A mistake that many fixed-income investors make repeatedly is failing to protect their principal. In the pursuit of higher interest to live on, they fail to see the erosion of their assets. I first saw this with some older family members who bought GICs in the 1980s. In the first half of the 1980s, inflation averaged 7.5% per year and 5-year GICs paid an average of 13% per year. These family members just spent their interest payments and felt secure that they weren’t eating into their principal. Of course, their principal was eroding at an alarming rate. In the 5 years starting in 1980, the purchasing power of their savings dropped by 30%. So much for feeling good about not having touched their principal. The real shock came when they renewed their GICs at much lower interest rates. Not only did the interest payments drop dramatically, but the prices of everything they had to buy had gone up considerably. Another good example of principal erosion was discussed by Canadian...

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 about controlling spending by creating artificial scarcity , I wrote the following in response to a reader comment: “When I first had a mortgage, my wife and I used to save more than 50% of our income, but we put it all on the mortgage by doubling all payments and paying 10% of the original mortgage balance each year. I realize now that I would have been better off to have invested some of this money, but I didn't know that at the time.” Based on the information I had available at the time, I now think I did the right thing by paying off my mortgage aggressively. With the benefit of hindsight I now know that my income grew considerably from those early years and that stock ...

Warren Buffett’s Annual letter to Berkshire Hathaway shareholders came out this past weekend. It contains his usual mixture of clarity and wit. Here are a few quotes that struck me as noteworthy. Increasing Employment The U.S. is still soaking up an excess of housing units, but “demographics and our market system will restore the needed balance – probably before long. When that day comes, we will again build one million or more residential units annually. I believe pundits will be surprised at how far unemployment drops once that happens.” Market Predictions In discussing Berkshire’s record of beating the S&P 500 in all rolling 5-year periods, Buffett said that this streak “will almost certainly snap, though, if the S&P 500 should put together a five-year winning streak (which it may well be on its way to doing as I write this).” I hope that Buffett is right in the sense that these businesses go on to produce impressive earnings growth. However, because I expect t...

Rob Carrick interviews Malcolm Hamilton about retirement issues and his own retirement. Hamilton is a very smart guy and it’s worth reading what he has to say. The Blunt Bean Counter explains a hidden risk of trying to recover EI premiums your business has paid for employees who are family members. Canadian Couch Potato interviews Scott Burns about the history of index investing. Preet Banerjee says that “sometimes investors answer [risk profile questionnaires] as if they were taking a test. They try to select the answers they think a successful investor would select as opposed to what they really feel.” This sounds like a formula for sleepless nights and losing money. Boomer and Echo think that if you want to have a “frugal month” free of spending, you have to be realistic about the fact that certain expenses are unavoidable, like food. My Own Advisor gives step-by-step instructions for closing your DRIPs and taking your stocks to a discount brokerage. Million Dolla...

Have you noticed that some bloggers publish articles with little useful content that seem mostly designed to carry links to commercial web sites? Here is a great example of the kind of “helpful” emails I receive: “I know producing high quality content on a daily basis can be time consuming and I believe I have a solution that can help you on slow news days. [Our organization] has a team of in-house writers that can provide you with unique custom written content covering any relevant topics. I’m certain we could provide some valuable unique articles that would engage your users and expand your site. This is provided completely and entirely free of charge to our partners. We also have [a web tool] that [steers users to our clients]. For placing these we would be able compensate you for each user [directed to our clients], creating a new incremental revenue stream for your website.” What I’m being offered is a chance to publish advertising that masquerades as content. I have no phil...

In a recent article, Rob Carrick suggested increasing the tax clawback for Old Age Security (OAS) as a way to control costs. This would have the effect of lowering benefits without having to increase the retirement age. However, I think we need to have goals other than just cost containment. Life expectancy has risen considerably since 65 was chosen as a retirement age. Instead of increasing the retirement age as life expectancy rises, government workers tend to retire in their late 50s, with many retiring at age 55. Many of these workers will be retired as long as they were working. This is not sustainable. Outside of powerful unions in the public and private sectors, pensions are generally dismal by comparison. Many advocate an improved pension system for all that is as strong as the pensions that government workers enjoy. This will never happen. How could we possibly run a country if nearly half of all adults are retired? Who would mow the lawns on the golf courses? W...

In the book Market Mind Games: A Radical Psychology of Investing, Trading, and Risk , author Denise Shull argues that rather than trying to control their emotions, traders should tap into their emotions to get better investing results. The main themes of the book are that math is bad, trying to control your emotions is bad, and using the author’s methods would help you avoid losses. To paint a picture of a radical new approach to trading, Shull devotes the first half of the book to rejecting math and controlling emotions. She then goes on to describe her methods in the second half of the book. However, where she gives concrete advice, the tips turn out not to be particularly radical at all. The author’s most direct attack on the idea that traders should control their emotions is to argue that damaged people who have no emotions aren’t capable of making any decisions at all. However, controlling emotions doesn’t mean eradicating them. It means staying calm and thinking before a...

