One of the computers in my house came to the end of its useful life recently. In my house, that means ordering a new computer from Dell. Since I’m a tech guy and have techie friends, I’ve heard time and again how I can save money by buying cheap components and putting the PC together myself. But I’d rather leave it to Dell to put the system together and pay a little extra, but not too much extra. I prefer to buy online, but the Dell web site didn’t allow me to make all the choices I wanted. This meant having to make a call to Dell. This also meant having to turn down all the high-margin items available as add-ons. I was pleasantly surprised when the salesperson didn’t press me on an extended warranty after I turned it down; she just went on with the list of other choices. However, when we came to the end, she began a script: “You know sir, you’re buying an expensive computer...”. For a mere $119 I could extend the standard warranty from 1 year to 2 years. After I turned d...

I’m a victim of marketing. The title of the book Train Your Brain to Get Rich by Aubele, Freeman, Hausner, and Reynolds caught my eye, but the title is misleading. The additional words on the cover, “the simple program that primes your gray cells for WEALTH, PROSPERITY, and FINANCIAL SECURITY,” just add to the misdirection. This book isn’t really about money. As I read through the first quarter of the book, I kept waiting for the financial aspects to begin, but by the hundredth page I suspected that they never would begin, and as I finished the last page, my suspicion was confirmed. This book is really about brain health and the benefits of such things as a positive attitude, meditating, exercise, sleep, and healthy eating. The superficial financial parts of the book could just as easily be replaced with “train your brain to play better tennis.” The financial references actually seem as though as though they were added after the fact by a different writer. It’s as though s...

This will be the last regular post until next year. I may write one or two before then if the mood strikes. To all my readers, I wish you happy holidays and all the best in the new year. Where Does All My Money Go? breaks down the effect of mutual fund fees on a 25-year investment. Check out the spreadsheet that lets you enter your own inputs to see how much of your money goes to your advisor, the dealer, and the fund company. Gail Vaz-Oxlade conducted a poll to find out how much people could reduce their monthly expenses if they had to (in a post no longer online). The most striking thing about this poll is that the highest category is “15% or more”. I could reduce my expenses by 50%. If I absolutely had to, I could go further by moving my family somewhere cheaper. I think people have a misguided sense of the distinction between necessities and wants. Necessities are food, simple clothing, shelter, education, and not much more. The Blunt Bean Counter shows that there i...

Come January, I’m expecting a huge raise. Most workers get a huge raise at the start of a new year, but they don’t realize it. In the last days of the year, you are taxed at your top marginal rate, but in January the slate is clean and your income is untaxed for a while. You won’t see any of this on your pay stub, though. Payroll taxes are designed to smooth out the effect I’m talking about by predicting your final taxable income and taking equal amounts of tax off each pay. But your real taxes are based on your actual income using progressive percentages. For a person earning $100,000 per year in Ontario, after-tax pay at the end of this year is $28.92 per hour, but will rise to $51.11 per hour starting in January (based on 37.5 hours per week and 365.25 days per year). Of course, it will then drop off over the course of 2012. For most of us who collect a regular income for the whole year, none of this makes much difference, but for those who work irregularly of for irregul...

A friend I’ll call Jerry recently complained about his Maclean’s magazine subscription: "I see via your magazine insert I can order a year's subscription for Ontario for $53.62 (tax included) whereas I just recently paid $70.86 to renew mine! While I can understand the ‘bonus gift’ difference, I am quite upset that you are gouging (over 30 %!) a long time subscribing customer (over 30 years)." Jerry went on to demand a refund of the difference, and Maclean’s promised he would get it in 4 to 6 weeks. Of course, the other loyal customers who don’t bother to complain won’t get this refund. Most people believe that loyal customers deserve to be well-treated, but companies seek profits. Apparently, Maclean’s magazine has decided that the most profitable approach is to draw people in with low prices and hope they keep subscribing at higher prices. My guess is that they are right. This doesn’t mean that I think loyal customers deserve poor treatment; I just don’t think t...

We often hear of unions seeking pay parity with other workers. Invariably, a pay raise and possibly some back pay are required to right the supposed unfairness. No doubt there are legitimate cases, but I suspect that most are not. My direct experience is mostly with programmers. Organizations have different philosophies when it comes to paying programmers. Some seek the best talent they can find and give them above-average pay. Most offer average pay and get average talent, and still others offer low pay and try to get by with whoever will work for them. It is too easy for programmers at one company to look at another company’s pay scales and complain. The truth is that most complainers would be rejected if they tried to get a job with the higher-paying company. Superficially, all programmers do similar work, but when we get down to details it is normal for one company’s programmers to be far superior to another company’s programmers. When this is true, demands for pay pari...

