I love reading Dan Ariely’s blog where he answers reader questions about human behaviour. His answers are very entertaining in addition to giving insight into our irrational responses and giving us ways to compensate for our irrationality. Ariely has collected many of his best questions and answers into a wonderful book, Irrationally Yours . Not much of the book is directly related to personal finance, but understanding your own irrationality is important in investing. On the subject of deciding whether your financial advisor’s services are worth the cost, Ariely recommends imagining sending a cheque every month instead of having the money taken away without your notice. Picturing yourself in the painful position of having to write that cheque, you’re in a better position to “ask yourself if you would pay your financial advisor directly for these services.” When Ariely answers a question about making sure people have enough retirement savings, he makes a joke with a commentary ...

Here are my posts for the past two weeks: Reader Question: Leveraged ETFs The Little Book of Common Sense Investing Personal Finance Election Issues Here are some short takes and some weekend reading: The Blunt Bean Counter , our favourite accountant, has written a book. It’s too late to enter his giveaway, but look for a review and giveaway on this blog in the next couple of weeks. Canadian Couch Potato explains why your ETF’s trading volume is likely higher than it appears. Tom Bradley at Steadyhand explains why the Steadyhand team is strongly incented to generate good returns for their clients. Big Cajun Man has noticed that just the act of examining his spending seems to automatically cause him to spend less. My Own Advisor takes a look at some of the things wealthy people do better than he does. Boomer and Echo gives a real life example of how leveraged investing can go horribly wrong.

Recently, Mark Seed at My Own Advisor called on Canadians to turn three personal finance issues into election issues . It certainly makes sense to take personal finance policies into account when you vote. Unfortunately, I mostly disagree with Mark on all three of his points. Here are Mark’s preferences in bold followed by my thoughts. 1. Keep the Tax Free Savings Account (TFSA) contribution limit at $10,000. On the surface, the choice is between a $5500 TFSA limit and a $10,000 limit. But that misses a crucial point. When the government increased the limit, they eliminated inflation indexing. So, the real choice is between $5500 with automatic cost-of-living increases or a fixed $10,000 limit whose value declines each year with inflation. It can be difficult to imagine that $10,000 will become a much less valuable amount of money at some point in the future, but it will happen. Just 5 or 6 decades ago, $10,000 could buy a nice house. Now it’s not much of a used car. F...

The average return earned by stock investors (before expenses) must exactly equal the average return of the stock market. This is the “humble arithmetic” founder of Vanguard, John Bogle, writes about in The Little Book of Common Sense Investing . Collectively, we can’t be above average because we are the average. To be above average, you have to take money away from someone who ends up below average. However, stock trading is dominated by sharks looking to take your money. Bogle’s simple advice is to give up trying to beat the professionals who dominate stock trading and just buy and hold broad-based index funds. The best index mutual funds and ETFs give you the market average returns at extremely low cost. To beat the market, you have to outsmart professional traders by enough to cover the much higher expenses of active investing. This is a fool’s errand for all but a few of the best investors. Even most professionals can’t succeed at this game. So, why do we try? It see...

A reader, J.H. asks the following thoughtful question about leveraged ETFs (edited for length): I am familiar with the decay factor of leveraged ETFs over the long term. However, it seems that using 50% cash, 50% 2X ETF, rebalanced say annually, mirrors the underlying 1X ETF very closely. In fact it is a bit better on a risk adjusted basis. Blue portfolio: 100% SPY (an S&P 500 index ETF) Red portfolio: 50% SHV (short-term U.S. bonds), 50% SSO (a 2X leveraged S&P 500 ETF) These two portfolios gave nearly identical returns from 2008 to the present. I found this to be contradictory to everything I read about leveraged ETFs. A six year back-test should be enough to unveil the presumed decay, but I don't see it. I am particularly interested in this way of investing as it provides a way to beat SPY without taking all the risk of being all-in. If on the cash component one can earn more than what SSO pays to borrow to buy stock (these days, one can make 2.3% or so using a...

Here are my posts for the past two weeks: How Much Diversification Do You Need? Should You Take a Variable Rate Mortgage?  Here are some short takes and some weekend reading: Tom Bradley at Steadyhand explains how the wealth management industry encourages investors to follow cyclical shifts even though such behaviour harms returns. Boomer and Echo guarantee that the stock market will crash but aren’t saying when. My Own Advisor updates us on his progress toward financial goals. The one thing not clear to me is that I thought he filled his TFSA from older savings, which may be a good idea if you haven’t got new savings, but doesn’t represent much progress. Big Cajun Man sees his line of credit interest rate increasing and tries to get it reduced.

A fellow financial blogger asked my opinion about his upcoming mortgage renewal. He faces the same choice as many of us do: should you take a fixed-rate mortgage or go for the lower variable rate? The risk with the variable rate mortgage is that rates might rise. The answer requires surprisingly little math. If rates stay the same for 5 years, then the lower variable rate will save you money compared to a 5-year fixed-rate mortgage. If rates go down, you’re even further ahead. Averaged over all possibilities, the average outcome is that you save some interest on a variable-rate mortgage. The worry, though, is the possibility that rates go up. You can’t fully protect yourself against rising rates even with a 5-year fixed rate, because you’ll have to renew at a new interest rate after 5 years. But you might hope to get your balance down enough that you could absorb an interest rate increase in 5 years. The real test of what you should do comes with looking at a terrible outc...

Some investment experts advocate maximum diversification, which others deride it as “di-worse-ification.” In Ben Carlson’s recent article , he is somewhere in the middle saying you need to find the “right balance between eliminating unsystematic risk (risk that’s specific to single securities or industries) and di-worsification by adding too many overlapping funds.” Who is right? Your answer depends on your views on active investing. At one extreme, suppose you knew for certain you’ve identified the one stock that will go up most in the next year. You’re not 90% sure or 99%. You’re 100% sure. Then you’d be crazy not to invest everything you have in that one stock. Of course, you’d also have to be crazy to be this certain about the stock. As our crystal balls become cloudier, the need to diversify arises. Maybe you decide to put some of your money into other stocks, even though you have less confidence in these other stocks. You’ve decided that the protection against possibl...