For the last post of 2010 I thought I’d make a safe prediction and point to a couple of good financial videos. Prediction: In 2011, blogs and other media will be filled with reasons for why current conditions for different asset classes are different this time, but they will be wrong. The best ways to approach investing over the long term will continue to be the best ways into the future. In his latest newsletter, Ken Kivenko included a couple of interesting videos. The first is a short funny video about mutual funds and the second is a clear explanation of what you’re up against when trying to beat the market . Have a fun and safe New Year’s Eve.

In response to yesterday’s post about difficulties insuring home businesses , Sue Waterman, President of Intercon Insurance Services Limited in Vancouver, was kind enough to send a clear explanation. The following are her (lightly edited) remarks. As you’ve discovered, with a few very limited exceptions homeowners’ policies normally exclude home based businesses, though some simple arts and crafts type businesses can be added for a small additional premium. But professionals of any kind consulting from home are a challenge. As professionals they’re liable for the work they do and defending professional liability claims in today’s legal climate is seriously expensive even if you win (think $50,000 to $100,000 and much more if it goes to court). So they need professional liability or Errors and Omissions insurance – which given the size of legal defence costs is, not surprisingly, also expensive. But my experience over the years has been that many retired or part time professiona...

According to the Globe and Mail, insurance brokers receive lavish vacations and other perks from insurance companies. My own brief encounter with insurance brokers didn’t reveal any conflicts of interest, but it did leave a bad taste in my mouth. Continuing yesterday’s story of my home insurance company dropping me , my next step was to try to find another insurance company to take me on. I decided to try an insurance broker and called a few. None answered the phone. I left messages and when I didn’t get a call back by the next day, I called a few others. In all I called 15 insurance brokers. Only one had a human answer the phone to take a message. After I left a second message with one broker, I got a call back from a guy who took some information, promised to call back again, but never did. The entire experience was baffling. Something big must have been happening in the industry at that time.

People who run small businesses out of their homes often mistakenly think that their home insurance policies cover their business activities. As explained by Miranda at Financial Highway this is usually not the case. My own experience with home insurance was much worse than the picture Miranda paints. I used to run a one-man consulting business. The only things I needed for the business were a computer, some space in my files for papers, and some desk space. I never even had any clients in my home. Even so, I thought it would be best to contact my insurance company to make sure I was properly covered. I also inquired about professional liability insurance for my business dealings. The insurance company took all the information, went away for a long time, and finally came back to say that they wouldn’t offer me professional liability insurance and further they were dropping me for home insurance! They didn’t care that I had nothing in my home that would matter to my business...

Back in March the Conservative government announced some changes to the way that stock options are taxed . One of these changes brought relief for those who had to pay taxes on phantom income. Unfortunately, these new rules did not become law until Bill C-47 received Royal Assent December 15. Canada Revenue Agency (CRA) was quick to come out with a form to allow people to elect to pay a penalty tax instead of paying tax on the phantom income. This form has the catchy name Election for Special Relief for Tax Deferral Election on Employee Security Options. This whole business is quite complicated. If you’re affected, you may want to get some professional tax advice.

It’s been a quiet week and instead of my usual roundup I’ll say thank you to my readers and a special thank you to my wife for all the work she does at this time of year. My shopping responsibilities for Christmas are minimal. What I do is better called buying than shopping. Once I thought through what I wanted to get and where I’d get each item, shopping took me just under 2 hours including time for a haircut. As you may have guessed, my wife does most of the Christmas shopping.

Tom Bradley at Steadyhand has an excellent book out called It’s Not Rocket Science ( available free here ). It is a collection of 34 of Bradley’s articles over the past five years. Each article approaches an investing topic in an easy-to-understand style contrasting sharply with the common industry message that investing is hard and that people should be afraid. Compared to the rest of the mutual fund industry, Steadyhand takes a very different approach to active investing and this shows through in Bradley’s writing. There are too many good themes is the book to mention them all, but I’ll pick three. S>B>C Over the long term “stocks will beat bonds, and bonds will beat cash.” This may not be true for one year or even five years, but my investing approach is based on the expectation that S>B>C. Insured Investment Products We’d all prefer not to lose money, but “too often buyers believe that someone else is paying for the insurance guarantees. Wrong. There i...

At this time of year many Canadians head to the U.S. in search of bargains for Christmas presents. Taking a bite out of the savings are travel costs and duties when you return. However, border guards don’t always make you pay. My cousin was telling me about a woman who returned from a trip recently having bought $900 worth of items, including the obligatory bottle of booze. She declared the full $900 and even though her exemption limit was only $400 for having been gone 48 hours, she was sent on her way without having to pay any duties. This happened to me once, although I was only over my limit by a small amount. Not being an experienced U.S. shopper, I’m curious about how common it is for border guards to not make people over their limit pay duties. Are there any experienced U.S. shoppers who can comment on how often border guards forgive duties and for what types of dollar amounts?

