It was a quiet week on most blogs leading into the Easter weekend. My posts for this week were Value Averaging Nonsense  Value Averaging Experiments  The Value of Math Here are my short takes and some weekend reading. Gail Vaz-Oxlade has some advice for investors whose stomachs churn as their portfolios go up and down (in a post no longer online). Her advice is sensible enough, but I worry about telling people to lighten up on stocks if they are worried. The problem is that they will be most worried when stock prices are lowest. Maybe a better answer is to write a letter to yourself explaining how worried you are. Then when stock prices recover, read the letter and decide to lighten up on stocks while prices are high in anticipation of the next drop in stock prices. The Blunt Bean Counter explains some of the pitfalls of making a housing loan to your married children even if you formalize the loan.

I recently came across Andrew Hacker’s New York Times piece Is Algebra Necessary . He seems to be arguing that we don’t need to teach so much math, but I think all he demonstrates is that we teach it badly. Before looking seriously into these questions, I have some ideas for people with less thoughtful opinions than Hacker does on the uselessness of math, such as “why should we teach algebra if it obviously has no use in the real world?” I guess I’ve heard this question one time too many. <Rant On> Here are a few thoughts for the people who believe math has no use in real life and shouldn’t be taught so much in school. Remember to make the minimum payment on your credit cards this month. I like to keep my dividends flowing. When you look for a new vehicle, remember that leasing gets you the biggest truck for the payment you can afford. When you look for a house, your bank will tell you the biggest mortgage they’ll let you have. When you find a nice financial advis...

I’ve been quite critical of the investing strategy called value averaging (VA) . I’ve explained the reasons why it doesn’t work, and why the methods used by its proponents to measure its returns are flawed. One reader, Lost Cowboy, challenged me to dig deeper, and I’ve done that with some experiments. In short, value averaging is a strategy where you choose some target investment return and buy or sell as necessary to keep your dollar-value in equities rising by this target percentage. If equities rise on their own by more than this target, then you sell some, and if they rise by less than the target, then you buy some. The theory is that this will force you to buy low and sell high. In practice, this strategy demands that you invest cash when you don’t necessarily have it available. Solutions to this problem severely undermine returns. I dug up some historical U.S. S&P 500 stock returns, short-term interest rates, and inflation rates from Robert Shiller’s online data . ...

Andrew Hallam is promoting value averaging again . This is an investing strategy that involves choosing a pre-determined rate of growth for your portfolio and then either making up the difference when markets disappoint or taking money out of the market when returns exceed your expectations. It doesn’t work. Several months ago I explained in detail why value averaging doesn’t work . A quick summary: you have to have a pile of cash on the sidelines available to pour into the market if needed. Either that or you have to borrow deeply if the cash isn’t available. Value averaging proponents calculate their strategy’s returns using the “internal rate of return” (IRR) . The IRR can be a good way to measure returns, but in this case it means that we ignore the opportunity cost of idle cash and ignore the interest costs on borrowed money. Hallam gives some results over a period cherry-picked to make value averaging look good: the 5 years from February 2008 to January 2013. Note th...

My posts for this week were A Strategy for GIC Investors to Maintain Deposit Insurance Job Losses in Real Estate Why Not Raise CMHC Mortgage Premiums? Here are my short takes and some weekend reading. Retire Happy Blog explains in full detail how to calculate your CPP retirement pension. I’ve been looking for this for a long time. Every other explanation I’ve ever seen leaves out a lot of necessary detail. Dan Hallett reports that BMO is cutting the distributions on some of their income funds. This was inevitable. Investors’ dreams of indefinitely collecting income that exceeds investment returns are becoming nightmares of eroded principal and reduced income. Big Cajun Man got a $113 RRSP account fee reversed. The Blunt Bean Counter has a more comprehensive list of questions to stress-test your finances and see if your estate is ready if the worst happens to you. Tom Bradley at Steadyhand finds the current consensus that interest rates will stay low for the ne...

