Savvy investors have a plan and stick to it. However, even positive events, such as receiving stock options from an employer, can disrupt their plans. Call options on a single stock are just not a part of most investors’ long-term investing approach. Here I investigate how incentive stock options fit with an index-based investing plan. One simple answer would be to exercise the options (if they are in the money) at the earliest opportunity and sell the received stock. However, there are cases where this clearly makes no sense. For example, if you have 1000 options struck at $10, and the stock trades for $10.10, it makes no sense to cash out for only $100. Given the downside protection the options provide, it makes more sense to hold on. If the stock manages to get to $11, the value of the options increases 10-fold. Another answer is to go on the open market and sell call options on your employer’s stock. On paper, this gives you both the stock value above the strike price p...

I’m expecting to be named as executor of a couple of estates and will likely help out in others. So, I was interested to read The 50 Biggest Estate Planning Mistakes ... and How to Avoid Them by Jean Blacklock and Sarah Kruger. In addition to mistakes in planning an estate, the authors cover mistakes in serving as an executor and in being a beneficiary. Although the book is framed as a list of common mistakes, it serves as a how-to guide and provides some entertainment value with numerous anecdotes. My main criticism of this book is that it comes on a little strong in promoting the services of trust companies and various other experts that may be needed in preparing a will or settling an estate. I don’t doubt that these experts are sorely needed in many cases, particularly for larger estates, but this theme is overdone in the book. The strength of this book is the experience it draws from. Reading through the various mistakes people make I realized that I could make many of t...

Blue Hedge Investments are shaking things up in the Canadian investment landscape.  I've had a few people express concern that I've either lost my mind or have sold out to scam artists. The web site is gone now, but trying to "INVEST NOW!" took you to a warning about investments that are too good to be true. Larry Swedroe reports that hedge funds had another lousy year. The Blunt Bean Counter warns that new rules could lead to punitive taxes for incorporated contractors who are declared “incorporated employees” by CRA. Potato has some interesting thoughts on the debate about whether to prepare for financial emergencies with cash savings or a line of credit. He believes that it makes more sense to invest extra cash above one month of emergency savings. I think this depends on your situation in life. As many experienced tech workers with high-paying jobs found out a decade ago, your job can disappear and it can take years to find a new one at just 75% of your...

Writing this blog has taught me a lot about personal finance and investing. This is one of a series of articles where I argue with my former self by disagreeing with one of my previous articles. Unlike politicians, I’m allowed to change my mind as I learn more from my readers and my own research. In a post on the costs of trading stocks I said “I’m not against direct ownership of stocks. I happen enjoy tracking the progress of the businesses that I own, and I’m hopeful that I will prove to be slightly above average at stock picking.” I followed up with my prescription for success in stock investing: “Predicting the long-term future of a stock is best done by trying to predict the future success of the business rather than looking at wiggles in the chart of stock prices.” I’m still not against direct ownership of stocks for highly skilled investors, and I still believe that fundamental analysis beats technical analysis. However, I’m no longer hopeful that I’m a good enough sto...

Rob Carrick says it’s time to lock in your natural gas price. He reasons that current prices are very low compared to previous highs. Buying a fixed-price contract for natural gas is like buying insurance against price increases, but for natural gas this insurance is quite expensive. Carrick says that the current gas supply charge he pays is 12 cents per cubic meter. (He also points out that at this low price, the supply charge is only about half of what you pay. The other half is storage and distribution costs.) The peak price was 42 cents per cubic meter. The cheapest price he could find to lock in for the next 5 years is 19.7 cents. To make these figures more real, let’s use my family’s consumption numbers. We used 4700 cubic meters of natural gas over the last year. This translates to a cost at current rates of $564 per year (plus roughly another $564 for storage and distribution). At the peak price, this would be $1974 (plus $564). At the best 5-year locked in rate,...