It’s easy to make a plan for spending retirement savings that looks good on paper. But there are many unknowns when it comes to investing. A little bad luck in the first few years of retirement can sink your plan. Proper stress-testing of a retirement plan is the main theme of Jim Otar’s book Unveiling the Retirement Myth . Instead of testing a plan with average return figures for stocks, bonds, and other asset classes, Otar simulates retirement plans using actual market data since 1900. These simulations check the results when a virtual copy of you retires in each year to see what happens. Suppose you have a $1 million nest egg and plan to withdraw $50,000 rising with inflation each year. If you assume your investment returns will be 5% above inflation each year then the $1 million will last forever. But this is unrealistic. Returns vary unpredictably. This retirement plan that looks so great shrivels up when Otar’s analysis shows how often you’d run out of money before ag...

Trying to figure out how much money you can safely withdraw from an investment portfolio each year is challenging. Some use rules of thumb such as 4%, but the real answer must depend on the types of investments and total fees and commissions paid each year. Jim Otar has studied this problem extensively, but has a questionable built-in assumption. Otar’s book, Unveiling the Retirement Myth, contains a near endless supply of worked examples where Otar checks the likelihood of running out of money in retirement based on real historical rates of return over the last 100+ years. Readers are told to “ignore any retirement plan that includes a forecast” but implicit in Otar’s analyses is the assumption that the future will look like the past – plus a twist. The author replaces historical dividend returns with roughly the current dividend level: 2%. Otar says that using historical dividend yields “creates an artificially higher degree of outperformance compared to prevailing dividend ...

The Competition Bureau is going after Visa and MasterCard for anti-competitive practices. At issue is rules they impose on vendors that drive up costs for everyone regardless of whether they pay with a credit card or not. The responses from Visa and MasterCard accusing retailers of trying to pass costs onto consumers are mostly nonsense. All costs get passed to consumers eventually. The best way to benefit consumers is to lower total costs. Allowing consumers to pay less when they use a cheaper form of payment is the right approach. Potato got caught by a Pharma Plus location that doesn’t honour their parent company’s offers. Money Smarts is on a quest to eliminate all paper bills and statements. Big Cajun Man is tired of answering the same investor profile questions over and over again. Financial Highway reviewed Gary Kaminsky’s book Smarter than the Street and seemed to like it more than I did .

There is no shortage of lively debate about the merits of passive index investing versus active stock picking. Much of the discussion stems from one side misunderstanding the other. After reflection, I’m convinced that my choice to invest passively in index ETFs is fundamentally a statement about my own limitations. I don’t doubt that there are stock pickers who outperform due to skill rather than luck. It seems clear enough that Warren Buffett did this throughout his career, although it's not clear whether he can continue to outperform in the future given the huge 12-figure sum he is trying to grow. I don’t try to pick individual stocks because I don’t believe that I can beat the index consistently after costs. Proponents of active investing would be quick to point out that I can just find someone who can outperform at stock picking and invest in this money manager’s fund. This brings me to my next limitation: I don’t believe that I can figure out which money managers wi...

Dynamic Funds have 7 mutual funds that have beaten their respective stock index benchmarks over the past 10 years despite sky-high MERs. Jonathan Chevreau suggests that this is reason for index fund proponents to eat crow (the web page containing this article has disappeared since the time of writing). Canadian Capitalist did an excellent job of explaining the problem of identifying outperforming mutual funds before they outperform. I won’t repeat their arguments. But I will show how to replicate the performance of Dynamic Funds with a dead-simple strategy. Let’s say that we run a mutual fund company that wishes to charge a 4% MER. (Why water-ski behind a small yacht when it could be a big yacht?) But we also want 7 of our funds to outperform the S&P TSX index over the next 10 years. This sounds like a tall order, but it’s actually quite easy. To begin with we’ll create 112 (7x16) mutual funds in our family. The reason for this number will become apparent later. We’ll i...

Rob Carrick asked this question as a subtitle to an interview with Kerry Taylor about budgeting. The question is whether a viable alternative to budgeting is to take a percentage off the top of your income for savings and just spend all the rest. The unsatisfying short answer is “it depends”. I have no doubt that Carrick can make this approach work for him; he has proven many times over that he’s very financially savvy. Less sophisticated people can easily get themselves into trouble. These people might misunderstand “pay yourself first and blow the rest” to mean that as long as they set aside 10% of their pay cheques for long-term savings they can do whatever else they want. Building savings won’t help much if you build up lines of credit, car loans, and credit-card debt even faster. When the various debts grow large enough that your finances reach a breaking point, you’ll be forced to pay off the debts with the supposed long-term savings. So, paying yourself first and blow...

Figuring out how much money you need to save for retirement isn’t easy. It’s no wonder that so many people turn to experts for help. For the do-it-yourself crowd there are online retirement calculators to help. Unfortunately, the precise answers we get from most of these calculators just give us the illusion of certainty. For fun I imagined my 25-year old self using one of these calculators. A quick online search for retirement calculators landed me at Mackenzie’s RRSP Calculator . This calculator is a common type where you punch in some numbers including assumptions about inflation and returns and the calculator gives unrealistically precise answers about how much you need to save. So now I’ll conjure up the 25-year old me to answer the calculator’s questions: Current value of RRSP That’s an easy one: $0. Current RRSP contributions I haven’t really started yet, but let’s say that I start saving $100 per month. Years to retirement and number of years for funds to las...

