This New Year’s Eve I’m reminded of a Gary Larson cartoon depicting a final exam at ditch-digger school with the reminder “Have you got ... 1. Your shovel? 2. Backup shovel?” In the same vein, I ask: Do you have a designated driver? A backup designated driver? Have a happy and safe new year.

For the last couple of years my family doctor has offered me the option of purchasing extended health coverage to pay for any of his services that I would have to pay for, such as copying records, immunizations, and filling out medical forms. The list is actually 23 items long. I’ve never bothered to pay this “block fee” with the reasoning that I rarely need any of these services, and they are relatively cheap even if I need them one day. However, over the past year, I actually spent a total of $60 on services from my family doctor that weren’t covered by provincial health insurance. Each time I coughed up another $20, I felt like I was losing out. If only I had paid for the insurance, I wouldn’t have to be digging into my pocket. What if I incur more costs this year and it works out that I have to pay more than the amount of the insurance? When the papers inviting me to sign up for extended coverage for the upcoming year arrived, my first reaction was to pay. I had to think...

Most of us have thought at one time or another that we’d like to use what we know now to go back in time and make different choices. Looking back at stock prices in 2009, it’s clear that a big bet on stocks in March would have paid off handsomely. In a discussion of leverage in November 2008, I came dangerously close to making a prediction: “Let me reiterate that I’m not a fan of leverage, but if there ever is an appropriate time for it, now is probably that time.” As it turns out, stocks dropped further, but are now significantly above the level on that day. Suppose that I had borrowed $250,000 against my house to invest in the TSX Composite index, which was sitting at 9424.00 that day. The lows in March would have produced a painful paper loss of nearly 20%, but I’d be ahead 24.7% as of the closing value of 11,754.61 on Christmas Eve. Assuming that I paid about $10,000 in interest on the mortgage, my net gains right now would be $51,800. That’s not a bad payoff for minima...

Have you ever had the feeling that you pay more fees to your bank than you should, but you’re not sure what to do about it? If you’re a Canadian and answered yes, then Rob Carrick’s book How to Pay Less and Keep More for Your$elf: The Essential Guide to Canadian Banking and Investing may be for you. Whether your concern is savings and chequing accounts, credit cards, loans, mortgages, or investing, Carrick has useful suggestions for reducing fees and getting better interest rates. He also has good insights into working with financial advisors and the ins and outs of do-it-yourself investing. Unlike many writers, Carrick doesn’t bother to preach about the evils of debt or mutual fund fees. Instead he focuses on how to reduce interest rates on debt and fees on funds. For example, he says that debt is “an essential financial tool” in a world of expensive homes and cars. I agree when it comes to homes, but I think people should pay cash for cars. If they can’t pay cash for a car...

This is the last regular Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. The pool of under-appreciated articles has been exhausted. Enjoy. The Dividend Guy challenged other bloggers to post their top 3 investing mistakes.  Here is my contribution. 1. Putting my first savings into fixed income investments I was young and nervous because I owed $85,000 on my first mortgage. My mortgage permitted doubling monthly payments, and my wife and I were taking advantage of this feature every month; I wanted the mortgage GONE. This didn’t leave much for retirement savings, but we did manage to save some money each year. Unfortunately, I knew very little about the stock market at that time, and we put all of our savings into fixed income investments at our bank. We continued this way for several years giving up the gains available in the stock market. This was a big mistake. 2. Buying actively-managed high-cost...

This will be the last post until after Christmas. Have a Merry Christmas for those who celebrate it, and to everyone else, enjoy the time off work. There is a lot of truth to the saying that you shouldn’t judge people until you’ve walked a mile in their shoes. Looking at things from another person’s point of view can give useful insights. Let’s try this with financial advisors and Tiger Woods. The investing do-it-yourself crowd tends to vilify financial advisors who are actually mutual fund salespeople. The truth is that I don’t tend to think ill of these people; I just choose to protect myself from them, and I think other investors should do the same. If evil advisors were the issue, then we would have much less of a problem. Most people are basically decent and honest. The same is likely true of mutual fund salespeople. The fundamental problem is the incentive structure that they work within. Suppose Jim sells mutual funds and has hit some hard times. The economy is b...

The book Winning the Loser’s Game by Charles D. Ellis was a very pleasant surprise for me. I tend not to expect much from books and am pleased to learn even one interesting thing. Ellis provides consistently solid investing information from beginning to end. The presentation is clear and concise. This book is now my best recommendation for an individual investor looking for a foundation for a lifetime of investing. This book is in its fifth edition, which makes me regret not ever having seen it before. I certainly could have saved myself from financial mistakes armed with these ideas. Parts of the book are specific to U.S. investors, but they are not central to the main messages. Among other high-profile roles, Ellis has chaired investment committees at both Harvard Business School and Yale School of Management. But that doesn’t mean that he aims to baffle readers with his academic brilliance. Even concepts I thought I understood well and have seen in other books were expl...

