In a recent post , an anonymous commenter took me to task for my opinion that mutual funds should not be permitted to pay financial advisors. Rather than just rebut the commenter’s argument, I want to use it to illustrate an important difference between good and bad financial advisors. Here is the criticism edited for length (the original comment is here ): You say “If advisors are performing a valuable service, their clients should be willing to pay them directly.” How do you reconcile this statement with you making money via advertising on your site? If you feel that should be the ONLY model, why not charge people directly for this site? When you go to a store and a salesperson helps you pick out a product, do you pay them separately or assume their compensation is included in the sticker price? Of course, the reason I don’t try to collect a few pennies each time a reader visits my site is that the overhead would be far too high. It’s obvious which parts of my site are content...

In a week of travel and meetings for 10 hours a day, I managed two posts: The Little Book of Behavioral Investing Who Owns the Money in a Relationship? Here are some short takes and some weekend reading: Preet Banerjee does some detailed calculations to show how a lifetime of portfolios fees affect retirement income. He gives a clearly designed spreadsheet so that you can adjust the assumptions for your situation. Tom Bradley at Steadyhand found a new fund (not a Steadyhand fund) that charges a management fee not based on the usual percentage of investor capital but on the total amount of leveraged assets. So, if the fund has $600 million in investor assets and borrows $200 million more for leverage, the management fee is a percentage of the $800 million total. This is a pretty strong conflict of interest. Phil DeMuth at Forbes explains what’s going on when you get a pitch for active fund management. The appeal to your greed is strong. Jonathan Chevreau reports th...

My wife and I have various assets such as our home and our savings. The question of who owns what can be surprisingly complex. The reason for this complexity is that there are three different points of view on answering this question. Here I look at our assets from each of these points of view. How We See Ownership Our view of ownership is quite simple: 50/50 for everything. I know that some couples choose to have his and hers money, but that’s not how we do it. When it comes to paying for things, we decide who will pay based on convenience. If my wife needs some cash, I hand her some without bothering to do any kind of accounting. I think this works well for us because we are both quite frugal. Control of Assets Just because the ownership of our assets is 50/50 doesn’t mean that we each exercise 50% control of all assets. To pick a trivial example, I don’t touch her toothbrush. It might be 50% mine in an ownership sense, but in terms of control it’s 100% hers. This ...

Author James Montier promises to show you “How Not to Be Your Own Worst Enemy” in his Little Book of Behavioral Investing . He does this by going through a number of interesting ways we tend to make investing mistakes. In addition to being very interesting, this book is concise; it packs a lot of useful information into 219 small pages. A common theme in this book is that it isn’t just dummies who make behavioural mistakes. In one test where people are given three very simple questions, even among MIT students and professional investors, less than half get all three answers right. The problem is that the questions are designed so that an obvious but incorrect answer suggests itself quickly. One of the questions is “A bat and a ball together cost $1.10 in total. The bat costs a dollar more than the ball. How much does the ball cost?” Other testing shows that the more of these three questions you get right, “the less likely you are to suffer extreme loss aversion.” An experim...

I had a full week of posts: Different Ways of Comparing RRSPs to Other Types of Accounts Dishwasher Commits Suicide Reader Question: How to Protect against the Dropping Canadian Dollar Malcolm Hamilton on Public-Service Pensions Here are some short takes and some weekend reading: Preet Banerjee interviews Dan Hallett in his latest podcast discussing The Financial Advisors Act of Ontario. My 1000-foot take on this act: it’s about weeding out unlicensed advisors and does nothing to address the systemic problem of the bulk of advisors hiding their fees from their clients and choosing ridiculously expensive products for their clients. The Blunt Bean Counter explains that CRA now expects those who earn income from a web site, even if it is just advertising income, to fill out a T2125 form reporting these business activities. I’m still trying to get my tax software to handle this for me. I expect to get this to work, but if I end up having to file on paper, I’m pretty sure...

Well-respected pension expert Malcolm Hamilton has a new report entitled Evaluating Public-Sector Pensions: How Much do They Really Cost? He shows that public-sector pension costs are "materially understated and, as a consequence: employees in the public sector are paid more than is publicly acknowledged and, in many instances, more than their private-sector counterparts; public sector employees shelter more of their retirement savings from tax than other Canadians are permitted to shelter; and taxpayers bear much of the investment risk taken by public-sector plans while the reward for risk-taking goes to public employees as higher compensation." I approach studies skeptically and am frequently critical of mistakes made by authors of studies, but not here.  It is definitely worth paying attention to Hamilton.