Many parents keep their young children quiet for a while by letting them play games on their iPhones and iPads. They may want to rethink these diversions after reading about kids who managed to rack up triple-digit iTunes charges . This trap even caught parents who tried to make sure that their kids wouldn’t have access to the ability to purchase game tokens. Big Cajun Man finds an analogy between the latest Bank of Canada interest rate decision and a funny story about a tattoo. Canadian Financial DIY explains how income taxes increase the effect of inflation on investment returns. Money Smarts looks into why investors tend to fill their TFSAs with just cash and GICs.

I’m not a big fan of top 10 lists, but I highly recommend reading Meir Statman’s top 10 list of errors average investors make . Statman hits the ball out of the park. I can see my own tendencies in every one of the errors. I might go so far as to say that investors should reread this list just before making any trades. Even easier than seeing your own errors is seeing these mistakes in other people’s behaviour. However, I try to avoid pointing them out to all but my closest friends and family. Few will thank you for criticism and only those closest to you will forgive you and maybe even thank you (much later).

Interac is renaming its email money transfer to Interac e-Transfer in part because people can now send or receive money with mobile phones as well as their computers. This is a potentially convenient way to send money, but it brings up the obvious question of how safe it is to send money by email or with a mobile phone. The answer is partly encouraging. Interac attempts to allay security concerns as follows: “The sender’s financial institution and the recipient's financial institution transfer funds using established and secure banking procedures. Personal or financial information, such as address, phone number and bank account information, is not shared and remains private.” So the sender doesn’t need to know the banking details of the receiver, and the money is actually transferred using traditional secure banking procedures. This seems to close the door on any problems, but there is one potential security hole. When we pay bills online, we choose one of our accounts ...

My company’s HR department is encouraging employees to take part in a program to buy toys for less fortunate children. My only problem with it is the requirement that all toys be purchased new. My own experience with my family over the years tells me that there is a huge glut of perfectly good slightly used toys available. My family have thrown out thousands of toys, many of which were still new-looking, but we simply couldn’t find anyone who wanted them. They couldn’t be sold at garage sales or even given away at these sales. We often threw them away just to create room in our home. From what I saw of friends’ homes, they could have improved their lives by throwing away more toys. This whole charity effort has the feel of something designed to pump up toy sales. I have no idea if this is really the case, but adding to the glut of toys choking the homes of families rubs me the wrong way. I would prefer to see needy children paired up with some of the almost new but unwante...

Gary Kaminsky was a successful money manager and is now co-host of the CNBC show Strategy Session . His new book Smarter than the Street lays out an ambitious goal of teaching readers to do what he did: “We did it constructing a specific strategy and adhering to that strategy, regardless of the investing climate. It is a strategy that almost anyone can learn. One of the primary goals of this book is to reveal this strategy, step by step, to individual investors.” Kaminsky makes big promises in the Introduction that go largely unfulfilled in the rest of the book. The “specific strategy” turns out to be quite vague and relies heavily on gut feel. A large block of the book is devoted to advising investors to read company annual reports, look for big changes, and pay attention to how companies use excess cash. How to use this information to pick stocks is left unstated except for some examples. Some parts of the book are more specific, such as the recommendation to own betwee...

Rob Carrick profiles a mutual fund company that pinches pennies to the point where they take pens and paper from hotel conference rooms. Being careful with investor money should be applauded, but their MER is still about 2.2% on assets of $1.5 billion. This means that expenses are about $33 million per year. Maybe I’m not very imaginative, but I don’t know how they could spend this much money if they won’t even buy pens. Big Cajun Man gives his take on gifts you should never give your kids. I thought the best one was avoiding giving them something you always wanted. Times change. Your dreams aren’t your kids’ dreams. Financial Highway gives step-by-step procedures for disputing problems with your credit report. Money Smarts explains the requirements to qualify for four financial advisor designations.

I received an email comment on yesterday’s post that ended with “Thanks for the insight. And please take it easy on Investment Advisors ... some of us are genuinely trying to improve the lives of our clients.” The funny thing is that I do believe that some (probably most) financial advisors genuinely try to help their clients. So how can I believe this given my many past remarks on this subject? Let me explain starting with an analogy. The company I work for has a few direct competitors. The work my colleagues and I do is designed to increase our market share which means taking market share away from our competitors. If we succeed in making more desirable products, then our competitors will shrink and possibly even fail. This would cause people to lose their jobs. Few workers think in these terms, but the truth is that their efforts are aimed at destroying other people's jobs. Of course this is the nature of capitalism and it serves us well, but I don't really like...

Canada has no shortage of financial advisors, but some investors complain that it is hard to find an advisor who isn’t just a mutual fund salesperson. No doubt good advisors exist, but perhaps they are in short supply because of the requirements to get a designation. Mike Holman described the requirements to get 4 different designation levels . The requirements for the top two levels caught my eye. In addition to having to pass exams, becoming a Certified Financial Planner (CFP) requires “two years of direct financial planning experience,” and becoming a Chartered Financial Analyst requires “four years of related investment experience.” Why not make the testing more stringent and reduce the time component? The answer is that these rules are designed to protect those who already have the designations from competent competitors. With these time requirements it’s almost impossible to hold these designations for part-time work no matter the competence of the candidate. This crit...

