Inspired by a reader comment on Canadian Capitalist’s article about covered-call exchange traded funds, I’ve decided to make an offer to select investors. I will guarantee payments each year amounting to 20% of the average daily balance in each investor’s account. The idea for this investing approach was sparked by the savvy comments of STU L comparing covered call ETFs to regular ETFs: “I’ll take the income, thank you. The capital gain/loss is unimportant as I’ll hold these stocks indefinitely. 2.25% or +10%? it’s a no brainer decision. I wanted to setup some kind of cash generator portfolio or ATM and these coverd-call ETF’s filled the bill. Everyone gets all weird about the hi yields but have they noticed that more and more companies are bringing out their own call option funds. That says something in itself.” STU correctly points out that 10% is, in fact, more than 2.25%. STU is also right that many companies are coming out with covered call funds, which means that they mu...

The Blunt Bean Counter has a thorough checklist for your yearly financial checkup. Big Cajun Man asks whether warning labels on dangerous financial products are likely to scare you away or make you more determined to prove that you’re sophisticated enough to handle them. Retire Happy Blog explains pension splitting rules. This can save retired couples big money. Larry MacDonald says that if Warren Buffett thinks the rich should pay more in taxes, perhaps he should pay some extra taxes voluntarily. I’ve never understood this logic. If a football player objects to steroid use in the league, what sense does it make to tell him that he can avoid steroids and the rest of the players can continue as they please?

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 an article about a survey of investor attitudes toward their advisors , I said “Portfolio returns should be the main concern of an investor.” When it comes to a relationship with a financial advisor, I now think that other advice about saving, life planning, and tax planning are very important as well. In my own experience with a couple of financial advisors years ago, I never got anything useful in these other areas (and nothing useful in terms of portfolio returns either). I still think that people place far too much importance on whether an advisor is likeable and inspires confidence. Good advice should be more important than a nice smile, but this doesn’t seem to be how people ...

Dalton McGuinty’s minority government in Ontario has agreed to the NDP’s new 2% tax on income over $500,000 to get the budget passed. However, according to Scott Stinson this “is effectively a tax increase of 3.12% because it will be imposed before a high-income surtax that already exists.” McGuinty expects this new tax to bring in an extra $470 million per year, and I’m reminded of the Laffer curve as a reason why this added revenue may not fully materialize. It’s important to consider the possible secondary effects of any change. We tend to take for granted that increasing tax rates will produce more revenues, but the simple example of the Laffer curve shows that this isn’t always true. If the tax rate is 0%, tax revenues will be zero. But if the tax rate is 100%, tax revenues will also be zero because nobody would bother to work. So, somewhere between 0% and 100% tax rates, tax revenues stop increasing as the tax rate increases. Getting back to the new tax increase, the ...

In the spirit of My Own Advisor’s post The Top 5 Things You Need to Know about Dividend Paying Stocks , I decided to sing the merits of selling 5% of your stocks each year.  I don't want to pick on My Own Advisor because he's a good guy and many blogs say similar things, but I had to pick some blog to have some fun with. 1. Selling 5% of your stocks each year provides an immediate return. Even if your stocks subsequently go down in value, you get to keep the cash from selling 5% of your stocks each year. 2. Safety buffer against the worst case scenario. If the worst happens and the businesses you own go bankrupt, you get to keep the cash from 5% sales in all previous years. 3. The value of that 5% increases over time. As long as your business is successful and produces more than a 5% yearly increase in share value, each year’s sale will be worth more than it was the previous year. 4. Many businesses have a long history of rising share values. Several Canadian ba...

How many times have you heard something like the following? “On a $250,000 mortgage at 3.5%, if you choose a 20-year amortization instead of 30 years, your payments will only be $328 more per month more and your savings over the life of the mortgage will be $55,675!” This is just well-meaning nonsense. If there were no such thing as inflation, the figures above would be accurate. But in what universe does is make sense to simply add 2012 dollars to dollars from the year 2042? Even if inflation is only 2.5%, the 2042 dollars will be worth less than half of present day dollars. To figure out the real savings, you have to take into account inflation. Suppose that over the life of the mortgage, inflation is 2.5%. Then we can take the present value of the 20 or 30 years of monthly payments to figure out the potential savings. 30-year case: Monthly payment: $1119.09 Present value: $284,281 20-year case:  Monthly payment: $1446.66 Present value: $273,713 The actual s...

