During my morning commute I passed a gas station advertising a price of $1.30 per litre. This may not be the peak in my area, but it is quite high. You'd think that this would drive more people to take the bus or to carpool. Looking around I saw little difference in the density of cars, vans, trucks, and SUVs clogging the roads. In a minute of scanning, I didn't see any vehicles holding more than one person. This brings up the question, are high gas prices changing the way people drive? I hear no shortage of complaints, but my small sample indicates that people are just paying the extra money and going about their business as usual (with some extra complaining). If gas prices continue their climb there will have to be noticeable changes in how much people drive, but for now I'm not seeing it.

BC’s vote to scrap the HST brings up the question of what happens to the $1.6 billion the federal government gave BC to implement the HST. It seems natural that the money has to be returned, but apparently the NDP disagree. This willingness to hand out money so freely makes me wonder if politicians should have to pass some sort of financial savvy test. You might point out that politicians understand financial matters just fine and they act out of self-interest. This is likely true much of the time, but I wonder if sometimes politicians genuinely don’t understand basic financial facts. Here is a simple essay question that intelligent adults should be able to answer correctly to have any hope of running a government: Explain why having the government give every Canadian ten million dollars wouldn’t make us all rich. If that one proves too difficult, maybe the following question is a little easier: Suppose that ten people are adrift on a life boat. The only food they have is...

Scott Adams has a funny article on financial conspiracies that ends with "If you want to screw the rich, buy stocks in the broad market indexes and just hold them forever. They hate that." Preet Banerjee says that the primary consideration for whether you get a gym membership or buy your own exercise equipment should be your likelihood of sticking with your workout plan rather than the cost of each alternative. I agree, but I would add that you need to beware of initial bursts of enthusiasm. We need enthusiasm to get us started, but it can also lead to buying expensive equipment and clothing that gets little use. Channel enthusiasm into planning workouts rather than buying things. Once you prove to yourself that you'll stick with a plan, it makes sense to start acquiring the things you need to make the workouts better. Retire Happy Blog has a story of an advisor who abused Deferred Sales Charges (DSCs) to the detriment of his clients. Money Smarts describes hi...

Years ago I was buying a piece of furniture and was offered a "don't pay for one year" deal. I innocently asked whether I could get a discount if I paid right away. The answer was a firm no and my attempts to continue negotiating failed to lower the price. It wasn't until years later that I learned why. If you fail to pay the full amount on time, you get hit with high retroactive interest back to your purchase date. If enough people fail to pay on time, the zero interest for a year deal can actually be profitable for the finance company. To make things a little more concrete, I looked up a major retailer's don't pay for a year deal. At this store, if you pay on time, there is no interest and no extra fees of any kind for a year. If you are short one penny when the year is up, you pay 12 months of 2.4% interest (32.9% for the year after compounding) on the entire purchase. If the retailer just offered regular financing, let's say that the intere...

Vanguard announced yesterday that they will open 6 Canadian-domiciled ETFs. Two of these ETFs cover indexes of U.S. and international stocks. Unfortunately, they also incorporate currency hedging back to Canadian dollars. This takes away the risk protection that I’m looking for, as I’ll explain. Here are the 6 ETFs Vanguard announced: – Vanguard MSCI Canada Index ETF – Vanguard Canadian Aggregate Bond Index ETF – Vanguard Canadian Short-Term Bond Index ETF – Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged) – Vanguard MSCI EAFE Index ETF (CAD-hedged) – Vanguard MSCI Emerging Markets Index ETF One of the risks we face as Canadians is that the Canadian economy will falter and fall behind the rest of the world. As a proud and confident Canadian, I don’t think this will happen. But when I think through the many possibilities, a faltering Canadian economy would cause us big financial trouble. Imagine that at some point in the near future the world stops buying our oil...