For many people it’s almost impossible not to have opinions about stocks. Even those who use a low-cost indexing approach to investing like me find themselves with a strong opinion about a company’s prospects from time to time. For those who commit real money to their opinions, I have a suggested mindset for trading. Imagine an office building with 1000 people working away on clusters of the latest powerful computers. The workers are former physicists. String theory wasn’t challenging enough for them and they went looking for greater mathematical challenges. Now they are all working together developing advanced trading strategies. The next time you trade an equity imagine these former physicists being on the other side of the trade selling whatever you’re buying or buying whatever you’re selling. I’m not saying this just to scare readers; this is a fairly accurate depiction of the trading universe. I’m a believer in owning equities and taking some investment risks, but tra...

Readers of investing blogs tend to be those who enjoy spending time thinking and talking about investing. However, most people would rather talk about foot fungus than investing. These people see investing as a necessary evil and want to handle it in the easiest possible way. It seems like a no-brainer that the easiest way to invest is to hand your money over to a financial advisor and just do whatever he or she says. Even if we ignore the high cost of paying the typical advisor, I’m not convinced that the answer is this obvious. The term “DIY investor” conjures up images of a group of people boring their spouses at a party with endless talk of whether Apple or Google stock will go up or down. But it doesn’t have to be this way. An investment portfolio can be just about as simple as a bank account. For example, an investor could just divide investment funds into thirds: one-third for a Canadian stock index, another for a U.S. stock index, and the last for a bond index. New ...

Financial Highway gives the top three places to live and practice geo-arbitrage, which means living someone warm and inexpensive and making money from a western country while working remotely. Frugal Trader at Million Dollar Journey managed to pay off his mortgage in under 3 years. Big Cajun Man is contemplating re-gifting within the family, which means some hand-me-downs for his young son.

The National Post reports that a politician in Glooscap First Nation in Nova Scotia is paid $978,468 per year. This is very high, but sounds much worse when considering that the reserve has only 300 members. It gets worse, though. Apparently only 87 members actually live in the community. With a little math these numbers lead to a suggestion that would probably help these 87 people greatly. Perhaps we could get rid of the politician and divide the pay equally among the residents. This works out to $11,246 per person per year. I’m guessing that these people would be better off with the money than whatever service the politician provides.

Many people are unhappy with the size of their cell phone bills but imagine the shock a Quebec woman got when she was charged $47,000! Her story had a happy ending, but many others whose stories don’t make the news aren’t so lucky. From an informal poll of a few friends it seems that getting hit with an unexpectedly high cell phone bill is quite common. Maybe they’re not as high as $47,000, but they are higher than anticipated. This happens often enough that it seems to be part of the business plan of cell phone providers. A useful feature to protect cell phone users would be a monthly cap. If I expect my usual cell phone bill to be $100, I might volunteer for a feature where my service gets shut off if my monthly bill hits say $500. The idea is that this would be an immediate cut-off so that my bill could never exceed $500. This would only happen if I were being hit with some expensive charge that I didn’t understand in advance. Some people wouldn’t want such a feature, bu...

Preferred shares are tempting for fixed income investors mainly because they pay higher returns than many other fixed-income investments. These higher returns come with the inevitable higher risks. BlackRock has helped to spread the risk by coming out with a new exchange-traded fund called XPF that tracks the S&P/TSX North American Preferred Stock Index. The downside is the cost. The management fee is 0.45%, which is fairly high for an index ETF. The HST adds a little more: 0.03%. Then there is the currency hedging. Half the fund is invested in U.S. preferred shares and the currency exposure is hedged back to Canadian dollars. Such hedging usually seems to cause tracking errors in fund returns. Another thing to consider is that while XPF has 120 underlying holdings, they are from a relatively small number of companies. For example, I counted 18 holdings of various Royal Bank preferred shares. Presumably, if there is risk of default on one Royal Bank preferred share, th...

With much fanfare, the new GM Company had an initial public offering (IPO) last week. Sadly, some shareholders of the old General Motors Corporation think that their old shares will be converted into the new GM shares that closed Friday at US$34.26 per share. This will not happen. The old GM Corporation was renamed to the Motors Liquidation Company as part of its bankruptcy process. All the old GM stock was renamed MTLQQ. These shares closed on Friday at 18.46 U.S. cents per share. The Motors Liquidation Company sold its assets to the new GM Company. The ultimate value of the MTLQQ will be decided after the bickering among old GM’s creditors is done. This value is likely to be very low and will have nothing to do with the shares in the new GM Company. So, in a couple of steps, General Motors Corporation has restored its name to the same initials. However, the old one was “Corporation” and the new one is “Company”. In the shuffle, the old shareholders are left with very li...

New research suggests a strong correlation between math skills and wealth . Other skills such as a good memory had far weaker correlation with wealth. Money Smarts reviews CIBC Investor’s Edge Discount Brokerage. Big Cajun Man runs the numbers on taking the bus versus driving to work. Despite the fact that the numbers strongly favour the bus, he explains why he continues to drive.