Dan Hallett accused mutual fund critics of missing the big picture when they focus their criticism on high MER costs. His main point is not so much that MERs are not a problem but that there are other important ways that investors lose money. He claims that one of these ways that investors lose money is due to a volatility drag that comes with periodic investments or dollar-cost averaging (DCA). I’ve done a couple of experiments and can’t find any evidence that this volatility drag exists. In fact, DCA has a slight edge over lump-sum investing. Hallett explains volatility drag as follows: “You’ve no doubt scratched your head at why a portfolio’s long-term performance hasn’t quite lived up to expectations. It’s likely that volatility drag is one of the big culprits. ... If a mutual fund reports a 7 percent 10-year rate of return, for example, the only way to have achieved that precise result was to invest at the beginning of that period, hold for the full decade and have no buy...

It pays to be wary of investment scams. The well-done 3-minute video below hits the high points for how to protect yourself. It was created by the (deep breath) U.S. Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.

Glenn Cooke of InsureCan Inc. was our top bidder of $100 in the Blogger’s for Charity auction. Glenn will be contributing a guest post on this blog on 2012 Jan. 17. Thanks to all the bidders. Hopefully, they will contribute their bid amounts to their favourite charities anyway – winter is a tough time for those in need.

The highest bid so far in the bloggers for charity auction for a post on this blog ( see here for details ) is $100. Bidding will close tonight at 11:59 pm EST. I will update this note with further bids. Jason Zweig has some examples of small investors being harmed by strange results when trading stocks. He gives some suggestions for protecting yourself against these infrequent but costly problems. Ellen Roseman thinks that the Rogers-Bell collaboration to buy a majority stake in Maple Leaf Sports and Entertainment is bad for Canada. I agree with her. These companies' near monopoly status allows them to treat their customers poorly to increase profit. If anything we should be looking at breaking up these companies to improve competition. Canadian Mortgage Trends says that 6.5% of Canadian mortgagors currently pay more than 40% of their income to service debts, but that increasing interest rates would drive that percentage higher. Money Smarts finds that Canadian T...

My employer recently moved to a hoteling system where nobody has a fixed desk. We just take our laptops out of a locker and pick a desk each day. This has its advantages and disadvantages, but one side effect is that it is much more difficult to have great piles of paper. I've had to throw away unimportant papers and scan the important ones. This elimination of paper has been very freeing for me, and it occurred to me that this way of thinking would be good for Library and Archives Canada as well. Certain documents are of such great historical significance that they it makes sense for taxpayers to pay to preserve them. However, many documents held by Library and Archives Canada could simply be scanned, the electronic copies be made available to Canadians free on the internet (assuming their copyrights have run out), and then the original documents could be sold to collectors. I wouldn't want to lose great works of fiction written by Canadians, but all I need is an el...

The typical person will invest for many years, but we express investment costs with yearly percentages that are misleadingly low. I propose that for recurrent costs that accumulate, we use an investing horizon of 25 years to express these figures. For example, instead of talking about a fund's MER, we would talk about its MERQ (Management Expense Ratio per Quarter century). This would give investors a better feel for the effect of recurring costs. In another example, if an investor's portfolio concentration creates a drag on returns, we should look at the effect over 25 years rather than just one year. In a recent article, Jonathan Chevreau observed that Investors Dividend A Fund has an MER over 2% higher than that of iShares Dow Jones Canada Select Dividend Index Fund (XDV/TSX) despite the fact that they have substantially the same holdings. Even if we add 1% to the MER of the iShares ETF to account for the cost of advice, the percentages are 2.69% vs. 1.53%. The di...

Big economic events, popularized as “black swans”, are known to happen more often than standard economic theory predicts . However, it’s not easy for most investors to figure out what they should do with this information other than to be vaguely worried. One important implication is that leverage is more dangerous than it appears. Leverage just means borrowing to invest. If you invest $50,000 and it goes up 10%, you make $5000. But if you had borrowed another $50,000 at 4% interest, you’d have made $10,000 less $2000 in interest for a profit of $8000. When investments are rising, leverage is a wonderful thing. However, when investments are dropping, leverage magnifies losses. There is even the possibility of going completely broke if the value of your investments drops below the amount you owe. In most cases where investors use leverage, they can weather minor storms by paying off the leverage loan with employment income. This way they can wait out stock market tumbles unti...