I have a family full of students whose student fees include a health insurance plan. You might think that the school would see to it that students are offered a sensible plan at a reasonable cost. The plan description I got to see didn’t look very sensible to me. Flipping open the cover to the first two pages, my eyes were drawn to the giant dismemberments table. The funniest entry (if discussing dismemberment can be funny) is the loss of “One or More Entire Toes” for $50. In what possible way can $50 compensate for a lost toe? The purpose of insurance is to cover large costs of low probability events. Losing a toe has low probability, but $50? The top end of the table is $25,000 for losing any two of six things: your eyes, hands, and feet. Again, $25,000 is very low compensation for such devastating losses. The rest of the document is a long string of caps of $100, $1000, $2000, etc. on various mishaps. Real insurance would make you pay the first $100 and cover all of th...

Jonathan Chevreau says that Nick Barisheff is about to publish a book titled $10,000 Gold: Will it happen sooner than you think? (see the middle of the article). The article also included an opinion about gold being overvalued, which creates some balance, but I’d prefer to stay away from these predictions altogether. My first reaction to seeing “$10,000 gold” was to remember the 1999 book DOW 36,000 by authors who would rather remain nameless. Apparently, everyone had to pile into stocks or miss the 3-5 year ride on the DOW from around 11,000 in 1999 to 36,000. It’s now 12 years later and the DOW is still at around 11,000. The only reason a book like DOW 36,000 made it to print with some likelihood of success is that in 1999 stocks had been on a terrific tear, and people wanted to believe that the party would continue. The same is true for a book today about gold reaching $10,000. Apparently, Barisheff believes that a $10,000 gold price “could be justified.” I have little d...

Warren Buffett wrote an excellent piece for the New York Times calling for higher tax rates on the super-rich like him. He pays only 17.4% tax on his income, but average Americans pay a much higher percentage. Tom Bradley at Steadyhand brings us an explanation of why Standard & Poor’s downgrade of U.S. government debt was incorrect. Potato describes a market-linked GIC that claims “No cap on returns, no fees, participate in 100% of return.” If you’re suspicious that’s good because you should be. The fine print reveals details at odds with the marketing claim. My Own Advisor reviews the book Investment Zoo . One good quote: “Taxation has never been fair, since government can only take from those who have money.” The Blunt Bean Counter has seen people make mistakes in naming executors for their estates and has some detailed advice. Million Dollar Journey explains how to create a stock watch-list with Google spreadsheets. I’ve gone a step further to automatically c...

Reader R.M. is having trouble being double-charged HST for work done on a property. The following is a lightly-edited version of his situation. I have an agent managing a house for me. That means that they deal with various suppliers for maintenance and repairs. Suppliers issue invoices to my manager (not me) for work done. For example: $10,000 labour, material, etc. $ 1,300 HST $11,300 Total manager pays supplier Then the manager invoices me as follows $11,300 supplier services $ 1,469 HST $12,769 Total I am paying $2,769 HST on the $10,000. This appears to be double payment of HST by me. The original supplier has collected the HST and will remit that amount. But the manager has done nothing more than pay the supplier bill, which included the HST and should pass on to me nothing more than the 11,300. (Management fees are charged separately to me.) Is my reasoning correct? When the manager pays a bill for me which included HST, then is it incorrect to be billing m...

With the high stock market volatility lately, I haven’t been able to keep myself from checking the big swings in my portfolio value from day to day. I know I should focus on other things, but it’s hard not to check how many weeks of pay I’ve gained or lost each day. Of course, these swings tend to balance out somewhat over time. A week of volatility is less than 5 times a day’s volatility, and things balance out more over longer periods of time. But still, with these big daily swings, it’s hard to believe that tiny little MERs could make any difference. Consider the following example. Suppose that at the start of the day yesterday you owned $250,000 worth of large cap Canadian stocks in the form of the exchange-traded fund XIU. By the end of the day you would have lost $2477. The portion of this loss that is due to XIU’s MER is $1.70 (based on 250 trading days per year and XIU’s MER of 0.17%). If the MER had been 2.5%, the day’s MER cost would have been $25. It’s hard to i...