Bill Mann reports that No-PIN debit cards will be coming to Canada this summer . You’ll be able to wave these cards in front of a reader without having to insert them or enter a PIN or sign a slip of paper. My personal take on this is that I don’t want any part of it. I only use my debit card for accessing bank machines or to identify myself within a branch of my bank. I think of it as a bank card rather than a debit card and prefer not to give retailers access to my bank accounts. If my debit card were stolen, I certainly wouldn’t want the thief to be able to drain my bank accounts by making purchases. If I ever need to use my bank card as a debit card, I would prefer to have to enter a PIN. I realize that others think differently on this issue and that’s fine: to each his own. However, I would want the option of having a card that cannot be used as a PINless debit card. Some may say, “just don’t use it to buy anything,” but this doesn’t address my objection. I don’t want...

A friend I’ll call Jake was analyzing his investments and posed the following question (lightly edited): I’ve got a standard mix of ETFs, including XIC, XIN, XSP, XBB, and XRB, each with a target percentage of my portfolio and a plan to rebalance when things get out of whack. I plotted the value of my portfolio against the TSX. Guess what? All three lines are almost identical. The correlation isn’t perfect, but close enough over any time period. So what has my “diversification” and “balancing” bought me (aside from extra transaction fees)? Are markets so tightly interconnected as to make “diversification” impossible/meaningless? When was the last time you saw the S&P go one way but the DOW and/or NASDAQ go the other? Is there any advantage to carving off a chunk of cash and investing in a sector or part of the world? Logic says yes, but the results say no. I won’t give up on my diversification just yet, but if I was giving advice to a newbie it might be “buy XIC and s...

Commentators frequently recommend that people negotiate the interest rate on their mortgages, lines of credit, GICs, and other loans and investments. But not much is usually said about how to go about such negotiations. I don’t have all the answers, but I did recently negotiate for a better interest rate on a line of credit. The process surprised me in a few ways. I have an unsecured line of credit that has been mostly dormant for 17 years. A recent temporary need for money led me to use it and find out that the interest rate I’m being charged is prime+4.5%. After a quick poll of friends, it seemed that I could certainly do better. I decided to do what I could to reduce this interest rate as quickly and easily as I could. I figured the easiest way to proceed would be to simply call the bank’s general phone number and provide an update on the 17-year old information they have about me. Surely it would be obvious that my financial circumstances warrant a lower interest rate. ...

Too often I hear people talking about disaster scenarios where they protect their savings with gold or some other supposedly safe investment in case stocks go to zero. Do these people understand what it would take for stocks to be wiped out completely? For a stock to go to zero, the business must be wiped out. For a broad stock index to go to zero, all the businesses making up this index must be wiped out. Just imagine it: no internet service providers, no telephone company, no cell phone network operators, no cable companies, and no grocery stores. Without internet connectivity, telephone, cell phones, or food, exactly what would we buy with our chunks of gold? I certainly wouldn’t trade a can of beans for a bar of gold in such a desperate situation. No doubt the remedies governments are using to deal with recent financial crises will have negative financial effects down the road, but I have a hard time seeing how the average person can protect himself from a widespread disa...

Globe and Mail’s online broker rankings are out with Qtrade taking top spot again. Tom Bradley says that the big banks are crying wolf with their customers as the banks transition into sales organizations. Million Dollar Journey looks at whether people with defined-benefit pensions should save in TFSAs or RRSPs. Big Cajun Man reports that Canadians now have over a trillion dollars in mortgages. MoneyNing shows that telecommuting won’t save you quite as much money as some claim.

Poppies and “Support Our Troops” bumper stickers are common symbolic gestures of support for our armed forces and veterans, but many veterans could benefit from more tangible support. Recently, Canadian veterans demonstrated on Parliament Hill over the belief that their disability compensation and pension benefits aren’t adequate. In particular, they say that soldiers wounded in Afghanistan get less money than older veterans got. I haven’t investigated these claims enough to decide if I think they are true. But anyone who feels strongly enough about supporting our troops should consider checking into these claims. If you decide they have merit, call or write your MP and tell him or her what you think. You will be doing more for veterans than any bumper sticker can do.

A Wall Street Journal article New Ways Banks Are Spying on You lists the many new types of information that banks collect about their customers to make lending decisions. Banks look at rent, utility payments, estimated house value, and other information. One of the things they do with this information is estimate people’s income to check the income they claim on credit card and loan applications. Setting aside the privacy concerns, what if you live a lifestyle that doesn’t match the banks’ models? Maybe you have an average income, but their analysis leads them to think you have a low income. A bank that trusts their software more than they trust their customers may reject your application because they think you lied. As more of the intelligence in the business of banking gets coded into software, the people working in banking will become less likely to understand the limitations of this software. Despite the fact that I work in high-tech, I fear the day when the best answer y...