Right now in Canada you usually pay the same price to a retailer for goods and services whether you pay by cash, debit, or credit. On the surface this seems like a good thing. However, when we scratch the surface, we see inefficiencies that boost prices. Planned changes to these price rules could create different pricing for different payment methods, but whether consumers will benefit is still unclear. When you pay with a credit card, the retailer has to pay between 1.5% and 3% of the transaction amount to the credit card company. The cost of all the wonderful credit card reward schemes we enjoy comes out of these fees charged to retailers. Retailers have to raise their prices to compensate for the fees they pay to credit card companies. The catch is that everyone has to pay these higher prices, even those who pay with cash. In effect, people who pay cash are subsidizing the credit card rewards and cash-back schemes. But only some of the retailer fees flow back to consumers...

To answer a question about the charity auction for a guest post (see here for more details), yes I am willing to read your post before you make a bid to confirm that I’m willing to publish it. For the first time Warren Buffett is inviting Wall Street analysts to the Berkshire Hathaway annual meeting . Some commentators see this as a sign that Buffett believes Berkshire is undervalued. Boomer and Echo describes how debit cards draw people into high banking fees. Canadian Couch Potato has a vivid illustration of how investment marketers could paint very different pictures by just taking the window in time for quoting investment returns and shifting it by 3 months. Big Cajun Man stumbled onto a way to improve security for his ATM card. Preet Banerjee answers a reader question about whether MERs are tax deductible. The Blunt Bean Counter explains how to have a tax-free corporate divorce using a "butterfly" transaction. Retire Happy Blog says it's importa...

Nassim Taleb gets much credit for popularizing the idea that big economic events, so-called “black swans,” occur more frequently than standard economic theory predicts. The initial work was actually done by the “father of fractals,” Benoit Mandelbrot . Physicists have studied detailed market data and have now concluded that Mandelbrot was right . (Hat tip to the Stingy Investor for pointing me to this article.) The bigger the market move we contemplate, the lower the chances that it will happen. However, these probabilities shrink much more slowly than standard economic theory predicts. In standard economic theory based on the normal distribution, if a move has a 1 in 1000 chance of happening, a move twice as large has less than a 1 in a billion chance of happening. In Mandelbrot’s model as confirmed by the physicists, the bigger move has about a 1 in 8000 chance; each doubling in move size reduces the odds by 8 times. For conditions of low market volatility, standard theor...

Credit card companies, retailers, and other businesses have jumped on the loyalty points bandwagon. We accumulate all sorts of different points, and some of us manage to redeem points for various goods and services. I tend to look at these points as a kind of currency. Businesses are issuing their own brand of currency that they give their customers in return for making purchases with actual money. The problem for consumers is that these businesses control the rules for this currency and can devalue it at any time by adding various restrictions and changing the number of points needed to redeem a “reward”. Viewed this way, it becomes apparent that many reward points systems aren’t worth the bother, but this isn’t likely to change consumer behaviour. The innumerate masses love their points. It’s true that some points systems have real value and are worth the trouble, but this is the exception rather than the rule.

Vanguard's first 6 Canadian ETFs begin trading today (see the list below).  Note that the MERs consist of slightly more than the management fees listed.  The most interesting of these to me is VCE as a potential replacement for XIU for Canadian stocks.  However, I plan to wait and see that all goes smoothly in the first few months of trading.  I have little interest in the bleeding edge when it comes to new securities. VCE (Mgmt fee 0.09%) Vanguard MSCI Canada Index ETF VUS (Mgmt fee 0.15%) Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged) VEF (Mgmt fee 0.37%) Vanguard MSCI EAFE Index ETF (CAD-hedged) VEE (Mgmt fee 0.49%) Vanguard MSCI Emerging Markets Index ETF VAB (Mgmt fee 0.20%) Vanguard Canadian Aggregate Bond Index ETF VSB (Mgmt fee 0.15%) Vanguard Canadian Short-Term Bond Index ETF

A very popular method of investing is to build a portfolio of individual stocks with a solid history of dividend payments. Dividend investors tend to believe that this approach will beat index investing, and index investors believe that dividend investors have sub-optimal portfolios. Although dividend investing tends to be quite passive in the sense that it involves infrequent trading, it is at least a little bit active in the sense that dividend investors choose individual stocks. Any time you choose an active investing strategy, it makes sense to know how much your strategy is likely to underperform the market averages in the event that your strategy is little better than random. So, if we begin with the premise that index investors are right and that dividend investors are likely to underperform, how much lower are their returns expected to be? To answer this question, I dug up an old paper by Meir Statman: How Many Stocks Make a Diversified Portfolio? In it he reprints a t...

