy them for $1.85 per share. What is going on that makes people pay $1.90 now to get $1.85 later? Do they expect deflation? This is clearly a case where the market thinks it knows something that I don’t know. Perhaps investors hope that another suitor will come along and pay a higher price. I don’t know of any other interested company, but who knows. This creates a reverse version of the usual takeover arbitrage. In the normal case where a stock trades below the takeover price, an investor who is confident that the takeover will go through buys stock to later sell it at the higher price. In this case, the investor who is confident that the takeover will go through can short Entrust stock and later buy it back when the takeover happens. However, I’m not confident enough about what will happen to try any form of arbitrage.

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. So what if the Management Expense Ratio that I pay on my mutual funds is 1% or 2% or 3%? If I’m planning to at least triple my money before I retire, why should such tiny percentages concern me? The short answer is that the MER is collected on the same money year after year, which makes it really add up. The government may take one-third of your income every year, but at least they don’t tax the same money as income again. Imagine if instead of taking one-third of your income the government added up the value of everything you have and demanded one-third of that every year. “Let’s see ... your house plus the rest of your stuff is worth about $450,000. That makes your taxes $150,000 this year. Pay up.” The MER is more like property taxes; you are taxed on what you have instead of what you make in a year. However, property tax rates are much lower t...

1. Canadian Financial DIY is calling for Canada to follow the UK lead by offering auto trade-in incentives . I like this as a replacement for just giving money to the car companies because the free market is more involved, but I don’t like it as additional public money flowing to doomed car companies. 2. Patrick at A Loonie Saved makes the financial case for renting rather than owning a home . 3. Preet has a story of someone who leased a car and the dealership tried to change the terms of the signed contract a few weeks later claiming that a mistake had been made . The amount of money at stake is $2100 over 4 years. I’d be interested in hearing how this ends up. 4. Clever Dude gets an amusing offer from a fitness club . See if you can spot what’s wrong.

If you try to move retirement savings from one institution to another the wrong way, you can encounter roadblocks, unanswered phone calls, and extended delays. Money has to be pulled rather than pushed. In physics class, students are told that “you can’t push a rope.” This means that if your calculations result in negative tension on a rope, the rope goes slack rather than actually pushing. If you want to move retirement savings to a new institution, the best way to go about it is to have the destination institution pull the money away from the old institution. Many people believe that to move retirement money out of a brokerage, they have to talk to their existing brokerage to have the money sent elsewhere. Unfortunately, the existing brokerage has little incentive to cooperate. They may try to pressure the client to stay and may try various delay tactics. In yesterday’s discussion of what holds people back from making the switch to low-cost index funds , Mark Wolfinger sug...

I’ve run into more people than usual lately who seem interested in talking about money and investments. These conversations often end in roughly the same place. Here is a shortened version: Polite Person : “So, what do you do?” Me : (list a few professional activities) “... and I write a financial blog.” Polite Person : “Oh, really? So, what’s going to happen with stocks/interest rates/the economy?” Me : “I don’t know, and I don’t believe that anyone else knows for sure either.” That’s usually as far as it goes. I try to avoid talking money to people who aren’t interested. Lately, several polite people I’ve met have continued the money talk: Polite Person : “My money is in mutual funds with Fund Company X? What do you think of them?” Me : “They are charging you about 2.5% per year in fees. In 30 years, more than half your money will be gone. Instead of a million dollars for retirement, you’ll only have $500,000.” The conversation then goes to the advantages of low-cost index f...

Most of us prefer a nice steady income rather than a highly variable income. However, one of the advantages of a variable income is the up years. Unfortunately, with an up year comes an increase in income taxes. A consequence of our progressive tax system is that people with variable incomes end up paying more income taxes. If Ted makes $50,000 per year and Alice has alternating years of $25,000 and $75,000, Alice will pay more tax (assuming that everything else is equal) even though they have the same average income. One way for Alice to compensate for this unfairness is to make RRSP contributions only during her higher income years. Compared to making her contributions every year, this strategy gives her a bigger tax reduction for the same total contribution. So, if you have the happy circumstance of earning more money than usual in 2009, consider using some of the extra money to catch up on RRSP contributions. You might also consider making some necessary home repairs to ...