Where Does All My Money Go? says that successful investing is more about psychology than math. I’d say that it’s about having the right psychology to allow yourself to follow the math. I agree that many who are strong at math still do stupid things with their money. Big Cajun Man had some fun with a financial fill-in-the-blanks. My contribution: “Stupid people and their money are … not sitting at my poker table often enough.” The Blunt Bean Counter writes a top-ten list of pet peeves about personal income tax season. Retire Happy Blog gives an example of how to use a trust to save taxes.

At the intersection of economics and sports you’ll find the book Scorecasting: The Hidden Influences Behind How Sports Are Played and Games Are Won , by Tobias J. Moskowitz and L. Jon Wertheim. This book appealed to my analytical side, my sports nut side, and my love of debunking ideas that almost everyone is sure are true. I highly recommend this book to sports fans whether or not they are numbers people. While this book has little to do with finances other than the obvious financial benefits for professional sports teams if they can figure out how to win, I see a strong parallel between sports and investing. In investing, we have the debate between index investors and those who hope to beat the odds with their stock-picking hunches. In sports we have the debate between those who crunch the numbers to determine the best strategies and those who operate on intuition. The book begins with “whistle swallowing,” or the tendency for officials to try to avoid the perception that the...

We now understand well that investors consistently make certain types of behavioural mistakes, such as selling stocks after the market drops, buying back in when stocks are soaring, and chasing last year’s hot mutual fund. How best to adjust portfolios to deal with these cognitive errors is a subject for debate. One approach is to take the way an investor feels about gains and losses and construct an asset allocation that maximizes the investor’s perceived net gain. This is the approach taken by Morningstar with their star ratings that bake in an assumed average level of risk aversion . However, this can lead to extremely conservative portfolios, which is not in the best interests of most investors. The real answer is to evaluate potential asset allocations based on two criteria. The first is how beneficial the allocation would be for the investor (as opposed to how comfortable the investor would be). The second is how likely the investor is to stick with the allocation throug...

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. I wrote about Warren Buffett’s proposed solution to preventing a repeat of the U.S. housing crisis and in the comments section, I crowed “I'm proud of the Canadian system and its stricter policies for obtaining a mortgage that has pretty much dampened any housing bubbles that we might have.” I’m not so sure about this any more. I don’t think we’re headed for a mortgage crisis anywhere close to as bad as what happened in the U.S. a few years ago, but it seems clear now that many Canadians would be in for trouble if interest rates rose by even as little as 2%. On a $300,000 mortgage amortized over 30 years, 3% interest gives monthly payments of about $1260, but 5% interest leads to...

I used to make most of my stock trades as market orders. This meant that the broker just executed my buy or sell order at the best available price right away. However, I now make limit orders exclusively to avoid getting burned by unusual market conditions. The exact price on stock trades isn’t as important for buy-and-hold investors as it is for high-speed traders. A few cents per share spread over a decade holding period isn’t a big deal. However, unusual market conditions can lead to surprises. To use a concrete example, if you place a market order to sell 200 shares of VCE when its spread is $24.87 to $24.88, you expect to get $24.87 per share. However, this is not guaranteed. If there is a sudden change in the market, you could end up getting less. How much less depends on how violently the market shifts. A simple remedy is to place a limit sell order at, say $24.85. You are still very likely to get $24.87 per share, and you are guaranteed not to get any less than $2...

I used to read newsletters and blog articles touted as “investing ideas”. The premise seems to be that investors wander around without any idea of where they could put their money, and they just need some ideas. I think these writers are just avoiding making any claims that they think their investing ideas will be profitable. There are thousands of individual stocks, mutual funds, and ETFs. I could even get a listing of all of them if I was motivated to do so. A smart phone application could pop one up each morning as an investing idea. Why would I need to have someone else give me an investing idea? Of course, readers are supposed to infer that they are reading good investing ideas, and writers get the benefit of not being held accountable for their ideas if they don’t pan out. This reminds me of weasel-wording that can come up in legal contexts. Instead of saying “the young man who died bungee jumping was suicidal,” a lawyer representing the bungee operator might distance ...