Wealthy Boomer takes off the gloves in an exchange with Investors Group over sky-high mutual fund MERs and a questionable commitment to Canadians’ financial literacy. The truth is that Investors Group profits greatly from their clients’ lack of understanding of important investing facts. Big Cajun Man created an amusing flowchart of financial planning in families. I fear that many people follow this flowchart. The Blunt Bean Counter explains that while he is moving to passive investing, he plans to be a stock-picker for a small fraction of his portfolio for the excitement. Retire Happy Blog explains some model investment portfolios. He gives a range from conservative to aggressive. There are higher levels, though. If you borrow to invest, such as with the Smith Manoeuvre, you are moving into the hyper-aggressive range. I think leveraged schemes might be less popular if people understood how risky they are. Preet Banerjee gave us a look into the complex world of inter...

Calculating the total return of a collection of investments is a simple matter of adding up or averaging the returns of the individual investments, right? In reality, the right way to "add" or "average" returns depends on the context. Suppose that investment A stayed flat for two years (0% return each year), and investment B fared much better returning 20% each year for both years. Suppose further an investor splits $1000 between A and B in the first year, then rebalances and again splits his money between A and B in the second year: To start: A $500 B $500 After year 1: A $500 B $600 The total is $1100 for a 10% return. So we see that correct overall return is the average of 0% and 20%, namely 10%. This investor will get another 10% return in the second year and will end up with $1210 for a total return of 21% after two years. Note that the total return is not just 10% + 10% = 20%. In this case we have to "add" the returns using comp...

There are a couple of obvious explanations for why people buy more stuff on Black Friday and Cyber Monday: 1. Retailers offer better prices enticing people who have been thinking about buying to finally pull the trigger. 2. People are helpless victims of mass advertising and are deluded into thinking that they are acting along with their many friends. I have one more possible reason to add to this list: people look for excuses to follow their desires rather than use restraint. We see a similar effect with people who try to eat healthily. Even people with good salaries who can afford to eat anything they want will get overly excited about free donuts or pizza. They can afford to buy junk food, but they usually show restraint and eat healthy food. The free junk food is an excuse to indulge. So, for people who have a desire to shop, Black Friday and Cyber Monday are a great excuse for going off their "diets".

Many GIC investors long for the days of double-digit returns 30 years ago. In a post warning of misconceptions about guaranteed income funds , Jim Yih at the Retire Happy Blog observed that today's low GIC rates are “not very appealing to a lot of people.” He’s right that people feel this way, but the truth is that today’s GIC rates aren’t too far out of line with past rates when you properly take into account inflation and taxes. Most investors understand the idea of spending interest and leaving their principal alone. The problem with this approach over the long term is that inflation erodes principal. A better approach is to avoid spending part of the interest to account for inflation. This way the principal maintains its purchasing power over time. GIC investors should be focusing on real returns, which is the GIC return minus inflation. For example, if a GIC pays 3% interest and inflation is 2% per year, then the real return is only about 1%. Using inflation data fro...

Some companies are moving to a system of seating for employees where the workspaces are not assigned to anyone in particular. Each employee can just pick any spot when they arrive at work. This system is called hoteling (but according to Wikipedia if reservations aren’t necessary, it should be called “hot-desking”). The benefits from a company point-of-view are obvious: saving costs. If employees are in the office 75% of the time on average, then the company only needs to offer 75% as many work stations. And with people having to store their work items in lockers, they typically don’t accumulate as much paper and other items so that the work stations can be smaller. In talking to employees about this system, I was surprised to learn that the most common concern is the lack of a space to call one’s own. I would have thought that other concerns would be greater such as the time it takes to bring work items from a locker and set up each morning, and more time to tear down each e...

The main reason I write this blog is to interact with other people interested in learning about how to invest well and handle personal finances well. So, I’m always happy to hear from people who have questions or have something interesting to contribute. However, the truth is that I ignore 99% of the emails I receive. This is because they mostly fall into one of two categories: 1. “How much does it cost to put a link on your site in a place nobody will notice in order to boost my web site’s PageRank?” I don’t do this. 2. “Instead of having to write your own posts, would you like us to write some for you with embedded links to our payday loan web site?” I don’t do this, either. If I have ignored your email, it is likely because I suspect that your message falls into one of these two categories. I’m not opposed to placing advertising on my site or taking a guest post, but I don’t try to trick my readers into thinking that a post is real content when it is really advertising...

