Monday, January 31, 2011

Book Draw Result and Taxing the Rich

Last week I announced a giveaway of the book Your Money Ratios. The winner of the draw is Nathan. He has been contacted by email. Thank you to everyone who entered and thanks once again to the Penguin Group for offering a book for the draw.

For those who feel cheated by this meager post, I suggest reading Scott Adams' article in the Wall Street Journal. He might be onto something by trying to provide those who pay the most in taxes with various perks.

Friday, January 28, 2011

Short Takes: A Financial Television Casting Call, Usage-Based Internet Billing, and more

Preet Banerjee makes a casting call for his new show The Money Pit on W Network. Have you and your spouse got a money disagreement and a common desire to be on television? For now the call is limited to the Toronto area.

Potato explains what’s wrong with the current trend toward usage-based billing in internet access.

Rob Carrick tells the story of George Czerny’s persistent and ultimately successful battle with CRA over TFSA penalty taxes.

Big Cajun Man looks at different ways of doubling up on reward points.

Money Smarts reviews the TD Waterhouse discount brokerage.

Thursday, January 27, 2011

Bell Bill Layout Increases Odds of Underpayment

When my wife and I were paying our most recent stack of bills, we nearly underpaid our Bell bill. We could certainly be blamed for being inattentive, but the layout of the bill doesn’t help.

The first page of our Bell bill contains the summary information including the grand total to be paid for the month. The left side of the page has this total. However, the right side of the page repeats the same information, but without HST for some reason. Both sides have a highlighted total amount that draws your eye.

When we have our banking application open and all that is left to do is type in the amount to send to Bell, it’s easy to type in the total on the right rather than the real total on the left. The fact that the left side is in a slightly larger font helps a little but it seems inevitable that we’ll make a mistake at some point.

We haven’t made this mistake yet but presumably the consequence would be interest and/or late fees. Have any readers been caught by this? How punitive were the consequences?

Wednesday, January 26, 2011

0% Return for 17 Years

For the past 17 years I’ve have an investment account that has returned 0%, but I’m not unhappy about it. In fact, my wife has a similar account and I get a good chuckle every year when the account statements arrive.

Back in 1993 when we cleaned out these accounts, some sort of minor calculation error resulted in each account holding a few cents. I never did anything about it assuming that the bank would apply some sort of service charge and close the accounts. But that never happened.

Each year we get our statements along with a newsletter that I’ve never found to be worth reading. The best part is the pie chart showing my asset allocation:

The legend says that A stands for cash. I’m 100% in cash that has earned zero interest for over 17 years. If I’m ever in financial trouble, I can clean out these two accounts and make a down payment on an orange.

Tuesday, January 25, 2011

Book Giveaway: Your Money Ratios

In the book Your Money Ratios, author Charles Farrell lays out a blueprint for your entire financial life through your working years. If you’ve ever wondered if your debt repayment and retirement savings are on track for your age, this book provides an answer.

The book’s publisher, Penguin Group, has graciously offered an extra copy of the book as a giveaway for my readers. (However, the giveaway is now over.)  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 Sunday, January 30 will be considered for the draw. I reserve the right to eliminate entries that I judge to be outside the spirit of the contest.

The word “ratios” in the title might scare off some readers who think there will be a lot of math. There are numbers, but not too much math. The ratios come from the fact that almost everything in the book is scaled to your income. For example, rather than recommend that you save a particular amount for retirement, Farrell suggests that you should have 12 times your salary saved by the time you’re 65.

The core of the book focuses on your total retirement savings, yearly savings, and mortgage size. For example, by age 40 Farrell says that you should have 2.4 times your salary saved for retirement, you should be saving 12% of your salary during the year to add to your savings, and your mortgage should be at most 1.8 times your salary. These numbers change for each age from 25 to 65.

This blueprint of financial progression through your working career is like a pace runner letting you know whether you’re ahead or behind the pace you want to maintain. Farrell’s blueprint may not exactly fit your plans, but you can start with one of the blueprints in the book and modify it to create your own pace runner. The appendix covers situations that call for a different plan (like having a pension) and how to modify your blueprint appropriately.

