Tom Bradley at the Steadyhand blog wrote a piece pointing out that millionaires are bearish right now according to one measure. It turns out that Spectrem Group maintains an index of investment sentiment among millionaires by doing 250 interviews each month. So, do these millionaires know something we don't know? Bradley wasn’t endorsing this index in any way, but it got me thinking. If there is any group that may know something about investing, maybe it is millionaires. Perhaps that’s how many of them came to be millionaires. Perhaps this index has some predictive value. The scale of the index is -100 to +100. Five years ago it was hovering around +20. However, in late 2007 it went negative. This was nearly a year before the market meltdown. This seems like a vote in favour of millionaires having useful insight into short-term stock market moves. The next test is whether this index predicted the huge stock market rebound in 2009. Unfortunately, millionaires were ...

Last week’s post Unrealistic RRSP Contribution Expectations generated quite a few comments. We explored the issue quite thoroughly, and it makes sense to lay out a more realistic plan. The main problem with examples that assume constant contributions for a lifetime is that they ignore inflation. It makes little sense to assume that the typical young person will make considerably larger contributions (taking into account inflation) than that same person will make later in life. There may be a few people who will follow such a path, but the majority will make large contributions in mid-life. So, let’s try a different scenario. As some commenters suggested, let’s assume that the contributions increase in size with inflation. Let’s say that a 25-year old starts contributing $500 per month and increases this amount with inflation for 40 years. As before, we’ll assume that inflation is 4% and investment returns are 8%. The total in the RRSP after 40 years will be about $2.7 mill...

Big Cajun Man finds that the rules for RESP withdrawals force him to pay for his children’s schooling before he can get the money out of the RESP. I can see that this could be a problem for people with cash-flow difficulties. Preet Banerjee has some cell-phone deals for his readers. I don’t need as many features as most people want, and so I’ll stick with my $7 per month cell phone . Money Smarts says that Canadians should be invested in oil stocks.

We hear frequently that young people should start contributing to an RRSP early in life. Recently, I encountered yet another of these arguments. However, there are some unrealistic expectations buried in the assumptions used. Here is a typical version. If you start contributing $500 per month to an RRSP at age 25 and make an 8% return each year, you'll have about $1.7 million by the time you're 65. But, if you delay making contributions until you're 35, you'll only have about $800,000 at age 65. This is less than half as much. The math is right. The contributions during the first decade really do count for more than the remaining three decades because of the magic of compound interest. However, there is a serious problem with the built-in assumptions. Let's look at this from the point of view of a 65-year old who is just making his last $500 RRSP contribution and is about to retire with $1.7 million. Supposedly, he made $500 RRSP contributions each mon...

The book Freedomnomics: Why the Free Market Works and Other Half-Baked Theories Don’t by John R. Lott, is a mixed bag. It makes a strong case for free markets and democracy, but contains a healthy measure of partisan politics that undermines the reader’s confidence in various analyses. In part, this book is a rebuttal to Freakonomics, by Dubner and Levitt whom Lott likens to Michael Moore. Whatever you think of Dubner and Levitt’s ideas, they are a far cry from Moore’s populist (but entertaining) rants. In the end I found the criticisms of Freakonomics unconvincing, although Lott may be right on some points – it’s hard to separate his sound analysis from the apparent political bias. Lott makes a convincing argument for free markets working much better than having governments run industries. The role of governments should be to keep free markets working properly and not to interfere overly. However, free markets tend not to work properly in two situations: 1) When consumers ...

Larry MacDonald wrote an interesting piece about scammers who made about $10 million by duping banks and credit-card customers with bogus charges of $9 and $0.20 (the web page with this article has disappeared since the time of writing). The most surprising part of this is that only 6% of all charges were contested. I didn’t realize how far out of the norm my credit card habits are. I keep all my receipts until the end of the month and match them to my statement. Anything on my statement I can’t account for triggers a call to the credit card company. I don’t care if the mistake is for $1000 or for a dime; I still call and get it fixed. Apparently, for each person like me who tries to catch mistakes, there are 15 other people who don’t bother. I find this staggering. Apparently most of us can’t be pulled away from the television or video game long enough to check whether we’ve been cheated. It’s no wonder that fraud can be profitable for clever con artists.

I had an interesting experience recently where I got better service from an airline by threatening to abandon my travel plans. I didn’t intend for this to be a bargaining technique, but it seemed to work out that way. I was scheduled to fly 3 legs to a U.S. destination on a Sunday on United Airlines. We were an hour late leaving which made me miss my first connection. There weren’t any actual airline employees nearby to help me get a new connection and I ended up calling United Airlines customer service. U.S. air carriers use various techniques to keep their flights quite full, and I was told that they couldn’t get me to my destination until Tuesday (two days later)! The agent tried to convince me to just take a flight to a city nearer my destination and hope to get on another flight to my destination by getting on a standby list. However, I insisted that if I couldn’t be scheduled with guaranteed seats the whole way, I wanted to turn around and go back home. I’ve had exper...