The highest bid so far in the bloggers for charity auction for a post on this blog ( see here for details ) is now at $100. Keep those bids coming! Squawkfox explains how she got married on the cheap ( part 1 and part 2 ). Jeremy Cato at the Globe and Mail rants about taxes on drivers and how Ontario may be adding a carbon tax. I'm no fan of taxes, but we need higher taxes on gasoline consumption. This will stimulate private-sector green energy solutions that we desperately need. There could be offsetting income tax deductions to make the change revenue-neutral. Wealthy Boomer interviews Charles Ellis about the high cost of mutual funds in Canada. Big Cajun Man has a picture showing how he is keeping critters out of his attic. The Blunt Bean Counter asks whether Steve Jobs or Bill Gates is more deserving of being placed on a pedestal. Retire Happy Blog doesn't think the new PRPPs are necessary. Scott Ronalds at Steadyhand catches Investors Group sweeping...

Trying to break a mortgage before your term is up can be a bewildering experience. If interest rates have gone down since you took a fixed term, the bank will ask for an "interest rate differential" (IRD), which is a mortgage-breaking fee. Few people understand how this IRD is calculated and the banks don't make it easy to find out. There is an interesting way for banks to game the IRD calculations as I'll explain, but I have no idea if any of them actually do it. Most people know that a bank's posted mortgage rates are just a starting point for negotiations; borrowers usually qualify for a discounted rate depending on their credit record. The size of these discounts is controlled by the bank. A bank could raise its posted rate by a half-point and then give larger discounts without affecting the rates on the mortgages they write. By playing with posted rates and the size of this discount, I’ll show how a bank could affect the size of IRD penalties. The b...

How often do we see articles on how to invest the way rich people invest? For yet another example, see this Wall Street Journal article . The not so subtle implication is that you can become rich yourself if you act the way rich people act. Unfortunately, this can be like trying to become a surgeon by wandering around in scrubs. No doubt some rich people made their money by investing well. However, the people I know who are wealthy made their money in business, and they don't know any more than the rest of us about successful investing. One tried day trading with disastrous results, a few lost their money to a small-time advisor who skipped the country, and several just pay little attention to investing after handing their money over to a high-fee advisor. Imitating the actions of successful people may or may not be a good idea depending on particular actions you are imitating. To know what traits to imitate requires deeper understanding. Learn more and think for yoursel...

The Blunt Bean Counter has rounded up some bloggers to support charities by auctioning off the opportunity to write guest posts on our blogs. I have no idea how this will work out, but I’m happy to give it a shot for a good cause. The first announcement about this blogger charity effort came out yesterday . I won’t repeat all the information in The Blunt Bean Counter’s announcement, but I will lay out some rules: – Send bids to the email address on the upper right corner of my blog. (If you’re reading the feed or an email, you’ll have to click through to the web site. This is also a great way to see the comments people leave on blog posts.) – The auction will close on 2011 Dec. 16. I will publish periodic updates of the highest bid and will notify the winner after the auction closes. – The winning bidder must send me (by email) a scanned copy of a donation receipt, dated between Dec. 17 and Dec. 31 to confirm that the donation has been made. Please block out any perso...

Most commentators agree that the stock portion of our portfolios should consist of many stocks in order to reduce volatility. Where they disagree is on how many stocks are needed to be adequately diversified. Over the years, the trend has been for the recommended minimum number of stocks to rise. I have an explanation for this trend. In 2009 Tom Bradley wrote "While a portfolio of 20 stocks and a few government bonds were just fine for our parents a generation ago, it’s probably not enough today." Why would the minimum number of stocks we should own change over time? With each stock you add to a portfolio, the volatility tends to decrease. However, the amount of benefit drops off as the number of stocks rises. Adding a second stock gives a big reduction in volatility, but adding a 101st stock doesn't reduce volatility much. For indexers, there is no such thing as too much diversification as long as the cost of ownership (fund MERs) stays low. So, an index in...

Big Cajun Man explains why flooding in Thailand may cause computer prices to rise in time for the holidays. Million Dollar Journey explains how to calculate U.S. capital gains in a non-registered account. The Blunt Bean Counter says that starting in 2013 in Ontario, executors will have to be more careful about justifying the value of assets for probate fees. Money Smarts says you should take business media with a grain of salt. I liked the bit about an elevator with "Soar!" and "Plunge!" buttons.

