Friday, May 31, 2013

Short Takes: Mortgage-Breaking Penalties, Misguided Loyalty, and more

I wrote three posts this week:

Hertz in the Currency Exchange Business

Dan Solin on Investing

Return Expectations

Here are my picks for some weekend reading along with some of my short takes:

Robert McLister explains how banks play games with their online calculators for mortgage-breaking penalties to steer customers into calling customer service.

Tom Bradley at Steadyhand sees too many investors with a misguided sense of loyalty to their financial advisors. I suspect this is partially a case of investors not really understanding how much they pay their advisors. Many of us would buy an unwanted $5 box of Girl Guide cookies from a niece to avoid the awkwardness of saying no, but few of us would pay thousands just to avoid a mildly unpleasant situation. But investors do pay thousands per year for their financial advice whether they realize it or not.

The Blunt Bean Counter explains some of the problems you can run into when transferring property among family members.

Canadian Couch Potato brings some clear thinking about timing your entry into the market.

Money Smarts reviews the discount brokerage Qtrade.

Big Cajun Man says his retirement plans are “up on the roof.”

My Own Advisor updates his progress toward his 2013 financial goals. The first 3 goals would be trivial to achieve if it weren’t for sensible goal number 4 (no new debt).

Thursday, May 30, 2013

Return Expectations

Steadyhand recently released a report on the Five Essential Elements to Being a Better Investor. It’s an excellent report that focuses on mindset and qualitative factors. I highly recommend giving it a read. However, the part on return expectations irked my quantitative side.

The report’s basic message about having realistic return expectations is sensible. You shouldn’t be too optimistic expecting 20% returns every year. You shouldn’t be too pessimistic either; you’re unlikely to actually lose money over a long period of time. Wild swings can happen in any one year, but average returns over a long period of time tend to settle down.

However, the report includes the following figure:


I had one of those moments where Daniel Kahneman would say that my System 1 kicked in and I knew that something wasn’t right even though I wasn’t sure what was wrong at first.

The left side of this figure is some sort of equity price chart or portfolio size chart. Such charts give overall returns. If you average a 6% return for 10 years, such a chart would show that this compounds to an overall return of about 79%. However, the right side of the figure gives ever tighter ranges for average yearly returns (not overall returns). Just following the figure from left to right, the reader gets the impression that returns may fluctuate, but the destination is a small point in the upper right corner of the figure to be reached with certainty. This is not the case.

It’s true that the range of average yearly returns shrinks as we look further into the future, but the range of overall returns keeps getting larger. If we changed the figure so that the bars on the right indicated ranges of possible overall returns, the bars would keep getting longer the further into the future we go.

The important thing is that even though we can’t predict a final portfolio value with any certainty, we know that the odds of a low-cost broadly-diversified portfolio outperforming safe investments goes up the longer we stay invested. Over a week or a month the probability of stocks beating short-term government bonds is little better than 50%, but over 25 years it is almost 100%.

It could be that Steadyhand are actually doing investors a service by giving them the impression that future portfolio size is more certain than it actually is. Investors are too fearful of short-term fluctuations with their long-term savings. Perhaps they need to be calmed in this way.

A small quibble I have with the numbers in the figure is that ranges do not tighten up by a factor of 3 from 5 to 10 years of investing. If the 5-year range is 0 to +12% per year, then the 10-year range is closer to +2% to +10%. A rough rule of thumb is that it takes 4 times as long for the yearly return range to tighten up by a factor of 2. So, the 20-year range would be roughly +3% to +9%.

Once again, it could be that Steadyhand are doing investors a service by presenting a safe-looking narrow range of 10-year returns. However, I’m comfortable with realistic levels of volatility as long as I’m being compensated with a higher expected return.

Wednesday, May 29, 2013

Dan Solin on Investing

I had the pleasure of hearing Dan Solin speak recently about investing. He is the author of the Smartest series of books and is an outspoken critic of the investing industry.

Solin’s main message is that if you pay attention to the science of investing, there is no conclusion to draw other than investors should invest in low-cost broadly-diversified indexes rather than chase the dream of beating the market. Almost everyone who tries to beat the market over a decade or more fails.

