Investors find many ingenious ways to underperform stock indexes. Sadly, many have no idea that their brilliant moves actually work out badly over time because they don’t track their returns accurately. Among the ways that investors manage to harm their portfolios is what I call “anti-rebalancing”. The idea of rebalancing your portfolio is that you start with fixed percentages of various asset classes, and when they drift away from the fixed percentages, you bring them back in line. For example, suppose Beth holds 4 funds in equal amounts: Canadian stocks, U.S. stocks, foreign stocks, and bonds. Every so often she checks which fund balance is higher than the others and which are lower, and she makes some trades to get the amounts back in balance. This sounds easy enough in theory, but isn’t so easy in reality. After the explosion of U.S. stocks in 2013 and the relative underperformance of foreign stocks, Beth is supposed to sell some of her U.S. stock fund and buy more of her ...

The obvious upside of naked puts is that you get to say “naked” without being inappropriate. However, they have downsides as well. A colleague of mine (let’s call him Jim) took the time to understand how naked puts work and reacted the way many people react: they seem like free money. I’ll explain what naked puts are and why they don’t give free money. Let’s use Jim’s example Bank of Nova Scotia stock (BNS). The buyer of a put option on BNS has the right, but not the obligation, to sell BNS shares at a set “strike” price to the seller of the put option. In Jim’s example, he could sell put options on BNS for $6.25 each. If the BNS shares drop, the option buyer could force Jim to buy BNS shares at the strike price of $66 any time until January. The “naked” part of a naked put refers to the fact that Jim does not have a short position in BNS shares that would be closed out if he is forced to buy the BNS shares. The way Jim sees it, he can’t lose. If he is forced to buy the BNS...

Here are my posts for this week: Taking the Gail Vaz-Oxlade Test Filling out Tax Forms Properly for RRSP Contributions The Levels of Personal Financial Competence Here are some short takes and some weekend reading: Tom Bradley at Steadyhand sums up the current battle over mutual fund trailing fees. I’d be happy to see regulators put a stop to all payments from mutual funds to advisors. Canadian Couch Potato looks at the recent drops in ETF MERs by BlackRock and BMO. Big Cajun Man deletes his Mint.com account to improve his online financial security. Million Dollar Journey gives a high-level view of how to delay capital gains taxes on your business when you pass away.

Here I take a 1000-foot view and define levels 0 to 3 of personal financial competence. One of the big things I’ve learned about personal finance since I started writing this blog is the staggering number of people mired in the lower levels. Level 0: Spend as you please and tomorrow will take care of itself The main thing that characterizes people at this infantile level is declining net worth. They use credit to go out to eat, vacation, and buy cars. They justify their spending with nonsense like YOLO and “I’m worth it.” I don’t include in this group retirees who are sensibly drawing down their life’s savings. Their net worth may be declining, but with a logical purpose. I also don’t include people who face serious medical problems that prevent them from making a living and require them to spend on health care. Foreseeable events like a car breakdown or needing dental care don’t get you off the hook for a level 0 label. In my parents’ day, this level largely didn’t exist...

Those who make an early start at contributing to their RRSPs for the year are sometimes confused about how to file their income taxes properly. It’s important to fill out Schedule 7 in the correct year. Although TFSAs have blunted the traditional RRSP rush each year near the end of February, many Canadians still wait until the last minute to make their contributions. These last-minute contributors know that they can make an RRSP contribution in the first 60 days of this year and still take a deduction on last year’s income taxes. However, some early birds have already used up their 2013 RRSP room and got ahead of the game by making a 2014 RRSP contribution during the first 60 days of 2014. Some of these people mistakenly think they should wait until they file their 2014 income taxes to declare this contribution. That’s not how it’s supposed to be done. Even if you don’t intend to take a deduction for an RRSP contribution you made in the first 60 days of this year until you fi...

I’ve learned a lot from watching Gail Vaz-Oxlade work with people who manage their money poorly. She understands what they’re doing wrong and knows when they need a hug and when they need to be called morons. However, I find her prescriptions don’t apply well to people like me. To illustrate, I’ll take a recent test she posted on her blog. Like 10% of Canadians in a study Gail quotes, I give myself an A in financial literacy. However, Gail correctly observes that “many Canadians may have a false sense of confidence.” Here are a few facts about my finances before I leap into taking Gail’s tests: – I save more than half of my take-home pay. – This savings level is not really part of any plan. I just look back at my credit card, bank account, and trading account records and see that I’ve saved more than I’ve spent. – I check my account statements closely for errors, but I maintain high enough balances that I don’t have to check often to see if I have enough money for a particu...

With Easter upon us, I’ve compiled my short takes a day early. Here are my posts since my last set of short takes: Bad Advice on Retirement Is it OK to Pay Off Your Mortgage before Saving for Retirement? Personal Financial Education Can’t Solve All Problems Here are some short takes and some weekend reading: Jason Zweig explains some of the things that happen to an aging brain and how they affect investing decisions. I’m guessing that most of us are sure this won’t happen to us, but we’re almost all wrong. Mr. Money Mustache says that while spending on experiences makes us happier than buying things, buying nothing at all makes us happiest. Preet Banerjee was a victim of financial fraud recently. He describes what happened and how he solved the problem. Potato announces his new “Automagical Financial Planning Ballparkinator” to answer the question of how much you need to save. I like the fact that he advertises clearly that any such calculation is necessarily ju...

