For the most part, people are not well-equipped to handle probabilities. When it comes to flying, either we imagine an uneventful flight and get on, or we imagine a crash and refuse to get on. Discussion of probabilities of various outcomes does little to influence behaviour. A good example of this phenomenon is the willingness of people to buy lottery tickets. In Canada’s Lotto 6/49, only 47% of money collected is returned in prizes. This means that the average $2 ticket gets back only 94 cents. And from an investment perspective, the volatility of the returns makes the ticket worth even less than 94 cents. However, none of this makes any difference to the thinking of lottery players. Many will say that they play for fun, but the truth is that they can imagine winning, and that’s enough to keep them playing. A long run of lottery ads even used the line “imagine the freedom.” Most businesses that sell goods attempt to sell extended warranties along with their electronics, ...

Choosing a mortgage is a high stakes game. Most people understand the importance of getting a low interest rate, but trying to choose among variable-rate mortgages and fixed-rate mortgages of various durations can be difficult. A number of factors go into making the best choice of mortgage, and one of those factors is the interest rate offered for the different terms of fixed-rate mortgages. As an example, let’s use the best interest rates at the time of writing on fixed-rate mortgages available from one mortgage broker, Invis, which are as follows: 1 year: 2.55% 2 years: 2.89% 3 years: 3.39% 4 years: 3.74% 5 years: 4.09% 7 years: 5.05% 10 years: 5.40% If you’re already thinking of taking a 1-year term, you may wonder if you would be better off taking a 2-year term for only an extra 0.34% each year. To compare these choices, it is better to think of the 2-year mortgage as having a rate of 2.55% in the first year and 3.23% in the second year. This second year rate is cal...

Many Canadians have never heard of an alternative to bankruptcy called a consumer proposal . If you have a steady income and can’t pay all of your bills, but don’t qualify for a consolidation loan, you may be able to enter into a consumer proposal rather than go into bankruptcy. However, consumer proposals are still a serious matter as one lady found out. In a consumer proposal, you are essentially telling your creditors than you can’t pay all you owe them but can pay back a lesser amount. Your creditors may agree to this if they think that bankruptcy is the only other option because creditors usually get more money in the case of a consumer proposal. However, once you’re in a consumer proposal, you can’t expect new creditors to be excited about lending you money. A comment on Ellen Roseman's blog is from a “Frustrated” lady who was turned down for a lease on a new Ford vehicle because she and her husband had filed a consumer proposal that was accepted by her creditors. Th...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Everything I read about asset allocation says that investors are very conservative and must put a significant fraction of their money into fixed income investments like bonds even though stocks have historically given much higher returns. All of these commentators may be right about their assessment of investor psychology. Of course, this says nothing about what would be best for investors; it is just a reflection of how investors think. Morningstar has formalized this view of investors in a formula for assessing investments called the Morningstar Risk-Adjusted Return (MRAR). All the math in the Morningstar explanation tends to obscure what is going on. Let’s look at a simple example. Suppose that each year a particular investment either returns 50% or loses 20% with equal probability. A simple view of this investment is that its average retur...

1. Big Cajun Man has a video from 1985 explaining how pennies are a waste of time . It’s sad that we still use pennies even though they’ve been near worthless for a generation. 2. At Where Does All My Money Go?, guest writer Daniela Garritano has some tips on maximizing the sale price on your home . 3. Canadian Financial DIY brings us some research indicating that financial advisors do not bring enough value to offset the fees they charge .

In a provocative interview titled “Buy GICs. Only GICs.”, Author and Chartered Accountant David Trahair advocates saving for retirement in GICs and avoiding the stock market altogether. His argument is that the gap between GIC returns and S&P/TSX returns has been small and GICs carry no risk. In his book Enough Bull: How to Retire well without the stock market, mutual funds, or even an investment advisor , Trahair ignored dividends from stock returns in his comparison with GICs. In the interview, Trahair quotes both returns with and without dividends. However, because the returns without dividends are irrelevant for comparison, we’ll ignore them. Trahair quoted the following return figures over decades ending August 31, 2009: GICs: Past 10 years: 3.35% Past 20 years: 5.11% Past 30 years: 7.28% Past 40 years: 7.71% Past 50 years: 7.35% S&P/TSX Composite Total Return Index: Past 10 years: 9.41% Past 20 years: 8.86% Past 30 years: 10.76% Past 40 years: 9.77% ...

