1. Larry MacDonald described a scheme to eliminate your income taxes by buying tax losses from companies . I wouldn’t try this myself for fear that it would be disallowed for some reason, but it is interesting. 2. Canadian Mortgage Trends has some good advice about pre-paying a mortgage before discharging it . 3. Preet argues that when it comes to measuring the performance of mutual fund managers as stock-pickers, the index is too high a standard . His focus is on the manager’s stock-picking ability rather than whether the mutual fund in question is a good investment. 4. Canadian Financial DIY reviews the new taxwiki.ca . 5. Big Cajun Man got a good rant going about troubles with his PC MasterCard . 6. Million Dollar Journey addresses the question of whether students should contribute to an RRSP . 7. Money Smarts had an uplifting post about how work kills a piece of his soul every day . I’ve had days like that. I think my soul regenerates, though.

For some reason we overvalue things that are free. My wife jokes that she chose her university program based on the fact that they gave each new student a free T-shirt. We seem to be willing to do quite a lot to get something for free. Anticipating a free bag or other trinket at the end of the year keeps me doing volunteer work. A bottle of liquor with an attached sample-sized bottle of some other drink seems much more appealing than some other bottle without a “free” sample even though the first bottle is more expensive. I recently made a poor choice because I couldn’t turn down a free lunch. The owner of the building I work in offered tenants a free lunch. This lunch consisted of hot dogs, warmed up pre-cooked hamburgers, coleslaw, and fries. I was nauseous the rest of the day and even had trouble sleeping that night. The worst part of it was that I knew this would happen and I ate it anyway. I’m interested in hearing of other stories of free things that would have been ...

Mastercard has updated its Cardholder agreement to make it consistent with the new credit card regulations from the Canadian federal government. However, many of these changes don’t take effect until 2010 September 1. Here are the highlights: Credit Limit You must provide your consent before your credit limit is increased. End to Double-Cycle Billing You won’t be charged interest on new purchases if you pay your bill in full even if you didn’t pay it in full the previous month. Cancellation of Card Your card can be canceled if you have no activity for 9 consecutive months. The first two changes are definitely customer-friendly. To compensate, we can expect some combination of higher credit card interest rates, lower credit limits, and higher credit-worthiness to acquire a credit card. Banks and credit card companies are in this business to make money, and we have to expect them to shed unprofitable customers.

The typical equal billing plan has customers pay exactly the same amount each month for gas or other utilities. If the utility gets the estimated consumption wrong, customers face a large correction at the end of the year. Many Enbridge customers are unhappy about the recent large end of year bills they received to make up for monthly payments that were too low. One way to avoid this problem is to use a smooth billing plan of the type I’ll describe. This plan allows for modest changes in the amount billed each month to correct for poor initial consumption estimates. This smooth billing plan has the side benefit that consumers can see with each bill whether their consumption is rising or falling. Without this feedback, consumers are encouraged to increase consumption . Suppose that your estimated consumption of natural gas is as follows: Jul: $30 Aug: $30 Sep: $60 Oct: $80 Nov: $100 Dec: $180 Jan: $220 Feb: $190 Mar: $140 Apr: $100 May: $40 Jun: $30 These numbers...

Utilities often offer some sort of equal billing plan that allows customers to pay fixed payments each month. This requires the utility to guess each customer’s consumption for the year. Any estimation error gets corrected at the end of the billing year. But, what effect does equal billing have on consumption? Ellen Roseman reported that natural gas utility Enbridge underestimated customer consumption over the past year by a wide margin . This has led to a predictable outcry from customers unhappy with the large bill they received to cover actual gas consumption. Lost in the discussion of whether Enbridge should have done a better job is the negative effects of equal billing (called the Budget Billing Plan by Enbridge). In general, people like predictability in the costs they face. It’s easier to plan exactly how much money will be left out of every pay cheque if all monthly costs stay constant. However, for many people, once a monthly amount is set, the mental link between ...

1. Preet isn’t too happy with the direction taken by proposed new point of sale mutual fund disclosures . 2. Larry MacDonald thinks the flood of new commodities investors may be causing commodity returns to become more correlated with stock returns . 3. Larry Swedroe has some amusing things to say about the value of interest rate forecasts . I’ll give you a hint – he doesn’t believe that anyone can accurately forecast interest rates. 4. Financial Highway has a useful list of 10 things to know about renter’s insurance . 5. Big Cajun Man muses about what it would take to lower his mortgage debt by $10,000 in a year . 6. Money Smarts has a story of having to evict an old lady for her own good .

The Wealthy Boomer did a piece on the financial habits of homeowners and non-homeowners. The piece quotes from a survey that concludes that homeowners are more financially fit . This study is reasonable as far as it goes, but the conclusions confuse correlation with causation. Among Canadians who own a home, 65% pay off their credit card balances each month compared to only 48% of non-homeowners. This and other statistics leads Genworth Financial president and COO Peter Vukanovich to conclude that “homeownership helps people focus on their financial situation and get their fiscal house in order.” The idea is that buying a home somehow makes you better at managing your money. This last part is a theory based on the correlation uncovered by the study. Another theory is that people who cannot manage their money well are less likely to buy homes. Personally, I find this theory more plausible. Maybe there is some truth to both theories, but the statistics do not prove either one....

