I have a 17-year old line of credit that has seen very little use. I have it “just in case”. A recent temporary need for money led me to use it instead of selling investments, but I never actually checked on the interest rate. The rate turns out to be prime+4.5%. Ouch. I’m not exactly up on appropriate interest rates for unsecured lines of credit since the credit crisis, but this seems a little high. Perhaps the problem is that the bank is determining the interest rate partially on 17-year old information I gave them when I opened the line of credit. Or maybe they are just hoping that I won’t notice. Either way, I’ll be off to the bank to try to get a better rate soon. Anyone else who has an old line of credit but hasn’t looked at the interest rate lately might do well to check it and possibly try to get it lowered.

A recent study of currency-hedged foreign equity funds by Raymond Kerzérho provides some explanations for why these funds tend to perform worse than we expect. This reduced performance is called “tracking error”. I believe this is related to the fact that businesses have inherent value independent of currencies. Canadian Capitalist gave a good overview of this report, but I want to focus in on just one source of tracking error. One major reason why currency-hedged U.S. stock funds perform below expectations is that the value of the U.S. dollar and the value of U.S. stocks tend to move in opposite directions. For technical reasons with the way these currency-hedged funds operate, this negative correlation gives rise to tracking error. The idea that stocks and currencies tend to move in opposite directions makes perfect sense if you start from the point of view that businesses have inherent value that is at least partially independent of currency. When the U.S. dollar moves up...

Many people are inclined to think that the rise of China’s stock markets is happening for the first time. This isn’t true. As Jason Zweig explains, China has had temporarily successful stock markets a few times in the last 150 years . Personally, I consider the risk of the communist party choosing to just shut down their stock markets too great to make any serious investment with my money in China. Bulls will explain why maintaining markets is in the communist party’s interests, but who is to say that the small number of people who run the country will behave rationally? And who is to say that the communist party is even competent to run a capitalist economy? Zweig’s warnings are more nuanced than mine, but I’m content to avoid investments I don’t understand.

After a quick look through old brokerage statements, it seems that my number one cost is not commissions or spreads but currency-conversion charges. These charges are mostly hidden, but they are very real. I’m a little under the weather and haven’t actually studied the numbers carefully, but I plan to. Canadian Capitalist posted two ideas for avoiding currency conversion charges on U.S. dividends. These are good ideas, but the longer-term answer is to pressure discount brokerages to do two things: 1. Allow investors to hold U.S. dollars in RRSPs. A few do this already. 2. Start charging more reasonable currency conversion percentages. The high percentages used to make sense when banks actually had to handle cash, but for electronic transactions, banks could easily make a profit charging one-tenth of what they charge now. Feel free to give your brokerage a hard time about this.

Gene K. wins the draw for a copy of Mike Holman’s RESP Book (see my review here ). Thank you to everyone who entered the draw.

Money Smarts defends mutual fund DSCs (Deferred Service Charges). I’m not convinced, but I do see his point that they could be worse. Big Cajun Man sums up his experiences with RESPs now that he has actually made a withdrawal.

2025-12-30 update: According to the artificial intelligence Grok, today there are no RESP providers whose procedures are lax enough for the attack described in this post to work.  They all perform checks to make sure that a child's primary caregiver approves of any RESP opened for the child.  I hope this is true. A big part of the work I do professionally involves thinking about how to get around security measures and how to use things for unintended purposes. An idea related to RESPs came to mind. As I often do, I’ll explain my idea in story form: Ken is a well-to-do homeowner who recently had new neighbours Ted and Alice move in next door. Ken is an RESP expert and the subject came up the first time he spoke to Ted. Ted and Alice saw the benefits of an RESP and they opened one for their baby daughter Emily with some advice from Ken. The relationship between the neighbours later soured. Their squabbling escalated to the point where they were calling bylaw officers o...

We frequently hear that investors need to lower their expectations about investment returns. Experts say that it just isn’t realistic to expect double-digit average returns over the next decade or more. However, if we put the focus where it belongs on real returns, the future looks brighter. The latest expert to counsel lowered expectations is TD Bank's Chief Economist Don Drummond. Drummond suggests realistic expectations are 2% inflation, 6% to 7% returns for stocks, and 3% to 4% returns for bonds. These predictions are presented as very modest returns when, in fact, they are quite good. The important thing is to focus on real returns, which are returns after subtracting out inflation. Real returns of 1% to 2% for bonds and 4% to 5% for stocks are nothing to dismiss. I would happily accept this result. Investors get themselves into trouble when they focus on nominal returns, which are returns without subtracting out inflation. Let’s look the decade starting in 1972 ...

