Tuesday, September 27, 2016

Shrinking Bonds

As I write this, Canadian 30-year bonds yield 1.674% per year. If we assume that Canada will be able to maintain its 2% inflation target, these bonds will lose purchasing power for the next 30 years. Investors today are willing to tie up money for 30 years and get back less at the end of it all. This seems remarkable to me.

Of course, investors can choose to sell these bonds before they mature, but if we follow the life of an individual bond, its owners will share the loss of purchasing power for 30 years. Some investors may hope yields will drop further creating a capital gain. Some may think inflation will drop or that we might even have deflation. Others may think that alternative investments, such as stocks or real estate, will fare worse.

I don’t know if bond investors are being rational, but I find it hard to look past the apparent near certain loss of value. Over 30 years I’m hoping my stocks will roughly triple in real value and that my house will hold its value. I may be disappointed, but it’s hard to buy bonds with disappointment seeming to be a near certainty.

Bonds have the virtue of reducing portfolio volatility. This is useful for investors who can’t handle too much volatility or who have enough money that they don’t need to take much risk. However, these benefits aren’t enough to get me past the thought that buying bonds today is a money-losing proposition.

Friday, September 23, 2016

Short Takes: Fact-Resistant Humans, Financial Makeover, and more

I managed only one post in the past two weeks looking at the Air Miles fiasco:

Thousand-Foot View of Air Miles

Here are some short takes and some weekend reading:

The New Yorker cracked me up with a piece on “fact-resistant humans.” There’s not much of a connection to money, but it’s a good read nonetheless.

Mr. Money Mustache does an interesting case study of a young man’s finances and spending. A great quote: “it is impossible to out-earn the habit of spending all your money.”

Potato discusses the problem of companies such as Valeant and Nortel growing to dominate Canadian stock indexes. It’s true that when such companies topple, they bring the index down. But the flip side is that when they soar, they bring the index up. It’s only market timers who are harmed over the long run by stocks that inflate and deflate.

Million Dollar Journey looks into tax-efficient non-registered investments for children.

Canadian Couch Potato continues his series on “smart beta” with a look at the size factor.

My Own Advisor has a good list of ways to ruin your retirement plan.

Big Cajun Man goes through some financial priorities that come ahead of RESP contributions.

The Blunt Bean Counter analyzes income tax concerns for Olympic athletes and NHL players.

Thursday, September 15, 2016

Thousand-Foot View of Air Miles

Many collectors are upset that their Air Miles are set to expire and choices for cashing them in are slim. Boomer and Echo’s open letter sums up the current situation well. Ellen Roseman has even started a petition calling on LoyaltyOne to help collectors save their Air Miles. Sadly, this conflict was quite predictable.

Air Miles resemble a currency. In many ways it’s as though LoyalyOne minted their own money, and they control the exchange rate of cashing in Miles for flights and other goods. Collectors of Air Miles got used to one exchange rate, but it was inevitable that as the Air Miles “money” supply grew, LoyaltyOne would have a growing incentive to tinker with expiration rules and change the exchange rate.

In some ways, this reminds me of when my son was young and held onto cheques, thinking they were as good as money. I had to explain that cheques sometimes bounce and that they expire after about 6 months. It’s best to deposit them as soon as possible. Similarly, collectors of points of any kind need to think about cashing in points when possible is avoid the inevitable devaluation or expiry.

Now, it may seem that I’m building up to saying that Air Miles collectors were foolish and deserve their fate. I’m not. I hope the petition effort succeeds in embarrassing LoyaltyOne into doing the right thing. The fact that the current battle was predictable, at least in broad terms, does not make it right.

The important thing for points collectors to understand is that this is not the first time this has happened and it’s likely to happen again. Take Aeroplan as an example. The number of miles needed to get free travel has risen over the years, miles began expiring, block-outs grew, and travelers began having to pay taxes and other fees when using miles.

Don’t get fooled again. The best plans give cash back immediately. Next best is cash back within a year. After that is any points plan where you know you can use the points within a year or so for something useful. It almost never makes sense to let points affect where you shop and what you buy. Above all, don’t collect any type of points for years expecting them to hold their value.