A thoughtful reader asked me about how Canadians can protect themselves against our dropping Canadian Dollar. I won’t name this reader because I intend to answer this question more forcefully and bluntly than usual. This may come across as wrath against this particular reader but that isn’t my intention. I want to shake up people’s thinking. Here is the beginning of the (lightly edited) question: Predictions abound that the Canadian dollar will drop in value relative to the U.S. dollar. This might be due to the overall economic forces, or maybe the election of PQ and the Neverendum issue. First of all, “Neverendum” is clever; kudos to whoever thought of it first. Next I have a message for the people of Québec: Don’t listen to the vocal minority in the rest of Canada. We love you. Please don’t go. Predictions about the Canadian dollar are worthless. Do you seriously believe that Canada’s current economic and political issues have somehow escaped the attention of the peop...

Kenmore Elite “Dishy” Dishwasher died suddenly in the early morning hours of Tuesday, March 11, 2014, at the tender age of 9 years following a long battle with depression and cereal caked onto breakfast bowls. In a tragic end, Dishy stuck his motor relay to the on position and fired smoke through his door. His loving family found him through the haze and stench too late as his motor kept driving even after his door was opened and he fired hot water around the kitchen. After his breaker was tripped and open doors and windows cleared the haze, it was clear that the extensive damage meant Dishy had washed his last load. Foul play is not suspected; Dishy made his own tragic choice. Dishy leaves behind his family who missed him until he was replaced two days later with another dishwasher of the same colour, which apparently is important to at least one member of Dishy’s family. In lieu of flowers, please give generously to the foundation for making dishwashers that fail less spectacul...

I’ve had some reader feedback about my recent post on debunking RRSP myths concerning realistic approaches to making RRSP contributions. Here I take a look at different ways to fairly compare RRSPs, TFSAs, and non-registered accounts. In the original post , my hypothetical investor, Ami, only had $6000 available to invest for the long term, but knowing that she was in a 40% marginal tax bracket, she made a $10,000 RRSP contribution and counted on the $4000 tax refund. Some readers think it’s more realistic to assume that Ami would only make a $6000 RRSP contribution, which is fair enough. However, the $2400 tax refund that Ami gets from the $6000 RRSP contribution has to play a role in comparing this RRSP approach to investing the $6000 in either a TFSA or a non-registered account. With one way of handling the income tax refund, we could just assume that Ami puts it into her RRSP as well. But that’s not the end of it. Ami’s $2400 contribution next year generates a $960 refun...

Apparently pictures are popular given the response to my post about RRSP myths. Here are my posts for this week: XIU is Hard to Replicate Cheaply Debunking RRSP Myths with Pictures You’re Paying More Mortgage Principal than You Think Here are some short takes and some weekend reading: Snowbirds should be aware that Canadian and U.S. authorities are gearing up to keep better track of how long you spend in each country . This will open the door to enforcing existing health care and tax rules more strictly. Mr. Money Mustache has a run in with a company and its lawyers over reader comments on his blog. The ending is happy and funny. In a note to this company he suggests that “when you are done punching yourself in the face, you can send me a personal apology.” Preet Banerjee interviews certified financial planner Will Britton in his Mostly Money Mostly Canadian podcast. Potato has a very interesting calculator for deciding whether renting or buying a home is better ...

I’ve got some good news. When you think in inflation-adjusted terms, you’re really paying more mortgage principal with each payment than you may think. The bad news is that home buyers these days have a punishing amount of principal to pay. When it comes to money, it’s important to think in inflation-adjusted terms . It’s easy to get lulled into the feeling that a dollar today is the same as a dollar was last year. But it isn’t the same. Dollars are leaky; it takes more of them to buy the necessities of life each year. The leak is slow enough that we don’t feel it every day. Fortunately, the leakiness of dollars works to a borrower’s advantage. Suppose that you’ve just taken on a $250,000 mortgage at 3% interest. Amortized over 25 years, the monthly payment is $1183. After the first payment, the balance owing drops by $562. When we think in nominal terms (as though dollars are constant), we would say that your first payment was split so that you paid $621 in interest an...

There are persistent myths about the tax-inefficiency of RRSPs. Here I debunk these myths using pictures. Myth 1: It is more tax-efficient to earn capital gains in a non-registered account than it is to earn them in an RRSP. A typical justification for this belief is that in a non-registered account only half of the capital gains are taxed, but all of an RRSP withdrawal gets taxed. To explain why this is a myth, let’s enlist the help of a hypothetical investor Ami. Five years ago Ami bought a house on her own and was somewhat house-poor until a promotion and raise two years ago. Since then she has managed to build $11,000 in a savings account without adding any debt beyond her mortgage. Ami plans to use $5000 of her savings toward a used car this summer, but she wants to invest the remaining $6000 for the long term. She is trying to choose among an RRSP, a TFSA, and a non-registered account. Within the account, Ami intends to invest with a goal of earning capital gains. ...