Who knew that RESPs had so many rules! Mike Holman clearly explains all the ins and outs of RESPs in his book The RESP Book: The Complete Guide to Registered Education Savings Plans for Canadians . The book is only 118 pages long – the author tends to get to the point quickly. Holman has graciously offered an extra copy of the book as a giveaway for my readers. To enter, just send an email to the contact email address in the upper right corner of my blog with the subject “Book”. Readers who subscribe to my feed will have to click through to my web site . Another benefit of going to my site when reading a post is to see the comments other readers leave on that post. All entries received before noon on Saturday, October 23 will be considered for the draw. I reserve the right to eliminate entries that I judge to be outside the spirit of the contest. Holman covers the full range of RESP topics: contributions, grants, withdrawals, opening an account, and basic investing informati...

I’ve recently been trying to help an elderly GIC investor get the best possible returns on her money. While investigating different options, I discovered that the institutions offering the best rates aren’t accessible from BMO Investorline. BMO Investorline allows investors to hold GICs from banks other than BMO in an Investorline account. They offer 15 different choices with 3-year GIC rates up to 2.3% and 5-year GIC rates up to 2.95%. As long as they are all covered by CDIC, it’s not clear why anyone wouldn’t just choose the highest rate available. However, a Google search on “GIC rates” turned up 3-year GIC rates up to 3% and 5-year GIC rates up to 3.45%. This is a gap of 0.7% and 0.5% from the best rates available through Investorline. In every case, the rates in the Investorline list were as good as or better than the rates shown in the search. It’s just that Investorline didn’t offer GICs from the institutions with the best rates. Here is a list of the institutions ...

My Dollar Plan has an update on Madison’s amazing credit card arbitrage strategy. She borrows a 6-figure sum at a cost that is lower than the interest rate she can get in a savings account. Beware: there are many potentially costly traps for the unwary with this game. Big Cajun Man has a few choice words for anyone (including himself) who complains about bank overdraft fees. Money Smarts finds some problems with the free online financial advice service optimize.ca. Matthew McGrath promises to address Mike’s concerns. My Own Advisor tells the story of Grace Groner, a heroine for dividend investors.

According a 30-year veteran in the Canadian mutual fund industry, typical Canadian investors are either “not capable of grasping” or simply “refuse to believe” how MERs work. Identified as commenter “MDB” on Ellen Roseman’s blog, this industry insider goes on to explain that mutual fund investors lose “60-80% of their total lifetime return because of MERs.” However, when he attempts to explain this problem to clients, they “glaze over, not wanting to understand this issue. If everyone they knew invested in mutual funds, that made it okay with them.” Some of MDB’s clients believed “that a regulated product sold by a licensed broker could do no harm.” When MDB spoke to investors from other brokerages, “despite the prospectus in hand, they thought I was misleading them in order to discredit their advisor.” They would look MDB in the eye and say they were not charged MERs. When a seasoned veteran can’t even convince investors that they pay MERs, the prospect of improving things w...

In my earlier investing days I tended to make investing decisions based on short compelling stories about stocks. Some of these stories I got from others and some I created myself. These thoughts still rattle around in my head, but I no longer act on them. Consider the following story about Microsoft: Computer speeds are not growing the way they once did. It used to be that we could count on the speed of computers to double every year or two, but no more. A result of this fact is that consumers have less pressure to replace their computers as quickly as they once did. Microsoft makes money by selling a new copy of their operating system with new computers. Fewer sales of new computers will reduce Microsoft’s sales. In addition, dropping computer prices reduces the price Microsoft can charge for their operating systems. The end result is a bleak future for Microsoft stock. Let me begin by saying that I don’t know whether the premise of this story is correct. Even if the p...