Other sections of the book cover student loans, life insurance, and other types of insurance. Much of this material is specific to the U.S., but the general advice concerning student loans and life insurance is definitely relevant to Canadians.

I particularly liked the first part of the “Stocks and Bonds 101” section that explained what drives stock prices. I didn’t much like the section on financial advisors. It’s not that I violently disagree with it, but I can’t see how it would be much help to a novice investor out looking for a good advisor. One quote that I don’t agree with is “Most advisors work very hard to take care of their clients and treat their money with the utmost respect.” I think this is only true for a small minority of people who serve as financial advisors.

One claim that I can’t understand is “your odds in a given year of being disabled and unable to work are one in eight.” This seems way off. Perhaps one in eight people become disabled some time during their careers. However, one in eight each year for 40 years gives a 99.5% chance of becoming disabled at some point.

Some of Farrell’s Specific Advice

Save 12% of your income in the first half of your career and 15% in the second half.

In retirement you can spend 5% of your savings each year as long as you can cut back if the market has a bad period.

Limit your mortgage size to double your income.

Limit student loan debt to 75% of your expected average salary in the first decade of your career.

If your stocks run up in value, rebalance some back into bonds, but if your stocks drop in value, don’t rebalance some bonds into stocks. (This one is too conservative for me, but it is worth thinking about.)

Ignore most financial “innovations” and most of the financial press.

Some Good Quotes

On being rational about money: “When it comes to your money and your future, you want to be Mr. Spock, not James T. Kirk.”

On creative mortgages: “’Negative amortization’ is just finance-speak for ‘stupid.’”


This is a thought-provoking book that provides an answer to the question “Am I on track for retirement?” Readers are likely to find that the book’s life-script doesn’t fit them in one way or another, but the lesson on how to create a financial life script is useful.

Monday, January 24, 2011

Guide to What’s Good, Bad, and Downright Awful

In Rob Carrick’s Guide to What’s Good, Bad, and Downright Awful in Canadian Investments Today, he delivers on his promise to be opinionated rather than polite, respectful, and boring. However, Carrick doesn’t propose a single method of investing. He just points out the good and bad ways to go about many different approaches to investing.

The book is written in a style of lists related to different subjects. For example, the first two lists are “four examples of investment industry propaganda that you can’t take at face value,” and “seven dumb rookie mistakes investors make and how to avoid them.”

The most useful section to me was the one on investment advisors (as I said in an earlier post). This is mainly because I’ve never had a good answer when asked how to go about choosing a good investment advisor.

In the section on “big, fat mutual fund industry rip-offs,” Carrick is careful to say that some mutual funds are excellent but that investors should avoid almost all money market funds, most bond funds, many balanced funds, bank index funds (except for TD’s e-Series), and fund wraps. Another section points out some good mutual funds. This approach is more useful than most commentary that either whole-heartedly embraces mutual funds, or rejects them entirely.

In my opinion, Carrick is a little too accepting of high mutual fund MERs. Just because a fund is cheaper than most in its class doesn’t mean that it is reasonably-priced. I have a hard time understanding the logic of paying even 1% each year. But if an investor is going to buy mutual funds, it does make sense to focus on the cheaper ones even if they are still quite expensive.

Some Good Quotes:

“If you buy a stock at $10 and it rises to $20, then falls to $15, you haven’t lost $5.” This reminds me of people who planned their retirements when their stocks rose during the tech boom, but then felt cheated when stocks dropped. It is extremely rare to get out at the peak and investors who think this way are doomed to disappointment.

“Raise the issues of fees with companies offering wraps and you’ll get a blast of nonsense about all the inherent benefits of investing this way.”

On owning bonds: “Let’s just say it’s a mental health thing. My sense of the investing masses is that an all-stocks, no-bonds approach is a nervous breakdown waiting to happen.” I didn’t have a nervous breakdown during the recent stock market crash, but I agree that most stock investors did get very nervous.

“Not that you’d want to, but you can also buy such investment-industry refuse as principal-protected notes and wrap accounts.”