An acquaintance of mine I’ll call Carl mentioned that he invests with RBC’s private investing service where he pays a fixed percentage fee on his portfolio each year rather than paying management fees on all of his funds. I asked what other fees he pays and Carl’s reply was that there were no other fees. He said that he only pays the percentage fee and is pleased that he negotiated it below 1% per year on his sizeable portfolio. I just had to check into this. It turns out that Carl’s portfolio is mostly invested in RBC’s Series O Private Pools. (Note: 3 years later RBC's private pools were "merged" with their funds.) Carl was partially correct in that he does not pay any management fees on these funds. But, he does pay a management expense ratio (MER) and a trading expense ratio (TER) on each fund. Many people think that management fees and MERs are the same thing because of the similar names, but they have differences. MERs contain the management fees plus a few...

David Trahair’s book Crushing Debt is subtitled Why Canadians Should Drop Everything and Pay Off Debt . This led me to believe that the primary focus of the book would be the need for individuals to reduce their debts. However, to get to discussions of personal finance and debt reduction, readers have to wade through the first half of the book which is about macroeconomic factors related to debt. The book has some interesting parts, but overall it is a little thin on useful content. “A financially illiterate, disorganized client is a bank’s most profitable customer.” The thought of giving my money away to a bank is a great motivator to get me organized and seeking financial knowledge. Trahair even claims that he once arranged to give a series of free lectures at a university, but the university’s “Financial Partner” put a stop to his lectures because “it would be bad for their business.” “Household debt levels are threatening the stability of Canadian banks.” The McKinsey Gl...

Tom Bradley at Steadyhand reports on the underwhelming size of the shift from mutual funds to ETFs. Even as someone who competes against ETFs, he would like “these simple, low-cost products to have a bigger impact on the industry landscape.” Canadian Couch Potato looks at our tendency to overvalue the things we own. This can actually makes sense in some contexts. For example, it makes sense to give a low value to a new type of laptop bag until you’ve used it for a while and discover it’s much better than your old kind. But this doesn’t apply to investing; you don’t have to own something to judge whether or not it’s a good investment. Big Cajun Man is unimpressed by Suze Orman’s new debit card. The Blunt Bean Counter raised $12,575 in his bloggers for charity drive.

Do you own bonds and are hoping for interest rates to go up so that you can make more money? You’re not alone. Many people are confused about what makes bonds go up and down in value. Once you own a bond, you should be hoping for interest rates to go down, not up. The return that you get from a bond is determined by prevailing interest rates. However, once you buy a bond, your interest rate is locked in not only for this year, but all future years until the bond matures. If rates go up, you don’t get to collect the higher rate next year. Instead, higher interest rates will make your bond then looks worse in comparison to new bonds and other investors won’t be willing to pay as much for your bond. This is the basis for the inverse relationship between bond values and interest rates. Before you buy a bond, you’re hoping for higher rates, but after you’ve bought the bond, its value rises if interest rates go down, not up.

You’ve logged in to pay your credit card bill and you have to choose the date to transfer the money. Do you choose the actual due date, the day before, or some earlier date? What is the right balance between the risk of late fees and the opportunity cost of paying early? Some people say they always pay bills on their due date and have never had a problem with late fees. Others claim that banks use dirty tricks like setting due dates on weekends and holidays and not recognizing payments until the following business day. It can be difficult to gauge the risks of paying on or very close to a due date. But it isn’t too hard to figure out the cost of getting caught paying late if you can’t talk the bank or other creditor into waiving the late penalty. Many utility bills actually say explicitly what the cost will be if you pay late. With credit cards, the cost is retroactive interest back to the date of purchase on all outstanding items. The total penalties are often in the 2% to ...

