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...