Nearly a month ago I made an RRSP contribution and used the money to buy an index ETF. I then watched how it performed 10 minutes later, an hour later, a day later, etc. Even now I find myself more interested in how this ETF is performing than the rest of my portfolio. This happens every time I make a new investment or add to an existing one. Of course, this is all irrational, but I just couldn’t help being pleased that the ETF stayed above my purchase price during the first day. It shouldn’t make a difference to me whether I make $100 on this investment or some other one, but it does. I do my best to keep irrational emotions like this from affecting my decisions, but that doesn’t stop me from having the emotions. I assume I’m not alone in this need for new investments to perform well. Do other investors find themselves caring more about recent purchases than the rest of their portfolios?

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Among the games that mutual fund managers play to artificially boost reported returns, such as closing underperforming funds and fund incubation , you can add a practice called front running. Larry Swedroe describes front running in his excellent book Rational Investing in Irrational Times . A fund family starts up a new fund hoping to report good returns and attract a flood of investors. They begin by choosing some stock that has low trading volumes so that a modest size purchase will drive its price up sharply. The fund family then purchases a block of shares for the new fund. Then they purchase a larger block of shares for one or more of their large established funds. This will drive the price of the shares up and artificially inflate to apparent returns of the new fund. Done correctly, the number of shares purchased for the established fu...

1. Do you have any gift cards you don’t intend to use, or would you like to buy a gift card at a discount? CardSwap calls itself the eBay of gift cards. I don’t know much about them other than what I learned from a press release and looking at their web site, but the idea sounds good. Are there any readers who have tried buying or selling gift cards at this web site? My biggest concern would be that some cards would come with unexpected restrictions making them less valuable than they appeared at first. The card seller may not even be aware of any restrictions. 2. It doesn’t have much to do with money, but the Big Cajun Man thinks that ED medications have improved men’s health because they are sending more men to their doctors for physicals . It’s an interesting theory, but it’s the jokes in italics that will keep you reading. 3. Larry MacDonald has put together a timeline of the huge alleged Canadian Ponzi scheme . It’s troubling that the scheme seems to have been uncovere...

This blog has featured many attempts to explain the damage that investing fees, primarily MERs on mutual funds and ETFs, can have on your savings. This latest effort uses a picture. This picture makes use of Robert Schiller’s monthly historical data on the U.S. S&P 500 index . Although, I’d prefer to use Canadian stock market figures, U.S. figures are easier to get, and the results would look much the same for Canadian stocks. I traced the path of a $10,000 investment 50 years ago under three different conditions: 1. The money follows the S&P 500 with dividends. We track real returns, meaning that the effect of inflation is factored out. 2. The money follows the S&P 500 with dividends less MER fees of 0.17% per year. This is the MER level of the widely-popular iShares large capitalization index of Canadian stocks (XIU). 3. The money follows the S&P 500 with dividends less MER fees of 2.5% per year. This is the MER level of a typical Canadian stock mutual f...

A while back I discovered that there were mice in the drop ceiling of my finished basement. After cleaning up the mess they made, I set some mouse traps with some peanut butter in them. Mice really seem to like peanut butter and it lasts forever in the traps. The first time I noticed that I’d caught a mouse, it had been there for a while and didn’t smell too good. After disposing of the mouse, I proceeded to try to clean up the trap to use again. The cleaning was unpleasant and the trap still stunk afterwards. It wasn’t until after I reset the trap and put it in place that I thought about how foolish it was to do all that work. The last time I checked, mouse traps at a local store range in price from about 50 cents to $2 for a “deluxe” model. So now I consider mouse traps to be disposable. If there is the slightest bit of unpleasantness in trying to dislodge a dead mouse from a trap or clean it up, it goes in the garbage with the mouse. Now I catch 3 or 4 mice per year and ...

Recently we discussed a modified 4% rule where we base the size of monthly withdrawals from retirement savings on the current portfolio size rather than the portfolio size at the beginning of retirement. Let’s follow this up by looking at actual market data to see how monthly retirement income is affected. Because U.S. data is more readily available, I’ve gathered returns on the S&P 500 (including dividends) since 1988, adjusted for inflation. Let’s consider the case of Rita who retired in 1988 with a portfolio worth $750,000 in today’s dollars. The actual figure in 1988 was a little over $400,000. Rita has 100% of her money in the S&P 500 index. This is obviously a more aggressive portfolio than most retirees would want, but let’s see what happens to Rita’s income. Using the modified 4% rule, Rita would start drawing 1/12 of 4% ($2500 in today’s dollars) per month. But this amount gets adjusted each month depending on whether the portfolio grows or shrinks. Assumi...

