Here is an amusing story of a lawyer who found a way to make money exploiting the fine print in insurance contracts . The insurance companies are trying to sue the lawyer with the argument that they don’t understand their own contracts. There are no angels here, but I’m on the side of the lawyer in this story that kept me interested right to the end. Scotiabank made a $3.13 billion offer to buy ING Canada . Online banks are an important part of maintaining a competitive marketplace in Canadian banking. Unfortunately for consumers, it looks like competition will be reduced in this case. The Blunt Bean Counter had some fun describing CRA information requests from taxpayers that make little sense. Boomer and Echo argues that Canada needs a fiduciary standard for investment advisors. Canadian Couch Potato reports that a number of ETFs are closing shop. Preet Banerjee answers the question of whether children have to pay the debts of their deceased parents. Big Cajun Man ...

If you have a mortgage, inflation is your friend. Your future payments are in fixed dollars and inflation erodes the value of the money you will have to pay. This affects the riskiness of mortgages over time. Consider the case of a $250,000 mortgage over 25 years. In one scenario, the mortgage rate is 4% with 2% inflation, and in the other scenario, the mortgage rate is 7% with 5% inflation. Here are the monthly payments in each case along with the inflation-adjusted real value of the last payment: Scenario 1 : $250,000 mortgage, interest rate 4%, inflation 2% Monthly payment: $1315 Real value of last payment: $803 Scenario 2 : $250,000 mortgage, interest rate 7%, inflation 5% Monthly payment: $1751 Real value of last payment: $519 Initially, the scenario 1 payments are much more affordable. However, by the end of the mortgage, the scenario 2 payments are lower in real terms. In the low inflation case, people are enticed into larger mortgages with lower payments, and ...

A reader, C.M., asks the following (lightly-edited) question about tax installments:  I have a Canadian Tax question for you. Question : Let says John pays $3685 as his amount owing on his 2011 tax return, and in May 2012 John gets a Notice of Assessment that says his Final Balance is Nil which is what he expects because he paid all the tax he owed that year. Now John gets a letter in the mail August 18th from CRA saying out of nowhere he has to now pay tax installments of $1843 due September 15th and December 15th for the 2012 tax season, but this makes absolutely no sense as John already paid his tax owing in 2011 in full and you have until April 2012 to file your 2012 tax return. History : John has been in the workforce for 25 years and never missed paying taxes once when they were owed and has never had a mistake on his returns. To me this looks like a cash grab by the Canadian government well before the tax due date of April 30th, 2012. What does it matter to the g...

A while back I was trying to figure out if PRPP rules would permit PRPP administrators to offer inducements to employers at the expense of plan participants . The idea was to determine whether employers are likely to choose administrators who offer the employees the best deal or whether the choice would be based on the best kickbacks flowing to the employers. Shawn Patton pointed me to recently published PRPP regulations. Here are the sections on permitted inducements and low cost requirements: PERMITTED INDUCEMENTS 19. An administrator may give, offer or agree to give or offer to an employer and an employer may demand, accept or offer or agree to accept from an administrator, as an inducement to enter into a contract with the administrator in respect of a PRPP (a) a product or a service on more favourable terms or conditions than the administrator would otherwise offer if the inducement is for the equal benefit of the employees of that employer who are eligible to be members ...

Canadian Couch Potato has fun shooting down some silly arguments against index investing. Million Dollar Journey defends 30-year mortgages. Guest blogger Sean Cooper shows that it is possible to use 30-year mortgages responsibly, but overall I think the country is better off without them. Having a 25-year mortgage wouldn’t affect Cooper’s plan much, and preventing some borrowers from overextending themselves has high value. Big Cajun Man saved $1200 in one phone call to his cable company. Preet Banerjee recorded a hot water tank door knocker for his latest Mostly Money Mostly Canadian podcast.

For those who make their yearly RRSP contributions much sooner than the deadline of 60 days into the next year, it’s possible to get your tax refund well before filing your tax return for the year. You can do this by sending a T1213 form to CRA and taking the letter they send back to your payroll department. In my case, I’ve had to solve a minor problem of producing evidence that I made the contribution. The basic idea is that if you contribute to your RRSP, your payroll department is allowed to take this into account and deduct less tax from your pay. So, you effectively get a refund over the course of the year instead of waiting until you file your income taxes. However, you have to prove to CRA that you actually made the contribution. The T1213 form asks for your “payment arrangement contract,” which you would have if you make periodic RRSP contributions. However, I tend to contribute lump sums online with my discount brokerage, and they don’t send me any paperwork until t...

