Money Smarts explains the Conservative government’s Pooled Retirement Pension Plan (PRPP). The Freakonomics guys have some fun crunching the numbers on whether it makes sense to jump subway turnstiles in New York City. Retire Happy Blog looks at what investment returns you should use in your retirement plan. Big Cajun Man reports that the ecoEnergy program is back up and running.

Leveraged ETFs are designed to return double or triple the return of an index each day, but they come with disclaimers warning that they won’t double or triple returns over longer periods of time due to a mysterious compounding effect. I’ve come up with a more concrete explanation that is hopefully more understandable. An example of a leveraged ETF is the Horizons BetaPro S&P/TSX 60 Bull ETF (ticker: HXU). If the TSX 60 goes up 1% on a given day, HXU goes up 2%. The confusing part is that if the TSX 60 goes up 10% in a year, HXU doesn’t go up 20% that year. A partial reason is the management fees charged to run HXD, but this doesn’t fully explain the seemingly missing returns. To understand what is going on, imagine a volatile 2 days where the TSX 60 goes up 10% then goes down 10%. Let’s track a $100 investment in the TSX 60 for the 2 days: TSX 60: Start: $100, after up day: $110, after down day: $99 So, by the magic of compounding we lost a dollar. Here is the unsat...

It is well known that people often make irrational financial decisions even in fairly simple situations where they have all the information they need to make a good decision. I have an idea about why we are this way that is so simple that it is very unlikely to be original, but I couldn't find this idea in other writings in a quick search. One simple model of the value (or utility) of money is that each doubling of your savings has the same incremental value. So, if you start with $100,000, dropping to $50,000 is as detrimental as doubling to $200,000 is beneficial. For small gains and losses, the sizes of steps of equal utility differ by less. For example, a loss of only $1000 is as detrimental as gaining $1010 is beneficial. However, throughout most of human evolution, great wealth for a single individual did not exist. Before the advent of storing food, a large kill would only last until the meat rotted or was taken by other hungry people or animals. We are simply not ...

I happened across an ad claiming that “Penny stocks are the secret to buying happiness during a recession.” I couldn’t resist having a look. The link took me to an “advertorial” by SmarterLifestyles entitled “The Advantages of Buying Penny Stocks.” (I prefer not to give the link, but determined readers can search.) The article contains a number of misconceptions about penny stocks. “Penny stocks offer an incredible upside for potential investors.” They also offer incredible downside. That’s the nature of highly volatile investments. “Low prices allow novices to explore the markets, without risking an extensive amount of money.” Nonsense. You can just as easily buy one share of a $100 stock as 100 shares of a $1 stock. Either way you’re investing $100. I don’t recommend either investment because the commission (likely $5 or $10 or more) is too pricey for such a small investment. “If the stock were to dip in price, the investor will not have lost excessive amounts of money.” M...

An interesting thing about indexing is that it is never the best investing strategy when we look back in time. There is always some other strategy that would have been better if only we had known to make the right decisions. If only I had known the stock crash of 2008 and 2009 was coming. I could have sold out of stocks in advance and bought back at the bottom. But I didn’t know and I rode stocks down and back up again. Unfortunately, we can’t invest to make past returns. We can only invest and accept whatever the market brings in the future. A common human failing is the tendency to think that past events were predictable. We don’t know what will happen over the next month, but after it happens we tend to think that it was obvious that things would unfold as they did. But it was not obvious beforehand. For those who look back, there is always a strategy that beats indexing. But for those who look forward, the best bet for the vast majority of investors is investing in in...

Piracy in China has reached a new level: counterfeiting entire Apple stores. Getting harassed on street corners in China by sellers of fake goods is commonplace, especially if you look western, but a fake Apple store is a new one to me. Big Cajun Man reminds parents not to miss out on the Canada Learning Bond if they have children young enough to qualify. The Blunt Bean Counter explains how to use CRA's low 1% prescribed interest rate for income splitting. Retire Happy Blog has a list of potential questions to ask a financial advisor before hiring him or her. Million Dollar Journey 's Frugal Trader is concerned with whom to name in his will to get the millions he expects to have by the end of his life. He makes a good point that if he remains financially conservative and never eats into his capital, he'll leave a lot of money upon passing.

With the Canadian political parties squabbling over the Conservatives’ plans to reform pensions using Pooled Registered Pension Plans (PRPPs) rather than expanding CPP, a key factor that isn’t discussed much is that current retirees aren’t likely to get extra money each month. Many groups have put forth suggestions for pension reform in recent years. Most of these suggestions have not included plans to give more money to current retirees, but usually this fact was not made clear. Those who are retired now or who will retire soon can be forgiven if they thought expanding CPP would mean they’d get more money in retirement. With the Conservatives pushing defined contribution PRPPs, it should now be clear that you won’t get more money out in retirement unless you put more money in while working.

