Friday, March 27, 2020

Short Takes: Cash Reserves, Deferred Pensions, and more

Here are my posts for the past two weeks:

It’s Too Late to ‘Re-Evaluate Your Risk Tolerance’

Reader Question: What to do about the Stock Market Crash

Many “Experts” are Wrong about Risk

Here are some short takes and some weekend reading:

I enjoyed this brilliant letter from Warren Buffet’s grandfather explaining the value of maintaining a cash reserve. A great many people today are in need of a cash reserve.

Robb Engen at Boomer and Echo has a big choice to make about whether to take a deferred pension or take it’s commuted value. The deciding factors are how long the pension would be deferred and the current health of the pension plan.

Tom Bradley at Steadyhand says that if you choose to get out of the market, expect some tough choices on when to get back in.

Preet Banerjee explains the Canada Emergency Response Benefit (CERB) in a 3-minute video.

Ben Felix discusses how to handle the recent market crash. Stay calm and think.

Canadian Mortgage Trends describes the big banks’ mortgage referral relief. It’s hard to see how this differs very much from normal operation for banks. I used to get skip-a-payment offers from my bank when I had a mortgage. I don’t know if I could have done it 6 months in a row, so maybe that’s new. This CBC article confirms that interest accrues on the mortgage during the 6 months without making payments. Mortgage deferral will definitely help many people, but it’s not free. Banks will make money from this.

Big Cajun Man has a guest post from his daughter explaining how COVID-19 is affecting her small business.

Joseph Nunes at the C.D. Howe Institute quantifies the power of working longer to save for retirement. With people living longer, it makes sense that we can’t all retire in our late 50s or early 60s. Someone has to provide the goods and services we all need.

Jim Yih at Retire Happy tries to gently steer people away from selling stocks in fear.

The Blunt Bean Counter explains the impact of the coronavirus on small business owners.

Wednesday, March 25, 2020

Many “Experts” are Wrong about Risk

COVID-19 has brought a stock market crash and widespread unemployment, two things that often go hand in hand. None of the specifics of this crisis were predictable, but it was inevitable that the stock market would crash at some point. Now we have a vivid picture of what is wrong with a lot of financial advice.

I frequently argue with bloggers, financial advisors, and others about mortgages, borrowing to invest, and emergency funds. Some so-called experts say it’s fine to max-out your mortgage to invest more in stocks, or borrow to invest, or plan to use a line of credit instead of having an emergency fund.

Imagine what it’s like to have huge mortgage payments without a paycheque coming in. Sadly, many people don’t have to imagine. Those who use leverage to invest in stocks are looking at 45-60% losses or more, and they don’t know if it’s going to get worse. In these circumstances, an emergency fund helps a lot more than piling up more debt on a line of credit.

The problem with most thinking on these subjects is that people imagine normal circumstances. You don’t need an emergency fund when things are going smoothly. Borrowing heavily for a house or stocks works wonderfully when the economy and stock markets are running well.

Many experts do elaborate calculations to prove that you’ll end up with more money if you keep a big mortgage, use leverage, and fail to keep some cash in a savings account. During normal times, these strategies do give an advantage. It’s times like now when the cost of being unprepared is so high that it overwhelms this advantage. When you’re forced to sell at huge losses to get money to live on, these losses are permanent.

Does this mean we should all push to eliminate all debt and ignore investing? Absolutely not. Balance is key. When people ask whether they should pay down the mortgage or add to retirement savings, the correct answer is usually to do some of each. Few people are cut out for leveraging their investments, and all of us could use some cash in a savings account just in case.

It does no good to blame people who have been seriously harmed financially by this crisis. But the truth is there are steps each of us can take to be better prepared. It’s too late to prepare for this crisis, but there will be another crisis, and it will come during good times when we least expect it. Limit your debts to amounts you can handle during bad times, not just good times.

Monday, March 23, 2020

Reader Question: What to do about the Stock Market Crash

Art asks the following (lightly-edited) question about what to do with his portfolio now that the stock market has crashed.

Like everybody, I guess, I've lost a lot of money. Life goes on and I'm surprised at my risk tolerance. I have no desire to sell low (I grew up on the game Stock Ticker).

