1. Preet explains that Vanguard is owned by its clients which explains the ultra-low MERs . 2. Big Cajun Man marks a full year of unemployment . 3. Frugal Trader looks at the pros and cons of buying a car in the US and bringing it back to Canada . 4. Blunt Money sums up how to get out of debt in eight words . It’s refreshing to see a little tough love.

The Tax-Free Savings Account (TFSA) is a useful new tool for Canadians to reduce future taxes, but the $5000 limit per year makes them of little use to wealthier Canadians. Helping Canadians of modest means is an admirable goal, but you can count on wealthier people to complain. This brings us to Malcolm Hamilton’s proposal for retroactive TFSA room of $5000 per year back to age 18. Jon Kesselman gave a counter-proposal to give older people more TFSA room each year than young people get. Both of these proposals amount to a transfer of future wealth from young to old. To put a finer point on it, because only wealthier people can make use of large amounts of TFSA room, these proposals would transfer wealth from the young to wealthy older Canadians. Only self interest could blind people to the obvious flaws in the justifications offered for these tax changes. One commenter, yvrapx, made some intelligent observations: Recall the people he proposes get higher limits are the same...

Entrust, a spinoff from Nortel back in the late 90’s was sold to Thoma Bravo yesterday. Shareholders approved the deal for $2 per share with the required two-thirds majority. The deal was sold strongly by Entrust management. Thoma Bravo intends to leave existing management in place and will pay them cash incentives now that the deal has been approved. It is somewhat ironic that at the same time pieces of Nortel are being sold off to the highest bidder, the Nortel spinoff Entrust was sold to Thoma Bravo. However, it is less clear in the Entrust case that it was sold to the highest bidder.

A reader made the following observations about company pensions: I understood pension contributions were a contractual obligation between the employer & the employee, and the funds were essentially supposed to be held in trust for the employee. Maybe it's time we removed this responsibility from the employer, so it is no longer tempting for them to dip into these trust funds to prop up the company. It’s true that pensions are a contractual obligation between employers and employees, and that the funds are held in trust for the employee. Furthermore, employers are not permitted to directly dip into pension funds. So, how can pension funds get underfunded? The answer begins with a simple accounting game. Consider the example of Badco with a single 45-year old employee, Ed. Suppose that Ed is entitled to $1200/month (adjusted for inflation) from age 65 to 85. This is a total of $288,000. However, Badco doesn’t have to set aside $288,000 right now. Whatever money gets set asi...

I’ve said before that a great many Canadians won’t get the pensions they were promised through their working lives. Too many pension plans just don’t contain enough money to cover the promised payments. Recent news about Air Canada adds to this problem. Air Canada’s pension plan holds $2.9 billion less than it needs to hold to cover promised payments, and this deficit is likely to grow because the company has received approval to make reduced contributions to its pension plan for the next few years to avoid another bankruptcy. The possible outcomes here are 1. Air Canada’s business strengthens enough in the coming years that it makes up the pension shortfall (HA!). 2. The government makes up the pension shortfall and retired employees get all of their money. 3. Employees don’t get the money they were promised. 4. A combination of 2 and 3 where the government makes up some of the shortfall. My guess is that outcome 4 is the most likely. I’d like to think that all employees of all com...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Wouldn’t it be great if you knew when the stock market was going to go down? You could sell your stocks, wait for a while, and buy them back when the stock market was going to rise again. You’d get rich very quickly. Sadly, there doesn’t seem to be any magic way to know when the stock market will go down. You just can’t predict short-term swings in stock prices. But the sting of watching the value of your holdings drop 10% can make it tempting to look for signs of a market decline. Many people actually do a reverse kind of market timing. They get nervous and sell after stock prices drop, and they buy back in after prices start to rise again. Many commentators offer the sound advice that you should keep saving money and ignore short term stock market swings. Suppose that you have taken this advice to heart. Maybe you pour savings into low-MER index...

1. Preet explains the origin of Deferred Sales Charge (DSC) mutual funds and how this marketing move was extremely effective at pulling the wool over investors’ eyes. Congratulations to Preet on the second anniversary of his blog Where Does All My Money Go? Check out his big celebration giveaway . 2. Frugal Trader is in the market for a new car and has collected many useful suggestions from readers . 3. Big Cajun Man saves money by test-driving Wii games borrowed from the library before buying the ones his family like .