Million Dollar Journey compares two free chequing accounts in detail: ING Direct vs. PC Financial. Preet Banerjee gives his take on his interview with Martin Horvath about a tax-saving scheme. How to Invest Online gives a primer on investor protection in case a business connected to your investments goes belly up. Canadian Financial DIY does an interesting financial case study of installing a geothermal home heating system. Big Cajun Man rants about places that accept Mastrercard or Visa, but not both. Money Smarts continues the series on information for landlords with useful information on lease agreement and repairs.

Eleven years ago I took the plunge (pardon the pun) and put an in-ground pool in my back yard. I’ve always known that it was expensive to buy and is expensive to maintain, but I didn’t know how expensive the maintenance is until I added up the costs. Anyone considering an in-ground pool may be interested in the costs that await. My pool costs may be higher than typical because I put in a large (20x43 feet) pool with a longer and deeper deep end than is typical. So, some costs may be lower for other pool owners. My costs are laid out below. Most are actual figures including taxes. I estimated the costs for natural gas based on an average of the last couple of years. Hydro is a little more difficult. I based this cost on the power draw stamped on the pump. The figure I came up with seems consistent with the increased hydro cost we see in summer months. The repair cost is an average over the many years I’ve had the pool. Initial Costs $27,862 – pool + installation + heat...

Moshe Milevsky’s book, Your Money Milestones brought up so many interesting topics that I chose to write about four of them in earlier posts: Smooth Consumption over a Lifetime Owning a Home vs. Renting Human Capital Portfolio Construction Taking into Account Employment This very thoughtful book is worth reading. Its ideas are deep, yet the text is understandable. I didn’t agree with everything written, but the ideas were worth thinking about. To add to the points made in the four earlier posts, I include a few interesting tidbits below. Choosing a Career It turns out that not all university degrees are a good deal from a financial point of view. Some types of degrees won’t increase your expected lifetime earnings by more than the cost of acquiring the degree. This is reasonable as far as it goes, but may mislead kids coming out of high school. Engineering may pay better than Fine Arts, on average, but this isn’t helpful to most individual students.  A given stu...

Taking into account the nature of your employment when constructing your investment portfolio makes sense. Stock brokers may not want to expose their portfolios to too much stock market risk because their wages depend on the stock market performing well. However, paying too much attention to risk at the expense of expected returns can lead to problems. In his book, Your Money Milestones , Moshe Milevsky quotes a study saying that MBA students interested in a Wall Street career should consider shorting the stock market upon entering school. This is a good example of focusing on risk at the expense of expected returns. It is definitely true that these MBA students are exposed to stock market risk. If the markets perform poorly while they study, their job prospects upon graduating may be grim. Shorting the stock market would yield profits in this case and reduce their overall financial risk. However, stocks have a built-in tendency to go up. We may disagree on how large the r...

We often hear the following two seemingly contradictory claims: 1. Most investors need financial advice. 2. Most investors should get rid of their financial advisors. How could these both be true? The answer boils down to what we mean by advice. If you imagine the advice coming from a savvy investor who has your best interests at heart, then you would do well to listen. In this case, even experienced do-it-yourself investors could benefit. Investors need good advice, not just any advice. If someone suggests that you borrow $100,000 and bet on red at the roulette table $1000 at a time until the money doubles or is gone, this qualifies as advice, but not good advice. (By the way, your chances of doubling your money this way are less than 1 in 30,000!) Unfortunately, in the mutual fund world, “advice” means whatever tactics a mutual fund salesperson uses to get your money into a set of funds. Typically, the clients pay about 1% of their assets each year for this so-calle...

1. Preet thinks that Warren Buffett is not a poster child for active management . I agree that Buffett’s approach doesn’t bear much resemblance to the typical actively-managed mutual fund. However, Buffett is an active manager in the broad sense that he doesn’t own the index. I think Buffett’s approach is the only one that has a hope of consistently outperforming. I don’t have the skill, but it is conceivable that some investors can see that a given company has above-average long-term prospects. This seems more plausible than believing that some people can anticipate short-term moves without inside information. 2. Potato wrote an excellent review of Benoit Mandelbrot’s book, The Misbehavior of Markets . 3. Mike at Money Smarts thinks that now is a good time to start leveraged investing . What if it isn’t a good time? 4. Ever wondered how an expensive restaurant menu item can affect you even if you don’t order it? The story of the $69 hot dog explains it. Hat tip to the St...

Most of us have heard of the rule of 72. If you are paid an interest rate of say 6%, then it takes about 12 years to double your money. The “rule of 72” part comes from 6 times 12 equals 72. Similarly, it would take only about 8 years at 9% interest. However, this so-called rule is just an approximation. When you multiply an interest rate in % by the number of years it takes to double your money, you get the following chart: The rule of 72 turns out to be exactly accurate at about 7.85%. But up at around 26%, it should be called the rule of 78. Down around 1% or 2%, it should be called the rule of 70. Blindly applying the rule of 72 for interest rates of 1% and 2% gives answers that are slightly off. The real times to double your money are about 70 and 35 years rather than 72 and 36 years. This kind of error certainly isn’t a big deal when doing back-of-the-envelope calculations, but I prefer to know when rules are accurate and when they are just approximations.

