Friday, December 2, 2016

Short Takes: U.S. Fiduciary Rule, Jack Bogle, and more

I attended the Canadian Personal Finance Conference (CPFC16) recently. Here are my favourite quotes:

“A house is a forced spending plan as much as it’s a forced saving plan.” - Rob Carrick, columnist for The Globe and Mail on the CPFC Housing Panel

“You don’t borrow money from a bank, you borrow it from yourself.” - Preet Banerjee on learning how to hate debt again

Here are my posts for the past two weeks:

The Real Reason Why a Big Mortgage is a Bad Idea

Loyalty Points Battles

Here are some short takes and some weekend reading:

Brokers and insurance companies are desperate to preserve their right to deceive their clients. The latest effort to stop a fiduciary rule is an appeal to free speech.

Jack Bogle always gives a good interview, but this one is great. One gem concerns the path to real learning: “I glance at anything favorable to indexing; I pore over anything unfavorable. You don’t need people to tell you you’re right all the time. You need people to tell you that you’re wrong.” Another good quote is “Wall Street is a casino, that’s a fact.”

Justin Bender explains the catch behind commission-free trading of ETFs at National Bank Direct Brokerage. The result is that those who like to get new contributions working right away have to pay commissions.

Canadian Couch Potato has started a new podcast and the first episode is about DIY investing.

Potato announces a new web site for comparing robo-advisors (co-created by Sandi Martin). The focus is on comparing costs, but they take into account differences in other aspects of the robo-advisor offerings as well.

The Blunt Bean Counter sees a lot of estate planning mistakes, and he lists the top 10 here.

Boomer and Echo question whether reward points should be allowed to expire.

My Own Advisor interviews Ken Kivenko, a tireless advocate for individual investors. I admire Ken’s work, but after his description of his own investments, I’m not sure I agree when he says he is “very conservative.”

Big Cajun Man says debt is a four-letter word.

Monday, November 28, 2016

Loyalty Points Battles

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.

So, is it all just hopeless for the consumer? Not at all. Just keep all this in mind and protect yourself. For example, when comparing two programs, one with points and one that gives back dollars, discount the points somewhat before comparing. I’d rather get 2% cash back monthly on my credit card than get 3% in the form of points. (Even better would be if credit cards stopped giving anything back and charged merchants less, so that all prices could go down.)

Another way to protect yourself is to use up points as quickly as possible. Getting gift cards for a place where you routinely shop works well. I do this with Aeroplan miles (although it takes more miles to get a $100 gift card each time.)

An important way to protect yourself is to not let loyalty points change the way you shop. Spending money you wouldn’t have spent otherwise to collect more points is throwing away dollars to get back pennies. And once you have some points, if you wouldn’t have bought a Santa cuckoo clock for cash, then you’re not getting ahead buying one with points.

Loyalty point program rely on the fact that we get excited about seemingly free stuff without ever doing the math, or accounting for future changes in rules. But you can count on the fact that companies offering loyalty points are doing the math.

Thursday, November 24, 2016

The Real Reason Why a Big Mortgage is a Bad Idea

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 that you’d find another one easily enough. It’s very common for people losing their jobs to end up with a lower-paying job. Getting forced into permanently lower pay can happen to anyone, but is common for those over 50.

Health problems are another common reason your family income can drop. You may not be able to work at all or have to get a lower-paying job. Health issues are a common reason why some people are forced to retire before they want to.

Another factor younger people tend not to think about is that you may want to do something new later in life. If we could stop people on their commute to work and get them to answer honestly how they feel about their jobs, an alarming number of them would say they dread going to work and feel desperate and hopeless. They are trapped in their jobs by debt. They yearn to do something else, but that something else likely pays less money, at least for the first few years.

We can push all these worries aside by just leaving a healthy gap between the size of mortgage you take on and the size of mortgage a lender will let you have. Don’t give up future flexibility for an expensive house.

Friday, November 18, 2016

Short Takes: Active Management Police, Lake Wobegon Research, and more

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 share splits in ETFs.

Preet Banerjee explains how to calculate your CMHC insurance premium based on your house down payment (video).

Boomer and Echo have a good set of tips for negotiating a raise. It’s a good idea to look out for your interests, but it can be taken too far. I’ve worked with a few people over the years who were very good at the politics of getting higher pay and promotions. The trouble came when company fortunes forced layoffs, and these people were prime targets because their pay outpaced their usefulness to the company.

Jason Zweig reports on a new type of fund called an interval fund. Buyer beware.

Potato has a difficult personal story about failing to get disability insurance.

Insureye has a clear and informative list of insurance myths and facts. It covers insurance for home, car, life, health, critical illness, disability, and travel. I’ve never seen such useful insurance information gathered in one place before.

Big Cajun Man explains that when it comes to university costs, rent can be a bigger problem than tuition.

My Own Advisor breaks down his big investment goal into smaller sub-goals.

Million Dollar Journey answers a reader question about Whole Life Insurance for children.

Wednesday, November 16, 2016

Jobless Manufacturing

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 trend will not reverse.

If the U.S. becomes increasingly protectionist to the point of blocking the import of all foreign goods, this will spark the return to making goods in the U.S. But every manufacturer’s goal will be to automate as much production as possible and hire as few workers as possible. The amazing technology available today guarantees that these manufacturers would succeed in near-complete automation.

Even if the U.S. closes its border, we will never return to conditions decades ago when well-paid manufacturing jobs were plentiful. The past will stay in the past.