But I do get monthly RIF and LIF payments. As I can't stop payment, due to current conditions (and assuming that things will get better), I'm thinking of switching from month to month to an annual withdrawal which would leave me having losses only on paper. That makes sense to me as I can live without my RIF and LIF for now. I set up some GICs and they will keep me floating for a couple of years.

My second idea is, if I stay month to month, is to sell bonds (in my case ZAG) as they have suffered less damage than the stocks. I'm using Couch Potato 50-25-25, XAW/VCN/ZAG. Along with that, I would start a new RRSP as things are certainly a bargain right now and plough back whatever I get month to month and as above, and live off my GICs.

This is WHY we have GICs, right?

If you can let me know what you think, I would appreciate it.

Let’s start with the important stuff: I played Stock Ticker as a kid too. I don’t know if it had any effect on my risk tolerance, but who knows what drives these things. It’s good that you’re not panicking, Art.

As for the rest of your questions, my choice has been to continue with my plan unchanged through this market crash. But it’s important to look at exactly what it means to stick with my plan, because parts of it look similar to your thoughts.

My plan involves maintaining an asset allocation currently at about 80/20 between stocks and fixed income (cash, GICs, and short-term Canadian government bonds). The stock market crash has thrown this balance way off, so I’m selling bonds to buy more stocks to restore my balance.

Now that your stocks have tanked, your allocation to ZAG and GICs is high. So it makes sense to either shift some bonds or GICs to stocks, or live off bonds and GICs until you’re back to your desired asset allocation.

You could decide to go further and just live off your fixed income longer than it takes to restore your target allocations. This would effectively increase your stock allocation percentage higher than it was before the crash. This would be an active choice, but not one I’d make myself.

As for what to do with cash flowing from your RIF and LIF that you don’t currently need to live on, keep in mind that the government is letting you reduce RIF payments by 25% this year. If you’ll still have more cash than you need, then it makes sense to invest the excess in a way that’s consistent with your overall portfolio’s target allocations. Whether you invest this extra money within an RRSP, a TFSA, or a non-registered account depends on whether you have TFSA room, RRSP room, and a high enough income to justify making an RRSP contribution.

Whether you should change your withdrawal frequency from monthly to yearly comes down to convenience for me. I prefer yearly because it’s less work and I don’t have tight cash flow. Your idea is to delay selling stocks right now, which is an active decision that I wouldn’t bother to make, but is mostly harmless.

The question about why we have GICs depends on your philosophy. There are certainly many people whose plans involve shifting all spending to GICs after a market crash while waiting for stock prices to recover. This is obviously an active decision based on when you declare a stock drop to be large enough to call it a crash. As you have probably guessed, Art, I prefer a mechanical strategy without any hard switches from one mode of handling a portfolio to another.

So you’ll have to decide whether you want to follow your gut or just follow a mechanical plan that can be coded into a spreadsheet. One benefit of the mechanical strategy is that it eliminates hand-wringing about what to do next.

Monday, March 16, 2020

It’s Too Late to ‘Re-Evaluate Your Risk Tolerance’

It’s not easy to know your true investment risk tolerance. Fred Schwed explained this problem wonderfully in his book Where are the Customers’ Yachts?:

“There are certain things that cannot be adequately explained to a virgin either by words or pictures. Nor can any description that I might offer here even approximate what it feels like to lose a real chunk of money that you used to own.”

Now that the stock market has tanked and investors are learning what it feels like to lose money, experts like financial planner Jonathan Bednar are saying “This is a great time to re-evaluate your true risk tolerance,” and “If you are nervous then you may be taking on more risk than you are really comfortable with and should rebalance into a more conservative portfolio.”

This advice amounts to “sell stocks while they are low.” The best time to figure out that you don’t have the stomach for a stock market crash is while prices are still high. It’s now too late to reduce your stock allocation without permanently locking in losses.

Unfortunately, when stocks are soaring it’s far too easy to convince yourself that your risk tolerance is high. So maybe we need a different strategy. Perhaps we should record videos of ourselves saying how we feel after stocks crashed, and set a calendar reminder to watch this video annually. The next time stocks are soaring again, maybe the video will help us lighten up on stocks while prices are still high.

In the meantime, we have a choice to make. Either sell stocks and permanently lock in losses, or try to gut it out until the recovery and reduce our stock allocation at better prices.