On investors nervous about being a small fry buying just a few shares: “no one from your brokerage firm is going to call you up and laugh at you.”

On being intimidated by boastful investors: “Anyone who claims to bat anything close to 1.000 as a stock picker is a liar.”

Overall, I’d say this book may not offer much to very knowledgeable investors, but it is definitely useful for novices through to those who only think they are knowledgeable.

Friday, January 21, 2011

Short Takes: Toddler Bank Accounts and more

Million Dollar Journey looks at the ins and outs of opening a bank account for a toddler.

Big Cajun Man used to see work as a way of taking a break from his young family but with the passage of time he now sees the value of a day off.

Money Smarts reviews’s free online budgeting site.

Thursday, January 20, 2011

Finding a Good Financial Advisor

I made my choice years ago to manage my own investments, but for many this is a daunting task. These people would rather work with a financial advisor. This may seem like the last investment decision an investor would have to make, but this isn’t true. It brings the daunting task of finding a good financial advisor and the need to continuously monitor the quality of advice.

Some of the best advice I’ve seen on finding a good advisor is chapter 6 of Rob Carrick’s Guide to What’s Good, Bad, and Downright Awful in Canadian Investments Today. Carrick sets the tone early saying “Warning: Finding a good financial adviser is harder than you imagine.” This is because a disappointingly small minority of advisors are any good.

Carrick goes through the traits of good and bad advisors and provides a list of “five killer interview questions that will help you avoid hiring a deadhead adviser.” A common theme is the willingness of the advisor to discuss fees and how he or she gets paid. Good advisors “have no problem discussing fees because they’re trained professionals who require and deserve adequate compensation for their work.” On the flip side, “if you hear and adviser scoffing at costs—and, most likely, telling you that performance is what matters—then keep looking.”

Carrick goes through a number of other important issues about financial advisors as well. If you’re in the market for a financial advisor, I recommend reading this chapter of his book. (Stay tuned for a review of the rest of this book next week.)

Wednesday, January 19, 2011

Personal Financial Fears

The more experience I get with personal finance, the more I realize that I fear different things than most people fear. Investing and mortgages illustrate these differences.


Almost all personal finance gurus recommend that investors put some fraction of their long-term savings into bonds or some other fixed-income investment. The reason for this isn’t because it will produce better long-term results than an all-stock portfolio. The reason is to prevent investors from panicking and selling stocks at low prices.

It could be that these gurus are right. If most people would sell at the worst possible time then owning stocks is a bad idea. If owning some bonds is enough to moderate the extreme losses enough that investors sit tight through the bad times then owning some bonds is a good idea.

But I don’t fear bear markets for stocks. I’m content to receive whatever the stock market will give me over the long term. When I think I’m 3 years away from permanent retirement I’ll shift a fraction of my savings into safer investments. The actual time I choose to retire permanently is likely to be affected by how well my stocks perform over the years.


I’m much more afraid of debt than I am afraid of stock market volatility. The recent mortgage rule changes that push people from 35-year to 30-year amortizations would never have made any difference to me. My first mortgage had a 15-year amortization and I was scared to death to owe so much money for so long. I ended up paying it off in 4 years.

The idea of trying to consistently hold a job that pays enough to make mortgage payments for 30 years seems crazy to me. But from what I can tell, people who take out these long mortgages are quite calm about it all.


My best guess is that the uncertainty in the investing case drives fear in most people, while the mortgage payments are quite certain. But it was the certainty of having to come up with the mortgage payment for hundreds of months in a row that scared me.

Tuesday, January 18, 2011

BMO’s New Lifetime Cash Flow Product

BMO has a new Lifetime Cash Flow Product that seems suited especially for investors who are looking for safety and don’t understand inflation.

A quick summary: make a lump sum contribution at age 55 and collect 6% per year for the rest of your life starting at age 65. When you die, if there is anything left after these payments and the yearly 2.75% MER, it goes to your estate.