Behavioural economists have found many ways to expose our irrational tendencies. Given a choice between two options, people are sometimes too conservative and at other times too reckless. One example is whether you’re willing to play a game where you toss a coin and win $20 for heads or lose $10 for tails. From a purely mathematical point of view, almost all people should be willing to play this game. But many are not. Of course the reasons for refusing to play may have nothing to do with math. Some people object to gambling. Others fear that the game is somehow rigged. Usually, I can overcome any initial irrational feelings about these games to figure out which choice the researchers consider to be the correct choice. However, there is one game that I have a hard time with: Suppose that you win a prize and your reward is one of the following two choices: 1. $3000 for certain. 2. $4000 with a probability of 80% and nothing with probability 20%. It turns out that a st...

Investors have their choice of index method based on either traditional capitalization-weighted funds or fundamentally-weighted funds. The terms used in this battle may be somewhat intimidating, but the ideas are simple enough. The more difficult question to answer is which indexing method will produce higher returns. Traditional indexes are cap-weighted. For a stock index, this means that each stock is held in the index in proportion to the total value of the company. So if the market says that company A is worth $10 billion, and company B is worth $1 billion, the index will have 10 times as many dollars worth of company A stock as company B stock. Continuing this example, if a cap-weighted basket of stocks contains $10,000 of company A stock, it will contain $1000 of company B stock. The number of shares may not differ by a factor of 10, though. If A shares trade for $10, then we have 1000 A shares, and if B shares trade for $100, we have only 10 B shares. The fundamental...

Jane Honeck believes that at the core of our money troubles are unexamined beliefs that drive us to self-destructive behaviour that limits our ability to succeed financially. In her book The Problem with Money? It’s not about the Money! she lays out a series of exercises designed to root out your hidden beliefs, examine them, and find ways to break out of old patterns. An example might be a woman who believes that good people don’t have money. This belief would cause her to unconsciously waste money to remain poor and good. To change the pattern, she might seek out counterexamples such as Warren Buffett and recognize that her personality won’t change if she has money. The ideas in this book are quite far from the rational approach I usually take with financial decisions. However, if people’s problems are emotional, perhaps the solutions to these problems require techniques that deal with emotions. The methods described in this book are really designed to be used by an expert...

Update:  Preet Banerjee wrote a Globe and Mail piece on the FPSC study as well.  Thanks to Preet for including my remarks in his article. Financial planners would like to be able to say that their services give their clients peace of mind and a feeling of control over their financial futures. To this end, a new study seeks to measure the differences in financial comfort between those who use a financial planner and those who don’t. The Financial Planning Standards Council (FPSC) approached a market research firm to perform such a study. The results from the first year of a five year study are summarized starting on page 7 of the April 2011 FPSC publication called FPStandard. The most obvious problem for a study of this kind comes from the fact that financial planners tend to prefer wealthy clients, and wealthy people are much more likely to feel good about their finances than poor people. It would hardly be surprising if a bunch of rich people with financial planners ...

Americans have no love for dollar coins. There have been several failed attempts to get them to stop using one-dollar notes. However, some people have found a clever and amusing way to use dollar coins to get free air miles . Tom Bradley at Steadyhand hints that the Steadyhand Funds perform well on the “gap” measure which is the difference between reported fund returns and the returns actually experienced by investors in those funds. This gap measure is one way to gauge how well financial advisors help investors make rational decisions. Retire Happy Blog leans toward debt repayment in the debate about whether to contribute to a TFSA or pay down debt. Money Smarts updated a chart of the average wait time when phoning Canadian discount brokerages. Big Cajun Man has heard all the talk of the U.S. debt ceiling and coins the term “debt floor” to be the point where you get out of debt. Personally, I’ve never liked the term debt ceiling because I think of increased debt as sin...

In The House that Bogle Built , author Lewis Braham tells the story of how John Bogle built Vanguard and championed low-cost index investing. This book is much more than just a historical account, though. Braham explains the different sides of various investing related arguments such as passive vs. active investing and more. Brahma isn’t shy about injecting his own opinions as well. However, where he differs with Bogle, I usually found Bogle’s arguments more convincing. Braham is no breathless admirer of either Bogle or Vanguard. As one example, Braham calls one Vanguard advertising campaign a “schmaltzy video” containing “true sanctimony”. A big part of Bogle’s achievement with Vanguard was to separate control over invested assets from the management of the assets. A competitor to Vanguard is quoted as saying “By giving the client a fair shake, you’re going to destroy this industry.” However, many of Vanguard’s competitors continue to “put the desire to earn profits for the...

With four drivers in my house I often find interesting things in my car. Recently, I found a Swiss Chalet "Dip'n Win" prize strip. At first I assumed that it was abandoned because it was a loser. But that wasn't the reason. I was actually holding a winner of sorts: a "$50 THE SOURCE GIFT CARD*". Sounds great so far. However, the next line reads "with a new 3-year phone activation." I didn't even bother trying to read the remaining 7 lines of barely-legible fine print. This kind of worthless prize just makes me think less of Swiss Chalet. I'd think less of cell phone contracts as well if that were possible. What happened to the days when you would win a small order of fries?