I’m a believer in life-long learning. We’re better off when we take the time to learn what we can about personal finance. However, some people seem to believe that if we just taught personal finance well enough in schools, we’d prevent so many people from handling their money poorly. Education is valuable but will never be a complete solution. The first reason why personal finance education isn’t enough is human nature. We know we should eat well and exercise, but many of us are fat and out of shape anyway. When I eat a donut, it’s not because I lack education; it’s because I had a lapse in willpower and the donut was available. Similarly, personal finance education will help to a point, but even those who know better will often lack the impulse control to make consistently good money decisions. Another reason why personal finance education isn’t enough is that businesses that make money from our poor choices will adapt. Financial institutions have been remarkably successful...

Many financial advisors would say you shouldn’t defer saving for retirement to pay off your mortgage first. However, the truth is that paying off your mortgage first can be a perfectly sensible strategy as long as some important conditions are met. The main condition you need to meet is that you are saving for the long term in some form. This should be at least 10% of your take home pay directed to long-term savings, preferably more. Commissioned financial advisors can make money if your savings are in the form of RRSP or TFSA contributions, but making extra payments against your mortgage can work for you as well. Note that I said “extra” mortgage payments. It’s no good to save nothing in an RRSP or TFSA and just make your regular mortgage payments for 25 years. That’s just using your mortgage as an excuse to overspend right now. Suppose your family take-home pay is $70,000. Then if you’re going to defer making RRSP or TFSA contributions, you should be paying at least $7000...

In a recent Reuters article, Linda Stern explains that there is a big difference between an ideal retirement and the kind of retirement people end up with. She’s right about this. But she goes off the rails when she suggests that you should plan for a typical retirement. Apparently, “Most people spend a lot in their first year or two of retirement ... But over time, retiree spending drops substantially.” It’s hardly surprising that people spend now and worry about the consequences later. But when Stern advises that retirees plan to “start their retirements withdrawing 5 percent or more of assets in their first year of retirement” because retirees “don't inflate their spending on an annual basis to match the Consumer Price Index,” she goes off the rails. I find this logic nuts. Other people plan poorly, overspend initially, and endure the painful reality that they’ve wasted a chunk of their savings and have to cut way back. So, I should set out to do the same thing? Th...

I'm on vacation this week which leaves this week's short takes a little thinner than usual. Here are my posts for the week: What Distinguishes Good Financial Advisors from the Poor Ones? Feds Announce Sweeping CPP changes More on CPP changes Here are some short takes and some weekend reading: Preet Banerjee shows how financial advisors could make $1 million more in their lifetimes if their clients invest in lower cost products, even if the percentage cost of advice remains constant. James Osborne explains clearly why high frequency trading (HFT) is not a concern for buy-and-hold index investors. In short, HFT takes a small bite out of you only when you trade or the finds you own trade. Canadian Couch Potato wrote a very good April Fools’ joke. The description of his new mutual fund had me laughing hard by the end. The Blunt Bean Counter shares a retirement planning spreadsheet from one of his readers. Big Cajun Man says that laptops don’t last as long ...

By now most readers of yesterday’s post on sweeping changes to CPP have figured out that it was an April Fools’ joke. However, with the exception of very low income Canadians who are reasonably well served by the existing CPP+OAS+GIS system, I think such changes would be positive for Canadians. Many people would be thrilled to be able to just put their savings in CPP rather than try to learn how to invest well. Further, Canadians struggle with how much they need to save for retirement because of the uncertainty of how long they will live. Suppose that CPP payments started at age 75 and were large enough that no other savings would be needed from then on. Figuring out how much you need to save to live on from the time you retire until you’re 75 would be much simpler. For example, if you know you’ll be fine from 75 on, and you want $30,000 per year (on top of OAS) starting at age 65, you know you’ll need to save up about $300,000 less any interest you earn from 65 to 75. A s...

Of course, this is an April Fools’ joke.   No government could survive trying to make such a change.   Too many Canadians cling to the vain hope that they can retire comfortably with minimal savings at age 60 on CPP and OAS kicking in at 65. Experts say that Canada’s new Finance Minister is trying to make his mark on his new job by announcing sweeping changes to the Canada Pension Plan (CPP). Claiming that “average Canadians don’t want to think about how to invest their savings,” Oliver declared the current dominant model of defined-contribution pensions “a failure.” Citing evidence that individual investors consistently make poor choices buying high and selling low, “people need to be able to save their money in a fund they can trust, and that fund is CPP.” The current level of mandatory CPP contributions will stay, but additional contributions up to an income-tested maximum will be permitted “and encouraged.” A further problem is that CPP payments are just too...