Some of my readers ask why I bother with ETFs when I could save the MER costs and buy the index stocks directly. For example, instead of owning the popular iShares index fund XIU, why not save the 0.18% per year and buy the 60 Canadian stocks that make up the index this ETF tracks? The short answer is that replicating XIU cheaply is difficult. Let’s look at a fictitious example. Dan has a sizable portfolio. His allocation to XIU is $500,000. This fund’s MER of 0.18% costs Dan $900 per year. With such a large portfolio, Dan seems like a good candidate to try buying the TSX 60 stocks directly to save some of that $900. Let’s assume that Dan’s XIU shares are all held in tax-sheltered accounts, such as RRSPs, RRIFs, or TFSAs, so that we don’t have to worry about capital gains taxes. We’ll also assume that Dan pays only $5 per trade and that the spreads on TSX 60 stocks average one cent lost per $50 traded (0.02% per trade). Trading Costs If Dan wants to own all 60 stocks in ...

I had more opinions than usual this week as you’ll see below. But, first, here are my posts for this week: UFile Giveaway Winners and Some Buffett Quotes How Much Gold Fits in a Backpack? CRA: Your Partners Whether You Want Them or Not Here are some short takes and some weekend reading: Susan Eng discusses 10 dumb things people say about pensions. She makes a lot of good points in the first 9 items, but she loses me on her top “dumb thing people say about pensions.” Apparently, instead of cutting down MP and civil servant pensions, we should be fighting so that we all get equally-good pensions. This is hopelessly impractical. If we all retired in our late 50s, there wouldn’t be enough people left to do the work to keep our economy going. There just aren’t enough younger people to make food, run stores, manicure golf courses, and provide all the other goods and services retirees would want. Rob Carrick has a spreadsheet to help you decide if you can really afford to ...

Many people struggle to understand RRSPs. I’m going to try a different approach to explain how RRSPs affect taxes. This explanation is based on the idea that the Canada Revenue Agency (CRA) becomes a partner in your RRSP investment venture. If you put $10,000 into an account, you think of it as entirely your own money. If it is a regular non-registered account, you’ll have to pay income taxes on any gains, but the original $10,000 is your money. Things aren’t so simple for RRSPs. Let’s suppose that you’re in a 40% marginal tax bracket. This means that each added dollar of income you earn costs you 40 cents in incomes taxes. If you put $10,000 into your RRSP, you get to deduct $10,000 from your income, and your income taxes will go down $4000. But this isn’t free money; CRA just became your partner. With that $4000 refund from CRA, they bought partial ownership of your RRSP. You can think of this as similar to running a business and selling part of it to a partner. Someti...

Last week I had some fun writing open letter replies to email solicitations . In one reply I said “I have decided not to turn my entire net worth into a lump of metal that fits in a backpack.” This was my way of using humour to poke fun at the absurdly high price of gold. But you may wonder if this statement is literally true. What dollar amount of gold fits in a backpack? A typical backpack used by high school students has a capacity of about 20 liters. Here are a few other facts that will take us to our destination: – 1000 cubic centimeters in a liter – Gold density is 19.3 grams per cubic centimeter – One troy ounce is 31.1 grams – A recent gold price was $1328.60 per troy ounce Combining all this together, we find that a backpack holds $16.5 million worth of gold! Although I don’t like to talk too much about my exact net worth, I’m prepared to reveal that I have less than $16.5 million. So, my net worth in gold does, in fact, fit in a backpack. If you find it cra...

I’m pleased to announce that every single entry to my UFile activation code giveaway had the correct answer to the skill-testing question. I know it wasn’t at all difficult, but some small fraction of people would get it wrong. Apparently, those people don’t read my blog :-) Congratulations to the winners who I have already contacted by email: Anatoli Cameron Louri Sean Christian Chris Thanks to everyone who entered the draw. Special thanks to reader Jon who was a winner but realized he wouldn’t need the code, and he made it available for another reader. Now on to a few good quotes from Warren Buffett’s latest letter to Berkshire Hathaway shareholders : “When Wall-Streeters tout EBITDA as a valuation guide, button your wallet.” EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Some people shorten this to “Earnings Before Bad Stuff.” “When promised quick profits, respond with a quick ‘no.’” “If you can enjoy Saturdays and Sundays...