Suppose that Jim is 55 years old and has a lump sum of $200,000. He can get $1000 per month starting at age 65 guaranteed for the rest of his life. This sounds appealing until we consider inflation. Recently, inflation has been around 2% per year. The average since 1916 has been about 3% per year. So a bad period would be around 4% per year.

The purchasing power of Jim’s $1000 per month of income would be hit by 10 years of inflation before he starts to collect. Here is the purchasing power of Jim’s first payment at the three different inflation levels:

2%: $820
3%: $744
4%: $676

If Jim makes it to age 85, the purchasing power of these payments will be eroded much further:

2%: $552
3%: $412
4%: $308

These are not runaway inflation scenarios. Even if inflation stays at 2%, Jim’s payments shrink uncomfortably. The attractiveness of BMO’s new offering depends on investors not thinking about inflation.

Monday, January 17, 2011

Penny Supporter Misses the Mark

I’m not sure if there are any good arguments in favour of keeping the penny, but there is a bad argument from David Howden who teaches economics at St. Louis University. Howden thinks that the high cost of making pennies puts the brakes on inflation. Back when money was made out of gold, governments were limited in creating more money by the cost of acquiring gold. Howden believes that the high cost of pennies has a similar effect on modern governments that seek to create new money.

According to Howden each penny costs about 1.5 cents to make. With more inflation the nominal cost of each penny rises causing an increasing “loss” per penny. Howden believes this effect helps to hold the government back from causing ever more inflation. This effect is obviously miniscule compared to the costs associated with gold back when we used the gold standard for money.

The cost of handling pennies by businesses is a drain on Canada’s productivity. I’m sympathetic to frustration about governments using inflation to deal with past overspending, but continuing to make and handle pennies is not the answer.

A common unfair tactic in debating is to highlight good arguments for your own point of view and bad arguments for the other side. One could argue that I’m guilty of this in the penny debate. So, I invite penny supporters to write comments offering reasons to keep the penny.

Friday, January 14, 2011

Short Takes: Self-Banned Gamblers and more

Bill Mann reports that Ontario will be using new facial-recognition technology to help problem gamblers stay out of casinos.

Canada Mortgage News explains how banks are playing with the numbers to pump up penalties for breaking a mortgage.

Potato has an interesting collection of alleged China-based stock frauds.

Preet Banerjee explains what is worth $5400 per hour to him.

Big Cajun Man takes a look back at some financial decisions he’d like to change.

Mike Holman is calling for the Canadian government to unlock locked-in retirement accounts (LIRAs). A LIRA is like an RRSP except with restrictions that make you leave it alone until you hit retirement age. My wife and I each have one of these and life would be a little simpler if we could just combine them with our RRSP accounts, but I’m not as passionate about this issue as Mike is.

Million Dollar Journey gives himself a report card on his 2010 financial goals.

Financial Highway looks at the evidence that Canada is a haven for investment swindlers.

Larry Swedroe doesn’t buy the argument that the active-share measurement identifies good money managers.

Thursday, January 13, 2011

Smart is the New Rich

Christine Romans, anchor of CNN’s Your $$$$$, has a new book out called Smart is the New Rich. In an interesting mix of personal financial advice and macroeconomic commentary, Romans makes the point that being smart with your money is necessary to live well financially. In making her points, Romans manages to use statistics without overwhelming the reader with numbers. Some big chunks of the book are only relevant to U.S. readers, but the book has value for Canadians as well.

The author is careful to avoid angering the reader. She commiserates with the reader before stating an unwelcome truth. A good example of this was in the discussion of jobs when she warmed unemployed readers up for the messages that they may have to take pay cuts or move to find work.


One interesting section looks at where the new jobs will be and which jobs are disappearing. The highest growth rates are for biomedical engineers, computer analysts, and home health aides. The jobs disappearing in the greatest numbers are in department stores, semiconductor manufacturing, and car parts manufacturing.

In her analysis of where the jobs will be she says “with apologies to Willie Nelson and Waylon Jennings, mommas don’t let your babies grow up to be liberal arts majors.” She says this despite the fact that she majored in Journalism and French herself.

