Long-time reader, Gene, asked the following good question. “Have you considered making a pseudo index fund by buying perhaps 15 large-cap stocks from each of Canada and the USA that would mimic an index? Not ideal for a growing portfolio, but for a relatively-stable account, and low commissions, it could save money on fees. Drawbacks are that it would be harder to increase or decrease holdings, and the savings wouldn't be huge over already inexpensive ETFs.” Gene is right that a carefully-run stable portfolio of stocks can cost less in fees than index ETFs. However, an important issue is how well such a portfolio would track its index. For an answer here, I turn to Meir Statman’s paper How Many Stocks Make a Diversified Portfolio ? Table 1 of this paper shows how the standard deviation of portfolios varies with the number of stocks you own. At this point, I need to diverge to a topic that few investors understand well: volatility losses. Consider a very simple example. In...

I reviewed two books this week : How to Make Money in Stocks: Getting Started Managing Alone Here are my short takes and some weekend reading: Tom Bradley at Steadyhand calls out big financial institutions for the maddening way they delay RRSP transfers. Financial Crooks has some sensible advice about hot water heaters. Preet Banerjee appeared on The National in a panel on the cost of credit card reward programs. Big Cajun Man says that credit cards are making us fat, stupid, and lazy. I think credit cards will have to get in line behind television and beer. Million Dollar Journey explains how to roll a covered call position. Please don’t try covered calls until you can explain why the premiums you collect are not free money.

Losing a spouse is a devastating event that hurls difficult changes into the surviving spouse’s life, not the least of which are the financial changes. Financial advisors Jennifer Black and Janet Baccarani wrote the book Managing Alone to explore these financial challenges. The book’s style is to illustrate financial planning concepts related to the death of a spouse using detailed real-life stories. Peeking in on the lives of several couples makes this short book easy to read in a single sitting. Each story illustrates different aspects of coping financially with losing a spouse. The authors take a subject that is ordinarily quite boring and turn it into a page-turner. A common theme in the stories is the great help people get from working with a financial advisor. This shouldn’t be too surprising because the authors are financial advisors. No doubt working with a good financial advisor would be of great help at a difficult time. But working with a bad advisor would likely...

Occasionally I make a point of reading books or articles whose messages are at odds with my own thinking. Every once in a while this leads me to change my thinking, such as when I decided to stop picking stocks and focus on low-cost index investing. It was in this spirit that I read How to Make Money in Stocks: Getting Started . Author Matthew Galgani, co-host of the How to Make Money in Stocks radio show, seeks to show new investors how to use a particular system of short-term trading. This system, called CAN SLIM, primarily involves chart reading in an attempt to make money riding the momentum of stocks on the rise. A positive for the system described in this book is that it is quite specific in a number of ways. In many cases is gives precise rules on when to buy or sell stocks. For example, the author says “if a stock drops 7% to 8% below what you paid for it, sell.” The author also gives some precise buy and sell prices based on stock chart patterns. Unfortunately, th...

In another hot and lazy summer week a broken computer inspired a post: Personal Computer Costs and Trade-Offs Here are my short takes and some weekend reading: Canadian Couch Potato has some very sensible thoughts on the search for market-beating returns. My Own Advisor lists the investment and personal finance principles he lives by. Big Cajun Man says that changes in his tax return from one year to the next trigger requests from CRA for proof. Financial Crooks digs into how dividends are handled in the Canadian and U.S. dollar sides of a brokerage account (and admits to a misunderstanding about dividend dates).

My family uses computers quite a bit. We have a desktop machine for each of us. We’ve had quite a bit of success with hitting the right combinations of options to keep the costs per year low. When my wife’s computer finally stopped working, we had to go through the process of choosing options once again. Everyone has different ideas about what work they’re willing to do to keep a computer running. My list is roughly one item long: pay money. If some component in the tower breaks, the whole tower goes. If the machine has too little memory for my needs, then the whole tower goes. If the operating system gets too corrupted to fix without reinstalling it, then the whole tower goes; the several times I’ve tried wiping a hard disk and starting over have not been worth the effort. I’ll work hard to save my data, but then the tower gets replaced. In the past, I usually chose to upgrade from the minimum RAM, hard disk, and processor to get a machine that would last 5 or 6 years inst...

During this lazy summer week I managed to write only one post between dips in the pool: Retailer Strategy of Charging Less than Advertised Here are my short takes and some weekend reading: Canadian Mortgage Trends report that the tighter mortgage rules are doing their job to reduce the number of first-time home-buyers. Canadian Couch Potato explains in detail the steps of using Norbert’s gambit at CIBC to save money converting from Canadian to U.S. dollars. It seems that this process is different at every brokerage. Retire Happy Blog explains the pitfalls of the insured retirement strategy that many insurance agents pitch to their clients. Big Cajun Man gets a good rant going about hospital parking fees. They are effectively a form of co-pay; free medical care is a myth. Young and Thrifty pits RBC against a credit union while negotiating for the best possible mortgage rate.

I recently came to the sad realization that I needed a new pair of shorts and maybe a dress shirt too. I would have to (gasp!) go to a clothing store. For some reason these stores group everything by meaningless brand names instead of just having all the shorts or shirts of the same size located together. Even more puzzling is having my purchases ring up at the cash register for less than the marked price. I’m pretty good at looking around for signs that say something like “25% off marked price.” So, I usually know what price to expect when I get to the cash register. But many stores (Sears and The Bay come to mind) seem to routinely charge me less than I expect. I remember buying some socks a year or so ago and the lady at the cash actually apologized for the fact that I’d have to pay the marked price; she then suggested that I might want to go back and choose different socks! Fortunately, I declined; they turned out to be good socks. What advantage does this give the reta...

I had only one post during this holiday-shortened week: Dividends More Stable Than Capital Gains Here are my short takes and some weekend reading: Dan Bortolotti has a very sensible take on mandatory RRIF withdrawals. Canadian Mortgage Trends reports the details of new debt-ratio rules to qualify for insured mortgages. What amazes me about these rules is how deep a debt hole you can dig for yourself even if you stay within the new bounds. The Blunt Bean Counter announced that he is taking the summer off from blogging, but couldn’t resist helping us with his take on the new CRA Revised T1135 Foreign Income Verification Form. Where Does All My Money Go? interviews Jonathan Chevreau in a podcast about financial independence and retirement. You can’t retire comfortably without financial independence, but you can achieve financial independence without having to retire. Retire Happy Blog explains the difference between withholding taxes and income taxes. Focusing just o...

One of the justifications that dividend investors use to justify their belief that they will beat market indexes is the fact that dividend income is more stable than capital gains. Dividend Growth Investor recently explained this line of argument . Dividends do tend to be more stable than capital gains, but this doesn’t mean that dividend investors will beat the market over the long run. Dividend Growth Investor says that “Investors who sell stocks to fund their retirement face the risk of selling off stocks at low prices during bear markets, which could result in asset depletion.” The implication here is that this is not a problem if you own dividend-paying companies. However, the reason why dividends are more stable is that companies do what they can to avoid cutting dividends. Even when it is painful to pay dividends, companies tend to pay them anyway. Even if the money is better reinvested in the business, or better used for an acquisition, or the company is forced to incr...