Thank you to all those who entered the UFile draw . I’m pleased that all entrants remembered to answer the skill-testing question and all got the right answer. The six winners have been notified by email: Dan L. KB Bob L. Alex C. Anton N. Bhaskar N. I knew a couple of the people who entered, but I stuck to a random draw. Unfortunately for these two people, they didn’t win. Better luck next time.

Don’t forget to enter the draw for UFile online tax return activation codes. See here for details on how to enter . Retire Happy Blog shows that psychology is important when it comes to investing fees. Sometimes it is less painful to pay twice as much if the larger fee is less visible. Rob Carrick brings us some insight from a financial advisor trainer into the problems people have with their lines of credit. A good quote: “I might as well have been blindfolding these people, spinning them in a circle, handing them a Skilsaw and then wondering why they cut their finger off.” Larry Swedroe explains why “buy what you know” is a bad investing strategy. Big Cajun Man has some doubts about the wisdom of maintaining a large bank account balance just to avoid some banking fees. Million Dollar Journey explains leveraged buyouts. Money Smarts answers a tricky RESP question from a reader about who can access an account after a divorce.

There is no shortage of opinions on whether it is better to save in an RRSP or a TFSA. It is best to maximize your contributions to both, but realistically most people can’t do this, and so they have to choose. Which option is better depends greatly on how you handle money. Rational Money Personality For the very rational person who never makes foolish financial mistakes, the decision comes down to the difference between the tax rate when you contribute money and the tax rate later when you withdraw money. To understand this, it is best to think of RRSP savings as partly belonging to you and partly belonging to the government in the form of taxes. Suppose that your marginal tax rate is 40% and you’re trying to decide whether to put $10,000 in an RRSP and get a $4000 tax refund or just put $6000 in a TFSA. If your tax rate when you withdraw the money is still 40%, then it is as though the RRSP is holding $6000 of your money and $4000 of the government’s money. Suppose that af...

The tax season is gearing up and that means tax software giveaways! I have 6 activation codes for individual online UFile returns to give away. See the contest rules below. For the winners of the contest and any other UFile users, I am particularly interested in how well the transition from other tax packages in previous years to UFile this year works. UFile claims a “One-touch data import from TurboTax.” How well does this work? It’s nice to have your name and other personal details filled in automatically, but it is also important to have certain information carried forward, such as capital losses, undeducted RRSP contributions, and undeducted charitable donations. What was your experience like? Does it make a difference whether you used the online version of UFile this year or Turbotax last year? Giveaway Rules To enter the draw, send an email with the following things: – Subject: UFile – Answer to the following skill-testing question: (3 x 5) + (7 x 5) – Use the em...

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 asset allocation , I wrote “I’m still searching for a rational reason to invest in bonds for the long term.” Over the years I’ve softened my position on bonds to some degree. I still don’t own any bonds myself except for cases where I know I’ll need money available in less than 5 years. My long-term savings are still 100% in stocks. However, I’ve come to appreciate that so few investors are able to control cycles of fear and greed that it is practical for almost all investors to consider including bonds in a long-term portfolio. I considered the stock market crash of 2008-2009 to be a good test of my ability to remain calm and rational. I didn’t sell stocks and even man...

I’m not often surprised by changes in the offerings from tax software providers, but the TurboTax announcement that they offer free tax advice from tax professionals got my attention. The usual focus is on prices and how many returns are included for the given price. Free tax advice is definitely an interesting new offering. One restriction is that this service is not available to users of the Business Incorporated version. The focus seems to be on helping people with less complex tax situations. Another restriction is that they will answer question about 2011 personal returns and not previous years. The service is available now and will end on May 4. I will definitely be interested in hearing reviews of this service. How are the wait times? How good is the advice? How much time are they able to spend with taxpayers who need help? If it works out well, this could definitely change the tax preparation experience.

Where Does All My Money Go? explains how to get your RRSP tax refund early. The Blunt Bean Counter admits that he’s not very young and not very thrifty. However, I suspect he’s got a decent income. Big Cajun Man is giving away some TurboTax online activation codes. Retire Happy Blog thinks that the old adage “keep your winners and sell your losers” is just performance chasing.

Regular readers of this blog are very familiar with the arguments that seemingly small costs can cause big damage to your portfolio over an investing lifetime. To make this more clear, I’ve proposed the MERQ (Management Expense Ratio per Quarter century) as a better measure than a single-year MER. One thing I’ve discovered about the MERQ in casual discussions is that many people simply don’t believe it. For example, the Investors Group Beutel Goodman Canadian Balanced Fund Series A has an MER of 2.89% (as of 2012 Feb. 9) which translates into an MERQ of 51.4%! This means that after 25 years, more than half of your portfolio would be consumed by fees. In contrast, a balanced portfolio of index ETFs from iShares (XIU and XBB) has an MER of 0.235% for an MERQ of 5.7%. So, a portfolio that would have come in at a million dollars without fees would end up with $486,000 with the Investors Group fund and $943,000 with the iShares ETFs. This difference is so large that people are sk...