Friday, September 9, 2016

Short Takes: Sponsored Post Crackdown, Dividend Investing, and more

Here are my posts for the past two weeks:

Thinking Differently about Investing

Adventures in Credit Reports

Here are some short takes and some weekend reading:

CBC News reports that Advertising Standards Canada will be cracking down on sponsored posts on blogs. This sounds great to me. I’m tired of getting part way through a blog post and realizing that I’m reading paid-for dreck.

Boomer and Echo explain why Echo made the switch from dividend investing to index investing. The comments are civil, and in a few cases they illustrate some dividend investors’ beliefs that can only be true if dividend stocks earn higher total returns than other stocks. One example is “In an upcoming age of slower growth, I believe it’s important to own birds in hand (dividends) vs. two in the bush (capital gains). If I’m correct, dividend investing will be more beneficial.” Another example is “it’s simply not true to generalize that a dividend stock’s price will be held back by its dividend.”

Canadian Couch Potato begins a series of articles explaining smart beta.

Potato reviews The One-Page Financial Plan and finds he is torn between praising it and damning it. He notes that the book “has been out for a little over a year so this isn’t exactly a fresh review.” This doesn’t concern me. If a book isn’t worth reading after a year or even a decade, it probably wasn’t worth reading when it first came out. Authors crave positive reviews at a book’s launch, but I write my reviews for readers.

Big Cajun Man says textbooks are too expensive and that students are a captive market being exploited.

Million Dollar Journey offers wealth-building tips for a friend (Gary) for taking advantage of free money. The only one I take issue with is the cash-back credit cards. If Gary has built a life using cash and debit cards, perhaps the reason is that it helps him avoid overspending as happens with so many of us when we use credit cards. The cash back is a small consideration compared to spending more or paying interest. Don’t spend any time thinking about cash back until you are certain you don’t spend more when using credit cards. One test of this is to imagine buying a $200 item with a credit card and then fan out ten $20 bills and imagine handing them over.

Thursday, September 8, 2016

Adventures in Credit Reports

Equifax and TransUnion are required to provide Canadians with free copies of their credit reports once per year, but you only get these reports if you ask for them. Fortunately, asking for these reports by automated telephone system or online is fairly easy as long as you can get past the authentication questions. Here I describe my experience getting these reports.

It’s not too difficult to search for “Equifax free credit report” or “TransUnion free credit report” and find ordering instructions, but don’t be distracted by their attempts to divert you to reports that aren’t free. Find the word “free” on the web pages.

TransUnion Request

TransUnion offers a way to order free credit reports online that seemed easy enough, but didn’t quite work for me. The problem was that one of the questions they used to authenticate me was based on errors in my file. They crossed up my home address with that of one of my family members. I know what TransUnion thinks my address was 13 years ago, but it seemed wrong to authenticate myself by selecting a choice that I know is wrong.

So, I moved on to their automated telephone system. The sound quality is quite bad, but I was able to answer the various questions to their satisfaction. Fortunately, I wasn’t asked a question about past home addresses. The trickiest question was whether I had asked for a copy of my credit report in the past 2 years. My last request was close enough to 2 years ago that I was forced to guess. I must have guessed right.

Equifax Request

Equifax doesn’t offer a way to order a free credit report online, but their automated telephone system is easier to use that TransUnion’s. The sound quality is better, and Equifax’s system repeats each answer back to you before asking if it is correct. TransUnion just asks if you’re happy with your answer without repeating your answer back to you.

Report Errors

I found a total of 3 errors in my TransUnion report, and 2 errors in my Equifax report. None of the errors are related to my credit history. They are all related to my history of home addresses and employers. The funniest error is a strange phonetic misspelling of a former employer’s name. The word “Cryptographic” was turned into “Kripta Grapixs.” I actually tried to correct this error 5 years ago. Apparently, trying to correct errors is futile.

The good news from this exercise is that I don’t seem to have been the victim of identity theft. I don’t have much reason to worry about access to credit, but credit reports are used in so many ways today that it pays to keep your record clean.