I’ve seen a great many articles lately arguing against investing in stocks. A good example is an article at Falkenblog that argues that the risk premium is actually zero . Canadian Capitalist does a good job refuting the points in this article, but the fact that so many compelling arguments against stock ownership are being written may be an indicator – or a contrary indicator.  Canadian Capitalist concludes that “stocks seem to be priced to deliver a healthy premium in the future,” which is dangerously close to a prediction about stock prices, but I’m inclined to agree. I remain invested in stocks because of the long history of a risk premium, but I’m hopeful that we’re entering a period more favourable for stocks than the last 15 years or so. The flood of commentators arguing against stock ownership make me feel even better about owning stocks now.

When we hear of one company being bought by another, we tend to think of the case where the acquiring company intends to run the acquired company itself. This can be bad news for existing management of the acquired company. However, sometimes a company is purchased by “private equity,” which usually means that existing management will remain in place. This will be the case with the company Entrust if the offer from Thoma Bravo to buy Entrust for $2 per share is accepted in a shareholder meeting on July 28. Unfortunately, in this case, the interests of Entrust’s management are in serious conflict with the interests of shareholders. As Thomas Kirchner explains in an article about the proposed Entrust takeover: “It is common to give management incentives in the form of equity and options once the company is private. The result is that management can make more money selling a company to a private equity fund and growing it than keeping it public. Moreover, the lower the price at w...

A friend of mine came oh-so close to a $15 million win in the July 10 Ontario Super 7 lottery. His group of 14 players matched 6 out of 7 winning numbers. He likes to tell the story to that point and have people guess how much he won. Some people guess that his share would be a few thousand dollars. More experienced lottery players guess smaller amounts, but few people get close to the right answer: about $118! How could the top prize be $15 million, but hitting all but one number pay the group only $1652.50? It turns out that when choosing 7 numbers from 1 to 47, there are 280 combinations that are off by one number. So, right off the bat, we expect the 6 out of 7 prize to be 280 times smaller. The next thing to take into consideration is that the top prize collects 73% of the prize pool, but the 6 out of 7 prizes share only 5% of the prize pool. Now we expect the 6 out of 7 prize to be an additional 73/5 times smaller. Overall, this lesser prize is now 4088 times smaller. Fina...

We frequently hear people claim that we’re in a “stock picker’s market” or that a “sideways market favours stock pickers.” Superficially the logic of this can seem compelling: When stock market returns are low, you can only get a high return by picking the right stocks. But, this logic doesn’t hold up to analysis. Problem #1 : Identifying the type of market. When someone says “we’re in a sideways market,” this is a prediction that short-term stock returns will be low. This prediction may be based on the fact that returns were low in the recent past, or may be based on other factors, but there is little evidence that anyone can predict short-term returns. I simply don’t believe that any commentator really knows what will happen in the short term. Problem #2 : Stock pickers don’t outperform, on average. Even if we knew that returns will be low for the next year, who says that a stock picker will pick the right stocks to get higher returns? Because of trading costs, the average stock...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. I don’t waste a lot of time feeling guilty about things, but it wouldn’t be too hard to feel guilty about succeeding financially because others make poor financial decisions. Let me explain. I have saved my money and have put some of it into Canadian bank stocks. Many people get second jobs to pay the interest on their credit card balances, and some of these interest payments flow back to me in the form of bank stock dividends. Similarly, the value of my shares in retail stocks goes up because other people shop compulsively. We have all heard the sound financial advice to save some of your income and invest in stocks for the long term to get rich slowly. Once you have enough money, you can stop working if you like. But this advice only works because most people don’t follow it. If everyone saved and invested for 20 years, we couldn’t all quit workin...

Fresh from his win in the big W network expert challenge, Preet gives details on Ontario’s new $10,000 rebate on electric cars .

A common misconception about Ponzi schemes is that the criminal running the scheme runs off with all the money owed to investors. In reality, by the time the Ponzi scheme collapses, there is no money. Imagine the following simplified Ponzi scheme. Bob, the friendly financial guy, gets people to invest $500,000 (inflation adjusted) with him each year. Bob reports a return of 5% above inflation every year to his investors after his fees, and the investors withdraw 10% of their money every year. However, in reality, the financial statements Bob sends out are lies because he is only making a return of 3% above inflation, and he has been taking $100,000 of investor money each year to spend on himself. This means that the amount of money invested is actually less than the total Bob reports to his investors. Unfortunately for Bob, investors withdraw 10% of the larger fictitious amount each year. The following chart shows how the claimed assets and real assets grow over the years. From th...