Romans advises job seekers to edit their social media pages such as their Facebook page. Apparently, many employers check these pages before hiring someone.

Another good quote: “I know of no one who has scored a job from a job board or paid job-search site.” Romans advocates making connections with people in a job search.

Credit Cards

“Credit card lenders are not there to do you a public service. They are there to make money off you. Their business model is simple—lend money to people who need it for short terms and make money off them when they don’t pay it all back at once or they pay late.” This is a healthy way to view banks and credit card companies.

Under the new credit card rules in the U.S., when the credit card company changes the terms for your account, you can reject the change and have 5 years to pay off the balance with the old terms.

In late 2009 Premier Bankcard rolled out a credit card for consumers with poor credit ratings that charged 79.99% interest! Customers with no other choice lined up for it.

Taxing Forgiven Debts

In the U.S., when a lender chooses to forgive part or all of a debt, the amount forgiven must be declared as income. There’s nothing like getting kicked by tax collectors when you’re down.


An old quote on Wall Street: “Don’t just do something, stand there.” It’s very true when investing that the times that seem to most demand action are often the best times to do nothing.

“What you buy depends on what you think will happen in the world.” I think most people get into trouble with this approach. Expectations for future events are built into the prices of equities. Few people have better insight into the future than the collective wisdom of experts. Making bets about the future in a fit of overconfidence is a great way to lose money.

Adult Children

80% of students graduating from college in 2009 moved home with their parents after graduation. I knew that staying home into early adulthood was a growing trend, but I wouldn’t have guessed that 80% of graduates fail to start out on their own.


The section discussing the effect of the recession on families is peppered with statistics, but they frequently didn’t support the author’s narrative. It’s as though the narrative was written before examining data.

A common theme was that women are making better financial decisions than men. “Women (72 percent) were more likely than men (65 percent) to say that if they were to somehow get extra money, they would save it or pay bills with it.” That is a very slim difference. One possible explanation is sampling error. Another is simple bravado.

To support the assertion that there were fewer divorces during the recession, Romans says “At the trough of the recession, the American Academy of Matrimonial Lawyers found that 37 percent of attorneys polled reported fewer divorces.” Doesn’t this mean that 63% reported more divorces? Certainly some people stayed together for financial reasons. But others may have been driven apart by added financial stress. I have no idea which effect was dominant.


Overall, I’m glad I read this book because it contained a fair number of interesting tidbits. For those looking for a book focusing on one aspect of financial life such as investing, this isn’t the book for you. This book touches on just about every aspect of a person’s financial life and is written in an engaging and understandable way.

Wednesday, January 12, 2011

Equifax Credit Report

Last week I ordered my credit reports from Equifax and TransUnion. The Equifax report has arrived and it contains less than I would have guessed. In addition it has a few errors.

The first thing after my name is wrong. It shows me living at a family member’s house. Based on the reporting date this seems to be incorrect information from when I opened a joint account with this family member. The bank managed to send me statements at the correct address, but somehow the information they sent to Equifax was messed up. My previous addresses are accurate, but the dates associated with them show no correlation with reality.

The next category of information is current and previous employers. This information is fairly accurate except for the barely recognizable phonetic spelling of a previous employer’s name.

Then it shows my birth date (with the month omitted for security) and Social Insurance Number (with the middle three digits omitted for security). Based on the reporting date, they didn’t know this information until I asked for the credit report. I wouldn’t have included this information on my request had I known they didn’t already have it.

The next section is credit inquiries showing dates, requester’s name, and requester’s telephone number. The final section is a list of credit accounts including credit cards and lines of credit. In each case I’m given a rating of R1 or C1 (depending on the account type) which mean “paid as agreed and up to date”. For each account the report lists how many times the account has been past due 2, 3, or 4 payment periods. Apparently, making a mistake and being late for one payment did me no harm.

The report comes with a form to correct mistakes. I’ve sent in the request to get my current address fixed. It will be interesting to see whether they actually fix it. The main thing is that there is no evidence of identity theft.