A constant irritant of mine is the high cost of converting between U.S. and Canadian dollars at my discount brokerage. Canadian Capitalist has a good way to reduce these currency-conversion costs, but it involves several steps. I wish that my discount brokerage would offer a more sensible option. When I trade stocks or ETFs, I have to contend with commissions and spreads. Most people understand commissions, but spreads are less familiar. Consider the ETF XIU. As I write this, it is trading at a bid price of $17.51 and an ask price of $17.52. This means that the price per unit is different by one cent depending on whether I'm buying or selling. For $100,000 worth of XIU, this difference is $57. Each time I make a trade, I lose half of this spread, or about $28.50. Add in the trading commission of $10, and the cost to me is $38.50. Things are very different when buying or selling U.S. dollars. If I don't do anything special to avoid high costs, the spread at my disc...

A common problem for young investors who get excited about index investing is that they try to over-think their portfolios in their early saving years. Your asset mix is much more important when your portfolio is much larger than your new contributions than it is when you're just starting out. I'll go through a fictitious example to illustrate a pattern I've seen with novice index investors. Amy is a responsible woman in her mid-twenties with a good job who wants to start building savings for her future. She has read about index investing and is excited to learn that she doesn't have to be an expert on stock picking to be a successful investor. After some study she has settled on the following asset mix: 35% Canadian stocks 30% U.S. stocks 20% International stocks 15% Canadian bonds She has picked the 4 ETFs she plans to use for these asset classes, and she has RRSP and TFSA accounts opened with a discount brokerage. Right now she has $2000 in her RRSP and...

Dan Bortolotti’s MoneySense Guide to the Perfect Portfolio is the most accessible explanation of the merits and mechanics of index investing I’ve seen to date. He takes a topic that is often explained in a technical manner and makes it understandable for non-specialists. At 128 pages of easy-reading, it’s not painful to get through, either. I expect to be lending out my copy to friends and family. This book is actually a cross between a book and a magazine. It contains 10 pages of ads and has a fair bit of interesting artwork. Readers can decide for themselves what they think of a book with ads, but presumably the ads helped to get its cost down to $9.95 + $3 for shipping + taxes. The book begins by explaining how “Couch Potato” investing with indexes is a different way of thinking about investing. It then goes on to look at how to decide what should go in your portfolio and how to set up accounts to buy the chosen investments. Even investors who feel intimidated by financi...

Canadian Couch Potato gives his takes on Vanguard's announcement that their new ETFs will have lower management fees than other comparable ETFs in Canada. Preet Banerjee says that amid the doom and gloom about the stock market there is a bright note: the S&P 500 earnings per share hit a new record. How to Invest Online has some tips on when borrowing to invest makes sense and when it doesn't. The Blunt Bean Counter tackles a tricky question: should you set up your new business as a proprietorship or a corporation? Big Cajun Man says you should change your bank if you're not being treated well. Retire Happy Blog explains how to get organized for estate planning. If a friend or family member has asked you to be an executor, you might want to send them this information to make your job easier when the time comes. Million Dollar Journey has lists of the most and least expensive MBA programs.

Vanguard's entry into the Canadian ETF market with very low management fees has many ETF investors considering making a switch. However, it costs commissions and spreads to switch over to Vanguard ETFs. This leaves investors weighing the costs to decide whether to change or not. However, there is a middle ground. The most interesting of Vanguard's new ETFs to me is VCE which tracks the MSCI Canada stock index. This is a potential replacement for iShare's XIU which tracks the S&P/TSX 60. The management fees are 0.09% for VCE and 0.15% for XIU. These figures are not the complete MER, but we can assume that the difference in MERs will be close to 0.06%. So, an investor with $20,000 in XIU could save $12 per year by switching to VCE. This isn't exactly a huge savings. It's hard to justify the trading commissions and spreads to make the change. But, there is a simple compromise: just buy VCE whenever you're adding new money or rebalancing toward stoc...

Yesterday I got a letter that had the feel of a government mailing. The envelope had a Canadian flag in the top left corner like many government letters. The contents talked about the Canada Pension Plan, shortfalls, and how I’m eligible for benefits of the Purple Shield Plan if I register now . This letter turned out to be a come-on for life insurance that covers any expenses not covered by the CPP $2500 funeral benefit. But, there is no mention of having to pay any premiums. The form of this advertising is very likely to confuse some people enough that they will send in the “information request” thinking that they might be missing out on a free government program. This kind of thing just makes me more cynical about anything I read from my mailbox.

Tom Bradley at Steadyhand invited me to comment on their comparison of Steadyhand Funds versus indexing with ETFs . The piece is clear, balanced, and worth a read. (Disclaimer: I have no financial relationship with Steadyhand other than the fact that they’ve bought me lunch a couple of times. It would take a lot more than that to stop me from saying what I really think!) The summary on fees in their example of two investors with $250,000 portfolios is that Steadyhand funds charge about 0.55% per year more than the total costs of running an ETF portfolio. The burning question is whether Steadyhand offers enough benefits to make up for this additional cost of $1375 per year. Here are some of the ways that Steadyhand might earn their extra fees: – ease of getting started – investing advice on asset allocation – calming influence when you’re about to do something foolish and expensive out of greed or fear (a steady hand) – possible higher returns Although I wish them well, I...