The top bid in the Bloggers for Charity initiative was Glenn Cooke at InsureCan Inc. He donated $100 to the Wilmot Family Resource Centre that provides affordable social, educational, and recreational services and programs. What would you think if your car insurance broker suggested that you pay higher premiums for your car insurance in order to build up your RRSPs? You’d probably think that something was funny, and go looking for a real expert for your RRSPs. Conversely is your investment advisor the first person you call for advice on the best car insurance rates? Both of those situations smell a bit funny. Yet swap out the words ‘car insurance’ for ‘life insurance’ and all of a sudden many consumers find the idea more palatable. Why is that? The answer lies with a bit of history and a bit of insurance product design. Car insurance premiums are priced on a year by year basis – risk is passed along in the form of premiums each year. For most life insurance products,...

The central theme of Henry Hazlitt’s book, Economics in One Lesson , is that one must look beyond the primary effects of economic policies to see the secondary effects. Under such scrutiny, many policies lose their lustre. Hazlitt delivers on the promise of a useful lesson in economics in just over 200 pages. Originally written in 1946 and then updated in 1978, the topics in this book are still very relevant today. “The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.” Hazlitt begins with a story of a vandal breaking a window. Superficially, this seems to create work for glass makers and window installers, but upon tracing through all the effects, the world on balance loses more employment than it gains from the broken window. It makes sense that vandalism would have a net negative effect on the economy, but this is...

Tom Bradley at Steadyhand rants about how long it takes some large financial institutions to transfer out RRSP accounts. Wealthy Boomer explains the rule of 40 to figure out how long it takes for a mutual fund MER to consume one-third of your portfolio. This is a variant of the rule of 72 for figuring out how long it takes your money to double. Carol Goar at The Star explains a new scheme by tax preparers to exploit the poor. Larry Swedroe reports that 2011 was another bad year for actively-managed U.S. stock funds. My Own Advisor makes some financial goals for 2012. I like the approach he has taken to put dollar figures on each goal. Personal finance is not a pass/fail game. You get part marks for coming close. Money Smarts tries to raise awareness about Canada Learning Bonds (CLBs), which are government contributions to RESPs of low income families. They don’t even have to make a contribution to get a CLB. Big Cajun Man has an amusing rant about telemarketers. ...

Writing this blog has taught me a lot about personal finance and investing. This is one of a series of articles where I argue with my former self by disagreeing with one of my previous articles. Unlike politicians, I’m allowed to change my mind as I learn more from my readers and my own research. In a series on investing pitfalls, I wrote an article warning readers about overconfidence , where I said “There is nothing wrong with investing in individual stocks if you are truly knowledgeable and willing to put in the time to follow the companies you own.” I used to believe that smart people willing to put in the work to pore over annual reports and financial statements could beat the stock market averages. Former self, I think you are wrong. I no longer believe that intelligence and hard work are enough. There are too many brilliant people trying to do the same thing. Unless you are a true financial genius or have access to inside information, I’m pessimistic about your likeli...

I routinely get asked for market predictions. Friends and colleagues ask questions like what will interest rates do this year? My attempts to say that I don’t know and that I don’t think anyone else knows either are usually met with something like “yes, but where do you think the stock market is headed?” So, I decided to have some fun and give people the predictions they want. These predictions will be random. I didn’t toss any coins, but I’m just going to write down the first thing that comes to mind without any serious thought. Random predictions for the next year: 1. Interest rates will go up a little. 2. Housing prices will come down a little. 3. Canadian and U.S. stock markets will have an above average year. 4. Bonds will have a below average year. 5. RIM won’t drop 75% again. 6. Berkshire Hathaway will have a strong year. If you rely on these predictions, you’re crazy. If they prove to be uncannily accurate, I will refuse to take any credit. Humans seem wired...

We often hear that while most investors are better off with passive investing in index funds and ETFs, skilled investors should try to beat the market. The problem here is that the word “skill” here has a technical meaning that is quite different from its everyday use. The technical meaning of investing skill is more or less synonymous with having better than 50/50 odds of beating the market. So, if the odds are that you’ll beat the market (after costs), then it makes sense to try. But this meaning is very different from the ordinary use of the word “skill”. Just because you know more about investing than your friends and neighbours doesn’t necessarily mean that you’re likely to beat the market, even though your superior knowledge makes you skilled in the ordinary sense of the word. If I use “skill” with its everyday meaning, here is how I would state the conditions under which it makes sense to be an active investor: “Active investing makes sense when you are significantly m...

