Andrew Hallam wrote a piece in the Globe and Mail that likened enhancing performance in sports by blood doping to an investing method due to Michael Edelson called “value averaging” . Value averaging is simple enough to understand, and if you use the wrong method of evaluating its results, it seems to boost returns. However, the reality is that it doesn’t boost returns, and it drives up your investing costs. The idea of value averaging is to keep your portfolio increasing at some target rate, regardless of what happens in the market. For example, if you target a 0.5% return each month, if the market goes up more than 0.5%, you sell some of your portfolio; otherwise, you add more cash to buy more assets. No matter what happens in the market, your portfolio rises steadily. An immediate problem arises: where do I get this cash to pour into my investments when the market drops? The answer is that you’re supposed to keep a side pot of cash that you either put money into or take mon...

Dividend investors and indexers often disagree strongly on the relative merits of their investing strategies. Recently, the Dividend Growth Investor argued that homemade dividends produced by selling some stock are not as good as real dividends . However, we can easily show that the core of the disagreement comes down to whether or not dividend stocks have an expectation of higher total returns. For the purposes of this discussion, let’s compare an indexed portfolio of stocks that pay a 2% dividend to a dividend stock portfolio that pays an average of 4% dividends, both in tax-advantaged accounts. For the investor who wishes to live on 4% of his portfolio each year, his choices are to go with the indexed portfolio and sell 2% 1 of his shares each year, or go with the dividend portfolio and live off the 4% dividend. Dividend Growth Investor argues that “when someone sells a portion of their portfolio, they end up with less [sic] shares.” However, if the two portfolios get the s...

Depth Dynamics has an interesting story of a pitch to financial advisors to get them to promote leveraged investing. They also tell the story of a couple in their 70s who lost money after being talked into using leverage. Thanks to Ken Kivenko for pointing me to this one. Rob Carrick says that students handle credit cards better than many people think. I wonder, though, whether the various statistics Carrick quotes include the effect of parental help. Some students’ parents pay their credit card bills for them every month. And some parents pay off credit card bills for students who get themselves into debt trouble. This doesn’t always happen, but it happens often enough to skew the statistics to make it look like students handle credit cards better than they really do. You can be sure that banks know that parents are often willing to bail out students with debt problems. This makes students good candidates for credit cards (in the banks’ eyes). Mr. Money Mustache makes a...

The latest Carrick on Money post declared “my brain is a lame investor” and pointed to a well-written summary of 7 way your brain is making you lose money . Fortunately for me, I feel like I have two brains and only one of them is a lousy investor. I have one brain that tends to be emotional and makes snap decisions. It’s quite good at deciding whether to zig or zag in a touch football game and helps me pick up tells on opposing poker players. Unfortunately, it stinks at investing. My other brain – the rational one that tries to think everything through and makes deliberate decisions – has turned out to be the better investor. My years as a stock-picker began during the late 1990s tech boom. Along with almost everyone else, I was overconfident and took wild chances. I did use my rational brain to pore over company reports and accounting statements looking for useful information. However, when it came time to make a trade, it took my emotional brain to ignore the fact that t...

In Ontario, the Municipal Property Assessment Corporation (MPAC) administers the property assessments used to determine property taxes. I just discovered that MPAC’s estimated area of my property is way off. However, the official Request for Reconsideration process is onerous enough that I probably won’t bother to appeal. My fun began when my latest property assessment arrived in the mail recently. The form contains an “access key” which allows me to look up the data MPAC has about my property at their About My Property web site. This seems quite civilized. It was after poking around on this site for a while that I discovered that MPAC thinks my property is about 24% larger than it really is. My best guess is that this has cost me about $1500 in extra property taxes over the years. The problem is that my property is not rectangular. The way MPAC estimates the width is sensible, but the estimate of depth is way high. In a burst of optimism, I started poking around for t...