Much time and effort goes into searching for stock market inefficiencies that can be exploited for profit. Former string theorists work together developing algorithms to comb through historical data looking for persistent patterns. The problem is that once we find a strategy to exploit an anomaly and it becomes widely-known, it stops working. There is one pattern that I bank on, though. There are those who try to make money from momentum effects and others who believe in “sell in May and go away” until November because stocks have performed poorly in summer. I don’t trust these approaches because they seem like just the sort of thing that would stop working if too many people used them. If everyone believed in “sell in May and go away” then we could anticipate a big sell-off in May and a rise in November. So the right thing to do would be to sell before May and buy before November. But if too many people did this, the right strategy would change again. There is one stock ma...

Big Cajun Man reports that Costco is selling gas for about 5 cents less per litre than other stations. Canadian Financial DIY thinks very highly of the book Financial Statement Analysis . I'm not a fan of trying to beat the market by selecting stocks, but if you're going to try you must be able to read financial statements. The Blunt Bean Counter has some first-hand experience observing how people react to big cash windfalls. Canadian Couch Potato reviews the book Millionaire Teacher . Financial Highway runs through the factors that affect the interest rate on your loan. Retire Happy Blog outlines the 3 basic steps to creating a retirement plan. Money Smarts says that buying an annuity is like creating a gold-plated government pension for yourself and wonders why annuities aren't more popular. I suspect the answer has to do with a lack of forced savings leading to not having a big enough lump sum to buy a sizable annuity.

A widely-held belief is that the world contains a small number of financial geniuses who know what is going to happen in the stock markets and who make obscene amounts of money with their trading. With this world-view, the goal for the rest of us is to become a financial genius or hand over the reins of our investments to someone who is a financial genius. When I first started getting serious about investing, I began by trying to pick the right financial genius running some mutual fund to invest my money. When this didn't work out, I set out to read every book I could find about investing and become a financial genius myself. In the end I discovered I was heading in the wrong direction. The secret to successful investing is not making brilliant moves, but failing to make serious mistakes. Rather than trying to outdo other investors, the best strategy for most of us is to avoid doing anything stupid. Almost all of us are best off just trying to match the stock and bond mar...

Most of us have heard that it is good to hold asset classes with low or negative correlation. The informal explanation for this is that risk is lower because when one asset class, such as stocks, is going down, another asset class, such as bonds, is going up. However, this explanation is misleading. It is possible for two investments to both be going up over a period of time, but have negative correlation. Consider the following example: Investment A earns either 2% or 20% each year based on a 50/50 coin toss. Investments B, C, and D do the same. Investment B's return is based on the same coin as A uses. Investment C uses its own independent coin. Investment D does the opposite of A's coin. All 4 investments have an expected compound return of 10.63% (for math geeks, this is 1 less than the square root of 1.02 x 1.20). Even though the investments all look the same based on their returns, their correlations are different: A and B are +100% correlated (perfect cor...

Canadian Couch Potato took a detailed look at whether leveraged ETFs can cause market instability including links to other opinions on the subject. Missing in the various articles I read was a clear and simple explanation of the forces that can cause leveraged ETFs to add to market volatility. 2X Bull ETF Consider first an ETF that seeks to give double the daily return of a given stock index. Suppose that investors have invested a total of $100 million. There are many ways for an ETF to gain double exposure, but we'll look at a simple method: the ETF borrows another $100 million and buys $200 million worth of index stocks. At the start of the day the ETF holdings are Stock: $200M Cash: -$100M The ETF's goal is to maintain a 2:1 ratio between stocks and borrowed cash. Let's now look at what happens on a volatile day. If stocks go up 5%, the holdings are now Stock: $210M Cash: -$100M At the end of the day, the ETF has to borrow another $10 million to b...

A friend I’ll call Sam is in a situation that is new to me. He was in a car accident some time ago and has been trying to claim medical costs from an insurance company. The insurance company ignored him for a long time and recently offered a settlement that would close the matter. The problem is that the settlement appears to be taxable. Sam has already paid $1200 so far in medical costs. The insurance company has offered to pay $1500 to settle the matter, leaving Sam to pay any remaining medical costs on his own. Sam is inclined to accept the offer rather than fight any longer, but the settlement documentation claims that the $1500 would be taxable to Sam. At a 46% income tax rate, Sam would only get to keep $810 of the settlement which is less than the $1200 he has already paid. My first thought was to go back to the insurance company and ask them to cover his expenses so far ($1200) and pay an additional $300 lump sum to settle all other costs including any future costs. ...

