In an address to the Advocis symposium, Ontario Minister of Revenue John Wilkinson urged financial advisors to adopt a system of self-regulation. He argues that fraud is rare and self-regulation is better than government-imposed regulation. (Thanks to Preet at Where Does All My Money Go? for pointing me to this story.) While eliminating fraud is a worthwhile goal, outright fraud is not the major problem we have today among financial advisors. The real problem is systemic. Conflict of interest rules this industry. Until the system is fixed, neither self-regulation nor government-imposed regulation is likely to help. To defend these claims, let’s start with a small story about a couple in my extended family who changed their lives by uprooting themselves and moving to a warm country with nice scuba diving. I prefer not to name the country, but it has been declared the most corrupt nation on earth in the past. Among the many amusing stories of life in a different country, thi...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. All mutual funds have a management expense ratio (MER) that covers the costs of running the fund. In addition to the MER, some mutual funds charge “loads”. Loads are fees paid either when you buy into a fund (front-end load) or sell out of a fund (back-end load). Back-end loads are also called deferred sales charges. The purpose of a front-end load is simple enough. The financial advisor who sells you a mutual fund is paid out of front-end loads. But what about funds that have deferred sales charges? Does the financial advisor have to wait until you sell to get his money? Things look even worse for the financial advisor when the deferred sales charges are “contingent”. This means that the sales charge declines over time. In a typical arrangement, if you sell in the first year, you get charged 5% of your initial investment, but only 4% if you...

I had the opportunity to give an invited talk to an investment club called the Ottawa Share Club on Wednesday night.  I was peppered with many interesting questions some of which are likely to inspire future posts on this blog.  Many thanks to the club members and specifically co-founder James Palmer for the invitation. 1. Jonathan Chevreau notes that the recent bear market has motivated financial advisors to recommend more alternative investments (the web page with this article has disappeared since the time of writing). I think this characterization is too charitable for financial advisors. Clients are more inclined to buy alternative investments because of the perception that standard investments don’t work any more. Financial advisors are willing to sell whatever the client will buy as long as the advisors make money from it. My characterization may be a little too uncharitable, but I bet it’s closer to the truth. 2. Canadian Financial DIY reports on research into h...

Canadian seniors with low incomes receive a Guaranteed Income Supplement (GIS) from the government. Within a certain income range, each additional dollar of income reduces the GIS payments by 50 cents. This amounts to a 50% tax on this income. Combining this with the regular income taxes, the effective tax rate on RRSP withdrawals can be over 70%. When Canadians draw money from a registered plan (RRSP, RRIF, or a registered annuity), the payment counts as income for tax purposes. Low-income seniors who collect the GIS may end up keeping only a small fraction of their registered plan withdrawals. I have looked at some test cases to try to come up with a strategy to keep more of the money. Be warned that my analysis is based on a number of assumptions that may prove to be false. At the end of this post I outline some of the reasons why this analysis may have to be modified. Basic Scenario Annie is a single 71-year old living in Ontario collecting Old-Age Security (OAS) of $...

Frugal Trader at Million Dollar Journey had an interesting post explaining how car lease payments are calculated . The formula is simple enough until it adds a lease fee that involves a mysterious “money factor”. It all seems like extra profit for the dealership, but the truth is less nefarious.  According to commenter Robert, this money factor is only used in the U.S.; Canadians use the exact calculation given at the end of this post. An Example I’ll use the same example that Frugal Trader used: – Honda CRV: MSRP + freight + PDI: $29,880 – Residual Value after 3 years: $15,276.60 – Depreciation (price minus residual): $14,603.40 – Depreciation per month: $405.65 So, if the interest rate were 0%, then the payments should be just this $405.65 per month. But interest is a fact of life and we need to figure that out too. The accurate way to calculate interest involves present value calculations. I’ll leave the details of this accurate method to the end of this post f...