In a previous post I reported on the result of having forgotten to pay my credit card bill one month . I was hit with interest for three consecutive statements, even though each of the three times I paid off the bill in full plus the amount owing on purchases too late to appear on the bill. I was unable to square the wording of my credit card agreement with the way I’ve been charged interest. It seemed to me that I shouldn’t have been charged any interest the third month. So, I was left unsure of my status. This led me to start my own personal battle with the credit card company. I haven’t paid for anything with a credit card for a month now. My latest bill arrived with no interest charged and no amount owing. Hopefully this means I can start using it again without being charged interest. If not, I’ll have to break down and call them (shudder). Based on my experience, it seems that you could fail to pay your bill in full just a few times per year to end up paying interest ...

A common problem as homes age is moisture or fog between the panes of glass in windows. Until a few years ago, I thought that the only solution was to replace the windows whose seals were damaged. This is an expensive proposition. I’ve since heard of companies that claim to be able to fix moisture-filled windows, but it’s hard to tell how legitimate they are. The window repair companies claim that they can solve moisture problems by drilling a hole in the window, inserting some moisture-absorbing material, and plugging the hole with a one-way valve to let moisture out. Every year my neighbourhood is filled with signs saying some variant of “Moisture problems in your windows? We can help!” The trouble is that every year the signs are different and the company name is different. This doesn’t exactly inspire confidence. From what I’m told, window repair is significantly cheaper than replacing windows, but it’s still expensive. And if window repair doesn’t really work, then pa...

The Supreme Court found middle ground when it ruled on a case that could put some money in your pocket. Canadian telephone companies filled a $650 million fund with money collected from urban land line customers from 2002 to 2006. The Canadian Radio-television and Telecommunications Commission (CRTC) ordered phone companies to spend $350 million of this money on broadband internet for remote areas and give the rest back to customers. The phone companies appealed to the Supreme Court to spend the whole $650 million on broadband, and consumer groups wanted the whole amount given back to customers. In the end the Supreme Court decided that the CRTC’s middle of the road plan was reasonable. So, you can expect to get some money back if you’ve had a land line for a while. But, don’t expect too much. Although the refund amount isn’t set yet, various estimates are between $5 and $20.

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. What a great sounding idea: unlocking the value of your home. Whenever I hear this phrase, I picture piles of cash stored in my walls. What could be more reasonable than taking some of this cash out to make my life better? I usually hear advice about unlocking my home’s value from a bank that wants to sell me a loan or a financial advisor who wants to sell me mutual funds. But, so what? Do I really need to have so much of my money tied up in real estate? Some financial advisors even talk about the dangers of investing too heavily in just one asset class: real estate. For the sake of safety and diversification, do we need to take some money out of our houses and buy some stocks and bonds? To begin with, the idea that you can take some money out of your home without selling it is just a trick. You own 100% of your home regardless of how much y...

1. Preet explains the tax implications of a difference between Vanguard’s ETFs and other ETFs . 2. Big Cajun Man looks at monthly bank fees as an interest charge . He’s not too impressed with a chequing account with a negative 31% interest rate. Viewing bank charges as interest makes sense if the cost of providing the account is essentially nil. If the banks do have real costs, then it makes less sense. The truth is likely somewhere in between.

I’ve never been very optimistic about making money with collectibles. When I was young I dreamed of owning one of the coins listed in a coin book with a value of many thousands of dollars, but I never found any of those coins in my change. A while back I was asked to take a look at a deceased family member’s coin collection, and this gave me a chance to see how this collection fared as an investment. The coins I examined were collected over a great many years from change; none of the coins were purchased from other collectors. So, the “investment” cost was just the face value of each coin (adjusted for inflation). For this little test, I decided to focus only on coins at least 50 years old. Among these coins, I was surprised to discover that their total current value exceeded the total face value (adjusted for inflation based on each coin’s date) by 19%. This means that the average rate of return was about inflation plus 0.25%. In fact, the return is a little better than this...

Perceptions matter when it comes to having faith in stock markets. The recent case of the company Allen-Vanguard has left many investors wondering if they’ve had their shares taken away unfairly. Allen-Vanguard has had serious debt problems and its share price has dropped over 99% in the last two years. A Friday press release announced that Versa Capital Management would take over Allen-Vanguard, but that all existing shares would be “cancelled on closing of the transaction, with no consideration paid to holders.” To the average shareholder, this can be baffling. Don’t shareholders get to vote on this? If a company is willing to take over Allen-Vanguard, doesn’t that mean it still has value? Investors can’t be blamed if they think that their shares were simply stolen away. The reality is that Versa only took over some of Allen-Vanguard’s debts. If creditors agreed to only partial repayment, this is a strong sign that the company was indeed underwater and had negative value....