Canada Mortgage News reports that Zoocasa has a new free property valuation service called Zoopraisal. It was able to give me a value for my house. I don’t know if the appraisal is accurate, but it’s a start.  Update: a friend who keeps a close eye on real estate prices says that Zoopraisal is close in some cases, but in at least one case it was low by nearly 20% even though the house had just sold for the higher price.  He suspects that it didn't take into account special circumstances that make a house more desirable than others fairly close by.  Hopefully Zoopraisal improves over time. The Blunt Bean Counter has some useful details on who needs to report to the U.S. IRS. Many snowbirds don’t realize that they have IRS reporting requirements if they stay too long. Preet Banerjee reports another good reason to avoid day trading: machine reading of news. It’s hard to act on news first if computers are acting on it in a split second. Money Smarts has a detai...

Elaine Kurtenbach reports that there are signs that the red-hot Chinese real estate market is cooling off . Real estate prices in China have risen consistently for so long that people have come to believe that prices only go up. Our situation in Canada is much milder, but there are parallels. On a recent trip to China I happened to discuss housing prices with some PhD students. They talked about how their families were buying as many apartments as they could as investments. When I asked whether they were concerned that Chinese real estate might be in a bubble and that prices could drop drastically, they looked at me like I had two heads. It was clear that their perception of the safe path to wealth was to save money and pour it all into real estate. There are many Canadians who feel similarly. They buy homes bigger than they need on the theory that they will make money when they sell these homes. But there are no guarantees. It is better to buy the home you need, pay it off...

Scotia iTrade was the first online brokerage to offer commission-free ETF trading and now Canadian Couch Potato reports that Qtrade is offering commission-free ETF trades as well. Saving money on commissions this way is a good thing, but it can mask problems. I find trading similar to drinking: they’re both fun, make me feel good, and cost me money. I try not to be too anxious to get duty-free booze at the border. I have no problem with saving money, but I worry that if cheaper bottles of booze makes a significant difference to my finances, maybe I’m drinking too much. Getting back to ETF trading, it’s better to pay nothing than something, but if you’re really saving a lot of money with free ETF trading, maybe you’re trading too much. There are other hidden costs of trading that are less apparent than commissions. You pay half the spread on each transaction and you pay for trading against better-informed investors, some of whom have inside information (or at least informatio...

Money Smarts supports the idea of separating advisor compensation from mutual fund fees, but fears that this may not be enough to help investors understand their costs. I think this depends on how investors pay advisory fees. If they actually have to cut a cheque, then they will understand. If it is just handled with some incomprehensible lines on page 7 of their investment account statements, then the separation won't help. Canadian Couch Potato explains how criticism of leveraged ETFs should not be applied to all ETFs. Retire Happy Blog explains how to save on your taxes with flow-through shares. This is a guest post by The Blunt Bean Counter . Big Cajun Man explains why RESPs are killing trees. Million Dollar Journey reviews ING Streetwise Mutual Funds.

I tend not to pay much attention to the tools offered by discount brokers, but BMO Investorline has introduced a new ETF screener and comparison tool for its customers. With the increasingly muddied landscape of ETFs available in Canada and the U.S., a screener is potentially useful. The tool includes the ability to compare the performance of an ETF to an index. This is useful for checking an ETF's tracking error. Index ETFs are supposed to track an index, but many do so poorly. A quick comparison can tell you how good a job a particular index ETF is doing. Note: As far as I am aware, this screeneris only available to BMO Investorline clients in their online accounts. I'd be interested to hear what others think of this new ETF tool.

A decade ago, the Tyco company took a big fall and they were sued for allegedly overstating their financial results. The result of the litigation is that there is a $50 million pot of money to be divided among Tyco investors who held stock during the critical period. I mentioned a while back that I'm trying to get access to my share . I had thought that being Canadian rather than American would be a barrier, but seems not to be a problem. The real challenge has been to get my evidence of being a shareholder accepted. I have all the relevant records, but I twice got responses saying that my claim "has been wholly rejected" due to certain "defects". They keep asking me for records of a transaction on 2003 March 14. Explaining that I made no transaction on this date didn't help. During a telephone call with a pleasant person, I learned that I need to produce proof that I still owned shares on this date. I'm not sure how I was supposed to understa...