Monday, October 31, 2011

Taxing Insurance Settlements

A friend I’ll call Sam is in a situation that is new to me. He was in a car accident some time ago and has been trying to claim medical costs from an insurance company. The insurance company ignored him for a long time and recently offered a settlement that would close the matter. The problem is that the settlement appears to be taxable.

Sam has already paid $1200 so far in medical costs. The insurance company has offered to pay $1500 to settle the matter, leaving Sam to pay any remaining medical costs on his own. Sam is inclined to accept the offer rather than fight any longer, but the settlement documentation claims that the $1500 would be taxable to Sam. At a 46% income tax rate, Sam would only get to keep $810 of the settlement which is less than the $1200 he has already paid.

My first thought was to go back to the insurance company and ask them to cover his expenses so far ($1200) and pay an additional $300 lump sum to settle all other costs including any future costs. The hope here is that Sam would then only have to pay income taxes on $300 instead of $1200.

Are there any readers out there who are knowledgeable on these matters who would care to comment? Perhaps the Blunt Bean Counter has an opinion?

Friday, October 28, 2011

Short Takes: Free Online Property Valuation, Saving the Banking Ombudsman, and more

Canada Mortgage News reports that Zoocasa has a new free property valuation service called Zoopraisal. It was able to give me a value for my house. I don’t know if the appraisal is accurate, but it’s a start.  Update: a friend who keeps a close eye on real estate prices says that Zoopraisal is close in some cases, but in at least one case it was low by nearly 20% even though the house had just sold for the higher price.  He suspects that it didn't take into account special circumstances that make a house more desirable than others fairly close by.  Hopefully Zoopraisal improves over time.

Rob Carrick says it’s time for Canadians to stand up and save the Ombudsman for Banking Services and Investments (OBSI).

The Blunt Bean Counter has some useful details on who needs to report to the U.S. IRS. Many snowbirds don’t realize that they have IRS reporting requirements if they stay too long.

Preet Banerjee reports another good reason to avoid day trading: machine reading of news. It’s hard to act on news first if computers are acting on it in a split second.

Money Smarts has a detailed analysis of the relative benefits of Skype and long-distance voice plans for when you’re traveling.

Canadian Capitalist explains some new ETFs from Claymore.

Big Cajun Man went to the bank to get some free banking and came away with something better: a lower mortgage rate.


Retire Happy Blog has a glowing review of the new Wealthy Barber book.

My Own Advisor reviews the book The Elements of Investing.

Million Dollar Journey explains how to save money at Costco.

Wednesday, October 26, 2011

Real Estate Lessons from China

Elaine Kurtenbach reports that there are signs that the red-hot Chinese real estate market is cooling off. Real estate prices in China have risen consistently for so long that people have come to believe that prices only go up. Our situation in Canada is much milder, but there are parallels.

On a recent trip to China I happened to discuss housing prices with some PhD students. They talked about how their families were buying as many apartments as they could as investments. When I asked whether they were concerned that Chinese real estate might be in a bubble and that prices could drop drastically, they looked at me like I had two heads.

It was clear that their perception of the safe path to wealth was to save money and pour it all into real estate. There are many Canadians who feel similarly. They buy homes bigger than they need on the theory that they will make money when they sell these homes. But there are no guarantees. It is better to buy the home you need, pay it off, and diversify savings.

Let me stress that I have no idea if real estate in Canada or China is in a bubble or if the near future will bring higher or lower prices. What I do know is that any financial plan that pins its hopes on ever rising real estate prices is on shaky ground.

Monday, October 24, 2011

Commission-Free ETF Trading

Scotia iTrade was the first online brokerage to offer commission-free ETF trading and now Canadian Couch Potato reports that Qtrade is offering commission-free ETF trades as well. Saving money on commissions this way is a good thing, but it can mask problems.

I find trading similar to drinking: they’re both fun, make me feel good, and cost me money. I try not to be too anxious to get duty-free booze at the border. I have no problem with saving money, but I worry that if cheaper bottles of booze makes a significant difference to my finances, maybe I’m drinking too much.

Getting back to ETF trading, it’s better to pay nothing than something, but if you’re really saving a lot of money with free ETF trading, maybe you’re trading too much.