House shoppers get a lot of comfort from having a pre-approved mortgage. Knowing how much a bank will lend you removes one big worry from the process of finding the right home. In this context, “pre-approved” means that the bank took your relevant personal details and determined how much they would lend you. However, when it comes to credit card offers from the very same banks, “pre-approved” seems to mean something completely different. According to [a resource no longer available online], when it comes to credit card offers, “pre-approved” means “not yet approved” as opposed to “approved in advance”. When yet another pre-approved credit card offer from RBC arrived in the mail, I decided to check just how pre-approved I really was. A footnote from the heading on RBC’s offer pointed me to some fine print on the back that explained what they mean by “pre-approved”: “This pre-approved offer is based on the credit and financially related information the Royal Bank of Canada has ...

Bell has an offer for its customers: a $100 credit toward a new Bell TV subscription or a new cell phone. This sounds like a generous promotion until you read the body of the letter and fine print on the back. As a long-time monopoly, Bell was regulated by the CRTC and one of the things Bell was directed to do was to set aside some of the money it collected from its customers for “future use”. CRTC has now decided that this money should be returned to customers. Bell’s letter states that the rebate amount “could be up to $67 per home phone line”. However, “as an alternative” Bell is offering the $100 coupon. While it may not be obvious, the phrase “as an alternative” means that if you take the $100 offer you give up your right to the $67 rebate. The last line of the fine print on the back of the page is much more direct: “By taking advantage of this offer, you will not be eligible for any other offers specific to this program, or the rebate cheque mandated by the CRTC.” Le...

Scott Ronalds reported some results from the latest DALBAR study of the statements that mutual fund companies send to their clients. Apparently, 68% of reports don’t even include the client’s overall rate of return and few show the fees clients pay. The few “statements that do show fees present them in an unclear way.” Canadian Tax Resource explains the differences among setting up your business as a sole proprietorship, a partnership, and a corporation. Preet Banerjee takes a look at the conditions under which fundamental indexing will outperform capitalization-weighted indexing. Money Smarts explains the different ways that financial advisors get paid. If you don’t know how your advisor is being paid, there is a good chance that you’re paying too much. Big Cajun Man explains that when it comes to banking, everything is negotiable. Million Dollar Journey explains preferred stocks. See part 2 as well. Financial Highway has some useful information about credit car...

Most times in life we seek to spend time with people we like and who agree with our views on major topics. However, this may not be a good strategy when it comes to financial advisors as Jason Zweig explains . Here is a rough transcript of a common exchange I have with people about their financial advisors: Me: “Are you happy with your financial advisor?” Reply: “Yes, he’s a really great guy.” Me: “Is he handling your money well?” Reply: “Uh, I don’t really understand that stuff very well. But he’s really a good guy.” A sign of a good salesperson is being likeable. Things aren’t much different with financial advisors. The advisors who are hungry for business do well by agreeing with whatever the client says, even if the client thinks he want to manage his money in a way that isn’t likely to perform well. This brings me to a potential strategy for choosing a financial advisor. Seek out an advisor who disagrees with you. The theory is that such an advisor is more like...

Over the past decade, the price of gold has risen from about US$270 to US$1358 per ounce. This is a staggering average compound gain of 17.5% per year. Human nature compels us to imagine this trend continuing, but such high prices should make us wary, not bullish. If we cast our view back to before the most recent decade, gold actually lost value. For the 20 years ending 10 years ago, gold lost an average of 4% per year! This isn’t an after-inflation figure. If we take into account inflation, gold lost much more value than this. The tough thing about valuing gold is that it has almost no inherent value. Stocks correspond to businesses that have profits, losses, and dividends. We can at least measure the price of stocks relative to the earnings of these businesses. In the case of gold, how do we measure value? Of course, currencies have a similar problem. Why do we value dollars? The short answer is that governments act in a manner designed to stabilize the value of curr...

The tax advantages of balancing assets between spouses aren’t as great as they used to be, but there is still some advantage to shifting assets (legally) from one spouse to another. For example, a couple can reduce their income taxes if taxable dividends are attributed to the lower income spouse. To this end, my wife and I have been trying to increase her financial assets at the expense of mine. The main tool for doing this has been for all family expenses to be paid out of my income. She saves all money that comes into her hands. Under the TFSA rules, one spouse can contribute to the other’s TFSA without the resulting income being attributed back to the contributor. This is explained clearly a few paragraphs into this CRA page on TFSAs . So, I can fill up my wife’s TFSA from my non-registered account and she can leave her money in her non-registered account. This reduces the amount of taxable passive income I receive and increases hers. Fortunately, new rules on income s...

With the Lotto Max jackpot reaching $50 million for Friday’s draw, tongues were wagging. Most of my co-workers claim they don’t buy tickets even when the jackpot becomes huge. In a few cases the stated reason is not wanting to have to manage all that money. It’s certainly true that most lottery winners seem to manage their money poorly. There is no shortage of rags to riches and back to rags stories. So, what would be a good way to handle the money from a $50 million win? I may not have the best answer, but here is one answer. I would open two discount brokerage accounts and designate one of them the “tax” account. Both the tax and non-tax accounts would get $25 million. Each would hold the same mix of ETFs. One possible mix is equal dollar amounts of each of the following: XIU, ZCN – Canadian stocks XBB, ZAG – Canadian bonds XSP, ZDM – U.S. and international stocks The idea here is to have the following types of diversity in case of problems: – 2 separate brokerage...