Yet another suspected Ponzi scheme has surfaced in Montreal. Financial advisor Earl Jones has disappeared owing investors an estimated $50 million to $100 million. If this turns out to be a Ponzi scheme, then this money doesn’t actually exist because old investors get paid out of new investors’ capital. Typically, Ponzi schemes are detected when the economy goes bad and many people need to draw on their savings. The demand for cash overwhelms the ability of the criminal running the Ponzi scheme to find new investors to supply the needed cash. As more of these schemes are uncovered, the call for regulation gets louder. In some cases, opportunist organizations simply call for self-serving changes to laws. But, what rules would actually detect Ponzi schemes in their early stages? The key difference between legitimate financial firms and Ponzi schemes is that the legitimate firms actually control assets that match the total amount on statements sent out to investors. In Ponzi schemes...

We tend not to think much about the contracts we sign on a fairly regular basis. Almost every time you sign something you are essentially signing a contract. Most of us don’t bother to read these contracts, but I sometimes do read them and I’ve noticed something interesting. Frequently, if I look for the fattest paragraph in the latter half of a contract, the latter half of this fat paragraph will contain something unpleasant. It could be that I’m guilty of confirmation bias, but it could also be that those who write these contracts are doing their best to hide the controversial parts. Applying this rule to my credit card agreement, I found that if a charge in a foreign currency gets reversed, I won’t get all of my money back. I’ll lose out on the dollar conversions in each direction. In the agreement to buy my last car, the fat paragraph informed me that if the deal fell through for any reason and my trade-in car was returned to me, I’d have to pay the dealership for the “Safety S...

I’m no fan of cell phones; the idea of never being able to get away from people who get bored and choose to call me is just too scary. But the advantages of having a cell phone in some situations, like when your car breaks down, are undeniable. I’ve had my cell phone for long enough now that I feel confident I know about all the gotchas that make it more expensive than I first thought. As far as I’m aware, I have the cheapest possible deal for people who rarely use their cell phones. My phone is from Petro Canada. I pay 25 cents per minute of air time, but this isn’t significant because I rarely use the phone, and I have to put more money into my account periodically or else my old money “expires”. There are charges for text messages too, but I don’t send them, and the only messages I’ve ever received were from Petro Canada. Fortunately, they allowed me to put an end to this by sending the message STOP. The cheapest option for buying air time (measured per month) is to add $25 eve...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. How you ever been to see a doctor who is obviously upset about something that has nothing to do with you? This has happened to me a couple of times where a doctor was complaining about something and I had little choice but to sympathize even though I was much more concerned about my own problems. Otherwise, why would I be seeing a doctor? One of these times the doctor was having a problem with her extended health coverage for topping up the basic government medical coverage. Her partners wanted her to go in with them on a plan that cost $400 per month for each doctor, but she saw in the fine print that the plan had a lifetime cap on all benefits of $25,000. She correctly figured out that she would pay $25,000 in premiums in just a little over 5 years. I asked her if she could afford to pay $25,000 right now if she had some sort of medical problem, and ...

1. Preet gives a financial literacy test in just 3 questions . If you get any of them wrong, you're at significant risk of having others take advantage of you financially. 2. My Dollar Plan has some good advice about learning the financial impact of everyday purchases by annualizing their costs. 3. Big Cajun Man weighs the pros and cons of a Costco membership .

One negotiation tactic that has worked on me in the past is strategic use of silence. When a gap in conversation gets long enough most of us have an irresistible urge to fill in the gap with something, anything. The problem comes when negotiating and you jump in to fill a gap with a concession. It’s not just high-powered business negotiations that I’m talking about here; it could be negotiating over whose turn it is to wash the dishes. Since I first learnt about silence as a negotiating tactic, I’ve recognized it being used by others many times. One long gap in conversation was on a telephone call with a lawyer seeking ridiculous concessions on a consulting contract. We didn’t talk for about 15 seconds, which may not sound long until you’re actually sitting there holding the phone for an apparent eternity in silence. Fortunately, I knew about the use of silence and didn’t break the tension by agreeing to indemnify the other company against patent problems related to the proje...

