The latest battle over expiring Air Miles prompted Robb Engen to call for a law banning loyalty point expiration similar to the ban on gift cards and pre-paid cards . This is sensible in that it removes one method loyalty point programs have to devalue points. However, it doesn’t solve the whole problem because there are many other methods. The most obvious way to devalue points is the slowly increase the number of points it takes to get rewards. Aeroplan has been doing this for years with their miles. Another commonly-used way to devalue points is to place arbitrary restrictions on when points can be redeemed. Clever businesspeople can certainly find other inventive ways to reduce their liability once the number of points they give out swells. One explosive way would be to set up a corporate structure so that the liability rests with a corporation starved for cash that goes bankrupt. This is similar to the way fitness clubs used to renege on multi-year pre-paid memberships. ...

We can try to justify taking on a huge mortgage by doing detailed projections of house price increases and accounting for various housing costs, but this isn’t the path to a useful answer. It’s unexpected factors that drive this decision. One factor that many don’t properly take into account is repair costs. We all know the furnace, roof, and other expensive items will need replacing, but we usually can’t predict when. This makes it easy to ignore such infrequent large costs in a budget. Some inexperienced homeowners may even forget about predictable costs like property taxes, house insurance, and condo fees. Another category of unexpected factors is reduced income. If you buy a house with a spouse right up to your joint affordability limit, any reduction in income can be devastating. We’ve all been told that we could lose our jobs, but in my experience, most people don’t think this will happen to them, even though it’s common. You may believe you could lose your job, but th...

Here are my posts for the past two weeks: Pandering to those with too much debt Helping students handle credit cards well Some financial policies to look for with a Trump presidency  Making arguments with made-up data Jobless Manufacturing Here are some short takes and some weekend reading: The Reformed Broker offers a funny piece satirizing the pressure on active management. I think the real pressure is on expensive management. I’d like active funds more if they were as cheap as the passive funds I own. Allan S. Roth gives a scathing indictment of the Journal of Financial Planning that once again published a flawed study claiming that active mutual funds outperform index funds and that fees don’t matter. One amusing conclusion of the study is that even index funds produce alpha. Tom Bradley at Steadyhand takes off the gloves in criticizing big banks that “accidentally” double-charged their clients. Canadian Couch Potato explains some benefits of reverse ...

Decades ago, well-paid manufacturing jobs were plentiful. Many people performing these jobs were solidly in the middle class. Recent protectionist talk in the U.S. has given voice to those hit hardest by the loss of these jobs. These people dream of returning to better times. Unfortunately, this won’t happen, but perhaps not for the reasons they think. Globalization has brought us cheaper goods and has shifted jobs to countries with lower-paid workers. On the whole, these changes have been positive for countries like Canada and the U.S., but localized areas have been hit hard by the loss of manufacturing jobs. Our modern economy has created many new jobs as well, but they require different skills and many of them provide less than middle-class pay. But it’s important to realize that globalization is only one reason why manufacturing jobs left. Another important reason is automation. Factories are now filled with machines to do jobs that used to be done by people. This tren...

Economic inequality around the world has been increasing in recent decades. It’s tricky to find the right balance between sharing the wealth and reducing the incentive to work and innovate. This is an important debate, but it is filled with nonsense arguments using made-up data. For some reason, people are impressed by arguments that include some sort of numerical evidence, even if the numbers make no sense. In a discussion of government spending and public debt, I once heard someone say that every dollar the government spends gets re-spent seven more times in the economy. The implication is that government spending provides a free multiplier effect, but just a little thought shatters this dream. If the government were to borrow and spent a few trillion dollars, it wouldn’t somehow grow and make us all rich. But this made up statistic seemed to win the argument at the time. A widely-cited web site is the Global Rich List (that has disappeared from the internet since this arti...

Donald Trump’s electoral victory came in part because he appealed to Americans who feel left behind in the modern economy. These people seem to believe Trump will improve their financial prospects. With this in mind, I’ll be watching for policy changes that affect American taxpayers and retail investors. Two in particular are a fiduciary rule and bank leverage. Fiduciary Rule When brokers and other financial salespeople sell investments to the American public, mostly for their retirement accounts, they are allowed to sell grossly over-priced investments. The high fees can consume one-third to one-half of an investor’s savings over an investing lifetime (these fees are typically even higher in Canada). The Department of Labor has been moving toward a fiduciary rule, which means the salespeople would have to put their clients’ interests ahead of their own and choose lower-priced investments. We’ll see if this rule gets abandoned now that Trump has been elected. Bank Leverage ...

