One of the computers in my house came to the end of its useful life recently. In my house, that means ordering a new computer from Dell. Since I’m a tech guy and have techie friends, I’ve heard time and again how I can save money by buying cheap components and putting the PC together myself. But I’d rather leave it to Dell to put the system together and pay a little extra, but not too much extra. I prefer to buy online, but the Dell web site didn’t allow me to make all the choices I wanted. This meant having to make a call to Dell. This also meant having to turn down all the high-margin items available as add-ons. I was pleasantly surprised when the salesperson didn’t press me on an extended warranty after I turned it down; she just went on with the list of other choices. However, when we came to the end, she began a script: “You know sir, you’re buying an expensive computer...”. For a mere $119 I could extend the standard warranty from 1 year to 2 years. After I turned d...

I’m a victim of marketing. The title of the book Train Your Brain to Get Rich by Aubele, Freeman, Hausner, and Reynolds caught my eye, but the title is misleading. The additional words on the cover, “the simple program that primes your gray cells for WEALTH, PROSPERITY, and FINANCIAL SECURITY,” just add to the misdirection. This book isn’t really about money. As I read through the first quarter of the book, I kept waiting for the financial aspects to begin, but by the hundredth page I suspected that they never would begin, and as I finished the last page, my suspicion was confirmed. This book is really about brain health and the benefits of such things as a positive attitude, meditating, exercise, sleep, and healthy eating. The superficial financial parts of the book could just as easily be replaced with “train your brain to play better tennis.” The financial references actually seem as though as though they were added after the fact by a different writer. It’s as though s...

This will be the last regular post until next year. I may write one or two before then if the mood strikes. To all my readers, I wish you happy holidays and all the best in the new year. Where Does All My Money Go? breaks down the effect of mutual fund fees on a 25-year investment. Check out the spreadsheet that lets you enter your own inputs to see how much of your money goes to your advisor, the dealer, and the fund company. Gail Vaz-Oxlade conducted a poll to find out how much people could reduce their monthly expenses if they had to (in a post no longer online). The most striking thing about this poll is that the highest category is “15% or more”. I could reduce my expenses by 50%. If I absolutely had to, I could go further by moving my family somewhere cheaper. I think people have a misguided sense of the distinction between necessities and wants. Necessities are food, simple clothing, shelter, education, and not much more. The Blunt Bean Counter shows that there i...

Come January, I’m expecting a huge raise. Most workers get a huge raise at the start of a new year, but they don’t realize it. In the last days of the year, you are taxed at your top marginal rate, but in January the slate is clean and your income is untaxed for a while. You won’t see any of this on your pay stub, though. Payroll taxes are designed to smooth out the effect I’m talking about by predicting your final taxable income and taking equal amounts of tax off each pay. But your real taxes are based on your actual income using progressive percentages. For a person earning $100,000 per year in Ontario, after-tax pay at the end of this year is $28.92 per hour, but will rise to $51.11 per hour starting in January (based on 37.5 hours per week and 365.25 days per year). Of course, it will then drop off over the course of 2012. For most of us who collect a regular income for the whole year, none of this makes much difference, but for those who work irregularly of for irregul...

A friend I’ll call Jerry recently complained about his Maclean’s magazine subscription: "I see via your magazine insert I can order a year's subscription for Ontario for $53.62 (tax included) whereas I just recently paid $70.86 to renew mine! While I can understand the ‘bonus gift’ difference, I am quite upset that you are gouging (over 30 %!) a long time subscribing customer (over 30 years)." Jerry went on to demand a refund of the difference, and Maclean’s promised he would get it in 4 to 6 weeks. Of course, the other loyal customers who don’t bother to complain won’t get this refund. Most people believe that loyal customers deserve to be well-treated, but companies seek profits. Apparently, Maclean’s magazine has decided that the most profitable approach is to draw people in with low prices and hope they keep subscribing at higher prices. My guess is that they are right. This doesn’t mean that I think loyal customers deserve poor treatment; I just don’t think t...

We often hear of unions seeking pay parity with other workers. Invariably, a pay raise and possibly some back pay are required to right the supposed unfairness. No doubt there are legitimate cases, but I suspect that most are not. My direct experience is mostly with programmers. Organizations have different philosophies when it comes to paying programmers. Some seek the best talent they can find and give them above-average pay. Most offer average pay and get average talent, and still others offer low pay and try to get by with whoever will work for them. It is too easy for programmers at one company to look at another company’s pay scales and complain. The truth is that most complainers would be rejected if they tried to get a job with the higher-paying company. Superficially, all programmers do similar work, but when we get down to details it is normal for one company’s programmers to be far superior to another company’s programmers. When this is true, demands for pay pari...

