National Post has a good summary of the latest federal budget . They include actual numbers to give the changes some meaning. Those who want more detail can check out the actual budget document . The Blunt Bean Counter breaks down the Ontario budget measures that affect personal and corporate income taxes. Retire Happy Blog compares active and passive investing and looks at the long-term effects of fund fees. Where Does All My Money Go? has a cool interactive motion chart to illustrate investing returns since 1970. Big Cajun Man has an amusing strategy to cut down on wedding costs for his daughters. My Own Advisor shares his strategy for paying himself first to build his emergency savings. Million Dollar Journey runs through the costs of owning a pet. You can put me in the camp of people who think that the costs are nuts. People are free to spend their money as they wish, but you won’t catch me spending thousands on a cat or dog. Many years ago I read an analysis ...

Stock pickers should work out their personal investing returns and compare them to an appropriate benchmark. Otherwise you have no idea how well you’re performing. On the other hand, ignorance is bliss, except for the part where you have to keep working past retirement age. I’ve evaluated my past performance in many ways, but rarely have I done it on a year-to-year basis for my entire portfolio. After much fighting with a spreadsheet and my old account statements, I have personal return figures for each year from 1995 to 2011. These returns take into account all my investments, capital gains, dividends, incomes taxes, mutual fund redemption fees, transfer fees, margin interest, administrative fees, trading costs, and other account fees. A particular challenge was how to handle employee stock options. I decided to treat them as though they didn’t exist until the first day I was permitted to exercise them. On this day I recorded a purchase equal to the current value of the opt...

While thinking about the curious tendency for investors to feel more comfortable owning stocks when they are expensive, an idea occurred to me. Perhaps our mental arithmetic is calculating the wrong things. To explain the idea, I need to make a brief detour into sports. Sports fans are familiar with the idea of “stealing a game.” The home team jumps out to an early lead and holds that lead for almost the whole game. At the end, the visitors finally catch up and take a small lead just as the game ends. Most fans feel that the home team somehow deserved to win because they held the lead so long, and the visitors stole the game. This feeling is completely irrational, but it is prevalent anyway. The visiting team scored more total points, so they deserved to win. Why should points scored late in a game be worth less than points scored early in the game? One model of how fans feel about a game is to take a snapshot of the score difference (with a negative value if the visitors ...

Most people who make RRSP contributions for the 2012 tax year will do so either with periodic payments throughout 2012 or at the last minute in February 2013. There are those who suggest that people should make their 2012 contributions right now to take maximum advantage of deferred taxation. I have my own approach, but I don’t necessarily suggest that others should follow my lead. I agree with those who say that last-minute contributions are less than optimal. At the same time, I don’t like making a contribution until I’m certain that I’ll use the deduction the next time I file my income taxes. Consider the following potential sequence of events. - I make a large RRSP contribution today. - Tomorrow my boss decides he’s tired of me and fires me. - I decide to drift into semi-retirement and never make a large income in any one year again. RRSP contributions work best when they are deducted against income that is taxed at a high marginal rate. I haven’t made enough money yet...

You’ve just plowed some hard-earned money into the stock market. You watch the second-by-second price changes of your latest purchase. Each little increase validates your latest investment decision, and every time the price drops a little you feel some of your life energy drain away. But once you get some control over your emotions, what should you really be hoping for? Many people offer simple answers, but the real answer is a little more subtle. If you are entering retirement and will be selling stocks in the near future, it makes sense to want higher prices. But if you plan to be a net buyer of stocks over the next few years, you should actually be hoping for lower stock prices. However, the reason why stock prices are rising or falling is important for both buyers and sellers. Broadly speaking, stock prices consist of two components: 1. A value based on long-term future prospects. This is sometimes called “intrinsic value.” Unfortunately, we cannot know the intrinsic ...

An insurance agent was convicted of felony-theft for selling a complex market-linked (indexed) annuity to an 83-year-old woman who seemed to show signs of dementia . Perhaps the test for dementia should be whether you’d be willing to buy one of these market-linked annuities where the commission to the selling agent can be up to 12% of the invested lump-sum or even higher. The Motley Fool says “ Ignore the experts. Index funds are for chumps .” The article writer, Rich Smith, demonstrated 20/20 hindsight in his reasoning, and he forgot to include “buy our investing newsletters” in the article’s title. Canadian Mortgage Trends reports that ING is ending its business of mortgages that require no income confirmation. Apparently ING will still offer mortgages where people state their income and are taken at their word. Retire Happy Blog takes a look at the math of indexed annuities. The term “indexed annuity” can mean many things. In some cases it means an annuity linked to eq...