The recent introduction of mutual funds that hold a single ETF and pay financial advisors 1% trailers each year for selling these funds has stirred a debate: are financial advisors worth 1% of your savings each year? Of course, the answer depends on the investor and financial advisor. Knowledgeable investors won’t find it worthwhile to pay anyone 1% of their assets for financial advice every year. Poor financial advisors aren’t worth 1% each year no matter how little the investors know about investing. But what about the combination of investors with medium to low knowledge and advisors who are middling to very good? People differ on this question, and I don’t have the data to answer it definitively. However, I can examine my own experience. When I first began investing in more than bank GICs, I turned to a financial advisor who gave a presentation at my workplace. For about 5 years I owned mutual funds recommended by this advisor. For two years during this period I owned ...

I actually enjoy the occasional trip to Las Vegas, but I’m not the kind of gambler casinos want to see. It’s nearly impossible to beat the odds playing games against the house in a casino, but I do have one small idea for beating the house (sort of) at the dice game craps. Before I go any further, I should mention that this idea hasn’t worked for anyone else who has played craps with me. It requires patience that the typical gambler doesn’t have. So, I don’t recommend trying this. I start by finding a craps table that allows bets as small as $5. Some casinos don’t have any tables with bets this small. Then I only bet what is called the pass line. It is the most boring possible bet, but it has very close to fair odds. Out of 495 bets, the casino expects the player to win 244 times and lose 251 times, a net loss of 7 bets. Out of 495 bets, I expect to lose $35, which works out to just over 7 cents per bet. It takes about 3.2 rolls of the dice, on average, to decide each bet...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. A strategy is said to be dominated if it is guaranteed to give the same or worse results than some other strategy. This term is usually used in game theory, but it can apply equally well to investing. Most of the time when we have a choice between two alternatives, we don’t know for certain which choice will lead to a better outcome. Should you buy stocks or bonds? In a given year, stocks might give better returns or bonds might give better returns. In some cases, the choice turns out to be clearer. Suppose that I offer you a bet: we’ll toss a coin, and the winner gets $100 from the loser. I see you hesitate, and I make a second offer: I’ll give you $10, and then we’ll toss the coin for $100. No matter which way the coin comes up, you’ll be ahead $10 taking the second offer rather than the first. This means that the first choice is dominated...

1. Making a claim on your insurance is often something you have to do at a traumatic time in your life. MoneyNing explains the things you shouldn’t say to your insurance agent if you want you claim approved. 2. Canadian Financial DIY reports on rule changes with Locked-in Retirement Accounts making it possible to shift money to a regular RRSP . 3. Big Cajun Man likens the choice between a fixed or variable rate mortgage to the choice for New England to punt or go for it on fourth down in a recent football game against Indianapolis . He’s right that fixed rate mortgages are the more conservative choice, but this doesn’t apply to the football game. Football games don’t have intermediate outcomes; the only possibilities are win, loss, or tie. New England coach Belichick made the right choice. 4. Mr. Cheap thinks it’s OK not to save for retirement in your 20s and 30s (the web page with this article disappeared since the time of writing).  This is another one of those cases ...

We’ve had no shortage of headlines proclaiming “Gold Hits New Record!” When you’re in the business of writing something new every day, it’s easier to write about gold prices than to find something substantial to talk about. Leaving the value of such reports aside, are they true? Well, recent stories announced that gold had reached US$1150 per ounce. Back in 1980, gold peaked at US$850 per ounce, which is obviously a smaller number than US$1150, but what about inflation? US$850 in 1980 had the same buying power as US$2230 has today. So, an ounce of gold today has a little over half the buying power it had at gold’s peak in 1980. I’d say that this is a much more reasonable way to judge the price of gold, but it makes for less exciting headlines. If we look at everything in absolute dollars, we can pump out headlines for record prices of many items every time inflation nudges up another 0.1%. Alarmist stories are great for reporters, but not much good for readers. Wake me up...