We’ve been treated to a long-running battle between Jim Flaherty and mortgage lenders over the length of mortgage amortization periods and low mortgage interest rates. I wonder why we can’t just have a market-based solution. I don’t mean this in the same way as some critics of Flaherty who call for him to leave markets alone. Mortgage lenders lay off much of their risk to the Canada Mortgage and Housing Corporation (CMHC), and CMHC charges mortgage loan insurance premiums that make no sense. As long as this situation persists, we can’t just let the lenders go crazy lending to anyone with a pulse. This brings up the question of why CMHC premiums make no sense. The rules for calculating the premium you have to pay with your mortgage fit on a short web page . The premium amounts don’t take into account important factors such as the current ratio of house prices to rents. This guarantees that the premium you pay has little relationship to the real risk of default. It wouldn’t b...

According to Will Dunning, Chief Economist at the Canadian Association of Accredited Mortgage Professionals (CAAMP), as quoted by Canadian Mortgage Trends , “190,000 jobs will be lost between 2013-2015 due to the maximum [mortgage] amortization being cut from 30 to 25 years.” Apparently, people making their living building and selling homes are in for a rough ride. However, this is an inevitable outcome of the necessary reining in of Canadian real estate. This 190,000 figure is split between “70,000 lost jobs in the new build market and 120,000 in the resale market.” Let’s look at new housing starts first. CMHC has historical housing start statistics going back to 1955 showing housing starts over the last decade well above the long-term average. As for home resales, CREA has statistics on recent home resale showing that home resales are perhaps just slightly above long-term average figures. However, these above average sales levels are happening at a time when prices are very h...

A common problem for GIC investors is to stay under the $100,000 limit for Canadian Deposit Insurance Corporation (CDIC) coverage in case a bank fails. This can involve the hassle of trying to maintain accounts at several different banks. I have a potential solution that also solves the side problem of having to fight with bank staff to get a decent interest rate. The rules for what deposits are covered by CDIC can be tricky. Some writers just say that you’re covered up to $100,000 in each account, but this isn’t exactly right. For example, if you have two GICs in separate accounts both in your name in the same bank, they count together for the $100,000 limit. Only banks that are CDIC members are covered. Further, accounts that have the same owners at the same bank and holding the same type of deposits get lumped together for a total of $100,000 coverage. So, you can’t just set up several GIC accounts all in your own name at the same bank to get around the limit. Knowing a...

My posts for this week were Investors Group Advises Leverage for 75-Year-Old Widow of Modest Means The Futility of Leveraging Bonds Here are my short takes and some weekend reading. Canadian Couch Potato looks into the difference between the market price of exchange-traded funds and the net asset value of their underlying securities. Million Dollar Journey gives us a peek at what he holds in his RRSP. Retire Happy Blog tackles a reader question about whether to pay the deferred sales charge to get out of an expensive mutual fund. Big Cajun Man says that passive investing doesn’t mean lazy investing, and he has been studying up on some of the ETFs he owns. He also has a very colourful description of how his career as an active investor was less than perfect. The Blunt Bean Counter has a guest writer who says that lawyers often fail to cover RESPs when they draft wills.

With 5-year Canadian bonds paying about 1.2% interest, it’s hard to see how anyone could get ahead by borrowing money at 3% or more to invest in bonds. Yet this is what many people are doing, probably without realizing it. Let’s start with the example of the widow Mary whose Investors Group advisor had her borrow $50,000 to invest . Mary’s leveraged portfolio is currently invested 44% (about $22,000) in bonds. She pays 3.5% interest on her investment loan and pays a yearly management expense ratio (MER) of 1.75%. Even if we assume that the bonds will pay 2% to maturity, Mary is losing about $715 per year (pre-tax) on this part of her portfolio. Mary has about $28,000 worth of stocks in her portfolio. On these stocks she pays a blended 2.7% MER and 3.5% on the investment loan. To make up for the $715 loss requires an additional 2.55% return. Adding up these percentages, we find that the stocks must return about 8.75% just for Mary to break even for the year. One thought her...

In late 2006, Mary (not her real name), a 75-year-old widow, accepted the advice of her Investors Group advisor to borrow $50,000 to invest in mutual funds. She has maintained this loan for over 6 years now. Mary is an intelligent woman, but not an experienced investor. It’s easy to see how this move was good for Investors Group, but very hard to see how it was good for Mary. Mary’s recollection is that this strategy was somehow going to save her heirs money on taxes. The only connection to taxes that I can see is that she can write off the loan interest each year. But this just saves her a fraction of the interest; she still has had to pay the rest. The main thing this leverage did was add another $50,000 to Investors Group’s assets under management. As of the end of 2012, this figure has shrunk a little to about $49,800. The hidden management expense ratio (MER) cost on these assets is $1211 per year. After accounting for the tax write-off for interest, Mary has lost $91...