Some small-time investors think that rich people have some sort of secret access to better investments, but Solin says that the only difference between rich people and poor people is that rich people have more money to lose if they trust their brokers.

He says that the entire active investing industry is a “giant scam” and “there is a huge amount of money invested in keeping you ignorant.” The wealth management industry exists to “transfer your wealth to themselves.”

On the subject of alternative investments such as hedge funds, Solin says they are just a way for rich people to lose money.

Solin’s shortest answer to an audience question came when he was asked whether we should be buying gold. His answer: “don’t”.

Some of the audience questions made it clear that they did not really get Solin’s message. He doesn’t believe that anyone has any useful insight into future investment prices, and that we should all just seek to capture market returns at an appropriate level of risk. Yet questioners asked about market timing and the future of various specific investments.

Solin believes that you should ask your advisor “what besides investing are you going to do for me?” Given that advisors are useless for picking stocks or mutual funds that will beat the market, you should be getting tax planning and other useful services from your advisor.

Monday, May 27, 2013

Hertz in the Currency Exchange Business

I’m used to being charged at least 2.5% extra by MasterCard when I buy something in a currency other than Canadian dollars. However, I recently had my first experience with a retailer doing the conversion for me at a higher price than MasterCard charges.

I rented a car in Europe and the total cost for 4 days came to a hefty 425.70 Euros. According to the Bank of Canada, converting this to Canadian dollars at a fair rate on the day I paid would give C$560.31.

Based on credit card charges on the same day, MasterCard would have charged me $575.90 or 2.8% more. This differs slightly from their advertised 2.5% fee possibly by random variation and possibly due to choosing a favourable rate during the day.

However, MasterCard never got the chance to make an extra C$15.59 from me because Hertz did a conversion to Canadian dollars. They charged me C$586.37 or 4.7% more than a fair exchange. Hertz made an extra C$26.06 from me, which is C$10.47 more than MasterCard would have charged me.

The most amusing part of all this is the following note printed on my receipt:

“I have been offered a choice of currency and chosen to pay my rental charges in the currency of my card.”

This isn’t true. No doubt there was something buried in the papers I had to hurriedly sign when I picked up the car, but I would never have chosen to be charged in Canadian dollars if I understood the choice I was making.

So, Hertz, congratulations on extracting an extra ten bucks from me in addition to MasterCard’s money. Maybe you could have converted the charge to U.S. dollars so that MasterCard could get a piece of me as well.

The part of all this that irks me the most is that there is virtually no cost to currency conversion when there is no physical cash involved. The extra amounts are almost completely extra profit.

Friday, May 24, 2013

Short Takes: Impolitic Ads, Firing the Financial Industry, and more

Here are my posts for this week:

Canadian Snowbird Guide

Disagreement over investing in bonds

Here are my short takes for some weekend reading:

Freakonomics has an interesting list of old ads. If you don’t think societal attitudes about women (and other subjects) have changed much over the years, check out these ads.

Mr. Money Mustache asks whether we need to fire the entire financial advice industry. In this interesting essay, he makes the case that “that most of our modern assumptions about money are bullshit,” particularly when it comes to necessary spending.

Canadian Capitalist objects to a comparison of stock and real estate returns that ignores rental income. Of course, we also have to factor in upkeep costs such as a new roof, etc.

Million Dollar Journey looks at how new mortgage rules for HELOCs affect investors interested in using the Smith Manoeuvre.

The Blunt Bean Counter explains the importance of finding a compatible business partner.

Big Cajun Man objected to being told by Rogers’ customer service that they didn’t want to talk to him.

My Own Advisor explains his low-cost approach to a healthy lawn. My approach is a combination of neglect and low standards.


Thursday, May 23, 2013

Disagreement over Investing in Bonds

According to CNBC, Warren Buffet “said that bonds are a ‘terrible’ investment right now because they are ‘priced artificially’ high ... and could lose people a lot of money when inevitably interest rates start to rise.” Chartered Financial Analyst Steve Lowrie says he disagrees with Buffett, but I think the two are actually talking about different things.