Because I was expecting a tax refund this year, I’ve already filed and received my refund. The delay from filing electronically to having the refund deposited in my bank account was only 9 days. What does this say about the value of “instant cashback” from tax preparers? To begin with, thanks to CRA for the fast turnaround. I’ve had some challenges in dealing with CRA, but this year has been a breeze (so far). To those who would point out that I should arrange my finances so that I don’t have a tax refund, I say, “you’re right,” but events conspired against me this year. On to the value of “instant cashback.” H&R Block offers to give you your tax refund immediately for a fee of 15% on the first $300 and 5% of the rest. This would be a steep price to pay to get your money 9 days sooner. If I had used this option, my implied interest rate would have been (366/9)*5% = 203% per year (based on fictitious simple interest). Compounded out, this is a whopping 627% per year. ...

Investors who embrace passive investing often spend a lot of time agonizing over their asset allocation percentages. I used to be no different. However, I now think that sticking to a strategy may be more important than the percentages. When researchers do back-testing of passive investment returns based on fixed asset allocation percentages, a key assumption is that investors would actually stick to these percentages. However, this is more difficult than it seems. The truth is that many so-called passive investors reduce their allocations to stocks right after a stock crash and increase it again after stock prices soar. Allocation percentages will naturally rise and fall as stock prices move, but many investors go beyond failing to rebalance; they sell at low prices out of fear and buy back at higher prices. This is disastrous for long-term returns. Unless you have a far-out plan like leveraging yourself to the eyeballs and dividing your money equally among junior mining st...

Recent musings at Blessed by the Potato about BMO’s 2.99% closed 5-year mortgage offering made me wonder about the possibility of running an arbitrage with a mortgage and a GIC. Outlook Financial offers a 5-year GIC at 3.10%. It would seem that if you owned your home outright you could take out a mortgage, put the proceeds in a GIC, and make a free 0.11% per year for 5 years. On a $250,000 mortgage, this would be a total of about $1375. This won’t make you rich, but it’s not trivial. There are a number of potential problems here. For one, the fine print on the BMO web page includes “If we require you to obtain an appraisal, the appraisal fee would increase your APR.” So, you may not be able to get 2.99%. Another potential problem is hidden compounding assumptions. In Canada, most mortgage rates assume semi-annual compounding. This means that 2.99% is really 1.495% every 6 months. This compounds out to 3.012% per year. I was once offered a variable mortgage by BMO where ...

Wealthy Boomer quoted the BMO Retirement Institute concerning some sound retirement advice about debt . Reading through the very sensible advice, it occurred to me that there are many ways to mess it up as I’ll show with some questions and answers. Canadians’ “priority should be to retire free of debt, including a home mortgage.” Q : Does this mean that as long as I am debt-free I’ll be fine in retirement? No. Becoming debt-free is an important start. Then you have to build some savings for retirement in the form of a pension or your own savings. “A paid-up home is the foundation of financial independence” Q : Does this mean that I should buy the biggest home the bank will let me buy? No. If you are going to buy a home, you shouldn’t over-stretch your budget. Think about what home you need rather than the biggest you can afford. Q : Does this mean that I have to own a home to have a decent retirement? No. Choosing to rent can be a sensible choice, but you should b...

An executive director at Goldman Sachs leaves the firm where he has “seen five different managing directors refer to their own clients as ‘muppets’.” He paints a picture of a company focused on finding ways to shift clients’ assets into their own pockets. Retire Happy Blog makes a good point that you have to look at the numbers to make big financial decisions like purchasing an annuity. Young and Thrifty makes an interesting point that teachers may have difficulty teaching financial literacy to students because their high pay, job security, and guaranteed pensions give them little reason to care about many personal finance issues. There was also discussion of the difficulty of attracting qualified math teachers. Of course, the private sector would solve this problem trivially by offering math teachers more pay than other teachers. I’d love to watch someone suggest this in a teacher union meeting. Big Cajun Man isn’t too happy with those who say that civil servants get free...