Recently, a car ad trumpeting 0% financing caught my eye. Sounds great! I’ll take it. Just give me a 25-year amortization at 0% and I’ll drive off in my new car. Fat chance. The car company would never agree to this arrangement because the financing isn’t really at 0%. If I could get this deal for a $30,000 car, the payments would be $100 per month for 25 years. At 4% inflation, the last payment would have the purchasing power of $38 in today’s dollars. That would be a very sweet deal, especially if $30,000 was the final price after negotiation rather than the inflated asking price. In reality, we get to choose either a price discount (cash back) or a low financing rate for just a few years. This proves that the real financing rate is much higher than advertised. No doubt car marketers know how to avoid breaking the law, but why is this type of advertising permitted? This reminds me of the deal my parents were offered when they bought their first house. They could get t...

Canadian Couch Potato explains how ETF units come into and out of existence and how this process keeps them trading at the value of the underlying assets. Potato analyzes his performance as an active investor and explains his struggle to decide whether to be an active or passive investor. The Blunt Bean Counter explains 5 popular CRA audit targets. Big Cajun Man writes about the magic dancing monkeys that may be standing (dancing?) between him and his son’s Canada Learning Bond. Gail Vaz-Oxlade explains that the best way to change your behaviour is to focus on what you really, really want rather than focusing on what you should stop doing (in a post no longer online). I see the power of this with one friend of mine who has set a target date to retire into a life of daily golf. He is laser-focused on his goal and this makes it easier for him to save a high percentage of his income. Without this goal it would he harder to avoid expensive temptations. Million Dollar Journ...

So far I have more questions than answers about the new Pooled Registered Pension Plans (PRPPs) and a big question is what the costs will be like for participants. The Department of Finance has a framework document that lays out the basic idea of PRPPs, but it is the details that will determine if this approach is beneficial for Canadians or not. PRPPs will be administered by “regulated financial institutions that are capable of taking on a fiduciary role in order to act in the best interests of plan members.” The investment choices will allow participants to create portfolios consistent with their “investment objectives and risk preferences including a low cost option.” This seems to imply that high-cost options may be offered as well. Because it will be employers who will decide which financial institution to choose as a PRPP administrator, and we can reasonably believe that employers can evaluate costs better than the typical Canadian, there is some hope that PRPP administrat...

Canadian Couch Potato recently posted a thoughtful criticism of Gordon Pape’s argument in favour of active investing . Pape’s reasoning strikes me as another example of what I call the ‘Hail Mary’ argument. Passive index investors receive market returns less modest costs. Active investors also receive market returns, but their costs are much higher. So, on average, active investors get lower returns than passive investors. This is true whether market returns are high or low. Despite this argument, which is based on simple math, we often hear people say that when the markets give poor returns, you have to become a stock picker to get decent returns. On the surface this is true. The only way to beat the market is with some active investing approach; passive investors will never beat the market. However, the average active investor will still lose to the market. A few will beat the market, and most will get less than market returns, even when market returns are poor. For mos...

I do my best to explain things as clearly and simply as possible, but David Chilton, author of The Wealthy Barber Returns , does a better job. Years of seeking financial strategies that work and explaining them to people has clearly paid off. It’s nearly impossible to write a financial book aimed at a broad audience that is useful, understandable, and entertaining, but Chilton has done it. A major focus of the book is recognizing human weaknesses and finding financial strategies that work despite these weaknesses. Temptation is everywhere and “one of the biggest reasons that it’s so difficult to save is that no one out there really wants you to,” from your kids and friends to bankers and governments. Chilton says that learning to say “I can’t afford it” is liberating and “frees you from the pressures to live beyond your means.” The book points to home-renovation expenses as a major factor in people getting into trouble with their lines of credit. As for credit cards, the cycle...