Tuesday, January 11, 2011

Deducting Mortgage Interest on Rental Properties

A colleague I’ll call Andy came up against a curious barrier to deducting mortgage interest on a rental property. Canada Revenue Agency (CRA) likes to see a straight line between the mortgage lump sum and the purchase of the property that will generate rental income. Unfortunately, it seems that Andy cannot easily draw a line that would satisfy CRA.

Andy owns a small home free and clear. He plans to move to a new larger home soon. He had hoped to rent out his old home to make some rental income. His plan had been to take out a mortgage on the old home and use this money to reduce the size of the mortgage on his new home. A side benefit Andy hoped for was using the interest on the mortgage on the old house once it becomes a rental property as a deduction against the rental income.

Unfortunately, CRA won’t allow this. From CRA’s point of view, the borrowed money wouldn’t be used to purchase an investment, but would be used to buy Andy’s new home. The following Q and A on page 12 of CRA’s Rental Income guide explains CRA’s thinking:
Q. I own and rent a semi-detached house. This year, I refinanced the property to increase the mortgage because I needed money for a down payment on my personal residence. Can I deduct the additional interest on the mortgage against my rental income?

A. No. You are making personal use of the funds you got from refinancing your rental property. As a result, you cannot deduct the additional interest when you calculate your net income or loss from your rental property.
If Andy were to go out and find some new rental property and buy it using borrowed money, then the mortgage interest on the rental property would be deductible against his rental income. This situation seems absurd. It’s hard to see any important difference between this scenario and what Andy hoped to do other than the fact that CRA treats them differently.

Perhaps CRA has the current rules in place to prevent clever schemes that skirt the intent of the rules and Andy is collateral damage. The end result is that Andy has to sell his current home and buy some different rental property if he wants to deduct mortgage interest. One solution suggested to Andy was to sell the old home to a family member or friend and then buy it back using a mortgage lump sum. I’d be worried that CRA wouldn’t accept the validity of these transactions.

If there are any readers who know of an easy way to solve Andy’s problems without entering into multiple expensive and pointless real estate transactions, I’m sure Andy would be happy to hear about it.

Monday, January 10, 2011

QuickTax Becomes TurboTax

A new year brings us ever closer to the dreaded tax filing deadline. A visible change this year is that QuickTax has been renamed TurboTax in Canada. This aligns the names between the Canadian and U.S. products. However, there seems to be little change other than the name.

I’ve used QuickTax for years and familiarity has kept me coming back. Once again this year the comparison chart designed to help customers decide which of the 5 versions they need makes it seem like investors need at least the third level product (“Premier”, $69.99+tax this year). However, I’ve always used the second level (“Standard”, $39.99+tax this year).

According to the comparison chart, I’d be missing out on extra guidance for investments in stocks, bonds, mutual funds, employee stock plans, rental properties, and calculation of capital gains and losses. From experience in past years I can say that it’s been possible to declare investment gains and losses without this extra guidance.

Friday, January 7, 2011

Short Takes: ETF Market Timing Losses and more

Larry Swedroe reports that the average dollar invested in ETFs underperformed the ETFs themselves due to failed market-timing efforts.

Big Cajun Man explains the changes you’re going to see on your pay cheque starting in the new year.

Larry MacDonald reports a reversal of contango in commodities ETFs. If you don’t have the faintest idea what that means, Larry explains it well. However, these concerns are one factor in why I avoid commodity ETFs.

Million Dollar Journey has a guest article from Mike Holman explaining the benefits of low interest rates for investors.

Rob Carrick isn’t too impressed with scare-mongering polls about whether people have saved enough for retirement.

Thursday, January 6, 2011

Getting Free Credit Reports

A recent article about getting free credit reports gave enough practical information that it overcame my natural laziness. It turns out that you can order these credit reports with a call to an 800-number that responds with an automated system. You don’t even have to talk to a person.

I was able to order my credit reports by keying in information that I had in my head and wallet: Social Insurance Number, credit card number, address, telephone number, date of birth, etc. I attempted to place the order with both Equifax (800-465-7166) and TransUnion (800-663-9980 (outside Quebec) or 877-713-3393 (within Quebec)). You have the option of paying to get your credit score at the same time. I decided to stick to just the free information.