We’re all familiar with the idea of introductory rates. They are a good price that starts low to draw you in and jumps up later. This is common with internet providers, cable television, and credit card balance transfers. But, what if the fantastic deal stays in place indefinitely? There has to be a catch, right? MoneyNing wrote about a variant of the 0% credit card balance transfer that I hadn’t seen before. Usually, the deal is that the debt transferred to the new card is charged no interest for a few months, and then the interest rate shoots way up. There are two main ways people get caught with this deal. The first is that they are unable to pay the balance off before the interest rate shoots up and they have to pay excessive interest. The second catch is that if they use the card for new purchases, payments go toward the 0% balance and the new purchases start collecting high interest right away (although there is pending legislation to force credit card companies to ap...

Among investors who have heard of exchange-traded funds (ETFs), their level of understanding often doesn’t go much beyond “ETF good and mutual fund bad”. This shouldn’t be too surprising. We can’t all be experts at everything. But the line between ETFs and mutual funds is becoming blurred and investors will need more knowledge to make good choices. Many investors demand ETFs from their advisors, and now Invesco Trimark is offering “hybrids” of ETFs and mutual funds to meet the demand. We should be suspicious about calling these products ETFs when they can be sold by advisors who are only licensed to sell mutual funds. Most of these new products are actually regular mutual funds that invest in a single ETF. These new funds pay a trailer fee of 1% per year to advisors who sell the funds to their clients. Hapless clients, who can now be told they are buying ETFs, will pay a management fee that includes the 1% trailer plus the management fee of the underlying ETF for a total betw...

When my wife decided to go back to school, at first I thought she might be losing her mind. But she’s having a great time. A decision she agonized over for a while was whether to drive or take the bus. It’s nice to think that we take the bus for green reasons, but it really comes down to cost and convenience. I’ll let her tell you the rest. When the City of Ottawa reversed their decision to limit student bus passes to students under the age of 27, I decided to buy a bus pass and take the bus to school every day instead of just the two days a week I start at 8:00 am. A monthly student express bus pass costs $76.60 compared to the full adult express rate of $106. If you are paying with cash or tickets, there is no discount for being a student. A monthly parking pass at school in the cheapest lot would cost me $71. Of course, there are 700 people on a waiting list to get one of these coveted spots and the college doesn't guarantee that even with a parking pass you will actu...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Many Canadians are confused about whether they should be saving money in Tax-Free Savings Accounts (TFSAs) or in RRSPs. In some situations this can be a complex question. Let’s look at the basic differences between TFSAs and RRSPs. The TFSA is similar to an RRSP in that the income from investments within the account are tax-sheltered. The main differences are as follows. 1. TFSA contributions do not give you a tax deduction. RRSP contributions are deducted from your income to reduce taxes. 2. TFSA withdrawals are not taxed. With RRSPs, any withdrawal is treated as regular income and is taxed. 3. TFSA contribution room accumulates at $5000 per year. RRSP contribution room calculations are more complex. 4. Any amount withdrawn from a TFSA becomes new contribution room for the future. Regular withdrawals from an RRSP don’t increase future...

1. Canadian Financial DIY can’t find any advantage to foreign diversification in 22 years of investing returns . 2. Preet explains how high-frequency traders make money . This is definitely not a system for the average overconfident day trader.

Following up on last week’s musings on using portfolio rebalancing with a 100% stock portfolio , I decided to run an experiment using real stock prices. The goal is to see what benefit rebalancing brings over buy-and-hold. Fairly arbitrarily, I decided to divide the portfolio into half Canadian and half U.S. stocks. Each half consists of one individual stock and two index ETFs (one large cap ETF and one small cap ETF). The starting portfolio contains equal values of 6 different equities: BMO – Bank of Montreal stock XIU – iShares Canadian Large Cap ETF XCS – iShares Canadian Small Cap ETF BRKB – Berkshire Hathaway stock VV – Vanguard U.S. Large Cap ETF VB – Vanguard U.S. Small Cap ETF The starting portfolio size for the experiment is $400,000 (Canadian). Because XCS began trading 2007 May 18, the experiment begins on that day with money divided equally among the 6 equities, rounded to the nearest 100 shares, except for BRKB which is rounded to the nearest share (because ...