There are other hidden costs of trading that are less apparent than commissions. You pay half the spread on each transaction and you pay for trading against better-informed investors, some of whom have inside information (or at least information you don’t have).

So, go for the free ETF trading if the available ETFs fit your investment plans, but remember that your investing strategy is more important than a few dollars for commissions. Don’t let the tail wag the dog.

Friday, October 21, 2011

Short Takes: Isolating Advisory Fees, Flat Tax Trickery, and more

Money Smarts supports the idea of separating advisor compensation from mutual fund fees, but fears that this may not be enough to help investors understand their costs. I think this depends on how investors pay advisory fees. If they actually have to cut a cheque, then they will understand. If it is just handled with some incomprehensible lines on page 7 of their investment account statements, then the separation won't help.

Scott Adams thinks that talk of flat taxes is designed to trick people who aren't wealthy into helping the rich.

Larry Swedroe thinks that Warren Buffett got the math wrong on taxes.

Canadian Couch Potato explains how criticism of leveraged ETFs should not be applied to all ETFs.

Retire Happy Blog explains how to save on your taxes with flow-through shares. This is a guest post by The Blunt Bean Counter.

Larry MacDonald (this web page has disappeared) says that farms may be in a bubble just as housing is in a bubble.

Preet Banerjee says that analysts are still applying lipstick to pigs.

Big Cajun Man explains why RESPs are killing trees.

Million Dollar Journey reviews ING Streetwise Mutual Funds.

Tuesday, October 18, 2011

BMO Introduces ETF Screener and Comparison Tool

I tend not to pay much attention to the tools offered by discount brokers, but BMO Investorline has introduced a new ETF screener and comparison tool for its customers. With the increasingly muddied landscape of ETFs available in Canada and the U.S., a screener is potentially useful.

The tool includes the ability to compare the performance of an ETF to an index. This is useful for checking an ETF's tracking error. Index ETFs are supposed to track an index, but many do so poorly. A quick comparison can tell you how good a job a particular index ETF is doing.

Note: As far as I am aware, this screeneris only available to BMO Investorline clients in their online accounts.

I'd be interested to hear what others think of this new ETF tool.

Monday, October 17, 2011

Dividing the Tyco SEC Fair Fund Pot

A decade ago, the Tyco company took a big fall and they were sued for allegedly overstating their financial results. The result of the litigation is that there is a $50 million pot of money to be divided among Tyco investors who held stock during the critical period. I mentioned a while back that I'm trying to get access to my share.

I had thought that being Canadian rather than American would be a barrier, but seems not to be a problem. The real challenge has been to get my evidence of being a shareholder accepted. I have all the relevant records, but I twice got responses saying that my claim "has been wholly rejected" due to certain "defects".

They keep asking me for records of a transaction on 2003 March 14. Explaining that I made no transaction on this date didn't help. During a telephone call with a pleasant person, I learned that I need to produce proof that I still owned shares on this date. I'm not sure how I was supposed to understand this from a letter stating that I need to send "supporting documentation for a transaction on 03/14/2003".

This process has been annoying, but potentially profitable. If many people ran into the same confusion that I had, then there will be fewer investors dividing up the $50 million. Of course, there is still the possibility that my claim will be rejected for some other incomprehensible reason.

The interesting part of all this is that I'm actually best off if the process is as confusing as possible without preventing me from getting my claim. My sense of right and wrong makes me prefer a transparent process, but I won't turn down extra money if others are unfairly excluded.

Friday, October 14, 2011

Short Takes: Fresh Take on RRSP vs. TFSA, Mortgage Pre-Payment Penalty Lawsuit, and more

The Wealthy Barber, David Chilton, gives us an excerpt from his latest book with a fresh take on the RRSP vs. TFSA debate. In his engaging style he explains that the problem with RRSPs is that people blow their income tax refunds, and the problem with TFSAs is that they are too easy to raid.

Canadian Mortgage Trends reports that a class-action lawsuit has been filed against CIBC mortgages.

Thicken My Wallet says that recessions are a necessary part of our economic system and we shouldn't pay much attention to media hysteria.

Preet Banerjee says that trying to make it as a market timer is like trying to make the NBA.

