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...