Two Alberta men, Milowe Allen Brost and Gary Allen Sorenson, have been charged by the RCMP with allegedly running a Ponzi scheme that attracted more than $100 million from investors. The scheme’s marketing was based on gold mining and investors were promised a high rate of return along with tax advantages. RCMP were investigating the scheme for more than three years before charges were laid. This will be maddening for those who lost money over the last three years. To lose money in a scheme already believed to be a fraud by authorities has to be infuriating. This type of story is all too familiar lately. Shocked investors will be hoping that the money will be found, but if it really is a Ponzi scheme, it is very likely that almost all of the money is long gone. To investors in Ponzi schemes, it feels like the money disappears suddenly. In reality years of account statements were fantasies because the money was stolen over time. Some media reports feed into this feeling tha...

Each year the Chartered Financial Analyst (CFA) Institute polls its members on the state of ethics and integrity of markets. The report on the integrity of Canadian markets came out recently showing less confidence in the effectiveness of Canadian regulatory and investor protections than those of other countries. One part of the poll had respondents rate the ethical behaviour of individual market participants. Here are the results from most ethical to least ethical: Pension Fund Managers Buy-Side Analysts Mutual Fund Managers Corporate Boards of Public Companies Executive Management of Public Companies Private Equity Managers Financial Advisors to Private Individuals Sell-Side Analysts Hedge Fund Managers Note that financial advisors didn’t fare very well in this survey. The comments section on a survey is often more interesting than the dry numbers. Here is what some experts had to say about financial advisors in Canada: “Investment advice should be provided by inv...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. The core argument of the book Worry-Free Investing , by Zvi Bodie and Michael J. Clowes is that stocks are too risky for most investors and they should invest in inflation-protected bonds (called I Bonds in the U.S. and Real Return Bonds in Canada). The justification for this claim is in Chapter 6 where they show the results of some simulations. Monte Carlo simulations can be a good way to get a feel for the various possible outcomes of investing over a period of time. The authors use historical returns on U.S. stocks from 1926 to 2000 to simulate a one-time investment of $100 in U.S. stocks over 30 years to show what could happen. To make the numbers more meaningful, I’ll multiply them by 100 so that the initial investment is $10,000. In the three simulations the authors show, here is how much the stocks are worth after 30 years (adjusted for in...

1. Preet gives us an insider’s look at a financial advisor technique for collecting huge fees just short of retirement . Unfortunately, all these extra fees have to come out of investors’ assets. 2. Big Cajun Man is concerned about bank tactics in attracting new customers on university campuses .

Continuing with yesterday’s parable about an investor, Donna, who ignores the market over the past year and breaks even plus some dividends, she could have earned even more money by reinvesting dividends. This led me to think about the benefits of steady investing during down markets. In my story Donna collected $2020 in dividends while her $100,000 portfolio of S&P TSX units (ticker: XIU) was unchanged at $16.80 per unit from 2008 October 2 to 2009 September 8. However, if she had reinvested her dividends into XIU units, her gain would have been $2440, assuming a $10 commission on trades. This isn’t such a dramatic improvement, but she might think that an extra $420 is better in her pocket than elsewhere. What if Donna had invested her $100,000 slowly over the year instead of piling it in all at once? Spreading the money into 12 equal-sized purchases at the start of each month, Donna would have come home to just over $117,000! This is a 17% return over a “terrible” year...

Today we begin with a little story about ostrich investing. Our heroine, Donna, decided that she had a good life and wanted to give something back. Donna decided to sell her house and spend a year in Africa helping to build schools. Back on October 2, 2008, she took the $100,000 equity from selling her house, deposited it into her brokerage account and put all of it into the S&P/TSX 60 index (ticker: XIU). The sale went through at $16.80 per unit, and she hurried off to board a plane for what promised to be a rewarding adventure. After a lot of hard work and making some lifelong friends, but little contact with Canada, Donna arrived back in Canada last night to stay with her parents. After a meal and catching up for a few hours, Donna decided to take a look at her online brokerage account. Imagine the devastation! Donna is completely oblivious to the turmoil in financial markets over the past year. There was the real estate bust, the credit crisis, and the stock market ...