Friday, March 13, 2020

Short Takes: COVID-19 and a Life Insurance Primer

Here are my posts for the past two weeks:

My Asset Allocation in Retirement

The Ultimate Guide to When to Buy and Sell Stocks

Here are some short takes and some weekend reading:

The Canadian government is providing useful COVID-19 information. I’ve heard many opinions that Canada isn’t doing enough, and others saying that the risk is overblown. Amusingly, I heard one person with both of these contradictory opinions.

Preet Banerjee explains the different types of life insurance in more detail than the usual superficial explanations. Broadly, there are two types: term life insurance and permanent life insurance. There are many subcategories of permanent insurance. No one type of insurance is inherent;y good or bad; what matters are the numbers. I don’t claim to have investigated every type of life insurance, but when I’ve dug into the numbers, anything that wasn’t term insurance looked quite bad. I’ve had many insurance salespeople tell me there are good kinds of permanent insurance, but they’ve never been able to provide me with the details of an available permanent insurance policy that turned out to be a good deal.

Thursday, March 12, 2020

The Ultimate Guide to When to Buy and Sell Stocks

We’ve all heard that we should buy low and sell high. But when are stocks low and about the rise, and when are they high and about to fall? Here we reveal the secrets to when to buy and sell.

We begin with the short answer and then explain more fully.

When to buy. When you have the money.

When to sell. When you need the money.

The stock markets as well as markets for bonds, real estate, currencies, and other investments are complex systems controlled by many people whose collective actions cannot be predicted with accuracy. So we have to make choices without accurate predictions.

So, when I have money I want to invest, I don’t pay the slightest attention to my predictions about the near future (or anyone else’s predictions). Knowing that stock markets are volatile, I don’t invest any money that I think I’ll need within 5 years. When I do have some money to invest, I do so right away and don’t think about whether today is a good day.

Now that I’m retired, I sell stocks much more frequently than I used to. But I’m guided by the same principle. I try to predict how much money I’ll need over the next 5 years. If my current fixed income investments are too low to cover these needs, I sell some stocks right away without any regard for whether today is a good day.

This approach works best for index investors who own almost all stocks. Those who buy individual stocks have the additional problem of figuring out which stocks to buy or sell. I don’t worry about that. A happy side effect of this investment approach is that I don’t have to listen to any talking heads making stock market predictions that are just guesses anyway.

Sunday, March 8, 2020

My Asset Allocation in Retirement

Occasionally, I get questions about my portfolio’s asset allocation now that I'm retired. I’m happy to discuss it with the understanding that nobody should blindly follow what I do without thinking for themselves.

When it comes to the broad mix of stocks/bonds/real estate, my answer used to be very simple: 100% stocks. But now that I’m retired, I do have a fixed-income allocation that consists of high-interest savings accounts, GICs, and short-term government bonds.

My current mix is roughly 80% stocks and 20% fixed income, but I plan to increase the fixed income component over time. The way I think of it is that I have 5 years of my family’s spending in fixed income and the rest in stocks. Over time as I spend down my portfolio, the fixed income percentage will rise. For example, it will be up over 22% in a decade.

Some investors use a “bucket” strategy that resembles my approach, but there is a crucial difference. These investors typically plan to make active decisions about which bucket to withdraw from each year for spending. I don’t do that. I spend from my fixed income allocation and mechanically refill it without any regard for my opinions on the near future of the stock market.

When the stock market drops significantly (as it has recently), the drop in my portfolio makes the fixed income percentage grow above 20% faster than my family’s spending reduces it. In these situations, I can end up buying back some stocks to rebalance.

What I call my family’s monthly spending is calculated from my current portfolio size (less expected taxes). Currently, I take 20% of my after-tax portfolio and divide by 60 months. So, when my portfolio goes down, our monthly safe spending level goes down. So far this hasn’t been a problem for us because we rarely spend as much as my spreadsheet says we can spend. I guess that’s good for our sons’ inheritance.

My stock allocation consists mainly of 4 exchange-traded funds. The only exception is that after applying all my asset location rules, I still need more stocks in my taxable account where I’ve chosen to just buy the all-in-one fund VEQT instead of the 4 ETFs.

I’ve been asked why I don’t invest in real estate. The main reason is that I don’t expect it to outperform stocks over the long run. We’ll see over the coming decades if I turn out to be right about that. I do own a house, but I don’t think of it as part of my portfolio.