Money Smarts came out with a thorough comparison of Canadian discount brokerages. There are two handy tables for easy comparison along with detailed notes on each brokerage. The column that concerns me the most is Forex fees. Ellen Roseman finds a number of consumers complaining that their furnaces were “red-tagged” by technicians to boost sales of new furnaces. If these claims are true then homeowners need to be very careful about who they choose to clean and inspect their furnaces. Big Cajun Man says that TD Canada Trust plans to open branches on Sundays and asks whether this service is really needed. My take is that it doesn’t matter whether it is needed; what matters is whether it is wanted and profitable. Financial Highway looks at the wisdom or folly of using retirement funds to pay for your kids’ education. Million Dollar Journey gives us a look inside a demi-millionaire’s wallet.

I have a 17-year old line of credit that has seen very little use. I have it “just in case”. A recent temporary need for money led me to use it instead of selling investments, but I never actually checked on the interest rate. The rate turns out to be prime+4.5%. Ouch. I’m not exactly up on appropriate interest rates for unsecured lines of credit since the credit crisis, but this seems a little high. Perhaps the problem is that the bank is determining the interest rate partially on 17-year old information I gave them when I opened the line of credit. Or maybe they are just hoping that I won’t notice. Either way, I’ll be off to the bank to try to get a better rate soon. Anyone else who has an old line of credit but hasn’t looked at the interest rate lately might do well to check it and possibly try to get it lowered.

A recent study of currency-hedged foreign equity funds by Raymond Kerzérho provides some explanations for why these funds tend to perform worse than we expect. This reduced performance is called “tracking error”. I believe this is related to the fact that businesses have inherent value independent of currencies. Canadian Capitalist gave a good overview of this report, but I want to focus in on just one source of tracking error. One major reason why currency-hedged U.S. stock funds perform below expectations is that the value of the U.S. dollar and the value of U.S. stocks tend to move in opposite directions. For technical reasons with the way these currency-hedged funds operate, this negative correlation gives rise to tracking error. The idea that stocks and currencies tend to move in opposite directions makes perfect sense if you start from the point of view that businesses have inherent value that is at least partially independent of currency. When the U.S. dollar moves up...

Many people are inclined to think that the rise of China’s stock markets is happening for the first time. This isn’t true. As Jason Zweig explains, China has had temporarily successful stock markets a few times in the last 150 years . Personally, I consider the risk of the communist party choosing to just shut down their stock markets too great to make any serious investment with my money in China. Bulls will explain why maintaining markets is in the communist party’s interests, but who is to say that the small number of people who run the country will behave rationally? And who is to say that the communist party is even competent to run a capitalist economy? Zweig’s warnings are more nuanced than mine, but I’m content to avoid investments I don’t understand.

After a quick look through old brokerage statements, it seems that my number one cost is not commissions or spreads but currency-conversion charges. These charges are mostly hidden, but they are very real. I’m a little under the weather and haven’t actually studied the numbers carefully, but I plan to. Canadian Capitalist posted two ideas for avoiding currency conversion charges on U.S. dividends. These are good ideas, but the longer-term answer is to pressure discount brokerages to do two things: 1. Allow investors to hold U.S. dollars in RRSPs. A few do this already. 2. Start charging more reasonable currency conversion percentages. The high percentages used to make sense when banks actually had to handle cash, but for electronic transactions, banks could easily make a profit charging one-tenth of what they charge now. Feel free to give your brokerage a hard time about this.

Gene K. wins the draw for a copy of Mike Holman’s RESP Book (see my review here ). Thank you to everyone who entered the draw.

Million Dollar Journey explains real-return bonds. Money Smarts defends mutual fund DSCs (Deferred Service Charges). I’m not convinced, but I do see his point that they could be worse. Big Cajun Man sums up his experiences with RESPs now that he has actually made a withdrawal. Financial Highway has 10 ways to lower your insurance costs, but they were initially all listed as #1. I guess anything that saves money has high priority.

A big part of the work I do professionally involves thinking about how to get around security measures and how to use things for unintended purposes. An idea related to RESPs came to mind. As I often do, I’ll explain my idea in story form: Ken is a well-to-do homeowner who recently had new neighbours Ted and Alice move in next door. Ken is an RESP expert and the subject came up the first time he spoke to Ted. Ted and Alice saw the benefits of an RESP and they opened one for their baby daughter Emily with some advice from Ken. The relationship between the neighbours later soured. Their squabbling escalated to the point where they were calling bylaw officers on each other for minor breaches of local ordinances. In a spiteful mood, Ken concocted a little plan. He opened an RESP in Emily’s name and deposited the lifetime maximum of $50,000 in a single deposit. Ted and Alice hadn’t made a deposit in their RESP yet and now they would never be able to. Anything over the lifetim...

