1. Jason Zweig wades into the dark pools where hedge funds trade large share volumes at lightning speed . How can the little guy hope to compete with these shadowy figures that purportedly trade on inside information? The answer turns out to be by trading very infrequently. 2. Canadian Financial DIY has opinions about the new ability for Canadian retail investors to trade in Contracts For Difference (CFDs) . Buyers beware. Remember that whenever you enter into a financial transaction where you don’t fully understand what you’re buying, there is a good chance that it won’t end well for you. 3. Preet wonders what the point is of having an ETF with only a few holdings when it can be cheaper to just buy the individual holdings yourself . 4. Big Cajun Man explains why debt is like fat .

In an ideal world we would all make our maximum RRSP and TFSA contributions each year and look forward to being a millionaire in retirement. However, people who are able to do this are in the minority. Most Canadians have more combined RRSP and TFSA room than they will ever be able to use. But don’t despair! Having excess room gives us some tax-saving strategies: Income Smoothing If your income is highly variable from year to year, you can smooth it out by making RRSP contributions in a high income year and withdrawing some RRSP money in a low income year. This reduces the tax burden if your top marginal rate is higher in the contribution year than it is in the withdrawal year. One disadvantage of this approach is that the RRSP room will be lost permanently, but this is of little consequence if you have more room than you can use. There used to be another disadvantage before we had TFSAs: any gains on the money withdrawn from the RRSP in the future would be taxed. Howeve...

As Canadian Capitalist reported, BMO has come out with several new exchange-traded funds, including some bond ETFs. Any investor considering these bond ETFs should check whether it is cheaper to buy a bond directly. The safest of the new bond ETFs are ZFS (0.2% MER) which invests in Canadian 1-5 year bonds, and ZPS (0.25% MER) which invests in provincial 1-5 year bonds. These MERs are a huge improvement over the typical bond mutual fund MERs, but they can still be high for large investments. An alternative to these ETFs is to simply buy a bond directly. Discount brokers allow investors to buy bonds that make periodic payments, or buy another type of bond called a coupon that just pays a fixed amount at a given end date. The safest of these bonds are backed by the Canadian government or provincial governments. Let’s suppose that you want to invest $20,000 in Canadian bonds for 5 years. You could buy ZFS and pay 0.2% each year for a total of about 1% after 5 years. The total ...

Finance Minister Jim Flaherty has said that pension reform is coming soon. Unfortunately, it may not be what many Canadians are hoping for. With existing company pension plans underfunded by a total of about $50 billion, many Canadians who are retired or near retirement are justifiably worried. One of the more notable company pension plans in trouble is Nortel’s. Without any reasonable prospect of further contributions to Nortel’s pension plan, pensioners would like to see the government back the plan with financial guarantees. The same is true for those hoping to draw from other pension plans that are in financial trouble. But the Harper government hasn’t given any sign that it intends to pony up the massive pile of cash that would be necessary to back these pension plans. All indications at this point are that Flaherty intends to change the rules going forward to encourage companies to be more conservative in their pension funding. For example, the surplus cap of 10% may b...

I’ve argued in the past that trying to time the market is a near impossible game for most of us to win over the long term. This prompted the question “why should we bother trying to do anything like becoming a doctor or a lawyer – there will always be someone else who is better.” It’s certainly true that we can’t reasonably expect to be the very best doctor, lawyer, programmer, or poker player in the world. However, doctors don’t have to compete against every other doctor in the world. It might be tough if the world’s best doctor has the office next door, but under typical circumstances, a doctor merely needs to be in the middling range among his peers to run a successful practice. In the case of a poker player, he just needs to find a game where he is an above average player. The fact that better players exist in the world is of no concern if they aren’t seated at the table. However, when it comes to market timing, you can’t choose your opponent. Equity trading is essential...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Not to be too philosophical, but my experience has taught me that I’m best off to conduct myself as though there exists a single objective reality that applies to all of us rather than each of us having our own separate realities. What does this mean for the investing world? If several people all buy 100 shares of ABC stock at the same time for the same price, then they will all get the same return over a given period of time. Some of these people bought ABC stock for very smart reasons, and some might have bought it because they have the initials ABC. Some of the investors are smart, some dumb, some nice, and some mean, but they will all get the same return. This all seems obvious enough, but you have to keep it in mind when you read the come-ons for businesses that want to set you up with an account to trade stock options. Stock options are s...