Overall, I’m pleased to handle my finances with a set of mechanical rules that can be coded into a spreadsheet. Some time ago a reader showed me how to have a spreadsheet email me if some aspect of my portfolio was out of balance and needed attention. So, I have little reason to monitor my finances on a daily or even weekly basis. Life is good.

Friday, February 28, 2020

Short Takes: Illiquid Investments, Deferring OAS, and more

My most recent post argued that all of us have shortcuts in our decision making that can lead us astray and make us look irrational at times:

Behavioural Biases are in All of Us

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand explains what investors should know before diving into illiquid investments.

Boomer and Echo explains when you should or should not defer taking OAS to age 70. It’s important not to get too caught up in guessing how long you’ll live. The important thing is having a decent income in case you live long. This tends to make deferring OAS to age 70 look like a good idea for those with the savings to pay their own way through their latter 60s.

FINRA is investigating whether brokerages that offer free trades are creating profits from order flow. If you can’t understand this article, here’s the takeaway: don’t trade frequently. There are sharks looking to take a slice of your money in many different ways.

David Robson explains how the gambler’s fallacy finds its way into decisions unrelated to gambling. I suspect that the real life examples have more complex things going on, but it’s clear that there are biases at play. The problem is that most people think these biases are things that other people have, but not themselves. Thanks to reader Gene for pointing me to this article.

The Blunt Bean Counter explains some subtle points related to the complex Tax on Split Income (TOSI) rules.

Wednesday, February 26, 2020

Behavioural Biases are in All of Us

The findings of behavioural economics are often cast as the ways that we’re irrational. This allows us to laugh at the foolish things other people do and know that “since I’m rational, none of this applies to me.” But this isn’t true. Many of these biases are baked into all of us.

Consider the tendency to heavily discount the future. To take a cookie now instead of two cookies in a year is to give up a 100% return. However, look at this from the point of view of our distant ancestors who lived on the edge of starvation. They couldn’t afford to plan too much for the future and possibly starve today.

When people refuse a 50/50 coin flip to either lose $100 or gain $200, they are using a rule of thumb that appears to be baked into all of us to avoid a loss even at the expense of the possibility of a much larger gain.

We seem to have many such rules of thumb baked into the automatic part of our brains. These rules of thumb have served us well throughout human evolution, but they sometimes give us the wrong answer to modern questions such as “should I save some of my windfall or just go blow it all on a wild trip to Las Vegas?”

When we discover a rule of thumb people use that gives poor answers to some questions, we call it a behavioural bias and declare people to be irrational. I’ve done this myself. However, I now just think of it as a useful short-cut rule that my brain misapplies sometimes. Viewed this way, it’s easier to accept that these behavioural biases are part of me and not just other people.

Rather than label others as irrational, I’m better off accepting that behavioural economics applies to me, and that I need to look out for situations where my first quick answer isn’t the best one.

Friday, February 14, 2020

Short Takes: Stock-Picking, Falling for a Ponzi Scheme, and more

My most recent post was answering an interesting reader question about whether to leave TD e-Series funds for ETFs:

Reader Question: Switching Portfolios

Here are some short takes and some weekend reading:

Tom Bradley at Steadyhand has some good therapy for investors who trade individual stocks without knowing much about the companies they buy. This is a point I’ve tried to make in the past without much success. During my not very stellar stock-picking period I pored over financial filings trying to understand the businesses I wanted to own. But it wasn’t enough to compete with other traders effectively.

Andrew Hallam explains how he fell for a Ponzi scheme.

Retire Happy explains when you shouldn’t contribute to an RRSP.

Friday, February 7, 2020

Reader Question: Switching Portfolios

A reader, Doug, asked the following interesting (lightly-edited) question about whether it’s time to switch portfolios:

I currently have over $200K in my RRSP sitting in TD e-series mutual funds (25% bonds, 25% each in CDN/US/Int'l Equity). The resulting MER is 0.37%.

Does it now make sense for me to switch over to ETFs? I was thinking another Canadian Couch Potato portfolio with the ETFs VAB and VEQT. The MER is around 0.22%, a savings of $300 per year. However, I'm very comfortable with e-series funds as I've been using them for 6 years.

With ETFs, I also have to pay commissions to buy which will amount to perhaps $120 to $240 per year as I purchase twice a month.

