Here are my posts for the week: Rule of 72 in Reverse for Mutual Funds Crazy Arguments in Support of Leverage Now is the Time to Consider Lowering Your Portfolio Risk (Rob Carrick mentioned this post on his Carrick on Money Globe and Mail blog -- thanks, Rob) Here are my short takes and some weekend reading: Jeremy Siegel gave a very interesting hour-long lecture that includes the great quote “a bubble is an asset class that is going up in price that you don’t own.” Siegel takes a very long-term view of various asset classes and argues that Robert Shiller’s Cyclically Adjusted Price Earnings (CAPE) ratio is thrown way off by recent accounting changes that dramatically lower earnings in the last decade compared to decades past. Big Cajun Man has a nice chart showing that the percentage of Canada’s debt owed to foreigners is lower than the percentage for other nations. However, in just 2 years, Canada’s percentage jumped from 15% to 25% owed to foreigners. The Blunt Be...

During the 2008/2009 stock market crash, it wasn’t too hard to find people telling you to re-evaluate your asset allocation and tolerance for risk . However, that was a terrible time to lower you portfolio risk; now is a much better time to consider this question. It’s natural for your emotions to tell you to sell stocks after they’ve dropped and to buy more after stock prices rise. To a certain extent it is these emotions that drive stock market swings. However, it’s not too hard to see that this behaviour amounts to selling low and buying high, which is exactly the opposite of what most investors want. Re-evaluating your asset allocation isn’t necessarily a bad idea, but there are wrong times to do it. The stock market lows of March 2009 were the wrong time to consider selling stocks. Even if you were right in deciding that your stock allocation was too high for your risk tolerance, making a change back then would have caused a permanent loss of capital. Now would be a gre...

I was reading an article called Why borrowing to invest (leveraging) is a good idea (on a site called FinanceWorks that has since disappeared).  I’ve read many reasonable articles that point out the positive side of leverage and expected more of the same here. However, I didn’t get more of the same. The interesting part of the article begins when the authors take aim at critics of leveraging: “Critics argue that leveraging increases investment risk and that a rate of return higher than the loan’s interest rate is needed to generate a profit. But neither claim is accurate.” Okay, this is going to be good. Apparently, leverage doesn’t increase risk and you can profit even if you pay more to borrow than you make on your investments! Let’s start with risk: “Risk, as far as it pertains to investing, is the odds that you will lose money. By this definition, we have to question how borrowing money can impact risk. After all, whether you invest your own money or that of the bank...

Most people have heard of the Rule of 72 . It’s a way to estimate how long it takes for your money to double at a given rate of return. Less well known is that this rule can be used to estimate how long it will take for investment fees to consume half your portfolio. The Rule of 72 says that if your rate of return times the number of years you earn that return is 72, you’ll roughly double your money. So, if you earn 6% each year, it takes about 72/6=12 years to double your money. When it comes to fees, the same rule works for finding the number of years it takes for fees to consume half of your money. For example, if you invest in Investors Canadian Growth Fund, the total fund costs each year are 3.02% of invested assets. So, it would take about 72/3.02=23.8 years for half your money to be consumed in costs. This rule just gives an estimate, but it’s pretty close. The actual time is just under 23 years. Update 2018 Nov. 27:  This fund's total expenses are now 2.72% per...

I gave a warning about misusing TFSAs this week: Two Common Misconceptions about TFSAs Here are my short takes and some weekend reading: Tom Bradley at Steadyhand makes a strong case that the mutual fund industry has lost its chance to create practices that are friendly to investors. He says that regulators need to cause a transition in the industry that is “jolting, expensive and soul searching.” Million Dollar Journey compares the top Canadian brokerages that offer U.S. Dollar RRSPs. He compares them on fees and on how well they handle currency exchanges between Canadian and U.S. dollars. The Globe and Mail has also come out with its 2013 ranking of online brokerages . Larry MacDonald explains why tax-loss selling is not as valuable as it appears to be. Retire Happy Blog does a good job of interpreting the latest SPIVA scorecard comparing active versus passive investing. The 5-year results look quite dismal for active investors. Canadian Couch Potato explains t...

The name Tax-Free Savings Account does a good job of making it clear that these accounts produce gains that are tax-free. However, the “savings account” part of the name leads to confusion for some Canadians. Here are two common misconceptions about TFSAs. Misconception #1: TFSAs are just for holding cash like regular savings accounts. TFSAs can hold a wide range of investments, including stocks, bonds, and cash just like RRSP accounts. It’s common for banks to offer TFSAs that can only hold cash and GICs, but this is the banks’ restriction, not a TFSA restriction. Most banks offer other TFSAs that do permit holding stocks and other investments. Almost all discount brokerages also offer TFSAs that allow the full range of investments. Misconception #2: TFSAs can be treated like regular savings accounts with many deposits and withdrawals. Most people are aware that there are limits on the total amount you can contribute to a TFSA. For those who turned 18 in 2009 or earlier,...