Canada owes its war veterans a great deal. It’s hard to put a price on freedom. Looking for a connection between money and Remembrance Day, I wondered how we support our injured war heroes. It’s nice to stick ribbons on cars, but wounded soldiers need cold hard cash to put food on the table. A soldier wounded during war time who is considered to be 100% disabled gets a disability pension of $2322.14 per month. Soldiers who are judged to be only 50% disabled would get half of this amount. This figure is smaller than I was expecting. I suppose it doesn’t make sense to turn war heroes into millionaires, but it’s hard to imagine $2322.14 per month stretching very far for someone who is completely disabled.

There is no shortage of investing advice in the world. Some of it is good, some bad, and much of it is contradictory. However, just because two opinions are contradictory doesn’t mean that one of them is necessarily wrong. Unfortunately, we often gravitate to the advice that is wrong for us. For example, consider the following two very general opinions: 1. Investors should be careful with their money. 2. You have to take some investment risk to get rewarded. These opinions are somewhat contradictory, yet both true. They are also vague enough that people will read into them what they want. Let’s look at a couple of extreme examples to illustrate how this advice affects two investors. Action Andy has his investment account leveraged to the maximum and owns just two stocks. He reads the first piece of advice about being cautious and rejects it because it sounds like his mother talking. The second piece of advice prompts him to re-mortgage his house and buy into the latest...

Until recently, the leader in index ETFs for U.S. stocks has been Vanguard . Their great reputation combined with rock-bottom MERs has made them the clear choice. However, Schwab has come out with several index ETFs with management fees matching or beating Vanguard with the added bonus of paying no commissions when trading in a Schwab account. Some ETF companies generate extra revenue through securities lending. This is the practice of lending stock to short sellers for a fee.  Some commentators are speculating that Schwab is keeping the proceeds from securities lending to augment the MER. The Schwab prospectus doesn’t seem to clear up the matter: “When the fund lends portfolio securities ... the fund will also receive a fee or interest on the collateral. ... The fund will also bear the risk of any decline in value of securities acquired with cash collateral.” So the fund gets a fee and the fund bears the risk. What do they mean by “fund” in this context? Is it the unit...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. When people get into trouble with their debts, they usually have several different debts including credit cards, car loans, line of credit, and possibly student loans. The debts usually have different interest rates and different required monthly payments. Some debts are scheduled to be paid of quickly and others over a long period of time. The idea of a consolidation loan is to borrow one large amount to pay off all of the other debts. For this to make sense, this loan would have to be at a low interest rate and amortised over many years to make the payments low enough for the debtor to handle. To qualify for this type of loan at a low interest rate, the debtor might have to put up some collateral, and this collateral is usually a house. The consolidation loan then turns into a home equity line of credit (HELOC). On the surface, this seems li...

Bond investors may be interested in a recent roundup of articles on bonds from Rob Carrick, a personal finance writer for the Globe and Mail. Okay, you caught me. I’m pleased because Rob included my article comparing bond ETFs to directly purchasing bonds in his roundup. I suppose it’s too unprofessional to put “Rob Carrick has heard of me” on a business card. Rob has done a great job explaining financial matters clearly and I’m happy to be included.

1. Big Cajun Man isn’t too happy about the city of Ottawa’s plans to more than double garbage collection fees and charge for them separately . With the trend toward cities charging fees for services, eventually property taxes will pay for nothing but the bloated administration that adds nothing to the actual services delivered. 2. Jonathan Chevreau reports that Visa has revised its financial literacy web site (the web page with this article has disappeared since the time of writing). Apparently, Visa thinks the 20-10 rule makes sense: “never borrow more than 20% of your yearly net income” and “monthly payments should not exceed 10% of your monthly net income.” I have a better idea: never borrow more on your credit card than you can pay off at the end of the month.