Dan Hallett accused mutual fund critics of missing the big picture when they focus their criticism on high MER costs. His main point is not so much that MERs are not a problem but that there are other important ways that investors lose money. He claims that one of these ways that investors lose money is due to a volatility drag that comes with periodic investments or dollar-cost averaging (DCA). I’ve done a couple of experiments and can’t find any evidence that this volatility drag exists. In fact, DCA has a slight edge over lump-sum investing. Hallett explains volatility drag as follows: “You’ve no doubt scratched your head at why a portfolio’s long-term performance hasn’t quite lived up to expectations. It’s likely that volatility drag is one of the big culprits. ... If a mutual fund reports a 7 percent 10-year rate of return, for example, the only way to have achieved that precise result was to invest at the beginning of that period, hold for the full decade and have no buy...

It pays to be wary of investment scams. The well-done 3-minute video below hits the high points for how to protect yourself. It was created by the (deep breath) U.S. Financial Industry Regulatory Authority (FINRA) Investor Education Foundation.

Glenn Cooke of InsureCan Inc. was our top bidder of $100 in the Blogger’s for Charity auction. Glenn will be contributing a guest post on this blog on 2012 Jan. 17. Thanks to all the bidders. Hopefully, they will contribute their bid amounts to their favourite charities anyway – winter is a tough time for those in need.

The highest bid so far in the bloggers for charity auction for a post on this blog ( see here for details ) is $100. Bidding will close tonight at 11:59 pm EST. I will update this note with further bids. Jason Zweig has some examples of small investors being harmed by strange results when trading stocks. He gives some suggestions for protecting yourself against these infrequent but costly problems. Ellen Roseman thinks that the Rogers-Bell collaboration to buy a majority stake in Maple Leaf Sports and Entertainment is bad for Canada. I agree with her. These companies' near monopoly status allows them to treat their customers poorly to increase profit. If anything we should be looking at breaking up these companies to improve competition. Canadian Mortgage Trends says that 6.5% of Canadian mortgagors currently pay more than 40% of their income to service debts, but that increasing interest rates would drive that percentage higher. Money Smarts finds that Canadian T...

My employer recently moved to a hoteling system where nobody has a fixed desk. We just take our laptops out of a locker and pick a desk each day. This has its advantages and disadvantages, but one side effect is that it is much more difficult to have great piles of paper. I've had to throw away unimportant papers and scan the important ones. This elimination of paper has been very freeing for me, and it occurred to me that this way of thinking would be good for Library and Archives Canada as well. Certain documents are of such great historical significance that they it makes sense for taxpayers to pay to preserve them. However, many documents held by Library and Archives Canada could simply be scanned, the electronic copies be made available to Canadians free on the internet (assuming their copyrights have run out), and then the original documents could be sold to collectors. I wouldn't want to lose great works of fiction written by Canadians, but all I need is an el...

The typical person will invest for many years, but we express investment costs with yearly percentages that are misleadingly low. I propose that for recurrent costs that accumulate, we use an investing horizon of 25 years to express these figures. For example, instead of talking about a fund's MER, we would talk about its MERQ (Management Expense Ratio per Quarter century). This would give investors a better feel for the effect of recurring costs. In another example, if an investor's portfolio concentration creates a drag on returns, we should look at the effect over 25 years rather than just one year. In a recent article, Jonathan Chevreau observed that Investors Dividend A Fund has an MER over 2% higher than that of iShares Dow Jones Canada Select Dividend Index Fund (XDV/TSX) despite the fact that they have substantially the same holdings. Even if we add 1% to the MER of the iShares ETF to account for the cost of advice, the percentages are 2.69% vs. 1.53%. The di...

Big economic events, popularized as “black swans”, are known to happen more often than standard economic theory predicts . However, it’s not easy for most investors to figure out what they should do with this information other than to be vaguely worried. One important implication is that leverage is more dangerous than it appears. Leverage just means borrowing to invest. If you invest $50,000 and it goes up 10%, you make $5000. But if you had borrowed another $50,000 at 4% interest, you’d have made $10,000 less $2000 in interest for a profit of $8000. When investments are rising, leverage is a wonderful thing. However, when investments are dropping, leverage magnifies losses. There is even the possibility of going completely broke if the value of your investments drops below the amount you owe. In most cases where investors use leverage, they can weather minor storms by paying off the leverage loan with employment income. This way they can wait out stock market tumbles unti...

Right now in Canada you usually pay the same price to a retailer for goods and services whether you pay by cash, debit, or credit. On the surface this seems like a good thing. However, when we scratch the surface, we see inefficiencies that boost prices. Planned changes to these price rules could create different pricing for different payment methods, but whether consumers will benefit is still unclear. When you pay with a credit card, the retailer has to pay between 1.5% and 3% of the transaction amount to the credit card company. The cost of all the wonderful credit card reward schemes we enjoy comes out of these fees charged to retailers. Retailers have to raise their prices to compensate for the fees they pay to credit card companies. The catch is that everyone has to pay these higher prices, even those who pay with cash. In effect, people who pay cash are subsidizing the credit card rewards and cash-back schemes. But only some of the retailer fees flow back to consumers...