After the near financial meltdown in 2008, many wonder what can be done to stabilize financial markets. Too much government control seems like a bad idea, but letting those who run financial firms continue to enrich themselves at public expense is also a bad idea. In the book, The Malign Hand of the Markets , author John Staddon offers a prescription. Staddon goes through a number of topics with thoughtful commentary before finishing with his answers to stabilizing financial markets. He begins by explaining various ways that markets can work poorly, which he calls a “malign hand” as opposed to Adam Smith’s invisible hand. One example is problems with the market in scientific research that result from a monopoly buyer, the government. Other examples involve the separation of short-term profits from long-term risks. Another type of problem that can lead to a malign hand is asymmetric information. Some businesses seek to confuse their customers. When it comes to confusing contr...

I get a lot of pitches from companies wanting me to write about their products, which I mostly ignore, but Alexey Saltykov at InsurEYE sent me something interesting. It’s a graphic that explains the 3 most common ways that fraudsters might try to involve you in a car accident (see below or click here ). ( Disclaimer: I have no business or financial connection to InsurEYE. ) My first question after looking at these fraud scenarios is what can I do about this? If done well, it would be almost impossible for the victim to avoid the collision, and then it would be almost impossible to convince an investigating police officer that the collision was a fraud rather than poor driving by the victim. Alexey’s answer to this question is that he uses a dash cam: Here is a link to a supposed case of a fraudulent collision . The collision seems so minor that it’s hard to tell if this is real or staged, but I get the idea. I’m not likely to buy a dash cam any time soon, but I can see t...

A friend, Glenn, pointed me to some interesting research from the University of Toronto that links fast food to heavily discounting the future and poor financial decisions. Here is the abstract: “Based on recent advancements in the behavioral priming literature, three experiments investigated how incidental exposure to fast food can induce impatient behaviors and choices outside of the eating domain. We found that even an unconscious exposure to fast-food symbols can automatically increase participants’ reading speed when they are under no time pressure and that thinking about fast food increases preferences for time-saving products while there are potentially many other product dimensions to consider. More strikingly, we found that mere exposure to fast-food symbols reduced people’s willingness to save and led them to prefer immediate gain over greater future return, ultimately harming their economic interest. Thus, the way people eat has far-reaching (often unconscious) influences...

John Bogle says the recent past has been the “worst time for investors that he has ever seen,” but “long-term investors must hold stocks, because risky as the market may be, it is still likely to produce better returns than the alternatives.” Canadian Mortgage Trends reports that the 3-months interest penalty on some mortgages is based on a higher interest rate than your actual mortgage rate. Maybe people need to start hiring lawyers to read their mortgage contracts. Rob Carrick gives us some tongue-in-cheek definitions of financial terms. I liked “Contrarian: Someone who is wrong in predicting what will happen, but in a different way than the herd.” Big Cajun Man details his experience trying to get a reasonable deal on a new cellphone from Telus. Give Me Back My Five Bucks has a very sensible way to look at prioritizing spending. Preet Banerjee looks at some research showing that women tend to outperform men at investing.

Checking on your portfolio every day can be agonizing. One day you’re up $1000 and the next you’re down $1000. Toss in the fact that experts estimate that we feel losses twice as intensely as we feel gains, and an oscillating portfolio can leave you depressed even if the daily gains tend to be a little bigger than the losses. I’ve found that a minor change to the way I view my portfolio makes a big difference to me. I used to store my portfolio information on one of the free online services. It produced numerous statistics including the daily gain or loss in both dollar terms and percentage terms. In the last couple of years I’ve been using my own spreadsheet that does some extra calculations like telling me when it’s time to rebalance. Crucially, though, my spreadsheet does not report daily gains or losses. I only work out gains and losses roughly once per year. To know whether I made or lost money during a given day or week, I’d have to remember a past portfolio value. My...

I was (un)lucky enough to be selected this year for a CRA processing review. This was a virtual certainty given that I was paying tuition for 3 people at once. They want to see documentation for all the tuition deductions I claimed. Some people mistakenly refer to these reviews as an audit, but audits are much more involved. Processing reviews are quite common when you file your return with tax software and therefore don’t submit any forms or other documentation. CRA is simply doing a spot check to see if you have proper documentation for some of your deductions. I find the language used in the CRA letter to be quite amusing: “To determine if we have assessed your return correctly, we need additional information.” A more accurate, but more adversarial statement would be “We need to see documentation to make sure you’re not a lying deadbeat.” Don’t get me wrong, though. I’m quite happy that CRA does these processing reviews to keep people in line. Otherwise cheating woul...