Ordering my credit report from Equifax went quite smoothly. You have a choice of keying in the information or saying it. I tried saying my date of birth at first, but it just couldn’t understand me. The hardest part was my postal code. There didn’t seem to be an option for keying it in and I had to say it 4 times before the system understood me. In the end an automated voice promised to send me my report in 3-5 business days.

Ordering from TransUnion didn’t go as smoothly. They asked for less information, and all of it had to be entered on the telephone keypad. After entering each piece of information I was asked whether I was happy with my entry, but it didn’t tell me what I had entered. Equifax spoke my entry back to me each time so that I could verify that I’d got it right.

After entering all the required information, the TransUnion automated voice told me that it couldn’t process my order at this time. I called back and tried again painfully carefully but got the same result. At this point I started imagining all the identity-theft related reasons for this failure. No doubt the real reason for the problem is harmless, but I was hooked and I had to go to the backup plan: mailing in a request.

So now I sit back and wait for the credit reports to arrive. I’ve never worried too much about them in the past because I’m not very dependent on credit, but I suppose it’s better to know if the reports are full of incorrect information, or worse, evidence of identity theft.

Wednesday, January 5, 2011

RRSP vs. TFSA: Downside Protection Considerations

Much has been written about the relative merits of saving in RRSPs and TFSAs. The discussion usually comes down to a close call based on some elaborate calculations. For me the choice is clear.

For those who make a good living, marginal tax rates are somewhere near 45%. Given $10,000 of income burning a hole in your pockets, the choice is to put the $10,000 in an RRSP or to pay $4500 in taxes and put $5500 in a TFSA.

If all goes well in the future then it can be a close call which approach is better. But what if your financial future is terrible? What if your income is so low that you will be able to withdraw the $10,000 from your RRSP during retirement and pay a low tax rate? In this case, $10,000 from the RRSP is much better than $5500 tax-free from your TFSA. Choosing the RRSP over a TFSA offers some downside protection.

Of course, it’s better to save enough to fill both your RRSP and TFSA, and if your marginal tax rate is much lower than 45% you may prefer saving in a TFSA. Overall, I fill my RRSP first because it will provide a better buffer against the possibility of a meagre retirement. If I’m rolling in cash during retirement then it doesn’t much matter whether I saved in an RRSP or TFSA.

Tuesday, January 4, 2011

Late Entry to Stock-Picking Contest

Nine bloggers had a stock-picking contest for 2010. I decided to see how my actual portfolio would have fared in the contest.

If I had added an entry into this contest, it would have been the index-based part of my portfolio.  It managed a 22.6% return for 2010 helped by a tilt towards small-cap stocks. Adding my indexed portfolio as an entry in the contest would have left me fourth out of ten with a 14% edge over the average of the other entries.  However, when you add my not-so-great stock picks from the non-indexed part of my portfolio (which I'm slowly selling off), my 2010 return drops to 12.9%, which is still fifth out of ten and 4% above the average.

A result of fourth out of ten of is roughly what we should expect when comparing indexes to individual stock picks. The index will rarely be first, but it will be above average most of the time. Stock-picking contests are fun, but aren’t a great way to invest real money as the bloggers in the contest have said.

Monday, January 3, 2011

Steve Jobs’ Marketing Skills

Apple has had quite a run over the last decade selling a string of products that have changed our lives starting with the iPod. Looking back over this period of time, what amazes me is the way that Apple went about promoting these products.

As each new iThing became available, Steve Jobs made it clear that only out-of-touch losers wouldn’t own one. The truly amazing part of the marketing story was that when a new version of each iThing came out less than a year later, Jobs managed to create the impression that only out-of-touch losers would be caught owning the old version.

Being an out-of-touch sort of person, the only Apple product I own is the least cool and least expensive iPod: the Shuffle. It’s a good thing Apple didn’t have me anywhere near their marketing strategy because it would never have occurred to me that the best way to market electronics is to exploit people’s inner drive for social climbing.