Buffett says he believes that interest rates are set to rise at some point and this will hurt bond prices. This is a statement about expected bond returns over the next few years. Buffett makes no claims about the volatility of bonds, just that their expected returns are poor.

Lowrie objects that investors have a limited capacity for risk and cannot handle an all-stock portfolio. This is true of most investors. However, Lowrie is talking about the volatility of bonds (specifically that it is lower than the volatility of stocks); he is not talking about bonds’ expected returns as Buffett was.

Investors who believe both Buffett and Lowrie can use GICs (or very short-term bonds) for the fixed income part of their portfolios. This avoids the upcoming hit to bond prices that Buffett predicts and avoids increasing portfolio volatility that Lowrie says investors cannot handle.

Apparent disagreement resolved.

Tuesday, May 21, 2013

Canadian Snowbird Guide

Having spent some time in the southern U.S. during Canadian winters, I understand the appeal of being a snowbird who lives in Canada during the warm months and travels south for the cold months. I respect those who choose to embrace Canadian winters with outdoor activities, but many of us, particularly as we age, prefer to avoid winter.

With this in mind, I read the fourth edition of Douglas Gray’s Canadian Snowbird Guide, revised in 2008. This book covers a wide range of topics including deciding whether you’re well-suited to snowbirding, home exchanges, financial planning, immigration, renting and buying real estate, insurance, taxes, estate planning, and permanent retirement outside Canada.

Expecting to cover all these topics in full detail is far too ambitious for a single book. For my money, the main value of this book is that it made me aware of a number of issues that had never occurred to me before. For example, supplemental health insurance won’t do you much good in a hospital that only takes cash if your policy doesn’t require the insurance company to provide a cash advance.

Few people will need all of the information in this book, but you can just read the sections that interest you to get a useful overview. Then you can do some further investigating.

It’s not too hard to criticize this book for being out of date. There are constant references to traveler’s cheques, government blue pages in the phone book, and other things that still exist but have largely been replaced by the internet and our modern financial system. But if you’re serious about wanting to avoid big mistakes in living in another country for part of each year, these references to old ways of doing things are easily ignored.

One amusing and (in my opinion) terrible piece of advice in this book is to leave your shoes on during a flight because your feet will swell “and you may have trouble getting your shoes back on if you take them off.” Taking my shoes off during a flight makes me far more comfortable. I make sure to buy shoes wide enough that I can just loosen the laces if my feet swell. Your mileage may vary.

In general, Gray uses calm language to describe problems you may encounter, but he uses slightly sharper words for timeshares: “Be wary of hard-sell marketing” and “Trying to get your money back if you suffer from buyer’s remorse is extremely difficult.” I would be more blunt: the majority of people who buy timeshares have made a terribly expensive mistake. Actually figuring out all the costs of a timeshare usually makes it clear that it is a horrible deal financially.

On the subject of supplementary health insurance while traveling in the U.S., Gray makes it clear that this is a minefield of potential gaps in coverage. One common theme is the importance of giving an accurate medical history. Failing to disclose health problems and tests either deliberately or accidentally can leave you without coverage.

On the subject of gambling, I always thought that the only reason to use a casinos gambling card is to accumulate loyalty points to get free rooms, meals, etc. However, professional poker players may use these cards to help track wins and losses for tax reasons.

Overall, this book isn’t exactly a page-turner, but it does cover a wide range of issues to consider before becoming a snowbird.

Friday, May 17, 2013

Short Takes: Market Timing, Salary Secrecy, and more

Being busy on a business trip, I only wrote one post this week:

Business Travel Personality

Here are my short takes for some weekend reading:

Tom Bradley at Steadyhand paints an accurate picture of the challenges involved in trying to get in and out of the market at the right times.

The Blunt Bean Counter answers the interesting question, “Should You Discuss Your Salary with Friends, Co-Workers or Family?”

Canadian Financial DIY reveals a simple test to see if you’re likely to manage your finances well into your retirement. Spoiler alert: it’s math-related.