Here are my posts for the week: Fight Back Investment Survey Troubles Expanded CPP and Debt Here are my short takes and some weekend reading: Anita Anand and John Chapman at the University of Toronto Faculty of Law explain in this short article why investment advisors should be fiduciaries. They say that current Canadian laws in this area are “a mess.” Thanks to Ken Kivenko for pointing me to this one. Where Does All My Money Go ? says you shouldn’t take up a bank’s offer to take a payment holiday. Canadian Couch Potato shreds claims made by a mutual fund company in their ad. Big Cajun Man lays out the reasons why some parents are pushed toward sending their kids to a private school. The Blunt Bean Counter brings us a detailed look at the ins and outs of tax-loss selling. My Own Advisor calls for clawing back Old Age Security at lower income levels. His reasoning is that it makes no sense for working-class Canadians to subsidize the lifestyles of upper-midd...

The push to expand CPP has been strong lately. The idea is that too many Canadians won’t save for their retirements and must be forced to save more money. Setting aside the argument over whether it is a good idea to force Canadians to save more money, I wonder if it is even possible because of debts. For various reasons, many Canadians simply won’t save for their retirements. Some have good reasons, but most don’t. If we expand CPP, we can force people to save more through increased payroll deductions. Those who already save for their retirements can afford to save a little less because they can expect higher CPP benefits. So, by expanding CPP, we’re mostly affecting those who don’t save now. But how can we stop people from simply building larger debts as they head into retirement? When Canadians carry debt into retirement, it’s as though they have pre-spent part of their CPP benefits. If CPP expands, they can borrow even more and pre-spend the increase in CPP benefits. ...

In Rob Carrick’s latest roundup of personal finance links on the web he asked his readers to take a short Qualtrics survey to “help build a better investor risk assessment tool.” Unfortunately, the survey has problems that will muddle its results. The main question on the survey asks which of 4 investments you’d be most comfortable with. Here is the exact wording: “Investments with higher potential returns typically involve greater risk. The following chart shows four hypothetical investments of $10,000, each with a different potential best and worst outcome at the end of one year. Which investment would you be most comfortable with?” You are presented with 4 bar graphs giving ranges of possible portfolio returns going from safest to riskiest. Here were the ranges I was presented. Portfolio A: 0 to $10,900 Portfolio B: -$9600 to $11,200 Portfolio C: -$8900 to $11,800 Portfolio D: -$8400 to $12,400 Just based on the numbers, it’s hard not to choose Portfolio A because ...

Over her years of using her Toronto Star column to help consumers fight back against unfair company practices, Ellen Roseman has built up wide-ranging consumer skills. Her book Fight Back teaches us what she has learned and goes further with many parts written by experts in different areas. Across 81 short, easy-to-read sections, Roseman covers how to deal with almost every conceivable consumer problem. The broad categories covered in this book are banks, finances, telecom suppliers, travel, retailers, cars and houses, and the courts. I’ve had troubles in most of these areas, and I find this book very valuable. However, Dave Chilton, who wrote the foreword, shows he is better at singing Roseman’s praises than I am when he starts with “I LOVE ELLEN ROSEMAN’S WRITING.” I agree. In the rest of this post I’ll discuss specific parts of the book that I found interesting. Mutual Fund Companies In the past “many [mutual fund] companies treated investment advisors as their custome...

This week I fed my interest in poker: World Series of Poker Main Event Losses Here are my short takes and some weekend reading: Canadian Couch Potato uses factor analysis to look for value in Canadian equity ETFs. Big Cajun Man talks from experience when he explains how to get tax credits for school fees for a disabled child. My Own Advisor gives a quick, easy-to-understand summary of the things you should know about RRSPs. The Blunt Bean Counter is giving away copies of Richard Peddie’s book Dream Job .

With the main event of the world series of poker wrapping up tonight, I thought I’d throw a wet blanket on the dreams of aspiring poker players by looking at the risk-adjusted payoff of entering this tournament. The results are worse than I expected. The entry fee to the main event is $10,000. However, the prize payouts average only $9400 per player. Without any risk adjustment the average player is losing $600 by entering the tournament. To an insurance company with billions in assets, this analysis makes sense. But to people of more modest means, a reasonable amount of risk aversion makes the loss much higher. A sensible level of risk-aversion involves treating gains and losses geometrically. This means that doubling your net worth from $100,000 to $200,000 is as good as it is bad to have it cut in half to $50,000. Based on this model of the utility of money, a person with a $100,000 net worth expects to lose $5918 playing in the main event if his tournament result is just...

This week I found a problem with a trading account statement and added a new twist to my retirement income strategy: InvestorLine Computers Charge Me Interest A Retirement Income Strategy Revisited Here are my short takes and some weekend reading: The Blunt Bean Counter looks at the tax side of Bitcoins. Glenn Cooke gives a thoughtful review of Potato’s Short Guide to DIY Investing . Glenn makes an interesting pitch for keeping your stock investments in Canadian stocks, but then admits that this is likely just emotional and that including foreign stocks is probably best. Despite his assertion that we need to get emotions out of investing, he illustrates why this can be hard to do. Where Does All My Money Go? interviews Rich Cooper who explains some of the ins and outs of a DIY approach to settling your debts for less than you owe when you’re in serious financial trouble. Financial Crooks reviews Ellen Roseman’s book Fight Back . My Own Advisor has made some great...