Serious market timers sold completely out of stocks at some point during the recent market crash. Some have bought back in at least partially, but others remain on the sidelines with cash. Since March 9, the TSX composite index has risen 24.7%. This represents between 2 and 3 years worth of average stock markets gains. Stock prices may yet reverse after this recent rally, but what if they don’t? Will the market timers return when the TSX gets to 10,000? If not, then maybe 11,000? No bell is going to ring to let everyone know that the sharks are gone and it’s safe to get back in the water. For every market timer who crows about selling high and buying back in at low prices, I’m betting that there are two or more less talkative market timers who sold low and will ultimately buy back in at higher prices. I’ll stick to my strategy of staying fully invested through the ups and downs.

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. The people who run mutual funds have to eat. They also have to pay commissions to the people who sell units in mutual funds to the public. Other expenses include the cost of buying and selling stocks and paying for those slick commercials on TV scaring you into believing that you can’t do this investing stuff alone. Where does the money to pay for all this stuff come from? Well, mutual fund managers could look for nickels on the sidewalk, but it’s easier to take some of the giant pot of investor money invested in the mutual fund. The percentage of investor money taken for these expenses each year is called the Management Expense Ratio, or MER for short. A quick look through mutual funds with the Yahoo fund screener shows that for U.S. funds holding at least $100M of investors’ money, the MERs tend to be around 1%. There is some variability, tho...

1. Wealthy Boomer continues the discussion of harmonized sales taxes on mutual fund MERs (the web page with this article has disappeared since the time of writing). Although he mentions both sides of this issue, by calling the HST a “wealth tax” in his headline, he is decidedly on the side of the mutual fund industry on this one. I just don’t see this as a wealth tax. The tax is applied to the outrageous fees charged by mutual funds and not investor portfolios directly. Investors can eliminate most of the MER and taxes on these MERs by dumping mutual funds and buying index ETFs. 2. Big Cajun Man finds that some price matching promises from Best Buy and Future Shop aren’t worth much . 3. Four Pillars explains the dangers of post-claims underwriting (the web page with this article has disappeared since the time of writing). Many people don’t realize that for some types of insurance, the company doesn’t check if you qualify for insurance until after you make a claim. “Sorry ma’a...

Global sales of personal computers dropped just over 7% in the first quarter of 2009 (the web page with the supporting article has disappeared since the time of writing). It’s tempting to blame this on the current state of the economy, but I think there are other things going on. In the past, most personal computer upgrades were needed to get a more powerful processor or more memory to run the latest useful application. This reason is starting to fade. Most personal computers bought in the last couple of years are powerful enough to show videos, the most demanding application used by almost everyone. Upgrading a PC to run the latest video game still goes on among gamers dedicated to having the latest fast-moving game, but they are a fairly small minority of PC owners. Most people are content with simpler games that run just fine on a PC that is a year or two old. Even the widespread use of Firefox has made browsing faster and more reliable, thus reducing the need to replace o...

Warren Buffett has taken a 10% stake in a Chinese electric car company called BYD for $230 million . He tried to buy 25% of the company, but the founder, Wang Chuan-Fu, turned him down! BYD is a sign of the future for car companies. A normal part of progress is for upstart companies to take over industries while old companies die off. In this case, it is GM, Ford, and Chrysler that are at risk of dying off. When companies have been around as long as these three, it’s hard to believe that they could fail, but they have demonstrated that the North American car industry would be better off without them. A big change in the form of electric cars is coming, and new upstarts are more likely to satisfy customers than the old dinosaurs. I would prefer that the upstarts were home grown, but the change is coming whether we do it or the Chinese do it. The race is on for what will be a huge market, and Canada and the U.S. are piling resources into saving dinosaur car companies. Instead...

