The Financial Consumer Agency of Canada (FCAC) has a page providing information about payday loans that has drawn criticism from some personal finance experts. The main problem I see is that FCAC didn’t include enough summary of the dangers of payday loans in the first few sentences. Lower down on the page, there is solid information about dangers. When you’re trying to help people, it’s vitally important to set the tone for your message very early. Many people won’t read past the title of an article. Others will read only the first couple of sentences. In most cases, only a small fraction of readers will make it to the end. The failing of FCAC’s payday loan page is the tone it sets in its short introductory section. Some would want FCAC to use strong language to warn Canadians away from payday loans. However, the Government of Canada has to be careful about sticking to facts. They can’t publish a diatribe against a legal industry. Below is my suggestion for a few small ...

Here are my posts for the past two weeks: The Index Revolution Experienced Investors and Novices Here are some short takes and some weekend reading: The Reformed Broker asks “If stocks keep going up, why isn’t anyone celebrating?” A couple of other good quotes: “This may be the first bull market in history that featured layoffs on Wall Street” and “The stock market is now 35% passive and 65% terrified.” Squawkfox has some sensible advice about whether you can afford to buy a home. She even has a spreadsheet to help you work out the number for your unique situation. Sharp-eyed readers will notice a big difference between her rule of thumb that “a mortgage should not exceed 3X your annual income” and the much more relaxed “stress test” limits required by the government. Squawkfox says you should ignore how much the bank says you can borrow and figure out what you can really afford. A Wealth of Common Sense lists the things the market does not care about. The only one ...

It’s common to hear that certain types of risky investments are not for novices. Some will take this to mean that such investments are good for experienced investors. This isn’t necessarily the case. A recent example of this type of advice is an article warning investors about quadruple-leveraged ETFs : “Investing in even modestly levered funds is a potentially dangerous proposition for inexperienced investors.” This quote is true, but some readers may conclude that these leveraged ETFs are safe if you’re an experienced investor. It’s worth reminding ourselves of a simple truth: if two investors buy the same investment for the same price on the same day, and they sell it for the same price on the same later day, they will get the same return. The more experienced investor won’t somehow get a better result. To perform better than novices, experienced investors must do something different from novices. Quadruple-leveraged ETFs are usually a bad idea for investors no matter th...

Charles D. Ellis draws on his distinguished 50-year career in investing to make a very strong case for indexing in his recent book The Index Revolution: Why Investors Should Join it Now . He acknowledges that collectively professionals used to be able to use intelligence, discipline, and early access to information to beat the market, but that this is no longer true today. His arguments are clear and thorough. We might wonder whether the modern failure of investment professionals is a sign that past professionals were smarter. Ellis explains that this is not the case. In the 1960s, “Active investment managers were competing against two kinds of easy-to-beat competitors. Ninety percent of trading on the New York Stock Exchange was done by individual investors. Some were day traders ... [and] others were mostly doctors, lawyers, or businessmen.” “Fifty years later, the share of trading by individuals has been overwhelmed by institutional and high-speed machine trading to over ...

Here are my posts for the past two weeks: High Housing Costs vs. Avocado Toast Against the Gods Here are some short takes and some weekend reading: If forgery by banks is as widespread as this CBC article makes it out to be, we have much bigger concerns than whether banks are up-selling us. Phil Huber has a very interesting take on the unsung heroes of investing. Patrick O’Shaughnessy interviewed David Chilton in this interesting podcast. Because Money interviewed Preet Banerjee who shared several interesting findings from research in finance. One question he answered was why mutual fund companies have so many mutual funds. It turns out that it helps them capture performance-chasing clients. Robb Engen has some blunt words to describe the state of financial advice for people of modest means. Tom Bradley at Steadyhand says it is during calm times like we’re experiencing now that we have to plan how we’ll react to the inevitable downturn. It’s hard to get peopl...

Our modern understanding of financial risk is built upon work that reaches back thousands of years. Peter L. Bernstein traces this history in his interesting book Against the Gods: The Remarkable Story of Risk . Bernstein avoids overly technical material and looks at the historical figures who made meaningful contributions to the way we think about risk today. The book begins with ancient forms of gambling and early attempts to understand probabilities. It then covers Daniel Bernoulli’s early attempt to model rational financial decision-making when outcomes are uncertain. Bernstein frequently criticizes Bernoulli’s work as being a poor model of how people actually make choices. But, as I’ve explained before , I see no evidence that Bernoulli was trying to model human behaviour. He was modeling how we should make decisions, not how we actually make decisions. When Bernstein makes it to Gauss’ contribution, he observes that “The normal distribution forms the core of most system...