A couple in my extended family decided to leave Canada’s cold a little over a decade ago and headed off to the island of Roatan, the largest Bay Island of the Honduras. I’ll call them Bob and Jill. The two of them regularly see a mix of wealthy foreigners and very poor locals. Recently, lotteries hit the island in a big way. The results are tragically predictable. Tickets for the twice-daily draws sell for somewhere close to 25 Canadian cents each. Bob and Jill do a lot of volunteer work with the locals providing some jobs and helping children with education both by financing it and tutoring them. The excitement among the poorest locals over the lottery looks very similar to our experience. Bob and Jill try to explain that it is a waste of money, but the typical reaction from lottery players is “but I’m going to win so much money.” It is only the locals who are better off financially who seem able to see the new lotteries for what they are: a big waste of money. It seems t...

Preet Banerjee explains that the S&P/TSX index isn’t the same thing as the Canadian stock market. This illustrates that “passive management” is best thought of as a matter of degree rather than a binary condition. It is impossible to own a portfolio that exactly reflects a country’s investment opportunities. However, it is possible to come reasonably close. Million Dollar Journey did a net worth update. He’s more than half-way to a million dollars. Does this mean that this blog is nearing its end? Perhaps hiding assets in a shell company could keep this blog alive longer. I’m sure that there are plenty of corporate accountants around who are skilled at hiding assets and liabilities. Money Smarts reviews the book Pensionize Your Nest Egg .

As my own investment portfolio has shifted from individual stocks to index ETFs, I've given more thought to portfolio rebalancing (see my earlier post on a rebalancing trap ). I've discovered a number of barriers to the seemingly simple act of rebalancing a portfolio. Life would be simpler if we had fewer accounts. Here are some common investment account types: – Regular taxable – RRSP – Locked-in RRSP (withdrawn from a former employer's pension) – Spousal RRSP – TFSA – RESP For a couple there would be two of some of these accounts. When there are so many accounts, rebalancing can become quite complex. What starts in theory as a single sell order and a single buy order may become multiple trades in practice. We have reason to prefer holding certain assets inside or outside an RRSP for reasons such as taxes on interest or dividends. If rebalancing requires buying a particular asset, but the available cash is in the wrong account, then tax planning becomes...

It’s not every day that you hear of a court ordering an individual to pay over a billion dollars in damages. I just heard of two separate cases. Adam Guerbuez of Montreal was ordered to pay Facebook just over a billion dollars for sending spam messages. Former Société Générale SA trader Jerome Kerviel was convicted of trading fraud and ordered to pay his former employer US$6.7 billion in damages. It’s hard to understand the purpose of judgments that are so far beyond the means of these people. I suppose it sends some sort of message. Unfortunately, the message I hear is “we’re not very good at math.”

The idea behind rebalancing a portfolio is to maintain your intended asset allocation percentages. A side benefit is that rebalancing involves selling one asset when its price is high and buying another when its price is low. I’ll show that this process can actually lose money if you’re not careful. It is tempting to rebalance whenever assets differ from their target amounts by some fixed dollar amount. However, this doesn't always work well. Portfolio size matters. Larger portfolios should wait for larger deviations from target levels when the deviations are measured in dollar amounts. I’ll use a very simple example to illustrate the problem. In a real portfolio, there are many factors that mask what is going on making it difficult to judge whether rebalancing is profitable or not. A Fictitious Portfolio Suppose that Jim’s portfolio consists of just two ETFs: BND and STK. Jim’s intended asset allocation is 50/50. Initially Jim has 1000 shares of each and they trade...

My son tells me that there is a big debate going on at his school over whether more student services should be included in tuition bills. This is a form of negative option billing where students who don’t want the service have to pay for it and later line up to get their money back. This kind of change creates some financial winners and some losers. Let’s take a simple example. Suppose that a one-term bus pass costs $300. Suppose further that the students fall into three equal-size groups: 1. Those who use the bus. 2. Those who don’t use the bus and will get their money back. 3. Those who don’t use the bus but won’t bother to get their money back. By switching to negative option billing, twice as many students pay for bus passes. Thus authorities only need to charge each student $150 for the bus pass fee part of the tuition bill. With this change, students who ride the bus win $150 and students who don’t bother to get their money back lose $150. Of course, the real situ...

Money Smarts announced the launch of Mike Holman’s RESP book. Big Cajun Man managed to stop short of making the same mistake twice on purchasing home exercise equipment. Exercise equipment is the type of thing that far more people have than use. This makes for low prices on second hand equipment.