I had a full slate of posts this week (although you might not count the last one about a feed aggregator and not money): A Reader Question about Becoming Debt Free Bernoulli’s Model of Risky Decisions Rational Level of Saving for Athletes I Finally Stopped Procrastinating about Google Reader’s Demise Here are my short takes and some weekend reading: Canadian Financial DIY points out the irony of using a stock-picking contest to raise money for financial literacy. Real financial knowledge for most investors begins with understanding the futility of trying to pick your own stocks. Potato makes an interesting case for treating investing as one of your careers. Squawkfox explains how to get the most from the customer service of a large company. She includes an audio recording of a successful call she made. I agree with all her points, but I think a fair measure of her success on that call came from the man answering the phone perceiving her tone as somewhat flirtatiou...

I’m guessing there are many people like me who responded to Google Reader’s demise by procrastinating. I thought I’d have to investigate different readers and try to pick a decent one. Finally, I just clicked on a Feedly link and was pleased to find that it had a button for collecting my Google Reader data. After one more click to authorize the collecting of some data like my email address, I was presented with a fully-functioning reader with all my feeds. The user interface is different from Google Reader, but it seems quite easy to use so far. So, my search is over; I’m a Feedly user now (disclaimer: I have no connection to Feedly, financial or otherwise, except for the fact that I’m now a user). One warning is that Feedly does not pick up information about which posts you’ve read in Reader. If this is a concern, you can catch up first in Reader, and then make the two-click switch to Feedly. No doubt there are other good readers out there as well, but I’m happy to declar...

We’re used to hearing stories about very highly paid athletes running out of money . Reportedly, more than half of professional basketball and football players run out of money a few years after their careers end. To deal with this problem, the NFL Players Association announced in a news release “that it is expanding its financial education program for players and former players.” The part of the news release that struck me the most was the following result of an effort to get players to save: “The results were groundbreaking, with over 1,000 players participating in the program, most engaging on an ongoing basis, and 48% saving at least 20% of their annual earnings in preparation for a potential lockout in 2011 based on the results of a lockout preparedness assessment.” With a league minimum salary of $375,000 in 2011 , it’s painfully obvious to me that saving only 20% of income is far too low. And this was achieved by only 48% of players who participated in a program. Furth...

In 1738, Daniel Bernoulli devised a simple model of risk aversion ( English translation here ). Nobel Prize winner and author of Thinking Fast and Slow Daniel Kahneman criticizes Bernoulli’s theory extensively, describing it as “Bernoulli’s Error.” I disagree with Kahneman. I think Kahneman misunderstands Bernoulli’s claims. Bernoulli’s theory of decision-making is best described with some examples. He claims that doubling your net worth is as positive as dividing it by 2 is negative. So, if your net worth is $200,000, receiving another $200,000 is as positive as losing $100,000 is negative. Bernoulli applies the same type of rule to smaller changes as well. Going from $200,000 to $250,000 is multiplying by 1.25. Going from $200,000 to $160,000 is dividing by 1.25. So, winning $50,000 is as good for you as losing $40,000 is bad for you. (For the more mathematically-inclined, the utility of your net worth is proportional to its logarithm.) Kahneman’s extensive research h...

Here is a lightly edited question from a reader who calls himself or herself “Debt Free”: I've read over a bit of your blog, and I enjoyed it. I'm on a mission to pay off HUGE debt. I need some help (support – not asking for money). I need to be accountable to someone for my daily spending to keep me on track so to speak. This is my situation: Credit card #1 Balance $6500, Int. Rate 19.99% Credit card #2 Balance $11,800, Int. Rate 19.99% Credit card #3 Balance $3600, Int. Rate 28.99% Credit Line Balance $14,000, Int. Rate prime plus 5% (currently 8%) Car Loan balance $17,000, $177 biweekly Mortgage balance $114,000, $163.08 weekly Child support $500 per month (this is likely to change end of this year) Income: Full time job $2926 (net) per month Part time job $1700 (net) per month Do you have any suggestions? I would like to have this paid off in 2.5 years from now. Any advice you can pass on would be greatly appreciated. Thanks! Debt Fee, I’m glad yo...

My only post this week was a review of a great book: Thinking Fast and Slow Here are my short takes and some weekend reading: Rob Carrick wrote an interesting piece on some young financial advisors who welcome unbundling of fees for financial advice because they hope it will drive bad advisors out of the market. The remarks from the Advocis president are funny. The claim that fewer investors will get financial advice presumes that all people with advisors are getting advice in the first place. Picking a few mutual funds is not proper financial advice. Preet Banerjee interviews Barry Choi. In this podcast Barry tells the story of starting out with a financial advisor, having problems and dumping him, and even ending up in a confrontation with the advisor. Big Cajun Man has a great diagram that compares pay-day loan businesses to loan sharks. My Own Advisor has some thoughts on dumping your big-bank financial advisor.

Daniel Kahneman won the Nobel Prize in economics in 2002 for his brilliant work along with the late Amos Tversky on the way people make decisions. Kahneman clearly worked hard to make the conclusions of his research accessible to all in his book Thinking Fast and Slow . No other book as given me as much useful insight into the workings of my own mind. I understand much better why I would hesitate before accepting a 50/50 bet to lose $200 or win $300, and why I have an opinion on the future of Apple stock even though I know I really have no idea what will happen. The key is to understand the workings of my “System 1”. Kahneman portrays the human mind as consisting of two actors, System 1 and System 2. He’s careful to explain that they are not really separate characters inside your mind; speaking of them like they are separate entities is so useful for helping the reader understand the research results that the book would be far less useful without them. Roughly speaking, Syste...

