1. Canadian Financial DIY digs into bank practices and Canadian Payments Association rules to discover that post-dating a cheque doesn’t guarantee that it won’t be cashed right away . 2. Murray Dobbin thinks that Canada’s housing bubble will burst . Some of the remarks seem politically motivated, but he offers ample statistical support for his arguments. 3. Big Cajun Man finds that promised delivery dates for clothes dryers at Home Depot aren’t as firm as he had hoped . 4. Larry MacDonald makes use of the insurance component of his segregated mutual fund . 5. Preet explores the question of whether Warren Buffett is skilled or just lucky . 6. Have you ever wondered how mortgage brokers get paid? Canadian Mortgage Trends gives some insight with recent changes to mortgage broker compensation . 7. Ellen Roseman finds that not all customers who complain deserve her help .

PBS aired a very interesting story called The Card Game that takes a look at bank practices that exploit people when they start to have money problems. The story explained some of the more unpleasant practices and debated whether they should be stopped. Another concern was how they could be stopped without undermining free enterprise. One of the slimier practices described was overdraft fees on debit cards. In the example given, a consumer doesn’t realize that his bank account balance is low and goes about his business for a month making debit purchases. The bank then takes all the debit transactions, reorders them from biggest to smallest so that the account is drained on the first few transactions, and then charges a $35 fee on each overdraft transaction. So, a $5 coffee becomes a $40 coffee. This is a very nasty practice clearly designed to severely punish the unwary. There is no reason to believe that the bank’s exposure to a potentially bad loan is any different if the c...

Recently I combed through some ad fine print to show that some cars were more expensive than the ads made them seem . Yet another car ad reveals more of the same and I’m starting to wonder whether people are genuinely being fooled or whether they want to be fooled. This time I was looking at an ad for GM cars. The top car showed the price $16,498 in large font. However, the fine print says that the MSRP of the actual car pictured is $19,925. I can’t tell if that is before or after some “cash credits”. Here are a few more fun bits in the fine print: “Dealers are free to set individual prices.” “Insurance, license, PPSA, administration fees, and applicable taxes are not included.” “At some dealers, the vehicles in this advertisement are only available with additional features of glass etching (up to $424), locking wheel nuts (up to $150), nitrogen in tires (up to $399), GM tire protection plan (up to $220), mud flaps (up to $120), box liner (up to $325), Walk Away ins...

Gold bugs often say that it’s important to own gold because it is something real that will retain its value even if runaway inflation devalues cash. I don’t spend much time planning for the breakdown of society, but recent events in Haiti can cause us to think about what we should own that will retain some value when everything else is becoming worthless. In the face of extreme societal breakdown, nothing can really retain much value, but for lesser calamities, some things are better than others. It’s certainly true that poor fiscal management by governments combined with demographic changes, depletion of natural resources, and natural disasters could cause major instability leading to very high inflation. However, I don’t see gold as the answer. It has little inherent value. In the face of food shortages, why would anyone trade some food for gold? It’s true that money only has value because we all agree it has value. But the same is true of gold. If things get bad enough, w...

Many experts have commented on the relative merits of RRSPs and TFSAs for Canadian investors. Once people realize that TFSAs aren’t just for cash or GICs, they realize that they have to choose between RRSPs and TFSAs for their long-term retirement savings in all its forms: stocks, bonds, real estate, etc. The main consideration in this choice is tax rates. If your marginal tax rate while working is higher than it will be when you retire, then RRSPs look good. Some lower income Canadians will see their effective marginal tax rates increase because of the claw-back of the GIS and other government programs. Another lesser, but still significant consideration is taxes on foreign dividends. The U.S. in particular has a tax treaty with Canada so that dividends from U.S. companies have no tax withheld when Canadians hold the stock in RRSPs. When U.S. stock is held in a regular taxable account, the standard withholding tax on dividends is 15%. Unfortunately, this 15% withholding tax ...