We frequently hear that investors need to lower their expectations about investment returns. Experts say that it just isn’t realistic to expect double-digit average returns over the next decade or more. However, if we put the focus where it belongs on real returns, the future looks brighter. The latest expert to counsel lowered expectations is TD Bank's Chief Economist Don Drummond. Drummond suggests realistic expectations are 2% inflation, 6% to 7% returns for stocks, and 3% to 4% returns for bonds. These predictions are presented as very modest returns when, in fact, they are quite good. The important thing is to focus on real returns, which are returns after subtracting out inflation. Real returns of 1% to 2% for bonds and 4% to 5% for stocks are nothing to dismiss. I would happily accept this result. Investors get themselves into trouble when they focus on nominal returns, which are returns without subtracting out inflation. Let’s look the decade starting in 1972 ...

Who knew that RESPs had so many rules! Mike Holman clearly explains all the ins and outs of RESPs in his book The RESP Book: The Complete Guide to Registered Education Savings Plans for Canadians . The book is only 118 pages long – the author tends to get to the point quickly. Holman has graciously offered an extra copy of the book as a giveaway for my readers. To enter, just send an email to the contact email address in the upper right corner of my blog with the subject “Book”. Readers who subscribe to my feed will have to click through to my web site . Another benefit of going to my site when reading a post is to see the comments other readers leave on that post. All entries received before noon on Saturday, October 23 will be considered for the draw. I reserve the right to eliminate entries that I judge to be outside the spirit of the contest. Holman covers the full range of RESP topics: contributions, grants, withdrawals, opening an account, and basic investing informati...

I’ve recently been trying to help an elderly GIC investor get the best possible returns on her money. While investigating different options, I discovered that the institutions offering the best rates aren’t accessible from BMO Investorline. BMO Investorline allows investors to hold GICs from banks other than BMO in an Investorline account. They offer 15 different choices with 3-year GIC rates up to 2.3% and 5-year GIC rates up to 2.95%. As long as they are all covered by CDIC, it’s not clear why anyone wouldn’t just choose the highest rate available. However, a Google search on “GIC rates” turned up 3-year GIC rates up to 3% and 5-year GIC rates up to 3.45%. This is a gap of 0.7% and 0.5% from the best rates available through Investorline. In every case, the rates in the Investorline list were as good as or better than the rates shown in the search. It’s just that Investorline didn’t offer GICs from the institutions with the best rates. Here is a list of the institutions ...

My Dollar Plan has an update on Madison’s amazing credit card arbitrage strategy. She borrows a 6-figure sum at a cost that is lower than the interest rate she can get in a savings account. Beware: there are many potentially costly traps for the unwary with this game. Big Cajun Man has a few choice words for anyone (including himself) who complains about bank overdraft fees. Money Smarts finds some problems with the free online financial advice service optimize.ca. Matthew McGrath promises to address Mike’s concerns. Financial Highway explains that friends and family are a significant risk for identity fraud. My Own Advisor tells the story of Grace Groner, a heroine for dividend investors.

According a 30-year veteran in the Canadian mutual fund industry, typical Canadian investors are either “not capable of grasping” or simply “refuse to believe” how MERs work. Identified as commenter “MDB” on Ellen Roseman’s blog , this industry insider goes on to explain that mutual fund investors lose “60-80% of their total lifetime return because of MERs.” However, when he attempts to explain this problem to clients, they “glaze over, not wanting to understand this issue. If everyone they knew invested in mutual funds, that made it okay with them.” Some of MDB’s clients believed “that a regulated product sold by a licensed broker could do no harm.” When MDB spoke to investors from other brokerages, “despite the prospectus in hand, they thought I was misleading them in order to discredit their advisor.” They would look MDB in the eye and say they were not charged MERs. When a seasoned veteran can’t even convince investors that they pay MERs, the prospect of improving things ...

In my earlier investing days I tended to make investing decisions based on short compelling stories about stocks. Some of these stories I got from others and some I created myself. These thoughts still rattle around in my head, but I no longer act on them. Consider the following story about Microsoft: Computer speeds are not growing the way they once did. It used to be that we could count on the speed of computers to double every year or two, but no more. A result of this fact is that consumers have less pressure to replace their computers as quickly as they once did. Microsoft makes money by selling a new copy of their operating system with new computers. Fewer sales of new computers will reduce Microsoft’s sales. In addition, dropping computer prices reduces the price Microsoft can charge for their operating systems. The end result is a bleak future for Microsoft stock. Let me begin by saying that I don’t know whether the premise of this story is correct. Even if the p...

A couple in my extended family decided to leave Canada’s cold a little over a decade ago and headed off to the island of Roatan, the largest Bay Island of the Honduras. I’ll call them Bob and Jill. The two of them regularly see a mix of wealthy foreigners and very poor locals. Recently, lotteries hit the island in a big way. The results are tragically predictable. Tickets for the twice-daily draws sell for somewhere close to 25 Canadian cents each. Bob and Jill do a lot of volunteer work with the locals providing some jobs and helping children with education both by financing it and tutoring them. The excitement among the poorest locals over the lottery looks very similar to our experience. Bob and Jill try to explain that it is a waste of money, but the typical reaction from lottery players is “but I’m going to win so much money.” It is only the locals who are better off financially who seem able to see the new lotteries for what they are: a big waste of money. It seems t...