To say that some people are unhappy that eligibility for Old Age security (OAS) will be going up from age 65 to 67 is an understatement. Preet Banerjee collected together some of the more reasoned arguments in this debate. I don’t want to pick on Preet because he’s definitely one of the good guys, but I don’t agree with everything he said. My main concern is with the oft-quoted statistic that OAS and GIS (Guaranteed Income Supplement) payments are currently 2.36% of GDP and are expected to rise to 3.14% of GDP by 2030. Preet says that some see this as a “whopping” increase, it doesn’t really look very whopping at all. I disagree. GDP (Gross Domestic Product) is the market value of everything produced in the entire country. Just about anything you measure as a percent of GDP (except government debt) is going to look small. Even Bernie Madoff’s fraud was only 0.45% of U.S. yearly GDP. If my cable company tried to convince me to take a full suite of all their top-of-the-line se...

All investment portfolios have leaks. As you drive that metaphorical portfolio, money leaks like air from a punctured tire. You lose money to trading commissions, trading spreads, ETF and mutual fund MERs, income taxes, lack of diversification, and other costs. We can’t eliminate these costs entirely, but we can shrink the size of the hole. One way to control costs is to trade infrequently. This reduces trading costs and triggers less capital gains tax. For those who embrace the benefits of diversification, Management Expense Ratios (MERs) on exchange-traded funds (ETFs) and mutual funds are a concern. Seemingly low MERs like 2% are actually applied every year, and they add up to big money over many years. To make this clearer, a while back I coined a new 25-year measure called the Management Expense Ratio per Quarter century (MERQ) . To illustrate what the MERQ means, let’s compare the largest Canadian equity fund in Canada to one of the least expensive Canadian equity inde...

Tomorrow is a holiday, so this is a special Thursday edition of Short Takes. Have a great long weekend! Tom Bradley at Steadyhand doesn’t understand why regulators permitted Scotiabank to underwrite its own stock issue. His disclosure at the end of the piece cracked me up. The Blunt Bean Counter wades into the debate about whether insiders have an edge in trading stocks they are close to professionally. Where Does All My Money Go? explains the wash-trading charges against RBC. Preet’s explanation is much clearer than anything I read in newspapers. Big Cajun Man looks at the budget’s changes to Registered Disability Savings Plans (RDSPs). Retire Happy Blog takes a look at corporate bonds. Personally, I don’t invest in such bonds and probably won’t in the future except possibly indirectly through a bond index ETF. Million Dollar Journey explains the Pension Benefits Guarantee Fund. My Own Advisor seems to be ahead of the game on his 2012 personal financial goals.

Andrew Hallam’s book Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School is a colourful and entertaining guide for novice investors to keep them on the right financial path. However, the ninth rule was a curious departure from the strong message in the rest of the book. The main thing that separates this book from others that offer similar advice is Hallam’s enthusiasm and vivid analogies, such as when he says that investing while you have credit card debt “makes as much sense as bathing fully clothed in a giant tub of Vaseline and then traveling home on the roof of a bus.” I’m not sure what that means, but it is entertaining. “Worrying about the immediate future is letting the stock market lead you by the gonads.” Perhaps this explains why women have better investment results than men. When it comes to spending, you “can’t be average” if you expect to become wealthy. Instead of looking to others’ actions to validate your own poor spending habits,...

I decided to poke around online to see what people think of eliminating the penny in Canada. The main thing I learned is that there are many opinionated math-challenged and spelling-challenged people in the world. There are also many people who are very unhappy about dropping the penny. While there may be some good reasons to object to dropping the penny, I didn’t find any. Let me go through the main arguments that I encountered. I like saying “a penny for your thoughts.” Saying this to a sweetheart is still permitted. When we are old enough to be great-grandparents, maybe we can explain to our families the meaning of that funny word “penny” that gets used in so many expressions. What if retailers all round prices up to the next nickel? I think this would enrage customers. If some retailer were bold enough to try it, we could shop elsewhere. However, I suspect that almost all retailers will follow the government’s guidelines to round shopping totals ending in 1, 2, 6, a...

Reader JP sent some questions about his leveraged investments and whether he should hold his mortgage in his RRSP. Here is an edited version of his questions: “Does it make sense to hold my residential mortgage in my RRSP? Given the size of my RRSP and the modest remaining size of my mortgage, I’m really torn about what steps to take. In addition to my RRSP I have after tax investments that I purchased using a secured line of credit, separate from the mortgage, and I claim the interest as investment costs. On one hand, I have enough that I could simply blow away the mortgage by cashing out the after tax investments. The after tax investments give a nice stream of dividends, but does it make sense to have them and still have the mortgage sitting there? Do RRSP contributions make any sense now that my wife and I are now both ‘employees’ rather than ‘contractors’ and we still have the mortgage sitting there?” To start with, I have nowhere near enough information to give JP any spe...