Million Dollar Journey has some ideas for saving money on a Disney World vacation. Another idea might be to pass on Disney World and do something else.

Big Cajun Man has an interesting theory on how to avoid having his barbecue run out of propane in the middle of cooking dinner.

Wednesday, May 15, 2013

Business Travel Personality

In the middle of another business trip, I’m once again struck by how the expenses are so much different from what they are in my personal life. My personality begins to change too: “The marble in the lobby isn’t shiny enough.”

I’m part-way though a trip with only 3 full days of meetings that will cost over $5000. Yet, I manage to play golf down south for 8 days for less than one-quarter of this amount. I’m not thrilled about the strange blue light in my current hotel bathroom, but I happily endure far worse during a vacation.

I think this is more than just a case of having a different attitude when someone else is paying. I actually tried to keep the costs of this trip down, but now that the money is spent, I find myself demanding that my treatment reflect the costs.

An amusing side note: there is a big sign at the entrance to to hotel stairway that reads “Stairway Trap”. A little googling revealed that “Trap” translates from Dutch more or less as “step”, but I found it funny the first time I saw it. You’re not likely to trap anyone if you tell them about the trap.

Friday, May 10, 2013

Short Takes: Top Stocks Drive Indexes, Clueless Investors, and more

Here are my posts for this week:

Is a 15% Return High or Low?

Choosing the Right Index for Comparison

Real Estate Agent Contracts

Here are my short takes on some weekend reading:

Larry Swedroe explains how the majority of market returns come from a modest number of stocks.

Canadian Couch Potato asks whether investors surveyed by Franklin Templeton are as clueless as they seem. I agree that the majority who believe they can reach their financial goals without equities are mostly delusional. However, I wonder about the 52% who believe the market declined or stayed flat in 2012. It’s true that S&P/TSX Composite was up 7.2%, but perhaps these investors’ answers were influenced by expensive Canadian balanced funds in their portfolios. Many of these funds were close to flat for 2012.

Larry MacDonald reports a bear’s take on Warren Buffett’s Berkshire Hathaway.

Million Dollar Journey explains how to file your rental income taxes. Claiming all your expenses properly is a critical part of succeeding as a landlord.

Big Cajun Man saved hundreds on his car insurance by telling the insurance company his daughter was away at university.

The Blunt Bean Counter has a wild story about rental car troubles in the Caribbean.

My Own Advisor explains the details of how Canadians can get caught by U.S. estate taxes.

Preet Banerjee thinks CMHC needs changing.

Wednesday, May 8, 2013

Is a 15% Return High or Low?

Stingy Investor pointed to a set of slides from Fairfax Financial Holdings that began with the quote “We expect to compound our book value per share over the long term by 15% annually.” Averaging a 15% per year return on a stock sounds great right now, but not too long ago it would have seemed very low.

Back in the late 1990s as tech stocks boomed, expectation for stock returns were well above 15% per year. These expectations turned out to be hopelessly unrealistic, but back then many investors wouldn’t have given Fairfax a second look if the company was only shooting for 15% per year.

I find this a useful reminder of how the world and people’s expectations can change drastically. It’s hard to even imagine a world with double-digit interest rates, but they could easily come back again. It’s dangerous to make your plans expecting today’s conditions to persist indefinitely into the future.

Every time I’m tempted to mortgage my house for half a million dollars and invest the proceeds, I think back to my brother- and sister-in-law who at one time had a mortgage at over 20%. That stops me pretty quickly. I don’t really have any appetite for debt.

Tuesday, May 7, 2013

Choosing the Right Index for Comparison

Rob Carrick points to the RBC Canadian Dividend Fund as an example that “shows why we need to reform the way investors pay for funds and advice.” He makes a number of excellent points about the problem of hiding the cost of advice in mutual fund MERs in the form of trailing commissions. However, I take issue with his claim that because this fund has beaten the S&P/TSX composite index over the past 5 years it “has been such a consistently good money maker.”