Investment firm Thoma Bravo is buying my former employer, Entrust Inc. You’d think that since I haven’t worked there for nearly 8 years, I wouldn’t have strong feeling about this takeover. Unfortunately, due to bizarre tax laws this is going to cost me a 6-figure tax bill for 2009! You see, back in the heady days of the late 90s, most people working in high tech got stock options. These options give the holder the right to buy shares at a fixed price. When the stock goes up, the holder of the options gets to buy the shares at the lower price and make money on the difference. Unfortunately for me (and many others), I bought shares, but hung on to the stock. So, I got shares at a cheap price when they were trading ridiculously high, but then sat on my hands and watched the share price make a long, sad descent. Now, I’m being forced to sell my shares to Thoma Bravo for a price lower than I paid for them. But, that’s the way it goes with stock ownership. I bought the shares fo...

A reader, PR, asked the following question: “I am moving in a few months and I'm trying to work out whether it will be wiser to buy a house outright (I can do so with savings from my last house, sold in 2006) or incur a mortgage. I have read Ric Edelman's spiel about why it is always better to take a mortgage instead of pay outright. I can see why it would work out if I were planning to stay, but I know I will be selling the house in 3 years. What do you think?” The first thing to realize is that whether you have a mortgage or not, you are exposed to the full volatility of the value of your house. The bank that gives you a mortgage isn’t your partner in your home investment. If your home’s value drops, the bank will still want all of their money back. If you decide to take a mortgage, then your portfolio will consist of your house plus the investments you make with the money you have on the side. You would be using leverage to increase the size of any portfolio gains...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. I was going through some old papers belonging to family again and found the following in the 1963 Canadian Federal Tax Guide: For the portion of income over $400,000, the tax rate is 80%. Add the Quebec provincial rate of 13.2% to this, and you get total tax rate of 93.2%! The corresponding U.S. tax rate in 1963 on income over $400,000 was either 87% or 91% depending on what their footnote 7 means. This really surprised me. Sure, $400,000 was an enormous income in 1963, but to take away almost all income above that level seems incredible. I used to think that income tax rates had risen steadily over the past century, but apparently, there have been some big bumps along the way.

1. Canadian Financial DIY has done extensive testing of Canadian Web tax software, and has found inconsistencies among the many available CRA-certified products. CRA has replied with an explanation of what CRA certification does and does not cover . It turns out that CRA certification means a lot less than I had assumed. You may be surprised as well. 2. Preet asks whether parents should cut their kids’ allowances during a recession . I can’t see doing this for young children, but it may make a good lesson for a mature 15-year old. The risk is that it will seem like random undeserved punishment without delivering the intended lesson.

Dollar-cost averaging is often described breathlessly as an investing technique that can pump up investor returns magically. This view of dollar-cost averaging actually contains two myths, and its real advantage is something completely different. What is Dollar-Cost Averaging? Dollar-cost averaging refers to investing a fixed dollar amount periodically to take advantage of stock price fluctuations. This is best illustrated with an example. Example Suppose that Mary saves $600 each month to invest in her favourite stock index ETF that has an average price of $30 per unit over the course of a year. Scenario 1: No volatility In this scenario, the ETF price stays steady at exactly $30 per unit each month. Mary buys 20 units each month for a total of 240 units by the end of the year. Scenario 2: Extreme volatility Now suppose that the ETF price bounces between $20 and $40 from month to month. The average price is still $30, but look at what happens to Mary’s purchases. Half of the mont...

In an interview with Charlie Rose, Warren Buffett discussed the mortgage crisis and said “beware of geeks bearing formulas.” It turns out that you don’t need to know any math to understand where these formulas go wrong. There are a whole host of Greek letters that represent investing formulas that few people understand. We have alpha, beta, sigma, and five other letters that are associated with stock options. Even people who rely on these formulas often don’t know much about them. A trader may tell you that he buys stocks when one or more Greek letters have certain values, but this is different from understanding what the numbers mean. One thing the formulas have in common is that they are usually calculated based on recent history of equity prices. So, any investing decision based on these formulas is necessarily a reaction to recent events. Often this results in traders gambling that the near future to be similar to the recent past. This sort of behaviour is similar to th...