Jonathan Chevreau asked his readers whether he should keep his old car running or buying a new one, and the reader response was solidly in favour of keeping the old car . I tend to agree that it makes sense to keep a car as long as possible. However, the day must come when we have to let go and replace our cars. The question then is how to pay for the new car. I think the answer is preparation. If you’ve got a good old car that is running well and not costing you too much money to keep in working order, then you should be able to save a couple of hundred dollars each month toward a new car. If you can’t afford to do this, then you really can’t afford your car. The best way to pay for a car is in cash. For one thing, you’ll think twice about buying an expensive car if you’ve had to save up the money. When you do buy your car, you can immediately start saving for the next car. This will save thousands in interest payments. For the majority of people who have fallen off this...

In an op-ed piece for the New York Times , Paul Krugman makes the case that current unemployment levels in the U.S. are a bigger concern than government debt, despite the recent focus on deficits. I’ve heard these arguments before, but I’ve always wanted to hear more discussion of the types of employment. It makes sense to me that pulling out of economic problems requires having as many people work as possible. However, it must matter what kind of work they are doing. If we subsidize clothing it will create more jobs in the clothing industry and will allow compulsive shoppers to buy even more tops and shoes they’ll never wear, but I fail to see how this will help the economy in the long run. It’s unlikely that we would all agree on what types of work benefit society and what doesn’t, but it seems to me that if the government plans to inject money to spark the economy, it makes sense to give some thought to the type of job growth that the stimulus will create. I have no great a...

The Blunt Bean Counter runs through some common personal income tax errors. Some of these are pretty subtle, but potentially expensive. Squawkfox mocks collectors but gets caught collecting questionable things herself. Big Cajun Man isn't happy with some advice for how a 17-year old should handle a credit card. Retire Happy Blog takes a calm view of recent market volatility and says it's time to rebalance. Money Smarts says don't sell. Million Dollar Jorney lists the top 5 pension myths. How to Invest Online sees the recent market volatility as a summer sale on stocks.

Part of the theory behind maintaining a fixed percentage allocation of your portfolio to different asset classes, like stocks and bonds, is that when markets are volatile, you can increase returns by rebalancing.  Unfortunately, there is no immediate return from rebalancing. To show that rebalancing has created a profit, you need to take into account not just your most recent rebalancing trade, but also the last time you rebalanced in the other direction.  If you do the calculation, it will show whether the second to last rebalancing trade produced a profit, but the most recent one won't show a profit until the next time you rebalance in the other direction. This situation creates a problem of a delay from effort to reward.  We're much better at doing things that give immediate gratification.

In the investing world, alpha refers to the ability to beat the market. In his book The Quest for Alpha , Larry Swedroe argues strongly that persistent alpha is exceedingly rare and we shouldn’t bother to look for it. He says that investors should use index investing to get market returns with minimum cost. In this way we will actually outperform those who try to beat the market. Swedroe is big on evidence. He looks at the numbers for mutual funds, pension plans, hedge funds, individual investors, and behavioural finance, and concludes that positive alpha is rare over long periods of time. For investors who think they can beat the market because they are smart, Swedroe has the amusing example of a Mensa investing club that had lost to the market returns by 13% per year for 15 years. “One investor described their strategy as buy low, sell lower.” David Swensen is quoted as saying “Individuals who attempt to compete with resource-rich money management organizations simply prov...

A while back I wrote briefly about being given a gift certificate for Amazon in the UK rather than Canada. My wife made her first purchase on the certificate and, amazingly, the total cost was less than if we had ordered the items in Canada. My wife bought some school books, clothing, and a runner’s water bottle for a total of £208.33, which the Bank of Canada currency converter says is equivalent to $336.93. This includes shipping (£18.36) and import fees (£19.36), but we didn’t have to pay the UK’s value-added tax (VAT). The same order in Canada would have been $368.21, which includes GST on the books and the full HST on the other items, but no shipping charge for such a large order. In total, we saved about 8.5% by ordering from the UK instead of Canada. This is definitely a case of YMMV, but the next time you place an order with Amazon it might pay to see what the order would cost if placed with Amazon (or some other company) in another country.