Retire Happy Blog asks whether you have a money mentor. I used to have money mentors but in my efforts with this blog I'm trying to develop the knowledge to be a money mentor myself. One thing I've learned is that it is mostly pointless to offer unsolicited advice. Curiously, (mildly) mocking people's poor choices is more effective at drawing them in than directly offering help.

Canadian Capitalist has some evidence to back up the claim that when it comes to stock market volatility, it's not different this time.

Big Cajun Man doesn't think that a lack of complaints is a good indicator that all is well.

The Blunt Bean Counter writes about strong feelings about market movements. I think most investors who watch the market have opinions about the market's near future. I've learned over time that my opinions aren't worth anything.

Million Dollar Journey gives us a primer on closed-end funds. An important thing to know about these funds is that they can sell for more or less than the value of the equities they hold.

Thursday, October 13, 2011

Action Still Required to Avoid BMO RRSP Currency Conversion Costs

A while back BMO Investorline informed their RRSP customers that they will be permitted to hold U.S. dollars in their RRSP accounts. This has the potential to reduce the number of costly currency conversions between Canadian and U.S. dollars. However, investors still need to take action to avoid automatic currency conversions on dividends.

Like cash accounts, RRSPs now have a Canadian side and a U.S. side. However, you can still hold U.S. securities on the Canadian side. In fact, keeping everything on the Canadian side of accounts is the initial default. This means that when these holdings pay a dividend in U.S. dollars, the dividend will be automatically converted to Canadian dollars (with the implicit conversion charge).

No doubt many customers will prefer to have only Canadian dollars. For this reason, I can see why BMO should not automatically move securities to the U.S. side of RRSP accounts. On the other hand, BMO will continue to collect fat currency-conversion fees from unwary customers.

If you prefer to hold dividends in U.S. dollars and not pay for the currency conversions, you have to call up a BMO Investorline representative to have U.S. securities moved to the U.S. side of your account. I haven't found a way to do this online.

Wednesday, October 12, 2011

Which Predictions are Profitable?

When I hear people discussing investing, they usually make predictions. Some people plan to act on their convictions. Unfortunately, many investors don’t understand that even if they are right they may not make money. Some predictions, if correct, can lead to profit, but not others.

For example, investor Bill believes RIM’s technology is inferior to that of its competitors and he sells RIM stock short. Even if he is right about RIM technology, he may not make money. The problem here is that this prediction about the future success of RIM’s technology in the marketplace may already be built into RIM’s stock price.

The important question is whether RIM’s troubles are bigger or smaller than the market believes. If another investor, Jane, is correct in her belief that while RIM has some technology difficulties, the market’s concerns are overblown, then she can make money by buying RIM stock. Both Jane and Bill may be right, but Jane will make money and Bill will lose money. All predictions have to be measured against the market sentiment that is already built into equity prices.

Another good example is interest rates. If you believe that short-term interest rates are going to rise, should you take a 5-year term on your mortgage? Current long-term rates already have expectations about changes in short-term rates built into them. If short-term rates rise, but by less than the market expected, long-term rates may drop making your 5-year mortgage term look like a bad idea.

For information about the future to be profitable, it has to be information that other people don’t have. Whenever you plan to commit money to a conviction you should ask yourself “what do I know that others don’t know?”

Tuesday, October 11, 2011

Evaluating Financial Goals

Mark at My Own Advisor wrote an interesting post about his financial goals that gives me a chance to show how I evaluate financials goals. Most people look at each goal on a pass/fail basis, but I look at dollar amounts.

Mark was good enough to give enough financial details to make my type of analysis possible. In a few cases where I’m not sure of the dollar amounts, I’ll just make up a figure. I apologize in advance if I get some of the numbers wildly wrong. Without further ado, here are Mark’s goals that we’re evaluating for the first 10 months of this year.

Goal # 1 – Increase mortgage payments by $200 per month

This amounts to $2000 over 10 months. He achieved this one:

Goal: +$2000
Achieved: +$2000

Goal # 2 – Contribute $5,000 each to TFSAs

Mark achieved this one for one TFSA, but not the other.

Goal: +$10,000
Achieved: +$5000

Goal # 3 – Optimize our RRSPs

Only Mark knows how much he is saving per year on MERs here. I’ll call this one $1000.