It’s a natural human trait to look for approval from others. We have a tendency to look for the social evidence of what others are doing to choose our own actions. Unfortunately, this tendency works against active investors who seek to beat the market averages by stock picking or market timing. In his most recent letter to shareholders of Berkshire Hathaway , Warren Buffett said “[approval] is not the goal of investing. In fact, approval is often counter-productive because it sedates the brain and makes it less receptive to new facts or a re-examination of conclusions formed earlier. Beware the investment activity that produces applause; the great moves are usually greeted by yawns.” We’ve heard the perverse truth that investors are most pessimistic about stocks when prices are lowest and destined to rise. Similarly, investors are most optimistic about stocks when prices are highest and destined to fall. However, many people get the causal relationship backwards thinking that stock...

I received exciting news in the postal mail. Apparently, Prizemasters International has undergone a rigorous selection process for their lottery offer, and I qualify for a chance at my share of $4,000,000.00! I wasn’t aware that a multi-stage evaluation was ongoing, but apparently in stage one I received a grade of 100 and made “selected – unrestricted status.” In stage two I received a grade of A qualifying me for the “elite offer.” In stage three I made first grade giving me “bonus 1 & 2.” It took a while to figure out from the various bits of paper that the offer was to enter a lottery, or a draw to get into a lottery, or something like that. In fit of altruism, I decided not to accept the offer because it would reduce other people’s lottery winnings. I also figured that Prizemasters would likely want their papers back to use again. So, I folded up all the papers that didn’t have my name on them and stuffed them into the reply-paid envelope to send back to Prizemasters. It...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. One day at work I saw a sign advertising a free seminar hosted by my employer about investing and retirement savings plans. It just so happened that I was starting to think about putting some money away for retirement, and so I went to the seminar. An energetic guy named Mike gave a slick presentation with lots of graphs that I couldn’t completely follow, but I was left with the impression that Mike and his firm knew what they were doing, and that people could do very well financially by investing. Another plus was that my company’s employees would not be charged the usual yearly fees for Mike’s services. I approached Mike, and we set a time for my wife and me to meet with him at his office. After some discussion, we agreed that we would invest in a couple of different mutual funds, but as we were getting ready to sign papers and hand over most of our...

1. Canadian Financial DIY lists the benefits of working after retirement . I suspect that many people will find this necessary whether they enjoy the benefits or not. We face a future with fewer and fewer working age people per retiree. 2. Big Cajun Man reviews the book Complete Idiot's Guide to Getting out of Debt . 3. Preet explains why a bear market leads to more insurance sales .

When gamblers are losing money, they often start increasing the size of their bets to try to get even. A familiar example of this is the double or nothing bet. It’s not just Blackjack players who do this. When stock prices drop delaying retirement dreams, some investors suddenly switch to low-return conservative investments, but others start making reckless investments in an attempt to make back losses quickly. Billionaire investor George Soros takes neither approach. In his book Soros: The World’s Most Influential Investor , Robert Slater quotes Soros’s thoughts on downside risk: “If you’re doing poorly, the first move is to retrench. Don’t try to recoup. And when you start again, start small.” Soros is clearly advising investors to avoid the double-or-nothing mentality by saying not to try to recoup. Superficially, it may seem that he advocates a switch to conservative investments, but this isn’t really what he is saying either. Soros routinely used leverage (borrowed...

I offer this morning’s small April Fools’ joke with apologies to Signetics who ran an ad in 1972 for write-only memory . Sadly for the victims of Bernard Madoff’s huge Ponzi scheme , the concept of a Deposit-Only Bank Account (DOBA) is all too real. It doesn’t much matter how good the investment returns are if you can’t ever withdraw your money.

New players are breaking onto the banking scene offering low-cost specialized services. Traditional banks try to be everything to everyone by offering a huge array of services including various types of loans, bank accounts, retirement investment accounts, and many more products. The new players are specializing in individual banking services. By specializing, these new banks hope to offer the best service and lowest fees in their specialty. Initially, the so-called DOBA banks are offering bank accounts with no transaction fees, no minimum balances, and the highest interest rates in the industry. For some reason, the first product that these new banks are specializing in is the DOBA (Deposit-Only Bank Account). In time perhaps banks specializing in the WOBA (Withdrawal-Only Bank Account) will enter the fray as well.