The world is running out of oil and according to Profit from the Peak by Brian Hicks and Chris Nelder, shortly oil production rates will begin their inevitable slow decline. The authors call the resulting scramble for energy sources “the greatest investment event of the century,” but is there a way for investors to profit? Official sources paint overly-rosy pictures of the amount of oil still available. The biggest reserves are controlled by Saudi Arabia, but the Saudis severely limit access to scientific information about these reserves. The authors painstakingly go through available scientific evidence and conclude that peak oil production world-wide is near despite official claims that at least 50 years of oil remain. Part of the problem with oil production is that as an oil field matures it gets progressively harder to extract oil, and the extracted oil has more impurities that take energy to remove. At some point, even if a field still has oil, it becomes unprofitable to ...

The commission costs of buying and selling homes in Canada may be set to drop. The federal competition bureau has wrapped up a two-year investigation of real estate practices and they are pushing for big changes. They want the Canadian Real Estate Association (CREA) to open up its Multiple Listing Service (MLS) to discount real estate brokers. Until now CREA has kept commissions on the sale of homes in Canada at artificial levels (usually 5-6% of the house’s sale price) by refusing access to MLS to any broker offering lower commissions. Because most homes for sale are listed in MLS, being denied access is a serious impediment for discount brokers. For now CREA is sticking to its guns saying that they don’t plan to grant greater access to MLS. This may ultimately lead to a showdown before the Competition Tribunal. It seems that we can eventually look forward to lower real estate commissions driven by market forces rather than a monopoly.

The book Super Trader: Make Consistent Profits in Good and Bad Markets by Van K. Tharp is definitely not what I expected. I thought the aim would be to show me how to make consistent trading profits. Instead it assumes the reader already knows how to profit by trading and needs help sticking to a proven system. Tharp paints a picture where profitable trading strategies are a dime a dozen, but the discipline to follow a system is the real key to success. A lack of discipline can certainly be harmful to investors’ returns, but Tharp offers no evidence that the consistently profitable trading strategies that he repeatedly refers to actually exist. The book anticipates this criticism by ridiculing a “gentleman from England” who took one of Tharp’s courses and complained that it didn’t give him a profitable trading strategy. Tharp’s reply is that the course wasn’t designed to give a methodology; “it is about how to become a peak performance trader/investor,” and “psychology is far ...

As regular readers of this blog know, I’m not a big fan of owning bonds for savings that won’t be needed for at least three years. It may not be for everyone, but I invest 100% of my long-term savings in stocks (with no leverage). For money I’ll need in less than three years, like University tuition for one of my sons, I buy bonds that expire close to the date I’ll need the money. This means that I don’t get the advantage of rebalancing a portfolio between stocks and bonds. By trading to maintain constant percentages in stocks and bonds, investors are forced to buy low and sell high (as long as they actually do the rebalancing). Too often investors delay rebalancing when an asset class is priced low and the news is full of doomsday stories. My latest idea is to change my portfolio to include fixed allocations to different stock asset classes. I’m sure that other people have thought of this before, but it’s the first time I have seriously considered committing my money to it. ...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. It turns out that banks consider students to be great customers for their credit cards. I learnt this from James D. Scurlock’s book Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders , which gives a fascinating look into the world of lenders and their hapless customers. So why are students good customers? When you think of the old style bank that only lends to people with steady income to pay off a loan, lending to students makes no sense. Students usually have little income, and many of them will run up bills on their cards that they can’t pay off. It turns out that students have something else that makes them great customers: parents. According to Scurlock, parents will almost always bail their children out of debt problems. And the attitude of banks has changed dramatically over the years. Students run up debts and pay in...