It is well known that the winner of an auction tends to be the person who most overestimates the value of the item being auctioned. The loss resulting from overpaying has been dubbed the “winner’s curse.” In a study of the winner’s curse ( full text here ), researchers conducted experiments to see if poor value estimation skills were really the main cause of overpaying at auctions. These experiments involved having people participate in auctions under different conditions. The main difference was that some auctions were conducted with several people, and others had people compete against a computer algorithm (and they knew that is was a computer). The results showed that when people outbid a computer algorithm, their bids tended to remain at rational levels. However, when people compete against other people in an auction, the winning bid tends to be significantly higher. This suggests that people tend to become competitive and willing to overpay just so that they won’t “lose” to ano...

My last credit card statement arrived in the mail last week and was unusually thick. I’m used to receiving an extra piece of paper or two, but this was really thick. It turned out to just have a new cardholder agreement, a new certificate of insurance on purchases (12 leaflet pages), and smaller pieces of paper inviting me to read the longer pieces of paper. One of the changed sections concerns the cardholder’s responsibility for fraud. Cardholders aren’t responsible for any fraud as long as they meet a list of criteria such as not knowingly contributing to the fraud, notifying the credit card company within 24 hours of noticing a problem, and having an account in good standing. The last part about having an account in good standing caught my eye because it happens that I forgot to pay my bill on time last month and made an oversized payment (to break the cycle of interest charges) about 10 days late. Unfortunately, I couldn’t find a definition of “account in good standing” anywhere ...

The UK Financial Services Authority plans to make big changes to the way that investment advisors are paid starting in 2012. They plan to make any fees charged to investors much more transparent. The blog Where Does All My Money Go reported the changes as so surprising that they seem like an April Fool’s joke . Currently, investors as a group know little about how their advisors get paid. This is true in the UK as well as Canada and the U.S. In fact, many investors think that they don’t pay anything to their advisors. The truth is that managers of financial products, such as mutual funds, offer commissions to advisors as an incentive to recommend their products. These commissions are paid from investors’ money, but most investors have little idea how much they are paying for their investment advice. The changes coming in the UK promise to make the system much more transparent. Fees are to be negotiated between investors and advisors, and managers of financial products won’t...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Some financial decisions, particularly about insurance, must take into account what is called the utility of money to get the right answer. Normally the concept of utility is explained in very mathematical terms, but it doesn’t have to be. Let’s take a fun example straight from a game show. You’re standing beside Howie Mandel playing a super-sized version of Deal or No Deal. You’re down to just two amounts left, 1 cent and $3,000,000! You get the following offer: take $1,000,000 now, or take a 50/50 chance at the $3,000,000. What should you do? If you got to do this many times, then on average, taking the chance you would win half the time and get an average return of $1,500,000. This is more than the million dollars you were offered, and so you should take the chance, right? Not so fast. Most people would correctly figure out that they should just...

Preet gives a performance update of the blogger's stock picking contest . His portfolio is deliberately selected to have very high volatility, but somehow his results are close to the median so far.

According to Sports Illustrated magazine, 78% of NFL football players are broke within two years of retirement. NBA players fare a little better with an estimated 60% of them broke within five years of retirement. Ordinarily, I avoid directly giving financial advice. I don’t know all relevant factors in someone else’s life, and people are unlikely to follow the advice anyway. However, in the case of wealthy athletes, I have some advice in the form of a simple rule: Treat every sports payment as though it is your last one. I feel safe giving this advice for two reasons. Firstly, it is very conservative and the likelihood of getting into trouble with it is low. Secondly, there is a good chance that no athlete will ever follow this advice. I don’t believe that this rule is too conservative. A career-ending injury can happen at any time. Even so-called “guaranteed” contracts have outs for the team if the player is caught engaging in some prohibited behaviour. Any payment co...

Happy Canada Day! This is a special Canada Day version of the usual Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Insurance is a financial matter and doesn’t actually do anything to prevent accidents. So, if insurance is just about trading money back and forth, how can it be a good deal for both the insurance company and the person buying the insurance? When it comes to buying goods like food, it is easy to see why an apple is more valuable to a person buying one than it is to the farmer who owns an orchard full of apples. I’m quite happy to part with 50 cents for an apple when I’m hungry, and farmers are willing to take less than 50 cents for each of their apples. So, in this case, it is possible for both sides to win. When it comes to insurance, it isn’t as obvious that both sides can benefit. To keep things simple, imagine that a car insurance company has worked out that they will have to pay out an av...