There is no shortage of speculation on what will happen with interest rates. Some commentators predict sharp increases and others predict stable rates. Maybe there are some who predict that interest rates will drop a little. Many borrowers listen to these predictions trying to decide whether they have to do anything about their growing debts. This way of thinking is dangerous. Just because a convincing forecaster says that interest rates will not rise, we should not ignore dangerous debt levels. Debtors should look at the range of possibilities rather than listen to experts make precise predictions. The truth is that nobody knows for sure what will happen with interest rates. The best rate I was able to find for a 1-year closed mortgage is 2.64%. In three years, this rate could easily be anywhere in the range 2% to 8% or higher. Borrowers should ask themselves what will happen to them if rates rise steadily to 8% in the next 3 years. Will finances be a little tight or will...

Recently, Canadian Capitalist asked whether Canadians should add commodities to their portfolios. On the surface, I couldn’t understand why a hunk of copper would be expected to perform as well as the stock market. However, when we say “commodities”, we are actually referring to commodity futures. (No doubt Canadian Capitalist understands this well.) Futures differ from the commodities themselves in important ways. There is no reason to believe that commodity futures will give the same returns as the commodities themselves. When we buy a copper future, the price will reflect not only the current price of copper, but also the uncertainty in the future value of copper. Like any other derivative, commodity futures have time value. If an investor buys a one-year copper future, sells it a year later, and buys another one-year copper future, there is no reason to believe that the sale price of the first future will match the purchase price of the second future. However, actual cop...

For many people income levels over their lifetimes can be very uneven. Younger people tend to earn less per year than middle-aged workers, jobs are sometimes lost, and many women and some men take time off to raise children. There can also be windfalls such as inheritances or lottery winnings. Despite this unevenness in income, it is possible to smooth out yearly spending with appropriate saving and borrowing. However, is targeting smooth consumption a good idea? I first encountered the idea of smooth consumption in Moshe Milevsky’s book Your Money Milestones . I’m not prepared to give a full review yet, but the idea of smooth consumption is worth some thought on its own. Milevsky introduces the idea with an idealized example. Suppose you are 25 and know for certain that you’ll make $25,000 per year for 10 years, $100,000 per year for 20 years, and then $25,000 per year for 30 years and then die. If we ignore taxes, inflation, and interest, your total lifetime earnings will ...

Larry MacDonald reports on a study that says 80% of Canadians’ save enough that their consumption will drop by less than 10% upon retiring . This contrasts sharply with the near hysterical cry to save baby boomers from starvation when they retire. My guess is that the truth is somewhere in between. Preet takes a stand and declares that eco fees are a tax despite what Stewardship Ontario says . Big Cajun Man got a rant going on the subject of pet health insurance . Financial Highway lists 9 things your insurance agent won’t tell you . I must say that I’ve found it challenging to learn how the insurance industry works. I wish I’d seen this list a decade ago. Frugal Trader debates whether to start paying off his Smith Manoeuvre investment loan now that his mortgage is paid off .

One of the justifications for applying the GST and HST at the cash register is that this makes it a visible sales tax. Unfortunately, it is this very feature that makes this tax invisible at the most critical time: when consumers make purchasing decisions. Canadians are becoming increasingly accustomed to seeing added charges on top of advertised prices. Eco fees just add to standard HST or GST plus provincial sales tax. Things are worse if you want to fly; the number of added charges on flight costs is almost uncountable. An unfortunate side effect of this trend is that we don’t know what the final price of an item will be even knowing the advertised price. This makes it difficult to make sound purchasing decisions. By adding these charges later to make them visible, they become invisible when we make the decision of whether to buy. There is some justification for applying sales taxes after the fact because not all customers must pay GST or HST. For example, online retaile...

John Lawrence Reynolds pulls no punches in his book The Skeptical Investor: How to Grow and Protect Your Retirement Savings . He rips through the investment industry, fraudsters, and poor investment vehicles. Overall, the book is useful for novice investors, but they may find themselves cowering under a bed before reaching the last page. The main focus of the book is what investors should not do. Less focus is placed on what investors should do, but this makes some sense. There is only one best path and many bad paths. Reynolds explains what is wrong with the bad paths in easy to understand compelling terms. About mutual funds he says “Canadian mutual fund expenses charged to those who entrust the fund with their money are outrageously and indefensibly high.” Reynolds thinks that a fee-based approach where investors pay a fixed percentage of their assets rather than paying commissions and MERs makes more sense. “Nearly 5% of Canadians have been victims of investment fraud a...