The Canadian S&P composite index is not the right index for judging the RBC Canadian Dividend Fund. A more appropriate index would be the Dow Jones Canada Select Dividend Index. The iShares ETF based on this index, XDV, beat the RBC Canadian Dividend Fund by 1.1% per year for the past 5 years, which is very close to the difference in their MERs.

Another possible index for comparison is the S&P/TSX Canadian Dividend Aristocrats Index. The iShares ETF based on this index, CDZ, beat the RBC Canadian Dividend Fund by 1.5% per year for the past 5 years, which is a little more than the difference in their MERs.

What has made investors money over the past 5 years is the choice to invest in dividend stocks. Among ETFs and mutual funds that focus on Canadian dividend stocks, RBC’s fund has not distinguished itself. There is no reason to believe that dividend stock outperformance will continue. If it doesn’t, then the high MER on RBC’s fund will be less palatable.

Monday, May 6, 2013

Real Estate Agent Contracts

I’m no real estate expert, but I’ve noticed a pattern play out a few times, once when I sold my first house and a few other times watching friends and family members sell their houses. In these cases, the real estate agent did almost nothing until the listing was getting close to running out. There were no reasonable offers until shortly before the listing contract ended when the house suddenly sold.

From a busy real estate agent’s point of view, this makes some sense. If you’ve got more houses listed than you can work on at one time, it makes sense to work hard on the listings you’re about to lose. If other listings happen to sell in the meantime, it’s a nice bonus.

If this phenomenon is as widespread as my limited experience suggests, then homeowner’s need to develop countermeasures. Homeowners should prefer shorter contracts to longer ones. I’m used to 3-month contracts, but I’ve heard of 6-month contracts. Even 3 months is a long time to wait if the real estate agent isn’t doing anything.

The next thing to consider is contract renewal. In my case, the real estate agent began hinting about renewing the contract a little less than 2 weeks from the end of the contract. I didn’t piece it all together at the time, but I now interpret this hinting as “will you re-sign with me so I can keep ignoring your house and hope it sells on its own, or do I have to try to find a buyer quickly?” Fortunately, my wife and I decided to tell the agent we would be changing agents; our house was sold within a week.

Have readers had any similar experiences or is my view skewed by some atypical cases?

Friday, May 3, 2013

Short Takes: Tyranny of Fees, Smith Manoeuvre, and more

Here are my posts for this week:

When Should You Start Collecting CPP?

Getting a Handle on the Cost of Cars

Car Costs Spreadsheet

It’s a bit of a thin week for my short takes on some weekend reading. But I did find some very good articles.

John Heinzl explains the ‘tyranny’ of fees and how costs kill investment returns.

My Own Advisor gives us the benefit of his research into the Smith Manoeuvre (tax-efficient borrowing against your house to invest).

Big Cajun Man doesn’t think much of a U.S. effort to eliminate the collection of data used for economic indicators. I guess the idea is that as long as we don’t know how many people are unemployed we can all sleep well.

Preet Banerjee says it can be okay to indulge yourself financially, but not when it comes to big-ticket items like cars and houses.

Financial Crooks explains some quirks in the transaction history in Investorline online accounts.

Wednesday, May 1, 2013

Car Costs Spreadsheet

Reader AnatoliN asked me to share the spreadsheet I used to work out the fixed and variable costs on my car. So, I cleaned it up, and with great fanfare, here is the car costs spreadsheet.

Remember that garbage in leads to garbage out. Unless you have an accurate list of your car expenses, this spreadsheet cannot magically give accurate answers. In my experience, most people know they paid too much for their cars and have a hard time admitting the real costs to others and to themselves.

If you want to protect your ego from the brutal truth of how ridiculously expensive cars are, I suggest using the advertised price of $23,999 that got you into the dealership showroom rather than the actual $33,000 you paid after various add-ons and taxes. You can also just estimate your gas costs instead of looking up your credit card bill to see that you actually pay much more. Leaving out the cost of new tires or brakes might help as well.

OK, enough sarcasm. You get the point. If you don’t include all costs, then the final answer will be wrong. For those who try it out, please let me know if you find the spreadsheet useful.