In a recent post, I showed that under current rules, baby boomers will get more from Old Age Security (OAS) than they contributed through their incomes taxes . I expected to get angry comments from boomers who don’t like the idea of changing OAS. Instead, several readers observed that boomers will get more from CPP than they paid in as well. Robert Hurdman pointed out that CPP is not fully funded which means that retirees get some of their benefits from current CPP contributions. Fortunately, the situation is improving as the degree of funding increases each year. This should reduce future inequities. Reader Greg put together a CPP spreadsheet analysis concluding that the oldest baby boomers will collect about twice as much as they paid into CPP. Changes to CPP contribution rates between 1986 and 2003 have made CPP less of a good deal for younger baby boomers. Greg’s second spreadsheet summarizes results for different birth years. Here is Greg’s summary of the spreadsheet ...

Just about every other blogger has written a “7 links” post where they choose posts in 7 categories, including most beautiful, most popular, etc. I have resisted this for some time because I knew I would agonize over which of my posts to choose in each category. Thanks to Tripbase and The Blunt Bean Counter for being the most recent to push me to stop procrastinating. On with the 7 links. My most beautiful post Market Timing in Pictures takes you from fantasy to reality. My most popular post My most popular post as judged by the number of comments was where I observed that preferred shares offer a 2% higher return than the interest rate on 3-year closed mortgages . But how large is the hidden risk in this potential arbitrage? My most controversial post In Understanding Ontario’s Switch to the HST , I explained that the HST is not all bad compared to GST plus PST. Some unhappy readers weren’t in the mood for hearing anything positive about the HST. My most helpful ...

I’ve never read a book about baseball I liked more than Moneyball by Michael Lewis. Before reading this book I had no idea that professional baseball teams were so dumb about what contributes to winning and what doesn’t. Lewis tells the story about how the Oakland A’s had much less money than many other teams yet managed to put together winning seasons by finding undervalued players. At its core, this book is about how statisticians and mathematicians revolutionized baseball, but you don’t have to care about math to enjoy Lewis’s compelling story. It might be a stretch to say that you don’t have to like baseball to enjoy the book, though. In very simple terms, the Oakland A’s general manager Billy Beane and his assistants showed that walks are far more valuable than most people realize, and bunting and stealing bases are far less valuable than people realize. Over the years I figure I’ve played or coached about 2000 baseball and softball games. A simple rule I used to judge ...

Canadian Mortgage Trends reports that CMHC is approaching its limit on mortgage default insurance and takes in in-depth look at what this could mean for the industry and borrowers. Where Does All My Money Go? provides further analysis of the impacts of the CMHC reaching its limit. Boomer and Echo have some clear thinking on health and dental “insurance”. The Blunt Bean Counter explains the rules and pitfalls with claiming automobile expenses on your taxes. I tried keeping a log book for a while. What a pain! The tax savings would have to be quite substantial to get me to try this again. Canadian Couch Potato evaluates market forecasters. Wealthy Boomer quotes a BMO Retirement Institute report saying that “younger Canadian job-seekers should be looking for employers that offer traditional Defined Benefit pension plans.” A problem with this strategy is that expecting to spend you whole career with one employer is unrealistic. Finding an employer with a DB pension is ...

I had the pleasure of listening to Tom Bradley give an update about Steadyhand mutual funds this week. Instead of trumpeting a few winners, he discussed successes and failures. Instead of avoiding index benchmarks, he showed them beside each of his funds. Instead of pretending he knows what will happen in the future, he told us what modest bets he plans to make for the upcoming year. ( Disclosure: Although I have no financial relationship with Steadyhand, I like the guys who run it and they did give me some cheese to nibble on during the presentation. ) I’ve made no secret of the fact that I’m a do-it-yourself investor using low-cost broadly-diversified index ETFs. Nevertheless, I believe that many people would benefit from investing with Steadyhand, but not for the reasons that people might think. I don’t trust myself to judge who is likely to beat the market. So, I don’t pay much attention to performance. Steadyhand has some funds that have won the race with their index an...

In a CBC interview about pension reform, Susan Eng of CARP was discussing the taxes baby boomers have paid to support old age security (OAS) payments: “These are the same people who paid their taxes all through their working lives and have funded their retirement in this way.” So, she is saying that it is an issue of tax fairness; boomers paid for their OAS benefits and would be cheated if these payments were reduced. Unfortunately, if we really introduced tax fairness it would decimate OAS. The reason for this is a combination of the way OAS is funded and demographics. Unlike CPP, OAS is paid from current tax revenues. While the CPP amounts deducted from our pay are saved to cover future CPP benefits, OAS payments to retirees are paid for by current taxpayers. This means that boomers paid for their parents’ OAS and they will collect OAS payments from their children. Boomers were in the middle of their careers around the year 2000. They will be in the middle of their retirem...