This is a guest post by my wife who is going back to school and trying to save money on her textbooks. Hoping to avoid long line ups at the campus bookstore and hoping to save some money, I did some comparison shopping on both amazon.ca and chapters.ca. I was happy to find a savings of 12.5% compared to the campus store. The textbook prices at both online book sellers were identical before applying Chapter's iRewards savings and since I don't have an iRewards card anymore and since the savings were only half of the cost of a new card, I decided to order my 5 books from Amazon. All five of the books individually qualified for "Super Saver Shipping" (over $39 of merchandise) so my money wasn’t going to be eaten up by Canada Post. Three of the books were in stock and the other 2 would be shipped in 1-2 weeks. I still had time before classes started so there was time to complete the order. The first option Amazon presented me with was to choose a shipping speed:...

This is a Labour Day edition of the usual Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Your reaction to a game show scenario can reveal important information about your attitudes as an investor. It can even tell you what mix of investments are appropriate for your portfolio. Let’s get right to it. You are playing Deal or No Deal and you are down to two amounts: one penny and a million dollars! What is the minimum offer you would accept from the banker? For those not familiar with this game show, here is the situation. You are about to toss a coin. If it comes up tails, you get nothing (and lose nothing). If it comes up heads, you get a million dollars. Just before you toss, someone offers you a sum of money to give up your chance to toss for the million dollars. What is the minimum such offer you would accept? It turns out that your answer depends on how rich you are. Bill Gates would likely ...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. I bought a scanner from a well-known chain store and was surprised to find a note inside the box explaining what was wrong with the scanner written by the last sucker who bought it. The note came with actual pictures of scans gone wrong. I’m grateful to this anonymous person who took the time to help out the next sucker to buy this scanner (me in this case). The two pages explaining the problem were not exactly hidden. They were the first thing that I took out of the box. Obviously the store employees never even looked inside. They just put it back on the shelf to sell it to someone else. Nice. I don’t see much point in naming the product or the store. But, I do like the consumer strategy of including a note any time you are forced to take a defective product back to a store. For your altruistic side, you get to help out other people. For ...

1. Big Cajun Man got Rogers Cable to back down on its unlimited surcharge for internet bandwidth use . 2. Preet shares some amusing hate mail sent to the Mutual Fund Dealers Association , an organization responsible for enforcing rules about how mutual funds are sold. 3. Million Dollar Journey discusses how to convert a principal residence into a rental property the right way so that mortgage interest becomes deductible .

I just had a new high efficiency furnace installed. As most people are aware, the Canadian and Provincial governments are giving out a lot of money in an ecoENERGY program to help homeowners pay for energy-saving upgrades. With all the grants I’m promised, I’ll be paying for less than half of the furnace. The process for me began with choosing a supplier and making sure that the high-efficiency furnace I chose was on the approved list for grants. I negotiated a price of $4209 (including sales taxes). I then arranged for an ecoENERGY home energy audit before the furnace was installed. Now that I’ve had the audit and the furnace is installed, the audit people will come again to check that I actually installed a new furnace. The total cost of the audits is $420 with tax, and then the following grants and tax deductions are supposed to come rolling in: $790 federal furnace grant $790 provincial furnace grant $150 provincial energy audit grant $125 provincial power authority g...

Trying to choose a cellphone plan is very confusing. The many plans available have different features, and it takes a determined consumer to gather enough information to evaluate all of them. Worse still is that you can’t rely on one smart person to figure it all out because the best plan depends on how much you use your cellphone and what features you use. The Canadian government rides to the rescue. Industry Canada developed a calculator to figure out which plan would work best for you. This is a great idea; the government doing something fairly inexpensive to help many Canadians. Unfortunately, as Michael Geist reports, wireless company lobbyists convinced Tony Clement to kill the calculator (the web page with this article has disappeared since the time of writing). The official reason doesn’t matter because the real reason is obvious enough. Wireless companies make more money from confused consumers than they do from educated consumers. Cellphone plans are confusing bec...

Many economic theories, such as modern portfolio theory and Black-Scholes option pricing, are based on the premise that equity price distributions follow a Bell curve. In his book The (Mis)Behavior of Markets , Benoit Mandelbrot makes a strong case that the Bell curve gets it wrong . So, why do we still use theories based on the Bell curve? A partial answer is that a great many phenomena, such as human height, do follow a Bell curve (also called the Gaussian or Normal distribution). In fact, Bell curves come up so often that it is natural to suspect that it would apply to equity prices. To see why Bell curves come up so often, let’s look at a simple example with dice. If we were to roll a die many times, we expect each face to come up roughly the same number of times. On a frequency chart, this would be a mostly flat curve. But, if we roll 10 dice many times, adding them up each time, the frequencies of the different possible totals from 10 to 60 would no longer be flat. I ...