My posts for this week were Takeaways from Warren Buffett’s 2012 Letter to Shareholders Front-Loaded Expenses for the Year Renaming the TFSA: TFSP Here are my short takes for some weekend reading. SquawkFox pays $783 for her smart-phone, but ends up saving $480 over 3 years. Rob Carrick reports that Canada’s big banks are changing the way they charge overdraft fees. I’ll let you guess whether costs are going up or not. Canadian Couch Potato explains why right now GICs are better than bonds in taxable accounts. The Blunt Bean Counter has a list of the top 15 ways you can help your accountant focus on saving you money on your taxes instead of wasting time trying to figure out what is in your shoebox. Preet Banerjee interviews Larry Swedroe about his latest book Think, Act, and Invest Like Warren Buffett ( my review here ). Larry is an excellent speaker; this interview is worth a listen. Big Cajun Man explains that when it comes to splitting pension income, ther...

Two common misconceptions about Tax-Free Savings Accounts (TFSAs) are that they can only hold cash like a savings account and that they can be treated like a savings account with an arbitrary number of deposits and withdrawals. I suggest a subtle name change to counter these misconceptions: Tax-Free Savings Plans (TFSPs). Part of the motivation for this suggested name change is to make the TFSA name closer to RRSP. The idea is to help people understand that TFSAs can hold anything an RRSP can hold including stocks, bonds, mutual funds, and many other investments. The other idea is to help people understand that there are rules governing deposits and withdrawals. It turns out that the “savings account” part of the name has misled Canadians. I’m sure that the people who chose the name had no intention of misleading people, but the evidence suggests that Canadians have been confused by the name. It’s true that TFSAs are more flexible than RRSPs when it comes to deposits and with...

Recently, it struck me that many of my expenses tend to come in the first half of the year. Here are some expenses that I have to pay in January through June each year: 1. Property Taxes 2. Payroll deductions of CPP contributions and EI premiums (anyone whose income exceeds double the CPP and EI earnings limits will finish getting these payroll deductions before mid-year) 3. Car and house insurance (my renewal date happens to be in the first half of the year, and I pay the full year’s premium in one payment) In my case, this all adds up to about $11,000 of first half-year costs that I don’t have from July to December. If we toss in the RRSP contribution of nearly $24,000 that I’ll make before mid-year and the resulting reduced payroll taxes for the second half of the year (over $10,000), the imbalance grows to about $45,000! The rest of my expenses tend to be fairly balanced across the year. None of this causes me much difficulty because I spend so much less than my ful...

My portfolio consists entirely of index ETFs except for an investment in Berkshire-Hathaway, whose Chairman is Warren Buffett. Every year I read his letter to shareholders because it is so clearly-written and contains many useful insights. His 2012 letter is no exception. Instead of trying to summarize the whole letter, let’s hit some of the highlights. Re-investing in the U.S. While many businesses held back on re-investing in the U.S. because of uncertainty in the economy, Berkshire was “spending a record $9.8 billion on plant and equipment in 2012, about 88% of it in the United States.” Buffett declares “Opportunities abound in America.” Stock Trading “Charlie and I believe it’s a terrible mistake to try to dance in and out of [the stock market] based upon the turn of tarot cards, the predictions of ‘experts,’ or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.” Renewable Energy Berkshire-owned ...

Some late-breaking news:  Rob Carrick's latest round-up included a mention of my post this week on Handling RRSPs and RRIFs for Low-Income Seniors . Money Smarts does a thorough review of high-interest savings accounts now that Ally is dropping off the map. Tom Bradley at Steadyhand explains the problems with surveys of investor attitudes toward their financial advisors. Canadian Couch Potato looks at the research on estimating future stock returns. I’m content to just use long-term historical real stock returns and their volatility as estimates for the future. The Blunt Bean Counter says you should be careful not to burn the goodwill of someone willing to give you a job reference by having too many employers call the reference. Canadian Couch Potato explains that while Real-Return Bonds offer inflation protection, they can be volatile in the face of changing interest rates. Tim Cestnick explains the tax rules for lottery prizes and other types of prizes. Pree...