My only post this week drew some good comments: Anchoring and Income Taxes Here are my short takes and some weekend reading: Canadian Couch Potato weighs in on the banning of financial advisor commissions debate and the arguments made by the president and CEO of Advocis. Tom Bradley at Steadyhand explains what really has him concerned about Canadian real estate. No matter what happens over the next 5 years, I’m sure that his last statement will be true: “we’ll look back in 5 years and say, ‘Wow, what were we thinking? It was so obvious.’” Human brains are such that things we can’t predict in advance seem inevitable in hindsight. The Blunt Bean Counter gives three tax-saving strategies that he says are an easier way to save money than being frugal with every small purchase. Million Dollar Journey explains stop-loss orders. Some traders seem to like this type of order, but I don’t see how they’re any use for investors.

My employer pays a modest bonus for each invention employees have that result in a patent filing. I had a few of these this year and recently received a letter showing me the size of this bonus. But this is a gross amount before the taxman takes his bite. So now my mind is anchored on the gross amount of the bonus. Next week’s pay cheque will be somewhat of a let-down because I will actually receive just over half of this figure. I don’t mean to sound like I’m complaining about getting a bonus. This should be a happy event and it is happy for me. But, I think my employer makes a mistake by giving me a piece of paper with the gross amount printed in bold. Perhaps many people don’t really look at their pay stubs and wouldn’t be struck by the much smaller after-tax amount. However, I do look at each of my pay stubs. This incentive scheme would work better on me if the letter they gave me had a prominent after-tax figure.

I wrote 4 posts this week that drew quite a few reader comments that are worth checking out: Can a Raise be Bad for Your Finances? Foreign Exchange Fees Invest Side-By-Side with Me Couch Potato Investors are Rare Here are my short takes and some weekend reading: Canadian Couch Potato explains why a new ETF based on strip bonds is tax-efficient for fixed-income investors using taxable accounts. The Blunt Bean Counter thinks that both investors and their advisors are to blame for TFSA over-contributions. Big Cajun Man says you shouldn’t make big financial decisions late in the day, and that people who try to sell you big-ticket items know you’re less likely to buy the next morning. My Own Advisor explains why he’s not interested in trading futures. Million Dollar Journey is getting close to a million dollars. I assume the blog will disappear the instant the magic million dollar mark is reached :-)

Passive investing using low-cost index ETFs and mutual funds is rising in popularity. The number of investors who are excited by the idea of couch potato investing is growing every day. However, in a recent conversation I had with Canadian Capitalist, he observed that enthusiastic couch potatoes usually don’t really invest passively. Sadly, I have to agree. Let me start by admitting my own transgressions. It took me many years as a stock-picker before I finally decided that I was better off investing passively. Even then I took my sweet time selling off individual stocks and buying low-cost broadly-diversified ETFs. I still hold one individual stock (Berkshire Hathaway) for less than 10% of my portfolio. I don’t intend to ever buy more Berkshire, but this is still a deviation from index investing. So, I’m not a pure passive investor. But, even if we adopt fairly lax standards for what constitutes passive index investing, few self-described couch potatoes meet the test. Fo...

Inspired by side-by-side arrangements where a mutual fund invests in the same assets as a hedge fund, I’ve decided to start my own side-by-side arrangement. Just as these mutual funds give small-time investors access to the investment choices of hedge fund managers, my arrangement will give investors access to my stock-picking. Just take a look at the chart of my 1999 portfolio return and you’ll see why this could be a great deal for investors. They will get access to a fund that contains my stock picks. The best part is that I won’t charge any management fee. Here’s how it will work. Every 3 months, I’ll buy shares in my top 100 stock picks using a mixture of my personal assets and fund assets. After the 3 months are up, I’ll allocate a non-random set of shares to my personal account (based on purchase price) in proportion to how much of the purchases were made with my money. The rest of my purchases go to the fund. Then I do it over again with another 100 stock picks. F...

Reading a review of Qtrade at Money Smarts , I was struck by the description of the foreign exchange fees as “pretty good”. They may compare favourably to foreign exchange fees at other discount brokerages, but compared to a reasonable fee, they are horrendous. For amounts over $25,000, Qtrade charges 0.96%. This is $240 on $25,000. What is there to justify such a high cost? I can understand the need to recover costs when handling actual cash. It costs money to pay employees to give out cash, and you have to take on currency risk for days to hold onto cash. However, these costs don’t apply to electronic transactions. A simple fee of $10 plus 0.1% for electronic conversions among major currencies would leave plenty of profit margin for banks and brokerages. This corresponds to $35 on $25,000. I understand that businesses seek profits and will charge what the market will bear, but it is time that investors demanded more reasonable foreign exchange fees.

A heuristic I’ve heard about a few times is that you should have 12 times your gross salary saved before you retire. I’ve always had a vague feeling of uneasiness about this rule of thumb, but the problem with it never hit home with me until I started thinking about a raise I’m expecting soon. Suppose I currently have retirement savings equal to 11 times my salary. I’m close to being able to retire by the 12 times salary heuristic. Suddenly, through no fault of my own, I get a 10% raise. Now my retirement savings are only 10 times my salary. My retirement dream is slipping away. I probably have to work an extra year or two and pray I don’t get any more raises. This is crazy. The ratio of savings to salary just makes no sense for me. I should be calculating the ratio of my savings to my yearly spending instead. Focusing on this spending-based ratio means that raises are a good thing because they allow me to build my savings faster. It may be that the savings to salary rat...