What are your thoughts? Any other pros and cons that you can think of? Does it make sense to switch given the saying that perfection is the enemy of good?

First of all, Doug, congratulations on amassing over $200k in savings over 6 years. You’ve given yourself more choices in life.

Your last question is an important one. No matter what your portfolio looks like, there will be some change you could that would seem to improve it. Some investors take the obsession for perfection too far.

There is nothing wrong with sticking to your TD e-series funds. You’ve obviously built a steady saving habit using these funds that is working for you. Even if your portfolio were 10 times larger, paying an extra $3000 per year (or $250 per month) is certainly tolerable, particularly when you have $2 million in invested assets.

But I understand the desire to cut costs. This is a choice I’ve made myself. You’re right that commissions could take a bite out of any MER savings. One solution would be to get an account that doesn’t charge commissions on ETF purchases. Another would be to allow cash to build up somewhat and trade less frequently.

Consider these potential changes carefully, though. Are you going to continue saving as well as you have been with this disruption to your current habits? Only you can answer this question.

I can see a number of sensible ways forward. One is to make the change all at once. Another is to open a new trading account and direct new savings to this account for a while before sending all your TD e-series assets to the new account. Or you could defer the decision about making this change for a few years when your portfolio is larger. Finally, you could decide to stick with e-series indefinitely.

If your current costs were much higher, I would say they will ultimately affect your life negatively. However, the differences among these approaches are fairly small compared to the big things in life like health, family, and friends.

Friday, January 31, 2020

Short Takes: Better Mutual Funds, Model Portfolios, and more

Here are my posts for the past two weeks:

Mutual Fund Costs not in the Spotlight

My Investment Return for 2019

TD to Start Charging More Interest on Credit Cards

Here are some short takes and some weekend reading:

Jon Chevreau profiles several mutual fund companies offering much better choices than the typical expensive Canadian fund.

Canadian Couch Potato makes some changes to his model portfolios.  The biggest change for the better is dropping Tangerine funds.  They’ve always been just too expensive.

The Blunt Bean Counter tackles the difficult subject of whether to pay for a child’s wedding.  A good starting point is to control the cost of the wedding no matter who pays for it.

Preet Banerjee interviews Justwealth CEO Andrew Kirkland.  If you have questions about Justwealth’s offerings, there’s a good chance Preet asked it in this interview.

Thursday, January 30, 2020

TD to Start Charging More Interest on Credit Cards

Recent reports that TD will start charging compound interest on all personal credit cards are only partially true.  TD was charging some compound interest on these credit cards and will start charging more.

The relevant section of the credit card agreement used to read as follows:

If interest is charged, it is calculated on the average daily balance of each Transaction from the transaction date until that amount is paid in full.  The total is the amount of interest we will charge you on each statement on the last day of your statement period.

The new agreement replaces the last sentence with the following:

We add your unpaid interest charge to your balance at the end of each statement period.  As a result, we charge interest on unpaid interest.

The difference is in the time from the end of a statement period until the due date for your payment.  During this time on certain personal credit cards, TD is now charging daily interest on the newly accumulated interest instead of giving you a few weeks interest-free to pay this interest.  Keep in mind that if you haven’t paid your balance in full, they’ve always charged daily interest on the rest of your balance during the time from the statement end to the payment date. It’s just the newly accumulated interest that is treated differently.

So, what does all this mean for the amount of interest TD charges?  On the surface, it seems like a change from simple interest to compound interest, but this isn’t right.  Under the old rules, there is compounding of interest upon interest with a delay. This may not seem right if you pay off the interest each month, but it’s still compound interest.  If it were truly simple interest, you could wait until the end of the year to pay all the interest without any additional interest being charged.

I’ll leave the details to the end of this post for the few who may be interested, but if a credit card charges a nominal interest rate of 20%, the compounded interest rate under TD’s old rules is 21.59%.  The calculation is simpler under the new rules because the full debt pays interest every day and gets compounded monthly. So, we take one-twelfth of 20% and compound it 12 times to get 21.94%.

So, we see that TD was already getting most of the compounding before they changed the rules, and now they get all of it.  We might wonder why they would bother making this change for so little benefit. Big banks are under pressure to keep their dividend payments growing, and they won’t leave any stone unturned in their search for higher profits.