Much is made of the value of having independent directors serving on a company’s board of directors. These directors are not employed by the company and are supposed to be able to freely challenge management plans and thereby protect shareholder interests. I’m not convinced that independent directors are better than owner directors. If a director has his or her net worth tied up in company stock, this aligns the director’s interests with those of shareholders. A director who is an employee with minimal ownership actually has interests that are opposed to those of shareholders. An independent director is somewhere in the middle. As a shareholder, I would place more trust in an owner director than an independent director. I would look for directors whose share ownership is large relative to the income they receive from the company. In this measure, I wouldn’t count stock options as ownership and I would count any form of income whether direct or indirect. Independent director...

I'm not particularly close to retirement age, but I've been thinking about what kind of real estate strategy makes sense. So far, my ideas have gone over with my wife like a lead balloon. I'm pretty sure I don't want to live in my current house after retiring. It's great for a family. I've got a big pool, big deck, lots of rooms, and lots of grass to mow. It's great right now, but I doubt it will make me happy in 10 or 20 years. My first thought was to sell the house at some point, reduce the amount of stuff I own as much as possible and go rent somewhere for a while. Whenever it suits us we could move on and rent somewhere else. By moving around we could get an idea of how we want to spend each year. Maybe we'd spend 6 months in Canada, 4 months in the warmer part of the U.S., and another 2 winter months somewhere else that's nice and warm. My wife is definitely not sold on this idea. She sees impracticality in owning little enough to...

Jason Zweig says that quarterly earnings surprises are largely planned. I remember this from the tech boom; arranging for an earnings surprise was essentially a way to market a stock. Big Cajun Man takes a swipe at advice to build up debt while you’re young. Building up debt would be fine if you know what your lifetime income is going to be and you know that you’ll enjoy staying in the job that pays this money. This applies to nobody and so debt should be kept to a minimum. Money Smarts and Million Dollar Journey reported on the current standings of their stock-picking contest. If I entered, I’d just pick some index ETFs and plan to finish third or fourth out of ten. The Blunt Bean Counter takes a look at 4 different personality types when it comes to money.

Let’s face it. Buying a house is way too expensive. A $500,000 mortgage amortized over 30 years at 4% costs $2378 per month. Who wants to pay that much? Car leases give us the answer. With a car lease we recognize that a car still has some value after the end of its lease. The customer only has to pay enough to cover the difference between the car’s starting price and its value after the lease runs out. This should work out even better for houses because they go up in value. Let’s be conservative and assume that houses will go up 10% over the next 3 years. Then a home buyer should only have to pay enough so that the amount owed on the house goes from $500,000 to $550,000 over 3 years. At 4% interest, this would only cost $343 per month! The rising debt isn’t a problem because you can always sell the house to pay it off. Compared to the old type of mortgage where the payments are $2378, this saves over $2000 each month. This is the kind of innovation we need to keep hou...

My employer reimburses me $0.45 per kilometer (km) when I use my car for company business. This turns out not to be a good deal for me with my expensive car, but it raises the possibility of augmenting your income by using your car for business. (Side note: It’s interesting that the word “mileage” has survived in a country that measures driving distances in km.) I did a rough calculation of my car costs taking into account initial purchase price, insurance, repairs, gas, and inflation. It turns out that my average cost has been about $0.50 per km (in today’s dollars) to drive my car. So, I lose a nickel per km on business trips. I’m not overly concerned about this small loss because I don’t use my car for business much, but it could make a big difference for people who drive for work frequently. For a trip to a city 500 km away, the round trip of 1000 km would leave me out of pocket about $50, but someone with a cheaper and more efficient car that costs only $0.25 per km woul...

“I keep hearing that bonds aren’t a good investment right now, but bond yields just went up. Doesn’t that mean that the bond naysayers were wrong?” Many investors seem to have a hard time understanding bonds. In its simplest form a bond is an IOU. Some organization promises to pay you a fixed amount of money on a particular future date. The price of a bond is whatever people are willing to pay for it. If a government bond pays $1000 in a year, you might decide that it’s worth $980 to you. If a small company’s bond pays $1000 in a year, you might decide it’s worth only $900 because the company may not be able to pay. The bond yield is just the implied interest rate when looking at the bond’s current price, the amount it is supposed to pay, and how long until it pays. So, for the one-year government bond above, the yield is 2.04% (because adding 2.04% to $980 takes it to $1000). However, the small company’s bond pays 11.1% because of the higher risk of default. The importan...

We may not always agree on which investing approaches are best, but some are so bad that it should be obvious. Flipping back-end loaded mutual funds monthly is just a bad idea no matter how skilled you are. Buying into IPOs you don’t understand is also a bad idea. A common defense of bad investing approaches is something like “there is no best investing approach” and “everyone has his own way to invest that works for him.” It is true that there are aspects of each person’s situation that are distinct, but for the most part, this defense is nonsense. If your financial advisor has you in 3% MER closet index funds and you could be investing with a different advisor who would charge you only 1% to be in low-cost index funds, then your investing approach is bad. Sticking with the high-cost advisor because he’s a good guy who makes you feel important is an expensive choice. Very few investors even know how their portfolios are performing in numerical terms. If they don’t know the...