1. Potato makes the case that while market timing in stocks is near impossible, it may be possible to time the real estate market . 2. Preet explains why over the long run stocks have to give better returns than guaranteed investments . 3. Canadian Financial DIY reviews the book The Secret Language of Money .

The Canadian government’s planned TFSA rule changes have been described as needed to prevent sophisticated abuses by savvy investors, but on closer examination, the biggest effect may be to protect investors from themselves. The penalty for over-contributions to a TFSA used to be 1% each month, but this has been changed to taxing any return on the excess amount at 100%. Apparently, some investors were deliberately over-contributing looking for short-term gains that would then be tax-free, except for the 1% each month. However, most investors who chase short-term gains lose money. This new rule will have the effect of saving many reckless investors from following a strategy that has a built-in 12% per year drag on returns. This is almost like borrowing on a credit card to invest. The new rule against swaps between RRSPs and TFSAs is designed to prevent a scheme to shift money from an RRSP to a TFSA as I explained previously . For an investor who tried this and failed to execut...

There seems to be no limit to the number of clever schemes that tax experts come up with to avoid paying taxes. The Canadian government is planning to make some changes to the rules governing Tax-Free Savings Accounts (TFSAs) to close some loopholes. The most interesting tax avoidance scheme involves swaps between RRSPs and TFSAs. Before now I wasn’t aware that such swaps were permitted without any tax implications. The idea is that if you have $5000 in cash in one account and $5000 worth of stock in the other, you can swap the cash for the stock without it counting as a withdrawal or contribution. This makes some sense. After all, the total value in each account doesn’t change. It’s like one account bought the stock from the other account at fair market value. However, this swapping idea led to an amusing scheme to shift assets from an RRSP to a TFSA. I’ll explain it with an example. Suppose that Tammy the tax avoider is nearing retirement with $100,000 in an RRSP and $50...

Rob Carrick wrote a provocative piece about the effect of rising interest rates on the bond market called Latest horror flick: Attack of the bond market . This made me take a look at how bad the carnage would be if interest rates rose. Poking around at my online brokerage, I found a $100,000 Canadian strip bond coming due 2029 Dec. 1 that they would sell to me for $43,818. When you own a strip bond you don’t get any periodic payments; you pay for it, and in this case you get your $100,000 when it comes due, unless you sell it first. The return on this bond works out to 4.19% per year for just over 20 years. However, according to the Bank of Canada , the average return on long-term Canadian bonds over the last 10 years is 6.38%. This raises the question, what happens to my strip bond if interest rates return to the average level? Suppose that in just over 5 years, the yield on my bond rises to 6.38%. By this time, it would be a 15-year strip bond and would sell for $39,546. ...

Even though the swine flu hasn’t caused the devastation that some predicted, it has still harmed many people. Widespread concern over this flu has had a curious financial side effect that I didn’t know about until my wife pointed it out to me. A couple of nights ago my family enjoyed a large pork roast that fed four hungry people and left enough for lunch for two. I wasn’t too surprised to find out that the roast cost only $5.50 because my wife routinely finds good deals on meat . But this wasn’t a case of a pork roast that was a day from its expiration date. My wife tells me that pork is almost always on sale now and that this roast would have cost more than $10 a year ago. Many factors go into the pricing of goods, but the dominant factor for pork right now is the swine flu. For some reason, people are avoiding pork because of this new flu. This makes no sense at all; experts say that you can’t catch swine flu from eating pork, but people are avoiding pork anyway. So the...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Many people don’t like to talk about money, and so I try not to discuss money unless others show an interest. On a few occasions when the subject came up, I’ve encountered people who think that they don’t pay fees on their mutual fund investments. In a recent case, an acquaintance who I’ll call Rosie offered her reason for believing this. Rosie said that she knew that some people paid fees, but she checked her statements regularly, and she had never seen any fees listed. Of course she does pay the Management Expense Ratio (MER) and possibly front or back-end loads. I decided to have a look at some of my old statements from back in the days when I owned mutual funds. Sure enough, there weren’t any references to fees even though I know I paid them. How widespread is the mistaken belief that investors don’t pay any fees on their mutual funds? I’...

1. Big Cajun Man has a take on the great debate of whether you should contribute to your RRSP or pay down your mortgage . 2. Preet explains why investing in managed futures over the last couple of decades would have reduced portfolio volatility .