According to some pundits, we are in a sideways market, which means that stock prices are neither going up nor down. Others say we are in secular bear market, which the Wikipedia entry for market trend defines as “a long-term trend that lasts 5 to 25 years ... [that] consists of smaller bull markets and larger bear markets.” Implicit in these claims is the prediction that these conditions will continue for the near future. Obviously, index investors can’t make money on their stocks in the near term if stock prices stay flat or tend to drop. A common follow up claim is that these markets are for stock-pickers or other types of active investors. The problem, of course, is that to beat the market you need to take advantage of those who lose money to the market. To be a market-beating smart investor you have to be able to exploit dumb investors. When the market performs poorly, the only way to get good returns is to beat the market, but that doesn’t mean that it will be easy to d...

Larry MacDonald found an academic study showing that pension funds outperform indexes. I asked Larry Swedroe about this study and his first reaction was that the results can be explained by momentum effects. Jason Zweig reports that some bond fund assets are used to bail out borrowers. Money Smarts explains that portfolio rebalancing is for controlling volatility rather than maximizing returns. Canadian Couch Potato defended index investing against some criticism, and The Blunt Bean Counter took a 1000-foot view of the whole debate. Retire Happy Blog tries to tackle the difficult issue of what returns you can expect from the stock market when planning for retirement. Big Cajun Man says that his staycation isn’t as cheap as he’d like. Million Dollar Journey surveys the top U.S. dollar credit cards in Canada. How to Invest Online takes a look at various ways of expressing the damage that costs can do to your portfolio.

I’m not in the business of making short-term price forecasts for stocks, bonds, or anything else, including gold. Gold has had quite a run over the last decade. I thought it would be a good idea to take a look at a gold chart from the last time gold had a great run (1970 to 1980). The chart below shows that decade plus a couple of extra years. Now this might look like I’m predicting that gold is going to crash soon. In fact, I just want to point out that this is a possibility. This shouldn’t be a great concern for those who have a small slice of their portfolios in gold. But for those who are piling into gold with the bulk of their portfolios because of government debt fears, inflation fears, or just bullishness on gold, such a crash is one of the many future possibilities. Diversification is a good thing even when it comes to gold.

A recent defense of couch potato investing by Canadian Couch Potato left me wondering why so many people believe in active investing strategies. I think it may be partly due to the feeling that you will be successful if you work hard. It may take some work to pick a passive investing strategy, but once started this approach is quite easy to maintain (which is why we call it “couch potato” investing). On the other hand, active investors work to try to beat the others who play the same game. Active stock pickers pore over company reports and calculate company valuations. For them investing is usually hard work. The thing that goes contrary to our expectations about hard work is that active investors, on average, get lower returns than the market averages. It’s not that they don’t get enough benefit to justify the work they do; it’s that they actually make a negative wage for the hours they put in. At least this is true of the average person who invests his or her own money act...

Being a math guy I couldn’t resist an offer to review Math for Grownups by Laura Laing. The main focus of the book is showing how to use basic mathematics in everyday situations. It is primarily aimed at adults who are not comfortable with math. A healthy chunk of the book deals with financial matters such as mortgage payments and debt to income ratios, but it also covers many other areas like hanging curtains, shrinking or expanding recipes in the kitchen, counting calories, and more. On the whole, Laing does good job of explaining how to do calculations in real-world situations for people who don’t already know how. However, the book contains a disappointingly large number of errors. One example of an error is the calculation of how much one would pay to finance a car. If the car costs $15,000 financed at 6% for 4 years, Laing says that the total financing cost is $15,000 x 1.06 x 1.06 x 1.06 x 1.06. This would only be true if you let the interest build without making any...