1. Jason Zweig finds that people have unrealistic expectations about stock market returns . The more things change, the more they stay the same. 2. Both Preet and Patrick shared their takes on the efficient market hypothesis. I’ve struggled with this one myself, and I’m stilling mulling over their ideas. 3. Larry MacDonald explores Milevsky’s idea that homeowners need to own more bonds . I’ll need more convincing on this one. 4. Potato lowered the stress level on a move by getting a library to take a donation of many of his unwanted books . 5. Big Cajun Man runs into some unexpected costs during a hospital visit .

“Is it better to just invest and pay your taxes now or is it better to invest through RRSPs? Or are they about the same return?” This question came from a reader, Dan, who I met when I spoke to the Ottawa Share Club. Most people focus on the immediate tax refund from making RRSP contributions, but this is really just a tax deferral. You will have to pay these taxes when you eventually withdraw the money. If your tax rate is lower when you withdraw the money, you end up saving on taxes, but this is not the primary advantage of RRSPs. By deferring taxes you get the benefit of having the returns on your savings compound tax-free. If you invest in a regular taxable account and pay the taxes owing each year, you lose out on much of the compounding. An example will illustrate this nicely. Example Rhonda is 25 years old. She plans to open an RRSP and contribute $10,000 this year and increase this amount by inflation each year for a total of 40 years. This year she’ll get a $4...

The inevitable assault on public service pensions appears to be underway. Many have assumed that the problems of private pension plans would not carry over to public pensions, but this is just wishful thinking. Just because governments can borrow hundreds of billions of dollars to cover promised pension payments doesn’t mean that they are willing to do so. Superficially, the problems of both public and private sector pensions are similar. Too little money has been saved to cover future promises. If that money isn’t made up, then something has to give. If a plate has ten cookies, and ten people have been promised three cookies each, we may not know who will get their cookies, but we can be sure that not everyone will get all three. An important difference between public and private sector pension plans is that the government has greater scope to lie to themselves about the real costs of future pension obligations. As explained in the C.D. Howe Institute’s backgrounder The Star...

According to the most recent RBC retirement poll , only 25% of Canadians expect to have enough retirement income to realize their dreams. The message isn’t very subtle as we head into RRSP season: contribute more to your RRSP. It’s important to remember that this is a poll of what people think will happen, not an expert’s prediction. The poll says more about people’s expectations than it says about what will really happen. It would be nice to live in a world where everyone got to realize their dreams, but life doesn’t always work out the way we want. I see the results of this poll as a sign that Canadians’ expectations are more realistic than what I remember from the tech boom. A decade ago we didn’t realize it, but we were coming to the end of a huge bull run in the stock market. The TSX Composite had returned a compound average 16.4% from 1993 to 1999 inclusive. People talked seriously about extravagant retirement plans that started with “Assuming I can make 15% to 20% ...

Statistics can be very useful objective data to guide decisions. However, they can also be used to mislead. For example, did you know that the TSX Composite index of Canadian stocks has averaged a 98% return per year for the last 40 years? One of the useful data sources that Canadian Capitalist pointed to is a spreadsheet of total returns of different asset classes maintained by Norbert Schlenker of Libra Investments . Using the total returns on TSX Composite stocks back to 1970, we find that $1 at the start of 1970 grew to $40.23 by the end of 2009. This a 3923% increase over 40 years, or 98.1% per year. I can hear a chorus of “just a minute – that’s not how you calculate yearly returns.” Of course, I agree. We shouldn’t just take the total return and divide by the number of years. However, a motivated debater could probably find creative ways to justify this calculation and muddy the waters nicely. For example, 98.1% really is the correct percentage when TSX Composite ret...

1. It seems wrong to just walk away from debts. What if your house value drops to $200,000, but you owe $300,000 on your mortgage? Should you just walk away? Laws in Canada make this difficult, but US law is different. Roger Lowenstein argues that Americans whose mortgages are under water should just walk away . Banks make decisions purely based on profit and loss calculations; why shouldn’t homeowners do this as well? By doing the “moral” thing, homeowners are putting themselves at a disadvantage in their dealings with banks. 2. Larry MacDonald is concerned about the direction Canada’s medical system is heading as doctors tend to work in clinics with increasing profit motive . 3. Canadian Financial DIY offers a drastic solution for keeping people away from fraudulent investing schemes . 4. Big Cajun Man makes a case for de-cluttering your financial records . 5. Frugal Trader sets some aggressive financial goals for 2010 . 6. Preet puts on his professor persona to expla...