The Gory Math Details

Let r be the monthly nominal interest rate: r=20%/12.  Let t be the fraction of a month delay from the end of a statement period to the payment date.  On one of my credit cards, this is 3 days short of one month: t=1-3/(365/12). If TD’s delay is different, it will make a small difference to this calculation.

Let x be the rate of increase of a credit card debt from one payment date to the next.  This is the quantity we want to calculate. So, without any intervening payments, the debt in 3 successive months is M, M(1+x), M(1+x)(1+x).

The interest in the last month is M(1+x)(1+x)-M(1+x)=Mx(1+x).  We can also calculate this last month’s interest a different way.  Before the payment date, interest accumulates on a debt of M for a total of Mrt.  After the payment date, interest accumulates on M(1+x) for a total of M(1+x)r(1-t).

Equating the two interest totals gives the quadratic equation xx+(1-r+rt)x-r=0.  We can solve this for x and then calculate the compounded annual interest rate (1+x)^(12)-1.  For the numbers in our example, this works out to 21.59%.

After TD’s rule change, the compounded interest rate is (1+r)^(12)-1=21.94%.

Tuesday, January 21, 2020

My Investment Return for 2019

In 2019, my investment return was 15.8%. This sounds good in isolation, but withers when we consider that U.S. stocks were up over 30%. So, is my investment approach a failure? Hardly, as I’ll explain.

To begin with, when you diversify, you’ll always have some part of your portfolio that performs better than other parts. Because I can’t predict which investment will work out best in a given year, I’m best off diversifying.

So, why did my return trail U.S. stock returns by so much? There were many factors. One is that I measure my returns in Canadian dollars. Because the Canadian dollar rose in 2019, U.S. stocks rose by less than 30% when measured in Canadian dollars.

Another factor that reduced my return was that other asset classes didn’t perform as well as U.S. stock indexes. Canadian and foreign stocks didn’t do as well, and I have a small cap value tilt that didn’t do as well.

Another drag on my returns comes from the fact that I’m retired and keep 5 years of spending in fixed income, including high-interest savings accounts, GICs, and short-term Canadian government bonds. This is nearly 20% of my portfolio, and it makes less than 3% interest.

All these factors apply equally well to my computed benchmark. But a final factor is that I had some bad luck in the timing of adding new money to my portfolio. This new money near mid-year missed the runup in stock prices over the first 4 months of the year. I use time-weighted returns for my benchmark, so this year my portfolio’s internal rate of return (IRR) trailed the benchmark by about 0.6%.

The following chart shows my cumulative 25-year investment results in “real” terms, which means after reducing the returns by the amount of inflation.

So, each dollar that has stayed in my portfolio for the full 25 years has increased in buying power by more than a factor of 7. That’s about double the rise in my benchmark, mainly because I had an unbelievably lucky year in 1999.

I have no idea what 2020 will bring, but I’m not counting on another year of double-digit returns. I’ll remain diversified and maintain my cash buffer to live on.

Saturday, January 18, 2020

Mutual Fund Costs not in the Spotlight

The high cost of having a financial advisor has been in the news lately. A recent example is Jonathan Chevreau’s discussion of the problems with Deferred Sales Charges (DSCs) and the future of financial advice. The banning of DSCs everywhere in Canada except Ontario is reshaping how financial advisors get paid. However, this discussion only covers a fraction of the costs mutual fund investors pay every year.

Mutual fund companies silently dip into Canadians’ mutual fund savings every year for a percentage called the Management Expense Ratio (MER). Too often, this is 2% or more. This may not sound like much, but when you lose 2% of everything you have saved every year, it adds up quickly. Over 25 years, about 40% of your money is gone.

Out of this MER, mutual fund companies pay financial advisors roughly 1% to choose their funds for investors. The remaining money from the MER goes to the fund company. But what do they do for their money?

Most of the largest mutual funds in Canada don’t even bother to try to pick good stocks. They are known as “closet indexers.” They just choose most of the stocks from a given index and collect their fees. With the biggest mutual funds, investors pay the fund company tens of millions of dollars and get little for their money. At least advisors do something for the tens of millions of dollars investors pay them.