What’s a factor of 100 trillion between friends? A woman in France received a phone bill that had an extra 14 zeros added to it ! Larry Swedroe examines the claim that index investing increases correlations between stocks making “it harder for active managers to harvest the winners” and argues that it isn’t true. Even if it were true, why would I abandon indexing to lose money picking my own stocks just so some professional money manager can have a better chance to pick winners? SquawkFox has some thoughts on how to get around the upcoming Globe and Mail paywall. The Blunt Bean Counter put together a collection of punitive income tax provisions. Don’t get caught by any of these. Rob Carrick says that “Asking a senior to co-sign or guarantee a loan is a form of elder abuse.” Preet Banerjee says “I’ve always thought that if you really knew what you needed to know to pick the right financial adviser, you probably wouldn’t need one.” He goes on to explain what we need t...

Do you think a financial advisor would rather take on and keep a client who already has a lot of money or a client with little savings? The answer is obvious, but this fact was missed by University of Montreal researchers who conducted the Cirano study of the value of financial advisors . The researchers collected survey data from 3610 working-age Canadian households. They asked many questions related to income, savings, and financial advisors. Among their conclusions was the following: “Controlling for multiple factors ... Those with 15 years or more [with a financial advisor] will have 173% more assets than if they did not have a financial advisor.” The study’s authors offer the following thoughts on this conclusion: “This amount is too large to be explained simply by better stock picking. One highly plausible explanation of this finding comes from the greater savings that is associated with having a financial advisor and other appropriate advice.” Despite the fact that t...

In the late 1990s, it seemed like everyone was a stock market expert. This was fueled by the fact that it didn’t matter much which tech stock you bought because almost all of them went up. Even mathematician John Allen Paulos got caught up in the hype with WorldCom stock. In his book, A Mathematician Plays the Stock Market , Paulos weaves a humble story of his investing folly along with many understandable mathematical lessons about investing. Like many “investors” at that time, Paulos abandoned good risk management and “invested heavily in WorldCom, as did family and friends at [his] suggestion.” He even “emailed Bernie Ebbers, then the CEO, in early February 2002 suggesting that the company was not effectively stating its case and quixotically offering to help by writing copy.” Of course, the world later found out that the real problem was “creative accounting” rather than poor marketing. On index investing, the author makes an interesting point that despite the fact that it...

There is no doubt that when insider traders make money illegally by buying a stock before it is about to rise or selling a stock before it is about to fall, some other traders must be losing this money. However, it can be challenging to figure out exactly who is losing money. The following argument by John Allen Paulos 1 sparked my interest in this question: Consider “a pair of similar situations. In the first one you buy a stock ... and your earnings are $1,000 if it rises the next day and -$1,000 if it falls. (Assume that in the short run it moves up with probability 1/2 and down with the same probability.) In the second there is insider trading and manipulation and the stock is very likely to rise or fall the next day as a result of these illegal actions. You must decide whether to buy or sell the stock. If you guess correctly, your earnings are $1,000 and, if not, -$1,000. ... Your chances of winning are 1/2 in both situations. ... The unfairness of the second situation ...

The Blunt Bean Counter has some concrete suggestions for those in debt to get organized and make a complete snapshot of their debts. Rob Carrick says that car insurers just don’t get Generation Y. Preet Banerjee says that establishing a habit of saving is more important initially than worrying about investing fees. He’s right that the expense ratio on the funds you own becomes more important as your total assets grow. Big Cajun Man had some trouble canceling a Motley Fool newsletter subscription after the free period was over.

This is a template for a guest post on a blog. Read at your own risk. 1. Buy a Less Expensive [Item] [Item]s can be very expensive. But, if you look around, you can find less expensive [item]s that are just as good. If you keep buying the expensive version, you could end up needing the services of [embedded link to credit-counseling business]. 2. Don’t Buy So Many [Item]s Try to extend the life of your [item] by taking care of it. If you can’t do this you could end up needing to see [embedded link to payday loan company]. 3. Look for a Used [Item] blah blah blah ... [link to random page in this blog to make this guest post seem like it belongs]. 4. Another Ridiculously Obvious Suggestion blah blah blah 5. Insultingly Simple Idea blah blah blah This guest post was brought to you by [link to more examples of this wonderful author’s work].