Jason Zweig explains how the U.S. JOBS Act is making it more difficult for investors to understand the stocks they invest in. Canadian Couch Potato has come out with a second edition of his book The Money Sense Guide to the Perfect Portfolio after the first edition sold out. I reviewed the first edition . The Blunt Bean Counter looks at tax issues with online poker and offshore trusts. Preet Banerjee says that the extreme couponing we see in the U.S. just isn’t possible to the same extent in Canada. Big Cajun Man has a list of financial tweets he’d like to see with a #YOLO tag (you only live once). Million Dollar Journey answers reader questions about ETFs vs. no-load mutual funds and starting a portfolio.

Unlike the fictional Lake Wobegon where “all the children are above average,” in the real world we can’t all be above average. If one investor gets above-average returns, there must be some other investor whose returns are below average. Because of a compounding effect, there actually have to be many below-average investors to compensate for one above-average investor. Consider two investors, A and B, who each start with $10,000 to invest. Suppose that after 40 years, they have an average of $250,000. Their average compound return per year works out to 8.4%. If investor A ends up with $475,000, then investor B must end up with only $25,000 to make the average $250,000. But look at their individual compound average yearly returns: Investor A: 10.1% (1.6% above average) Investor B: 2.3% (5.6% below average) So, what has happened here? If A and B exactly balance each other out to give the correct average portfolio size, why is B’s yearly return so far below average, while ...

Mark at My Own Advisor asked whether you are living your financial values and proceeded to list his values. I decided to see how his values line up with the way I run my financial life. I’ve listed each of Mark’s values below along with my thoughts. Continually reduce our mortgage debt by using prepayment privileges every month. I no longer have a mortgage, but when I got my first mortgage my wife and I doubled every payment for nearly 3 years and made a 10% lump-sum payment each year. This might have been overkill, but we hate debt. Use our line of credit only when necessary for major home renovations or emergencies. I would say “non-optional major home renovations” like a new roof makes sense, but far too many people use lines of credit for optional things like new kitchens and bathrooms. This is usually a mistake. Save up for a new kitchen or do without. My wife and I have a line of credit, but use it rarely. Lately, we’ve used it because we didn’t want to sell some...

Congratulation to Lyne who won the draw for the book The Beginner’s Guide to Saving and Investing for Canadians . Fortunately, Lyne’s was one of the 92% of entries with the correct answer to the skill-testing question ((7 x 8) + 6 – 2 = 60). I’m sure that other 8% just tried to answer too quickly. Thanks to all those who entered the draw, and for those who didn’t win this time, better luck next time!

Jason Zweig says that Wednesday’s sudden drop in stock prices was just the latest thing to discourage retail investors and drive them out of stocks. I’m a retail investor and I didn’t even notice. Perhaps Zweig meant “retail traders” rather than “retail investors”. Give Me Back My Five Bucks makes an interesting case that the reason you’re poor is a bad attitude and blaming others. I see a parallel with sports here. Many players moan and groan about bad calls from officials. However, players make mistakes, coaches makes mistakes, and officials make mistakes. If you’re mentally fighting both your opponent and the officials, it’s hard to win. With personal finance, it’s hard to improve your situation if you’re convinced that the world is to blame for your money problems. Tim Cestnick explains the bureaucratic steps you must take to properly appeal a CRA ruling. Otherwise, your appeal could be rejected because you didn’t say “Mother, may I?” My Own Advisor lays out his l...

William H. Gross wrote a very interesting Investment Outlook piece that he begins with “The cult of equity is dying.” He argues that the century long 6.6% real return of stocks will not persist into the future. However, I don’t understand the logic in one of his arguments. Over the past 100 years, real GDP growth has been 3.5% per year, but stocks have returned 6.6% per year. Gross likens the 3% excess for stocks each year to a Ponzi scheme. “If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)?” Gross goes on to explain that if this persists into the future, the rule of 72 tells us that stock owners would double their advantage every 24 years and would eventually own everything. The flaw in this logic is that stocks pay a slice of their returns in the form of dividends. These dividends get spent in the economy. Some divid...