Have a great Canada Day! With Canada Day landing on Friday, I’m giving my short takes a day early. Here are my posts for the past two weeks: Visa Response to Walmart Unconvincing Misbehaving: The Making of Behavioral Economics Benchmarking A Wealth of Common Sense Here are some short takes and some weekend reading: Big Cajun Man looks at solutions to the problem of how to keep making financial decisions for an autistic family member who becomes an adult. Hint: the solution is not a power of attorney. Tom Bradley at Steadyhand observes that few people in the financial industry are in a position to be critical of our banks, but he would like to see the much lower costs that are surely possible due to their massive scale. I’ve long thought that the best hope for lower costs will be a never-ending stream of banking start-ups (such as ING/Tangerine, PC Bank, EQ Bank, etc.). As the big banks buy each start-up, it just encourages more start-ups to give it a try. If enough...

In his book, A Wealth of Common Sense , Ben Carlson explains why the best investment plans use simple strategies with diversification and minimal trading. But his heart seems to be in trading. Maybe this makes his book most useful for those who are currently trading themselves into losses and need to be told to form a strategy that takes their own opinions out of the mix. The section that best illustrates Carlson’s tendency to think like a trader comes late in the book and is titled “Vetting Your Sources of Financial Advice.” After explaining the problems with most pundits who make extreme stock predictions based on oil prices and other economic indicators, he recommends that you “look for balanced viewpoints that look at both the potential rewards and potential risks.” I’d say that the average investor is crazy to trade frequently in the first place, and no amount of looking for the right talking heads will help. But, if you can’t help yourself, at least take Carlson’s advice o...

Some say that comparing your portfolio’s returns to an appropriate benchmark isn’t important as long as you’re meeting your financial goals. This sounds very reasonable, but whether or not it makes sense depends on the situation. Situation 1 : An investor saves all of her money in GICs. She could be making more over the long term by owning some stocks, but she is saving enough that she is meeting her financial goals. Is this sensible? With a couple of caveats, I’d say yes. Many investors, particularly GIC investors, don’t think enough about inflation. If you’re about to retire and your GIC portfolio is producing the amount of interest income you’d like to spend, then you could be disappointed in future years as inflation erodes your savings and your income. As long as our hypothetical investor takes into account inflation and possible interest rate changes, she should be fine ignoring the stock market. I prefer to go for the near certainty of an earlier retirement from deca...

Richard Thaler’s book, Misbehaving: The Making of Behavioral Economics , is both a fascinating look at the way humans make economic decisions and an interesting account of the history of this field within economics. Despite being an easy read, this book teaches important lessons. I had no idea that claiming humans are not completely rational was once controversial in the field of economics. The term used for a person who makes perfectly rational financial decisions is “Econ.” The entire field of economics was built on the notion that we are all Econs. Of course, we aren’t. Economists used to deny that our irrationality had any serious impact on markets, but Thaler devoted his career to showing how our mistakes are an important part of economics. One interesting finding is that “people who are threatened with big losses and have a chance to break even will be unusually willing to take risks, even if they are normally quite risk averse.” Perhaps this is the source of the common...

By now most people have heard that Walmart Canada announced it will soon stop accepting Visa credit cards. The reason they cite is that “the fees applied to Visa credit card purchases remain unacceptably high.” Visa now has a public response, but it is not at all convincing. Visa accuses Walmart of believing “that their cost to accept Visa cards should be much lower than all other merchants – lower than local grocery stores, pharmacies, convenience stores – and yes, charities and schools too.” Walmart’s announcement didn’t include a demand for lower costs than other retailers. All Walmart said was that Visa’s costs were too high for Walmart. Visa could reduce costs for all retailers if they want. This just looks like an attempt by Visa to pit Walmart against other retailers and portray them as greedy. Walmart doesn’t control what Visa charges charities and schools. Visa accuses Walmart of “unfairly dragging millions of Canadian consumers into the middle of a business disagre...

Here are my posts for the past two weeks: A (U.S.) Penny for Your Thoughts How Not to be Wrong Building a Tolerance for Debt “The Foundation of Financial Independence is a Paid-for Home” Here are some short takes and some weekend reading: The Reformed Broker has a very sensible take on the news that George Soros is betting against global stocks. No doubt Mr. Soros has high moral character, but if he were acting purely in his own self-interest, he would be best served by leaking this story shortly before buying out his short position and going long. Robert McLister warns us about a mortgage broker scam where the broker offers cash-back to effectively lower your interest rate but gives too little cash for the claimed reduction in interest rate. This is closely related to cash-back mortgages that I analyzed years ago and created a calculator to compute the effective interest rate for a given amount of cash back . The Blunt Bean Counter explains the tax implications of ...