On successive days my local newspaper carried full page ads from car companies. Ordinarily, I don’t notice ads in newspapers much, but the volume of fine print caught my eye. And of course, we all know that the bad news is in the fine print. A Ford ad had about 1500 words of fine print! That would cover about 5 pages in the Stephen King book I pulled randomly from my bookshelf. A Hyundai ad had about 600 words of fine print running sideways down the length of the ad. In a fit of masochism, I decided to read the fine print just to see how bad the news was. I’ll spare you the details and leap straight to the funniest parts. The top of the Hyundai ad featured a car whose price (in huge red font) is $9999 with 0% financing. However, fine print revealed the following information about the car pictured beside this seemingly too-good-to-be-true price: Price of car in picture: $16,999 plus a $1495 delivery and destination charge plus “registration, insurance, license fees, and...

Researchers have found a link between attitudes towards long shot financial risks and a specific gene . We tend to like paying a small price for a long shot at a big gain such as in a lottery. At the same time, we tend to prefer paying a small price to avoid taking a chance on a big loss, which explains insurance. The researchers found that how much we like going for big gains and avoiding big losses is linked to a gene called monoamine oxidase A (MAOA). It turns out that those with a more active version of this gene are more likely to enjoy lotteries and less likely to want insurance than those with the less active version of the gene. To overstate the results, we have two kinds of people: 1. Long shot gamblers who aren’t worried that their houses will burn down. 2. Non-gamblers who buy the $75 extended warranty on a $300 television. An interesting question is whether many people are able to overcome their perceptions and emotions to make rational decisions. I see this as...

Canada has socialized medicine that covers a wide range of medical needs. We usually say that these services are “free” to Canadians. Of course, by “free” we mean that all costs are shifted to taxpayers. However, many hospital patients and even visitors get hit with a form of user fees. These fees come in the form of parking costs. In a recent evening trip to my local hospital, I was charged $14 for parking from about 6:30 pm to 10:30 pm. This isn’t a lot of money, but it is much more than the going rate for evening parking in this area. I could have taken the bus if I wanted to avoid paying for parking, but the last thing I was thinking about while heading to the hospital was a few dollars. I suspect this is true of most others who go to the hospital. So, hospitals are mostly free to charge what they want for parking. Hospital parking rates in my area having been rising much faster than inflation for several years. Parking fees aren’t likely to ever be officially conside...

Lately I’ve seen several ads and web sites touting the records of different stock-pickers and their systems. One thing the proud claims had in common was that they didn’t count all of the picks for reporting performance figures. This can give misleading results as I’ll show with an example. Two stock pickers, Amy and Bill, made one pick each day for the past 10 years. They held their picks for the day and moved the resulting money to another pick the next trading day. After examining their records, we find the following results: Amy: 99% of her picks resulted in a cumulative outperformance of the S&P TSX index by 327%! Bill: 99% of his picks resulted in a cumulative underperformance of the S&P TSX index by 70%. It seems apparent that Amy is a great stock picker and Bill should find another job. Amy’s record appears so strong over 10 years that she could easily sell access to her picks through a newsletter. If you’re suspecting some sort of catch, you’re right. ...

1. Don’t tell the Big Cajun Man when EI premiums stop coming off your pay cheque. He’ll use that to figure out how much you make . 2. Larry MacDonald reports on the possible end to trailer fees . 3. Canadian Mortgage Trends warns not to just accept the interest rate offered in a mortgage renewal letter . One homeowner was offered a 5-year fixed rate 1.3% higher than the rate advertised on the same bank’s web site. 4. Tom Bradley at SteadyHand points out a logical inconsistency in a Kraft public statement about the battle involving Warren Buffett over the attempted takeover of Cadbury . 5. Frugal Trader rates his performance on his 2009 financial goals including a goal to pay down his mortgage by $20,000 more than the regular payments. He managed to exceed this goal! 6. Preet says that the new Google phone isn’t going to revolutionize the cell phone market .