What amount can an investor, Ian, withdraw safely each year from a portfolio 50% in stocks and 50% in bonds? Suppose that Ian wants to fix some dollar amount and bump it up by inflation each year, and wants a high probability of not outliving the money. According to a 1994 paper by William Bengen , the answer if Ian is between 60 and 65 years old is about 4% of his starting portfolio size. This has come to be called the 4% rule. So, starting with $750,000, Ian should be able to withdraw $30,000 the first year, and then bump up the withdrawal amount by inflation each year. With reasonable probability, Ian won’t run out of money during his remaining lifetime, according to Bengen. Patrick at A Loonie Saved noted a logical inconsistency with this 4% rule . Two investors in exactly the same situation might receive different advice. Let’s illustrate this with an example. Suppose that in the first year of Ian’s retirement stocks performed very poorly. Between the $30,000 worth o...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Most commentators advise investors to shift money from equities to fixed income as they age, and this makes sense. We may disagree on the exact asset allocation percentages and exactly how soon before (or after) retirement to start lightening up on equities, but it seems clear enough that the average 40-year old should have more in equities than the average 80-year old. However, there is a body of academic work that argues that investors should maintain a constant asset allocation regardless of their age. This work is based on what is known as constant relative- risk aversion (CRRA). I’ll show the problems with CRRA in an example below. One consequence of the CRRA assumption is that the optimal asset allocation percentages remain constant regardless of the length of the investor’s investment horizon. Paul A. Samuelson advocates this view in his...

I got my flu shot Thursday. Actually, I got two shots: one for the H1N1 (swine) flu and the other for the “regular” seasonal flu. I only planned on getting the swine flu shot, but the young man I first encountered was a good salesman. The whole process took 25 minutes, including filling out a form, standing in line briefly, getting the shots, and waiting the mandatory 15 minutes to make sure I didn’t have some sort of reaction. Apparently, the long lines have dwindled and the bracelet system isn’t needed any more in my community. So far the shots hurt less than the standard tetanus booster. 1. Who knew there were so many ways to calculate the return on a portfolio? Preet answers a reader question about the Modified Dietz return calculation . 2. According to Larry MacDonald, parents in need can sue their adult children for support if they supported their children financially when they were minors . 3. Ellen Roseman helped some people who made an online purchase, but were cha...

Just when it seemed that the fixed rate natural gas marketers had stopped coming to my door, hot water tank marketers started ringing my doorbell. So far I’ve had two of these guys show up, both pretending to work for my natural gas supplier, but they don’t. So, why would I turn down a free hot water tank? After all, my tank is more than 5 years old and may not have peak efficiency (according to one salesperson). I’ll save money because of the lower gas consumption. What these guys failed to mention is that they don’t work for a company that I already have a relationship with, the rental charges on the new tank will be higher than I’m paying now, and I would have to lock in this rental charge rate for many years (15 years according to some reports). Based on the rental charge I extracted from one salesperson and a quote from Sears for a new hot water heater, I could buy a new tank for less than three years worth of rental charges. So, when I decide the time is right to dump m...

In her book, Cheap: The High Cost of Discount Culture , Ellen Ruppel Shell argues that our drive for low prices and inability to determine product quality has led to eroding job quality in the U.S. and the rest of the world. Large retailers give us cheap goods, but they also kill the jobs requiring skill and replace them with low-skill minimum-wage jobs. Parts of this book contain a balanced treatment of issues carefully explaining both sides. Other parts descend into more of a rant that still manages to be thoughtful and entertaining. While it’s unlikely that any reader would agree with all of the author’s arguments, this book is consistently interesting as it discusses price discounting, behavioural finance, outlet malls, craftsmen, food production, and trade with China. In the author’s view, most large retailers are a major part of the problem (most notably Walmart), but there are a few large retailers that set a good example (Wegmans and Costco). Walmart pays poor wages a...

When we see a consumer item deeply discounted, we tend to react in one of two ways: 1. “What a bargain! I’ll take five.” 2. “I knew those things were no good.” Sometimes we see a low price as an opportunity, and other times we see it as a sign of low quality. In their paper, Motivating Discounts: Price Motivated Reasoning , researchers On Amir and Erica Dawson sought to find out what determines which way we react. It turns out that our reactions are determined by what we thought of the product before seeing the discounted price. If we’re already attracted to a product, then we see a discount as a bargain. If we’re neutral or negative about a product, we see the discount as a sign of low quality. A curious side effect of our behaviour is that deep discounts “discourage purchases by all except those who liked the product in the first place.” We’re less likely to buy a deeply discounted unfamiliar product than we are to buy it at the regular price. We can see this happenin...