A recent survey of investor attitudes concluded that “Canadian investors are more influenced by soft issues such as their relationship with their investment advisor than by hard-core financial factors such as portfolio performance.” It’s amusing to see portfolio performance described as just one of the “hard-core financial factors.” Portfolio returns should be the main concern of an investor. Instead, “investors are desperate for relationships with investment advisors that help them feel more comfortable.” It’s hard to know for certain why people focus on less important issues, but I’ll try a guess. Maybe most investors have no idea what returns they should expect, but they know how they feel and they know whether they like their advisor as a person. So, the judge their experience by the things they understand. In a perfect world, people would be able to examine their portfolios to determine their asset mix and then compare their returns to a similar mix of index returns. Th...

The giveaway winners of 4 copies of the book The Secret Language of Money by random draw are Aaron, Gene, Nora, and Adrian. The winners have been contacted by email. I accidentally jumped the gun and held the draw too early. Because I contacted the winners too early as well, I would have done a second draw for a fifth book for any last-second entries, but there weren’t any. Thanks to all who entered the draw.  Here are a few more interesting tidbits from the book. Affinity Bias Apparently, we tend to overestimate the value of things we like, such as familiar stocks and favourite sports teams. This explains why I always found so many willing Torontonians to take my bets against the Toronto Maple Leafs during the 1980s. Compulsive Spending Cycle I have always found the tendency for some people to buy things they don’t really want or need to be baffling. According to the authors, buying things makes some people feel good in powerful ways. Unfortunately, this immedi...

Commentators bemoan the lost decade for stocks. In Canada, returns were positive, but low over the last decade, but in the U.S., returns of the S&P 500 were actually negative. According to Larry Swedroe, this is the first time since the great depression that this has happened over 10 or more years. However, if we subtract out inflation, returns look even worse. As Larry shows, there have been three periods of at least 10 years since the depression that the S&P 500 has failed to beat inflation. These periods ended in 1947, 1983, and now (at least we hope it doesn’t continue). This is all very depressing, and can make us want to give up on stocks altogether. However, I wondered what happened after these bad times. Here are the S&P 500 total returns (including dividends) for the decade after these “lost decades”: 1948 to 1957: 14.4% above inflation 1984 to 1993: 10.7% above inflation 2009 to 2018: ? As you can see, those first two decades were spectacular! The...

Happy Thanksgiving, Canada! This is a Thanksgiving version of the usual Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. A major concern for many people is how old they will be when they can retire. This depends on a number of factors such as how much you save, how well your investments perform, how much you spend during retirement, and how long you live. Retirement calculators can figure this out for you based on a number of assumptions. However, most of them don’t give you a feel for how the final answer would change if your investment returns are volatile instead of perfectly steady. There was a good post over at the Canadian Financial DIY blog about using Monte Carlo analysis for financial planning . Monte Carlo analysis just means simulating possible outcomes many times to see how the final answer changes. I decided to use Monte Carlo to see how the mix of stocks and bonds in a portfolio affects whe...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Part of my motivation for writing this blog is to pass on what I know to my children before they are on their own making financial decisions. Even though I make my choices carefully and put time into understanding how things work, I have made some financial mistakes and other people have taken advantage of me financially from time to time. People like to say that money isn’t everything, and this is true. Relationships, fun, interesting activities, and challenging pursuits lead to a full life. Money can’t give you these things, but it can give you more freedom to pursue them. Most of us trade our time for money by taking jobs. The jobs we have vary in how fulfilling they are, but very few of us can honestly say that we would do our jobs for nothing. Even the best jobs have unpleasant parts, and almost all of us do some fraction of our jobs only...

1. Big Cajun Man reports that Canadians’ personal debt is rising at a record pace . 2. Canadian Financial DIY finds a fund whose management doesn’t get paid unless the fund makes money . 3. Guest blogger Daniela Garritano has some detailed energy saving tips for cold weather .

We attach all sorts of emotional meanings to earning and spending money according to The Secret Language of Money , by David Krueger and John David Mann. The authors seek to help you rewrite your money story to improve your life, but it is much more than just a self-help book. The publisher, McGraw Hill, has graciously offered four giveaway copies for my readers (but the draw is now over). To enter the draw, send an email with the subject “Book” to the address shown on the upper right corner of this blog. The draw will close Tuesday October 13 at noon. I will contact the winners to get postal addresses. This time, McGraw Hill has agreed to send books to winners even if they live outside Canada and the U.S. When it comes to investing, spending, debt, and financial scams, many of our decisions are driven by emotions. Because I see myself as a rational person, I didn’t expect much of what was said in the book to apply to me, but I did see myself in some of the examples. More ofte...