In the book Lifecycle Investing , authors Ian Ayres and Barry Nalebuff propose an investing strategy for diversifying across time that involves all-stock investing with 2:1 leverage while you are young. Many readers would be tempted to quickly dismiss this idea as crazy, but the authors are not crazy and they do a good job of answering (almost) all objections. Common advice is to think about all of your savings together as a single portfolio. Even if you have multiple accounts, your focus should be on having a sensible overall asset allocation; the allocation within any one account is less important. Ayres and Nalebuff take this a step further to say that you should take into account future savings as well. So, if you are destined to save $200,000 over the course of your lifetime, and a 50/50 split between stocks and bonds suits you, then ideally you should have $100,000 worth of exposure to stocks and $100,000 exposure to bonds for your entire life. If we treat your future sav...

The dream of many people as they approach retirement age is to derive a safe and steady monthly income from their savings. One fund that seems to fit the bill is the popular BMO Monthly Income Fund that holds nearly $5 billion. However, investors may be in for a nasty surprise. Let’s start with the positives. This fund has a very nice looking performance chart. Apart from the blip around the end of 2008, it has been on a steady uphill climb. Another great thing is that it has paid a steady monthly distribution of 6 cents per unit per month since the beginning of 2002. So, what’s not to like? Many people would be surprised to learn that the unit price for this fund has dropped from $9.63 in January 2002 to $7.65 on 2012 March 8. How is this possible? What happened to the nice chart that mostly went up? Well, charts like this assume that distributions are reinvested. If you spend the monthly income, your remaining money does not follow this nice chart. I wonder how many i...

Please see the updated post on this subject that computes better thresholds in certain cases. The idea of rebalancing a portfolio to maintain target asset allocation percentages is simple in theory, but tricky in practice. It is not obvious how far asset class percentages should be away from their targets before it makes sense to rebalance. I have developed a scheme that I use myself that I fully automated in a spreadsheet. Instead of obsessing over my portfolio’s returns, I can just check whether one cell is red to indicate that I need to rebalance. Investors should use any new savings or withdrawals they make as opportunities to rebalance by buying low asset classes or selling high ones. However, as a portfolio grows, rebalancing with new savings and withdrawals is unlikely to be enough to maintain balance when asset classes have big swings. Common advice is to rebalance a portfolio on a fixed schedule, such as yearly. This has the advantage of allowing investors to avoid...

A guest post at Where Does All My Money Go? described a strategy for selling your home where you offer a low price in an attempt to create a bidding war . This type of strategy may or may not help the homeowner get a better price, but it will definitely help the real estate agent. In a nutshell, the strategy is to price a home at the bottom end of a reasonable price range and advise buyers that all offers will be reviewed on a particular day less than a week away. The hope is to generate a lot of interest quickly and create a bidding war that takes the price up to the top end of the price range. Note that this is likely to create a fast sale. Real estate agents benefit most from fast sales rather than higher selling prices . Higher selling prices increase commissions a little, but faster sales lead to more sales and this helps agents a lot. In almost all scenarios, this low-ball strategy helps the agent. If it works as planned, the house is sold quickly, and both seller and...

Canada Mortgage News warns of banks making no-so-great offers to mortgage clients trying to get them to renew their mortgages early. Calling them “banksters” cracked me up. Larry Swedroe says that tactical asset allocation (TAA) is a rip-off. What do you really think, Larry? Swedroe says that TAA is just another name for market timing and the evidence shows that it hasn’t worked. What he missed is that “tactical asset allocation” sounds smart and it makes investors feel superior when they use it – as long as they don’t compare their returns to an appropriate benchmark. Steadyhand’s Tom Bradley illustrates what’s wrong with CEO compensation. I’m glad I just sold the last Canadian bank shares I own (except for those included in VCE and XIU). Canadian Couch Potato has some fun recommending a coma as the best state to invest in. Big Cajun Man rants about people paying exorbitant interest rates to get instant tax refunds. The Blunt Bean Counter says that there really ar...