While mutual funds usually just charge a fixed percentage management fee, such as 2% of assets under management, hedge funds add a “performance fee”. One of the supposed benefits of paying a hedge fund manager more if the fund performs well is that it aligns the manager’s interests with the investors’ interests. However, in reality, their interests are actually very poorly aligned. Consider the hypothetical Hyper-Uber-Growth Engine (HUGE) fund. It has a typical “2 and 20” arrangement where management fees are 2% of assets under management plus 20% of any profits above a threshold return of 4%. So, the manager gets 2% plus one-fifth of any returns above 4%. To model the amount of risk a hedge fund manager is willing to take, HUGE is run in the following unusual way. The assets are invested in some conservative way throughout the year, and on the last day of the year, the manager takes some fraction of the fund to Las Vegas and bets it all at the roulette wheel on red. The odd...

Those of us whose home position is to be frugal need to examine our behaviour sometimes to see if it makes sense, such as when I decided that mouse traps are disposable . This time I look at humidifier pads. I have the type of humidifier that attaches to the furnace and forces air to flow through a water-soaked pad. This pad seems to be made mostly of metal and a residue from the evaporated water builds up over time. For many years I didn’t realize that it was normal to buy replacement pads. I thought the pad was an integral part of the humidifier and I struggled to find ways to clean it. What seemed to work best was soaking it in CLR. Worried that maybe it wasn’t really getting cleaned properly, I decided to see if the pad could be replaced. On my first attempt at a big-box store, I learned not to call it a humidifier grill. They didn’t have those and I shouldn’t waste this very important employee’s time. Fortunately, I persisted and found that humidifier pads are a sta...

Larry MacDonald sparked a spirited debate over how Deferred Sales Charges (DSCs) on mutual funds are calculated . The debate centered on how an investor who makes regular monthly contributions to a mutual fund is affected by DSCs. However, even if DSCs are calculated in a way more favourable to the client, they can be surprisingly high even for loyal investors. Consider the case of a hypothetical investor Tara who made regular monthly contributions to the Investor Group Canadian Equity Fund C for 10 years. She then had a sudden need for the money and withdrew the full amount. How much will she pay in DSCs? The debate is whether Tara will pay DSCs on the full amount based on the date of her most recent contribution, or whether the DSC will be calculated for each contribution separately. The language in the fund’s simplified prospectus seems to imply that the date of purchase of each fund unit is tracked separately for calculating the DSC. Based on the following schedule, the f...

It’s common knowledge that 2009 was a terrible year in the stock market. But a quick look at the numbers shows that an investor in the TSX composite index using the iShares capped ETF (ticker XIC) with reinvested dividends would have made 33.5%! That’s a great gain. Just a minute, some readers would say. People are lumping in the losses in late 2008 as well when they say that stocks have performed poorly. Fair enough. Taking 2008 and 2009 together, XIC with reinvested dividends lost 5.6% per year. This isn’t exactly devastating, but it’s no fun either. What about an investor who made regular dollar-cost averaged investments of new money in XIC over the past two years? This new money that was invested for between zero and two years would have actually made a gain of 13.5%. These actual figures contrast sharply with the despair felt by investors through the depths of the paper losses in March 2009. It’s clear that those who stuck to a long-term plan either lost little or ac...

Happy New Year! Despite the reduced number of articles written over the holidays, I still found a few interesting things to read. 1. Many people advocate a “core and explore” approach to investing. This amounts to setting a solid core of investments plus a smaller amount of “play” money. When the advice comes from a financial advisor, it amounts to a core of index investments plus some explore money for active management. Larry Swedroe explains the evidence supporting this approach and then demolishes it in part 1 and part 2 of his article. 2. Preet went looking for Olympic hockey tickets to the men’s gold medal game . The price is unbelievable! 3. Big Cajun Man put together a carnival of money stories with a boxing theme .