To answer a question about the charity auction for a guest post (see here for more details), yes I am willing to read your post before you make a bid to confirm that I’m willing to publish it. For the first time Warren Buffett is inviting Wall Street analysts to the Berkshire Hathaway annual meeting . Some commentators see this as a sign that Buffett believes Berkshire is undervalued. Boomer and Echo describes how debit cards draw people into high banking fees. Canadian Couch Potato has a vivid illustration of how investment marketers could paint very different pictures by just taking the window in time for quoting investment returns and shifting it by 3 months. Big Cajun Man stumbled onto a way to improve security for his ATM card. Preet Banerjee answers a reader question about whether MERs are tax deductible. The Blunt Bean Counter explains how to have a tax-free corporate divorce using a "butterfly" transaction. Retire Happy Blog says it's importa...

Nassim Taleb gets much credit for popularizing the idea that big economic events, so-called “black swans,” occur more frequently than standard economic theory predicts. The initial work was actually done by the “father of fractals,” Benoit Mandelbrot . Physicists have studied detailed market data and have now concluded that Mandelbrot was right . (Hat tip to the Stingy Investor for pointing me to this article.) The bigger the market move we contemplate, the lower the chances that it will happen. However, these probabilities shrink much more slowly than standard economic theory predicts. In standard economic theory based on the normal distribution, if a move has a 1 in 1000 chance of happening, a move twice as large has less than a 1 in a billion chance of happening. In Mandelbrot’s model as confirmed by the physicists, the bigger move has about a 1 in 8000 chance; each doubling in move size reduces the odds by 8 times. For conditions of low market volatility, standard theor...

Credit card companies, retailers, and other businesses have jumped on the loyalty points bandwagon. We accumulate all sorts of different points, and some of us manage to redeem points for various goods and services. I tend to look at these points as a kind of currency. Businesses are issuing their own brand of currency that they give their customers in return for making purchases with actual money. The problem for consumers is that these businesses control the rules for this currency and can devalue it at any time by adding various restrictions and changing the number of points needed to redeem a “reward”. Viewed this way, it becomes apparent that many reward points systems aren’t worth the bother, but this isn’t likely to change consumer behaviour. The innumerate masses love their points. It’s true that some points systems have real value and are worth the trouble, but this is the exception rather than the rule.

Vanguard's first 6 Canadian ETFs begin trading today (see the list below).  Note that the MERs consist of slightly more than the management fees listed.  The most interesting of these to me is VCE as a potential replacement for XIU for Canadian stocks.  However, I plan to wait and see that all goes smoothly in the first few months of trading.  I have little interest in the bleeding edge when it comes to new securities. VCE (Mgmt fee 0.09%) Vanguard MSCI Canada Index ETF VUS (Mgmt fee 0.15%) Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged) VEF (Mgmt fee 0.37%) Vanguard MSCI EAFE Index ETF (CAD-hedged) VEE (Mgmt fee 0.49%) Vanguard MSCI Emerging Markets Index ETF VAB (Mgmt fee 0.20%) Vanguard Canadian Aggregate Bond Index ETF VSB (Mgmt fee 0.15%) Vanguard Canadian Short-Term Bond Index ETF

A very popular method of investing is to build a portfolio of individual stocks with a solid history of dividend payments. Dividend investors tend to believe that this approach will beat index investing, and index investors believe that dividend investors have sub-optimal portfolios. Although dividend investing tends to be quite passive in the sense that it involves infrequent trading, it is at least a little bit active in the sense that dividend investors choose individual stocks. Any time you choose an active investing strategy, it makes sense to know how much your strategy is likely to underperform the market averages in the event that your strategy is little better than random. So, if we begin with the premise that index investors are right and that dividend investors are likely to underperform, how much lower are their returns expected to be? To answer this question, I dug up an old paper by Meir Statman: How Many Stocks Make a Diversified Portfolio? In it he reprints a t...

Wealthy Boomer takes off the gloves in an exchange with Investors Group over sky-high mutual fund MERs and a questionable commitment to Canadians’ financial literacy. The truth is that Investors Group profits greatly from their clients’ lack of understanding of important investing facts. Big Cajun Man created an amusing flowchart of financial planning in families. I fear that many people follow this flowchart. The Blunt Bean Counter explains that while he is moving to passive investing, he plans to be a stock-picker for a small fraction of his portfolio for the excitement. Retire Happy Blog explains some model investment portfolios. He gives a range from conservative to aggressive. There are higher levels, though. If you borrow to invest, such as with the Smith Manoeuvre, you are moving into the hyper-aggressive range. I think leveraged schemes might be less popular if people understood how risky they are. Preet Banerjee gave us a look into the complex world of inter...

Calculating the total return of a collection of investments is a simple matter of adding up or averaging the returns of the individual investments, right? In reality, the right way to "add" or "average" returns depends on the context. Suppose that investment A stayed flat for two years (0% return each year), and investment B fared much better returning 20% each year for both years. Suppose further an investor splits $1000 between A and B in the first year, then rebalances and again splits his money between A and B in the second year: To start: A $500 B $500 After year 1: A $500 B $600 The total is $1100 for a 10% return. So we see that correct overall return is the average of 0% and 20%, namely 10%. This investor will get another 10% return in the second year and will end up with $1210 for a total return of 21% after two years. Note that the total return is not just 10% + 10% = 20%. In this case we have to "add" the returns using comp...