Goal: +$1000
Achieved: +$1000

Goal # 4 – Continue my full Dividend Reinvestment Plan (DRIP) with Bank of Nova Scotia

Mark achieved this one for $100 per month.

Goal: +$1000
Achieved: +$1000

Goal # 5 – Start my full Dividend Reinvestment Plan (DRIP) with Fortis

This one is not as complete as the BNS DRIP. I’ll guess that he achieved 50%.

Goal: +$1000
Achieved: +$500

Goal # 6 – Build up our emergency fund to $10,000

This one didn’t go very well for Mark due to some big expenses, including a new roof. He had to dip into a line of credit.

Goal: +$10,000
Achieved: negative by the amount of Mark’s LOC balance

The overall scorecard comes to

Goal: +$25,000
Achieved: +$9500 minus LOC balance

So we see that how well Mark has done so far this year depends greatly on the size of his line of credit. If it is big enough, then he has actually lost some ground despite achieving most of his financial goals. I suspect that Mark is actually on a good path, but many people have a line-of-credit problem that masks poor personal financial results. It doesn’t matter if you’re saving money in all kinds of different accounts if your line of credit is growing faster than your savings.

In summary, my preference is to rate personal financial results with dollar amounts rather than taking a pass or fail on each goal. This can be depressing if it turns out that your line of credit makes your overall results negative, but it is better to know if you’re losing ground rather than being misled by achieving several small goals.

Friday, October 7, 2011

Short Takes: Evidence Against Currency Hedging, Gold Vending Machines, and more

Canadian Capitalist has more evidence for preferring foreign stocks without currency hedging.

Preet Banerjee says that there are vending machines that dispense gold popping up in the U.S., Europe, and China. I guess this is convenient if you need gold quickly when you don’t get enough notice before the financial world collapses and you think that people would still trade food for your gold.

Scott Adams has a funny take on how the rich will escape taxes.

Canadian Couch Potato finds that the consensus view of institutional money managers is all over the map. This makes sense. If they all had a common view, their actions would move the market until enough of them had different views to stabilize the market.

Big Cajun Man brings us a video of comedian Louis CK’s take on bank fees.

Larry MacDonald reports that house prices keep rising despite claims by some that we’re in a housing bubble.

The Blunt Bean Counter thinks that when it comes to capital gains, you shouldn’t let the tax tail wag the investing dog.

Money Smarts has an update of a stock-picking contest. The results look pretty dismal so far.

Thursday, October 6, 2011

Sears Financial Makes a “No Interest with Minimum Payments” Offer

We’re accustomed to “don’t pay for a year” offers that trap people who can’t pay in full after the year is up. These people end up paying very high retroactive interest back to their purchase date. Sears Financial seems to have created a similar offer for their credit card.

With their offer, if all goes smoothly you can make just minimum payments each month without paying any interest. However, they are careful to say “interest will accrue on the financed amount from the transaction date at the rate then in force for purchase transactions but will be waived if you pay the financed amount ... in full on or before the Promotion End Date.”

There are three ways that you could be hit with retroactive interest (32.9% for me) back to your purchase date:

1. You fail to make a minimum payment.
2. You fail to pay the remaining balance when the promotion ends.
3. A mysterious “Promotion Termination Event” occurs.

This offer is just an attempt to drag the unwary deep into high-interest debt. Don’t be fooled.

Wednesday, October 5, 2011

Wall Street Protests

I listened to a radio piece about the recent Wall Street protests that are spreading primarily around the U.S. and somewhat in other countries as well. One speaker repeatedly made reference to “global capitalism” and the problems it causes. I suspect that I agree to some degree with the speaker, but he and I have different definitions of “capitalism”.

A key part of capitalism is competition. We have capitalism when a market has many producers and consumers and no one participant or colluding group of participants dominates the market. This definition automatically precludes anything that is too big to fail.

Just because a company is in the private sector doesn’t mean that its actions are automatically capitalistic. In fact, the goal of most companies is to grow to dominate their markets and manipulate prices to destroy competitors and undermine real capitalism.

If we really had capitalism worldwide with governments setting sensible rules concerning product safety and other public concerns, we’d be much better off than we are right now. I’d like to see the current wave of protests make some positive changes. However, rather than eliminate capitalism, I like to see it restored.