What would cause someone to bid more than $20 for a $20 bill? Max Bazerman of the Harvard Business School routinely auctions off $20 bills and gets bids above $20. Are the bidders dull? No, they are usually very bright people who have been tricked. The rules of the auction are simple enough: – No talking among bidders. – The first bid has to be a whole number of dollars. – Subsequent bids have to go up by exactly one dollar. – No bidder can bid twice in a row. – The highest bidder pays the bid amount and gets the $20 bill. – The second highest bidder must pay his or her final bid but get nothing in return. The last rule is a strange one and it turns out that’s the catch that leads to high bidding. But I’m getting ahead of myself. Imagine a typical scenario: An adventurous person throws out a bid of $1. Then someone bumps it to $2. This continues until Bob bids $18 and Alice bids $19. Without thinking it through, one might think that the bidding should be over. Aft...

A reader, Seth, asked the following question about taking a bearish position in the market: “I read your article on leaky leveraged ETFs . I have invested less in these products in the volatile markets. Other than put options or shorting a stock like the SPY (risk of call back and paying out dividend disbursements), do you know of other ways to take a bearish position on the indexes? Are all bear ETFs calculated on compounded daily percent?” There are other ways to bet against the market, including selling call options and investing in bear funds, but I can’t recommend them. Selling naked calls on the hunch that the market may be going down can lead to big losses if you’re wrong, and the various bear funds don’t perform well on average through all types of markets. All the bear ETFs I’ve looked at rebalance daily and suffer from volatility losses. The bear funds I’ve seen try to make money by picking individual stocks that they expect to drop in price. These funds don’t reba...

I don’t normally try to fix my own car mainly because I don’t really know what I’m doing and the consequences of messing it up can be painful. However, I was recently cornered into trying to deal with some rust that formed just above my windshield. I have a great mechanic who was referred to me by a close friend who is a former mechanic. However, my mechanic doesn’t do much body work and he turned me away. While plotting my next move I tried using some rust paint, but that just slowed down the rust a little; it didn’t solve the problem. Eventually, I asked my close friend the former mechanic to take a look. He started talking about a body shop having to remove the windshield and did I want to put all this money into this car or my next car! Who thought that a little rust could be such a serious problem? I decided that I’d have to try to deal with it myself. After scraping off some paint and grinding off some of the rust, here is what the worst of the three rust spots looked...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. People can be split into two groups: 1) those who spend carefully, save money, and invest wisely, and 2) those who, to varying degrees, do not do these things well. For convenience, let’s call these two groups savers and spenders. Some of the spenders’ wages get transferred to the savers, primarily in the form of interest on debts. Most interest paid by spenders becomes the profits of banks and other companies, which then gets distributed to shareholders who happen to be savers. Of course, people don’t really fit into just two groups. Most people fall somewhere between the best of savers and the worst of spenders. You can think of people being lined up the side of a mountain based on how well they handle money with the worst spender at the top of the mountain. Now imagine money rolling downhill from the spenders to the savers. Although I hav...

1. Big Cajun Man has highlights of the Canadian government’s new credit card rules designed to protect us . 2. Jonathan Chevreau has some insights into the difficulty of saving money, particularly for young people (the web page with this article has disappeared since the time of writing). One point he misses is that access to credit is more prevalent now than when baby boomers were young. Even a cell phone contract where a bill is sent at the end of the month is a form of credit. For some people, the only way they stop consuming is if they are prevented from having what they want. Long enough ago, that meant the money in their pockets was gone. Now it means all forms of credit have been maxed out. 3. Financial advisors must have to deal with a great many different financial goals that their clients have. Preet has a story about one goal that wouldn’t have made my top 100 guesses – secret children .

Being a victim of a Ponzi scheme is a terrible blow. However, life doesn’t seem to work out very well for the Ponzi scheme operators either after they get caught and go to prison. There must be some way to come out ahead with one of these schemes. Here’s my best shot. Start by setting up an investment company with some confusing-sounding plan that purports to make 20% return each year. Maybe the marketing would include stuff about sector-rotating bottom-up technical analysis wave theory. A potentially tricky bit is that investor funds would have to be protected by either the Canadian CIPF (Canadian Investor Protection Fund) or the American SIPC (Securities Investor Protection Corporation). Next, find some reasonably healthy 70-year old and make him the following offer. If he pretends to be the person who owns and runs this investment company he’ll get a pile of money. Then find investors who agree to sink $10,000 into the fund for the long term. You would be one of these in...