The concept of human capital is an interesting one. A young person may have no significant assets other than the potential to earn money over his or her lifetime. This potential is called human capital. Over time, we turn our human capital into actual assets. Moshe Milevsky does a good job explaining the idea of human capital in his book, Your Money Milestones . He gets his students to create a personal balance sheet. The first versions they produce are usually depressing; they are full of student loans and few assets. Then he teaches them about human capital. They work out their expected income over their working lives and add that to the balance sheet. Presto! Now they are millionaires. Human capital is definitely a worthwhile concept in personal financial decisions. However, it is misleading to include future income without considering future needs. We all need water, food, clothing, and shelter. Even the most basic versions of these things have a cost. Nobody wants...

The abbreviation ETF stands for exchange-traded fund. It used to mean a basket of equities making up some broad index where the annual fees charged were very low. As investors came to understand that ETFs were good, the name “ETF” began to be used for just about any type of investment. At first it was very narrowly-focused exchange-traded funds that got in on the ETF name. It’s hard to argue that this was really an abuse of the name, though, because these funds were, in fact, exchange-traded. But they were different from the original ETFs in important ways. Firstly, they had higher fees, and secondly, they did not represent a broad index (as Preet observed recently ). For a while I tried to use the cumbersome term “low-cost broad-index ETF” to get at the original meaning of ETF, but that’s not a very catchy name. Lately, the name ETF has been attached to index mutual funds as well. Because mutual funds aren’t exchange-traded, this is hard to justify other than with the we-w...

Moshe Milevsky thinks that many homeowners should have rented. In his book, Your Money Milestones , he makes many good points to support his conclusion. However, there is a compromise choice that may be better than either typical home ownership or renting. One of Milevsky’s arguments comes down to a correlation between wage risk and the investment risk in owning a house. If a big local employer leaves town, people lose their jobs and at the same time see the value of their houses drop. Another of Milevsky’s arguments is that houses represent too high a percentage of the typical homeowner’s net worth. Having all your money tied up in one house is similar to having your entire portfolio tied up in one stock. Milevsky does discuss some of the benefits of home ownership. There can be social benefits to having stable neighbours who help each other. To this I would add the benefit of not having to interact with a landlord. I don’t see this as a binary choice. A compromise that...

1. Preet takes BMO to task for trying to add “ETF” to their index mutual fund names to cash in on the popularity of ETFs . 2. Money Smarts has another funny tenant from hell story . 3. Big Cajun Man is fretting about his huge cash outlays for his kids’ schooling . 4. Planning a trip to Europe? Million Dollar Journey has a list of 8 ways to save money in Europe . 5. Financial Highway explains that while a credit card can be for emergency purchases, it shouldn’t be an emergency fund .

Most investment analysis is based on the assumption that returns follow a Gaussian or Normal distribution. However, examinations of available data show that returns don’t exactly follow this pattern. Benoit Mandelbrot of fractal fame suggested the Cauchy distribution as an alternative that may agree better with real-life investment data. To illustrate the difference between these two theories, suppose that you invest money over a period of time, and based on historical data, you expect to have $1 million on a certain date. Suppose further that historical data suggests there is a one in ten chance that you'll actually have $750,000 or less. What is the chance that you'll actually end up with $250,000 or less? The Gaussian distribution says that the odds of this bad outcome are less than one in a billion. However, the Cauchy distribution says that the odds of this bad outcome are just over 2%! This is an enormous difference. The available evidence shows that real lif...

With the skyrocketing veterinary costs for pets, many insurance companies are offering pet insurance. However, it's hard to find a good reason why pet owners should buy such insurance. The main idea behind insurance is to reduce risk. Suppose that you are forced to do a random draw of one ball out of 1000 lottery balls. If you pull the one bad ball, you have to pay $100,000. If you pull any of the other 999 balls, you pay nothing. It would be nice to buy insurance to cover the case where you pull the bad ball. In a simple analysis, this insurance premium should be $100. Out of 1000 people, we expect only one to pull the bad ball, and then the total premiums of $100,000 would exactly cover the required payment of $100,000. However, insurance companies have overhead and expect to make profits. They are more likely to charge $200 for this coverage. This illustrates an important point. The total of insurance premiums that you pay is expected to be more than the amount th...

A reader, Bill in Albuquerque, asks the following question (lightly edited): I have $1 million in a retirement account that I can’t get at yet (and don't need for another 10 years or so—I'm 59). The equity firm that has this IRA account now (not my employer—I retired 5 years ago) has been doing a lousy job, IMHO, for their 1%/year expense. Do you have any suggestions as to what other options might be available to me as a place to invest that money? I've thought of Max Advisor and have talked with the manager. I have also thought of managing an ETF portfolio based on Kiplinger recommendations. Thoughts? My starting point for financial matters is always personal education. You are unhappy with your current money manager, but why? Perhaps you have good reasons. To assess a money manager, you should make sure you understand your current investments. What is the breakdown of stocks, bonds, real estate and other asset categories? Are the percentages appropriate fo...