A while back Canadian Capitalist described a “foolproof method to convert Canadian dollars to U.S. dollars” using a version of the so-called Norbert Gambit. This involves buying the exchange-traded fund DLR with Canadian dollars, journaling it over to the U.S. dollar side of your account to make it DLR.U, and selling it to get U.S. dollars. I decided to try this at BMO Investorline. Overall it worked, but there were a few surprises along the way. Note that each unit of DLR just holds US$10. This is true whether it is DLR or DLR.U. The difference is that DLR trades in Canadian dollars and fluctuates with the exchange rate, and DLR.U trades in U.S. dollars. I don’t normally like to talk numbers about my personal accounts, so for the rest of this article, I’ll scale all the numbers down as though I was converting C$100,000 to U.S. dollars. The bid-ask spread on DLR was C$9.79 to C$9.81. I placed an order to buy 10,100 units of DLR at a limit of C$9.81. This trade was filled a...

Many of us would be thrilled to be able to retire from our regular 9-to-5 jobs long before the standard retirement age of 65. There is a vibrant community of people dedicated to finding a way to retire when still quite young. However, most of the early retirement enthusiasts have plans without a large enough safety margin to suit me. One blog dedicated to early retirement is Canadian Dream Free at 45 run by Tim Stobbs. Stobbs has a detailed plan to retire at age 45 on savings of $1.1 million. He and his wife plan to live on $2000/month, which sounds low, but they “both plan to do some work on the side after pulling the plug to fund some luxury items and trips.” Most readers of this blog who plan to retire early and have described their financial plans online expect to have roughly the same low spending levels as Stobbs, seemingly without the plan to work on the side. In general, these plans look quite realistic as long as these people are able to keep their costs down to the ...

Many commentators preach the benefits of choosing an asset allocation strategy, sticking with it, and rebalancing regularly. This is good advice, but some investors overestimate the benefits of portfolio rebalancing. If done properly it can certainly increase returns, but the gains are usually quite modest. Consider the following example. Emily starts with a balanced portfolio worth $22,000, half in a stock ETF and half in a bond ETF. Initially, both ETFs trade for $50. Emily’s starting portfolio looks like this: Stocks: 220 shares @ $50 Bonds: 220 shares @ $50 Now, suppose the stock ETF goes up 10% and then comes back down again. If Emily does nothing, her final portfolio value will be $22,000, the same as it was at the start. But, if she rebalances, she will make some money. Let’s see how much she can make (ignoring commissions and spreads for now). After the stock ETF has gone up 10%, Emily’s portfolio looks like this: Stocks: 220 shares @ $55 Bonds: 220 shares @...

The Toronto Star reported that the Ottawa Senators Hockey team claim they will go out of business if companies can no longer write off 50% of ticket costs . I’m a hockey fan, but I’m not a fan of giving professional sports teams tax breaks. When it comes to the financial side of sports, the fan base in one city is in competition with the fan bases in other cities. To see that this is true, we start with the fact that players move around. To the extent that players can move to new teams, the market for player salaries is similar from one team to the next. Poor teams have to pony up close to as much for a given player as other teams are willing to pay for him. This means that all teams face similar costs if they want to compete. Teams that do a better job of evaluating talent can get better players more cheaply (think Moneyball ), but this is the exception rather than the rule. All teams that want to compete face similar costs whether they have a large and rich fan base or a sm...

The Freakonomics guys report on some interesting research into how you can use anchoring to get people to save more in their employer savings plans by supplying them with the right examples. Big Cajun Man is facing a request from his daughter’s potential landlord for detailed personal and financial information to act as a guarantor. Does it make sense to have an online bank account that you don’t use much for these types of requests? This is similar to having an email address specifically for online registrations. Retire Happy Blog put together a video of a stereotypical interaction between a financial advisor and client and then deconstructed it. He wants to know if he was too hard on financial advisors. The Blunt Bean Counter looks at whether you should take into account an expected inheritance in your financial planning. Boomer & Echo explain mortgage payment vacations.

Most proponents of indexing strategies don’t quite manage to implement a pure index approach. They often come close to pure indexing, but they can’t resist adding some sort of twist. The twist may be a form of market timing or some other active strategy. So far, the way I’ve handled my own portfolio is no different. I’ve been on a steady transition from a pure stock picker a few years ago to about 70% indexed today. I intend to keep increasing this percentage, but I’m not sure that I’ll make it to 100%. Selling my last stocks will be fairly painless except for Berkshire Hathaway. After having read all of Buffett’s old letters to shareholders and having held the stock for about 13 years, I’ve become attached and don’t want to sell. I’ve thought through many possible justifications for keeping it, but the only plausible one is that Berkshire is so diversified that it could be thought of as an index of a slice of the American stock market (plus some foreign holdings). Another ...