On the surface, measuring your portfolio’s return and comparing it to some index seems like it should be easy: take the final value, divide by the starting value, and compare. However, there can be a number of complications. This is my attempt to evaluate my investing performance. Over the years I’ve done many approximate calculations to assess my stock-picking ability. A few months ago I met with Preet Banerjee of Where Does All My Money Go? fame, and he asked me how my stock picking results compared to index returns. This innocent question left me stammering because I knew I had only approximated the answer. Without taking into account all factors, I couldn’t be sure. I fired my financial advisors and started investing on my own roughly the middle of 1998. I completed a nearly full transition to index investing roughly the middle of 2010. So, the period of interest for measuring my stock-picking results is this span of 12 years. However, I did not start with one lump su...

A fairly common investing personality I see among my high-tech colleagues is the investor who needs action. While most investors tend to be overly conservative, action junkies need risk to make things interesting. Those who need some risk are likely better off finding some avenue other than investing for finding action. When the topic comes to investing and I mention buy-and-hold indexing, others often complain that this is too boring for them; they prefer to make big bets on hot stocks. However, when I press for details of their results, invariably their incomes prop up their portfolios rather than the other way around. How can investors like this save their portfolios from themselves? Maybe one possibility is to find risk elsewhere and keep the investing boring. I don’t think of myself as an action junkie, but I guess I have at least a small risk-seeking streak. I enjoy a few poker games each year. A typical game will see me ahead or behind less than $100. This is much be...

1. Larry Swedroe holds Fortune Magazine’s nose in their year 2000 list of “stocks to last the decade” . It’s important (and funny) to check up on these silly predictions that seemed smart at the time. The most amusing two entries were Enron and Nortel. 2. Remember the “Dogs of the Dow” dividend yield approach to beating the market? Preet reports that it has underperformed the market for the last 15 years . Trying to follow the latest trend is a great way to avoid the problem of having too much money. On the other hand, Larry MacDonald reports that the Canadian version is still beating the market . 3. Potato provides details on his belief that we’re in a housing bubble . 4. Big Cajun Man pulls out a math word with his third lemma of money . 5. Mike at Money Smarts has a great list of resources to check before agreeing to rent an apartment . It has been a while since I rented, but I do remember moving into a terrible building for a year. The owner had the renters assigned ...

Time-of-use electricity pricing has made it to my area. Electricity rates on weekends and overnight are about half of the cost during peak hours. This creates an economic incentive for people to shift electricity use to off-peak hours. In principle, this approach makes sense. People respond to incentives. According to the mailing I received, I can save 17 cents by setting my dishwasher to run overnight instead of running during peak hours. This isn’t enough to get me to change my behaviour much, but it is likely to get some people to change, and this will help to smooth out demand. A more cynical view is that this form of pricing is just more complicated and will ultimately lead to higher electricity prices without the average person being able to figure out as easily that prices have risen. Although the initial changes appear to be revenue-neutral, the groundwork has been set to make it easier to raise prices without as much complaint.

My transition from being an active stock-picker to investing in low-cost index ETFs is mostly complete, and I’d have to say that it has been a relief. While I enjoy thinking about investing topics, having to track a basket of stocks can be a chore when I’d rather be doing something else. I used to own between 10 and 20 individual stocks at any one time, and it takes time to keep up with them. For many investors, “keeping up with stocks” means watching their prices. However, to have any hope of success, stock pickers have to do much more than just stare at price graphs. They need to read company information and try to sniff out signs of changes in the odds of future company success. And they have to do this better than other investors. To reduce my burden I could have tried to find a financial advisor and hand over my money, but then I'd be left worrying whether I’d chosen the right advisor. Overall, I expect better performance from indexing than from an advisor because of...

“Work expands so as to fill the time available for its completion.” This familiar law is the first sentence of the book Parkinson’s Law and Other Studies in Administration , written by C. Northcote Parkinson, and published by The Riverside Press in 1957. This book is an absolute gem. It combines wit and humour to explain how human nature and self-interest drive the forces of administration. Parkinson explains how the administrative part of an organization will grow regardless of whether the rest of the organization is growing or shrinking. Administrative growth is independent of the total amount of work that must be done. This explains why the organizational charts I’ve seen of city government show a majority of workers doing administration and a minority actually doing the work the city is paid by taxpayers to do. Sadly, the numerous administrative workers aren’t just idle, though. As Parkinson explains, they create work for each other so that all workers are very busy, but...

With Ontario and BC making the jump to the Harmonized Sales Tax (HST), we’re bombarded with negative stories about paying more in sales taxes. However, the reality isn’t all bad. What is missed is that often the provincial sales tax (PST) used to be charged more than once on the same item. In these cases the HST is actually less than the combination of GST and PST. I’ll illustrate this with a simple contractor example and give you something to look out for on your next contractor bill. Let’s look at an example using Ontario percentages (5% GST, 8% PST, and 13% HST). Suppose that you hire a contractor to do some work that involves $1000 worth of parts or materials that were subject to GST and PST before and HST now. After July 1, here is the accounting: – contractor pays $1000 + HST = $1130 for the parts – contractor collects HST on the entire job from you – contractor gets back the $130 HST he paid on the parts in the form of an input credit This way, the HST is only char...

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