This article’s title is a frequent quote from journalist Jonathan Chevreau (see here for one among many examples). He is a baby boomer and this advice has worked out spectacularly well for most baby boomers who have followed it. However, today, this advice is likely to lead young people astray. In much of Canada, house prices have become—pardon the technical term—stupid. My first mortgage was less than one-and-a-half times my family’s yearly gross income. Even cheaper fully-detached homes on nice lots were available at the time. Today I see families getting mortgages for four to five times their gross incomes. The multiple on their take-home pay is even higher. This creates enormous multi-decade financial burdens at a time when secure long-term employment is becoming scarcer. Getting back to baby boomers, buying a home had many advantages. One such advantage was that in the period shortly after buying a home, mortgage payments forced a family to control spending and save i...

The first time I got a mortgage, the feeling of being in debt occupied my mind and kept me off balance for quite a while. I felt I should cut back on spending as a response to this feeling of financial “emergency.” Eventually, I got used to it, as do others. The trouble comes when you get used to more serious debt problems. When discussing credit cards, I usually tell people that having a balance on credit cards you can’t pay off each month is a hair-on-fire emergency that should trigger immediate cuts to discretionary spending. No more eating out, movies, or other unnecessary spending until the credit cards are paid off. However, it’s not possible to stay in a panic state for a long time. It’s very easy to get used to being in debt. Many people who lose their jobs or have some other financial calamities find themselves not only with credit card debt, but also in debt to hydro, the gas company, the phone company, and many other creditors. As they dig themselves out of debt,...

Jordan Ellenberg’s ambitiously-titled book How Not to be Wrong does a good job of teaching many broadly applicable ways of avoiding mistakes. It contains surprisingly little of what we’d recognize as math considering its subtitle The Power of Mathematical Thinking . Ellenberg explains that mathematical thinking often looks a lot like common sense. While this book isn’t specifically about personal finance or investing, it does teach lessons that are useful for our financial lives. The book begins with one of the best answers I’ve seen to the question posed by many frustrated math students: “ When am I going to use this? ” I can’t do justice to the answer in just a few words, but I’ll give it a try. Just as you never see a professional soccer player “zigzagging between traffic cones” in the middle of a game, you may not spend much time doing algebra or calculus in your daily life. But the soccer player’s drills make him a better player, and math training helps you “understand th...

Now that Canadians have had a few years of life without the penny, we’ve more or less figured out that none of the terrible predictions came true. But the U.S. has penny proponents who are sure that eliminating the penny will bring big trouble. I think their tactics are all wrong, though. One penny advocacy group called Americans for Common Cents wastes their time trying to refute obvious facts such as that the penny is essentially worthless, and that eliminating pennies will save time at checkout and will save the government some money. This approach of trying to make nonsense arguments sound reasonable is a bad strategy. I think they need to hit people with on a more emotional level. Here’s one idea from another successful lobby: The government wants to come into your house and take all your pennies! Nobody wants the authorities trampling flowers and rooting through their underwear drawers. And just think of the increased cost of having to play Rummoli with nickels. Al...

Here are my posts for the past two weeks: Dangers of Using the Rich as Role Models Pensionize Your Nest Egg Here are some short takes and some weekend reading: Tom Bradley explains why we need to overcome our emotional reactions and learn to love market sell-offs. It’s amazing how our instinctive reactions to falling stock prices can be so incredibly wrong. Preet Banerjee explains what he would tell his younger self about how to start off investing (video). Dan Hallett points out how some fund advertisers are misleading investors with returns from F-series funds. Boomer and Echo explain what’s behind car dealership offers to buy back your 3- to 5-year old car. Canadian Couch Potato explains why he removed real-return bonds from his model portfolios. My Own Advisor takes a run at comparing his investment returns to that of a benchmark. This is an important part of finding out whether a stock-picker’s hard work is producing any value. Big Cajun Man says that ...

There are two central messages of the book Pensionize Your Nest Egg , by Moshe Milevsky and Alexandra Macqueen. The first is that having assets saved for retirement is not the same as having a pension. The second is that you can turn assets into a pension with the right insurance products. Both are true, but I have serious reservations about the variable annuities the authors recommend. To a first approximation, the authors say that if there is a nontrivial chance that you’ll run out of money in retirement, then you don’t have a pension. Any attempt to manage your asset allocation through bucketing or other means can leave you vulnerable to the risks of living long, inflation, getting poor investment returns, or having poorer returns early in retirement that deplete your nest egg. The authors do a good job of explaining each of these risks. The offered remedies for all of these problems are various types of annuities sold by insurance companies. The authors offer a process fo...