There are good reasons for investors to reduce the riskiness of their portfolios using bonds. However, some commentators like to point out the surprising result that a portfolio mixing stocks and bonds can sometimes beat both the all-stock portfolio and the all-bond portfolio. A recent example is a post by The Reformed Broker titled ‘The Triumph of Diversification’ . I ran an experiment that shows that this kind of reporting can set up investors for unrealistic expectations. Common sense tells us that if you start your investing year with some stocks and some bonds and make no trades, your overall return will be somewhere between stock returns and bond returns. However, by a quirk of mathematics, if you rebalance to your target portfolio mix after each year, it is possible for your multi-year returns with a mixed portfolio to outperform both an all-stock portfolio and an all-bond portfolio. Somehow your portfolio can become better than the sum of its parts. I decided to see ho...

Canadian Couch Potato reports that Vanguard will be changing the benchmark it uses for several of its index ETFs to save on benchmark licensing fees. Canadian Mortgage Trends reports that a mortgage broker who submitted fraudulent mortgage documents on behalf of his clients in an effort to improve their chances of approval will be going to jail. They say this is a good thing because questionable mortgage documentation is all too common. Million Dollar Journey reports stock-picking contest results to the end of Q3. The average return of the 10 participants is 4.5%. This trails the TSX at 6% and the S&P 500 at 15%. I guess I’ll stick to indexing. Big Cajun Man is worried about the looming bacon shortage. Of course, we won’t have an actual shortage; it’s just that the price is going to rise. That’s the great thing about free(ish) markets; you can always have what you want if you’re willing to pay for it. Retire Happy Blog says that the ability to save money is a com...

Having worked in the private sector throughout my career, I’ve seen my share of rounds of layoffs. Even the most successful company will eventually stumble and not have enough revenue to pay all of its employees. What amazes me about large layoffs is that employees are unable to see them coming and do little to prepare themselves. Businesses have owners who invest their money to make a return. If a business misses its profit target, owners will be unhappy. A common remedy to improve profitability is to lay off employees. So, employees who see their company missing profit targets should immediately expect that layoffs are a possibility. But most employees are shaken when they learn that layoffs are planned, despite the seemingly obvious clues. They go from feeling safe and happy to feeling afraid for their futures. If their finances can’t withstand unemployment, it makes sense to be fearful. The part that doesn’t make sense is having felt safe and happy before the layoffs we...

Most of my readers know of Rob Carrick, a personal finance columnist at the Globe and Mail. He does an excellent job of cutting to the important parts of just about any financial story that affects your wallet. He also has a blog consisting of his picks of the best articles related to personal finance. The Globe and Mail ran a contest to rename Carrick’s blog. The winning name was Carrick on Money . I must say that this name sounds great to me. However, I have a nagging feeling that it seems familiar. Can anyone help me figure out why it feels like I’ve heard it before? Kidding aside, I hope Carrick continues delivering solid information to help us all run our financial lives well.

Nancy Woods at Globe Investor answered a reader question about an RESP for his newborn grandchild : “does it make more sense to contribute a lump sum and forgo the government grant (CESG) or do I make annual contributions and take the government’s free $500? Signed Bill”. Unfortunately, her analysis failed to find the best option. This question only matters if Bill actually has $50,000 (the maximum total contribution RESP amount) available right now. So, he either throws it all into the RESP now or he puts a certain amount in each year and invests the amount held back in a non-registered account. The advantage of the lump sum right now is longer tax-free compounding. The advantage of spreading out the contribution is that each year the government will match 20% of the contribution up to a maximum of $500 per year and a lifetime maximum of $7200. (There are also catch-up provisions, but they are not relevant in this case.) Woods concludes that Bill has two options: 1 . Make...