Robert Brown has some ideas for how banks can help students learn to handle their credit cards without growing debt and paying interest. To deflect some obvious criticism, he concludes with “I honestly do feel that the big banks and other credit card providers are missing an opportunity to attract new customers – potentially very loyal customers for life – by treating them better while they are students. They will have plenty of time to profit from them once they have graduated.” Let’s start with a minor problem. Brown thinks he knows how banks should run their business better than they do. This is ridiculous. If his simple ideas for encouraging students to avoid debt and interest were profitable, the banks would already be using them. The truth is that hooking students on credit cards is profitable on multiple levels. For one, students rarely default because their parents usually pay if necessary. For another, setting a pattern of high-interest debt makes people more profitab...

Professor of economics at Carleton University, Frances Wooley, says that “ Financial literacy education is mostly ineffectual debt-shaming .” Her article makes a number of excellent points, but contains a dose of pandering as well. Most of what passes for financial literacy education doesn’t help people get out of debt. True enough. The forces that drive us to spend money are complex, just as the forces that drive us to gain weight are complex. Just telling a person to spend less rarely helps. Most people with too much debt already know their spending is a problem, so telling them again has minimal effect. There are possible exceptions with naive young people who haven’t yet maxed out their first credit cards, but just telling them to stop spending so much isn’t likely to help much either. Businesses do what they can to exploit our weaknesses and make it very easy to spend money with the tap of a credit card. Governments can certainly do more to help simplify people’s finan...

Here are my posts for the past two weeks: Crazy Mortgages Investing Lessons from Gambling on Coin Flips Faulty Investment Assumptions Here are some short takes and some weekend reading: Canadian Couch Potato has been running a long series about smart beta that ends with this post summing up his opinions. His fans who feared he’d gone to the dark side can rest easy. I appreciate his approach of keeping an open mind when looking into new ideas. We can’t learn anything new if we automatically reject all new ideas. I would never have taken up index investing if I hadn’t given it a chance. Although it seems unlikely I will make significant changes to my investing approach in the future, I won’t rule it out. One could argue that I have taken a small step toward smart beta by owning VBR (Vanguard’s U.S. small cap value ETF). However, nothing I’ve seen about smart beta has persuaded me to go any further than this. Barry Ritholtz quotes Bill Miller saying that the shift fro...

Ben Carlson wrote an interesting piece called Faulty Wall Street Assumptions where he goes through some misguided ideas financial professionals perpetuate about the way to investment success. What Carlson understands well, but may not show through to his readers is that it isn’t the financial professionals on Wall Street and elsewhere who are misguided. They are exploiting our faulty assumptions. Investors like you and me are making the mistakes. Let’s go through most of Carlson’s list of faulty assumptions and look at why financial professionals behave the way they do. Investing is about finding new opportunities and security selection. The very best investors with superior access to company information may be able do well looking for new ideas, but retail investors just jump from one dashed hope to the next. Click-bait screams “5 NEW INVESTMENT IDEAS!” to exploit our weakness. Why would anyone go to the trouble of finding great new hidden gems and then give them away to u...

Imagine you get to play a profitable game. You’re given $25 and get to gamble on the flips of a coin. Whatever amount you wager gets doubled or you lose the wager. The profitable part is that you’re told the coin is biased; heads comes up 60% of the time. After betting for a half hour (enough time for about 300 bets), you get to keep whatever money you have left. Your wagers have to be multiples of a penny, and you’re told there’s a cap on your winnings, but not the amount of the cap. If you bet enough to put you at or over the cap, you’ll be told at that point the amount of the cap. What betting strategy would you use? The experiment Victor Haghani and Richard Dewey ran this experiment on 61 “college age students in economics and finance and young professionals at finance firms.” Their very readable working paper is available here . Despite the financial sophistication of the subjects, they didn’t do very well with the betting. The experimenters capped winnings at $250,...