The dividend yield reported on preferred shares is often misleading. These reported figures don’t take into account potential gains or losses when these shares are redeemed. Unwary investors can get surprised if they chase high yield without reading the fine print. Preferred shares are issued by companies to raise capital. Typically, they are sold for $25 each and promise fixed quarterly dividends until they are redeemed for $25 each. With common stock, shareholders own a slice of the company, but investors in preferred shares just get dividends. The name “preferred” comes from the fact that if the company has financial trouble, owners of preferred shares get paid before owners of common stock. Just because a preferred share starts and ends its life at $25 doesn’t mean that it holds steady at $25. If market conditions make the fixed dividend payment more or less attractive, the share’s price will fluctuate up and down. Usually preferred shares get a higher dividend (in perc...

This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy. Many investors seem unaware of the fees they pay to own their mutual funds. Disclosure rules are intended to prevent this sort of problem, but they don’t seem to be effective enough. Suppose that you meet with a financial advisor and agree to invest with her. She seems like a great person, and her investment advice seems sensible as far as you can tell. Then she hands you the following disclosure statement: Initial portfolio size : $150,000 Initial investments : 30% bond fund, 50% stock fund, 20% international stock fund Estimated Fees : Immediately : $6300 Year 1 : $3135 Year 2 : $3324 Year 3 : $3526 Year 4 : $2718 Year 5 : $2781 Year 6 : $2838 Year 7 : $4815 Year 8 : $5164 Year 9 : $5540 Year 10 : $5944 10-year total : $46,086 Gulp. Surely these can’t be right. Will you really pay this much? Yes, you will. These numbers wer...

1. Preet explains how leveraged Exchange-Traded Notes (ETNs) hide snowballing interest charges . 2. Big Cajun Man found that opening a Registered Disability Saving Plan (RDSP) isn’t as easy as opening RRSPs and TFSAs . 3. Million Dollar Journey looks at how to claim a capital loss on a de-listed stock like Nortel . 4. Mike at Four Pillars decided to collapse his leveraged investing plan (the web page with this article has disappeared since the time of writing). The big danger for anyone considering leveraged investing is that it will seem like a great idea when the stock market is booming (expensive stocks) and will later seem like a terrible idea when the stock market is crashing (cheap stocks). At least Mike stuck it out for the last 9 months while stock prices rose from their lows. 5. Potato concludes his story of looking for a place to rent in Toronto and has some advice for landlords .

In a recent post, Canadian Capitalist showed that the effect of the HST on investor returns in mutual funds is small compared to the drag caused by fund MERs. I thought that while this conclusion is correct, his calculation of the MER impact was a little off. It turns out that we were both (slightly) wrong. In the example, Investor A puts $100 to work in the equity market for 25 years at an average annual return of 8%, giving a final portfolio value of $685. Investor B makes a similar $100 investment in a mutual fund with a 2.5% MER. Reasoning that Investor B’s return dropped to an average of 5.5% per year, his final portfolio value works out to $381. With the HST, the MER drag rises to 2.7% leaving 5.3% average return each year, and the final portfolio value is $363. So, compared to Investor A’s $685, the MER costs Investor B $304, and the HST costs him another $18. It’s clear that while the HST isn’t helping, the real problem is the high MER. At first I thought that thes...

There is no shortage of commentators making predictions about interest rates. This is because they can get the attention of just about anyone who has investments. Those who depend on interest income want higher rates, and those who have stocks and bonds generally prefer dropping interest rates. It is possible to predict interest rates with better success than flipping a coin, but not in any useful sense. The market’s prediction on interest rates can be found by examining the current yield curve, which is a chart showing short-term and long-term borrowing interest rates. Typically, yield curves focus on government borrowing costs in the form of bond interest rates. The Bank of Canada maintains data on yield curves going back to 1986. Here is the most recent yield curve data for the last day of August: Typically, short term rates are lower than long-term rates because investors demand a higher return when their money is tied up longer. So, the yield curve tends to slope up...

The book Understanding Wall Street by Jeffrey Little and Lucien Rhodes is in its fifth edition and has a history going back 30 years and over a million books sold. The main strengths of this book are the wide range of investing concepts explained with clear language. The main weaknesses, although relatively minor, are the authors’ curious biases and the fact that the book hasn’t quite been updated for the internet age. The main topics covered are – the nature and history of different types of investments including stocks, bonds, commodities, and derivatives – accounting basics and the various fundamental analysis ratios such as price/earnings, dividend yield, and several others – technical analysis – the history of Wall Street and some of its colourful personalities – price bubbles through history Newspaper and the Internet Curiously, a separate section is devoted to the internet, rather than just mentioning its use as necessary in the other sections. Some of the discus...