Not all mutual fund companies are closet indexers. There are some that make a meaningful effort to choose good stocks and keep costs low. However, if your advisor hasn’t brought up how he or she gets paid, it’s likely you’re paying high costs to both your advisor and your mutual fund company.

Despite all the attention advisor fees are getting lately, this part of what investors pay in fees is somewhat useful. The money investors pay their mutual fund companies is usually a complete waste.

Friday, January 17, 2020

Short Takes: The World is Getting Better, and more

How your credit card company recovers from blocking your legitimate purchases matters:

Credit Card False Positives

Here are some short takes and some weekend reading:

Morgan Housel explains how the world keeps getting better for us even if it seems to be getting worse.

Retire Happy gives a nice summary of the high points of managing your financial life well.  He frames it in terms of New Year’s resolutions, but it’s really some easy-to-understand advice that applies any time. At one point, he throws out an interesting statistic: “What I find amazing is that 83% of those that file taxes have unused RRSP room”.  I have recently become part of this 83%. I used to use all my RRSP room each year, but I have no use for the room that arose from my last year working. I actually withdraw a little from my RRSP each year now to reduce lifetime income taxes.  So that last year of RRSP room sits unused. No doubt many retirees who used to use all their RRSP room contribute to the 83% figure.

Preet Banerjee explains how to save money when renewing term life insurance by undergoing a health check to requalify as healthy.  Keep in mind his warning about not cancelling the old policy until you qualify for a new cheaper policy.  If it turns out you’re very sick, the insurance company would like to have you cancel your existing policy (along with its guaranteed renewal) and then reject you for a new policy. In another video, Preet manages to connect the challenge of saving money for the future to gravity wells and the word “hyperbolic.”

Canadian Couch Potato goes through the 2019 investment returns of various assets classes as well as his couch potato portfolio returns.  Everything went up in 2019. This increased the safe monthly withdrawal amount for my portfolio and led me to sell some stocks to build my fixed income side to keep it at 5 years of available spending.  Fortunately, I have a spreadsheet to do the calculations and tell me exactly how much to sell.

Big Cajun Man is concerned that CRA is tightening the rules for getting the Disability Tax Credit.  It’s not clear if rules are changing or if CRA is changing enforcement of existing rules.

Boomer and Echo have a cautionary tale for those who feel like they missed the boat on weed stocks, cryptocurrencies, or any other high-flying “investment.”  Most things that goes up very quickly end up crashing, and most speculators get burnt.

Friday, January 10, 2020

Credit Card False Positives

It’s disconcerting when we find fraudulent charges on our credit cards.  A different type of problem is a “false positive,” which is when a legitimate charge is denied.  After having my credit card denied when trying to check into a hotel, I wished credit card companies would do more to help customers recover from these false positives.

It was my Tangerine credit card that wouldn’t allow the hotel charge.  Tangerine certainly could have done more to prevent this problem and to make it easier for me to recover from it.

I alerted Tangerine to the dates I’d be traveling and the country I’d be visiting.  I certainly could have given more detail, but all they wanted was “USA.” With more detail, maybe they could have seen that the hotel charge was legitimate.

The bigger problem was their response as I tried to fix the situation.  I called Tangerine customer service, but there was no option for “you denied a legitimate purchase.”  The closest I found was an option to update my travel plans over the phone.

Once I got a human on the phone and explained the problem, I was promptly forwarded to some sort of security center that had a canned message for office hours that didn’t include Saturday night, and then it hung up on me.  Nice. I guess that “customer service” agent gets credit for keeping the call with me short.

After a second try with Tangerine customer service, I got someone who was able to “clear my card.”  This seemed to solve the problem the next time I used the card, but through all this nonsense, I had checked into the hotel with a different credit card.  This story would have been much worse if I didn’t have a second card, or it hadn’t worked either, and I hadn’t lucked out with the second agent who bothered to help me. 

False positives must be a concern for credit card companies.  So, why don’t they do more to help customers recover from them?  When I call the phone number on my credit card, why isn’t there a prominent option for “you denied my change and I want to fix it”?  Even better would be if there was a way to do this online. Are other credit card companies more helpful than Tangerine at recovering from a denied charge?

Friday, January 3, 2020

Short Takes: Cheap Life Insurance, Financial Cleanup, and more

I reviewed Tim Geithner’s book defending his actions during the financial crisis:

Stress Test

Here are some short takes and some weekend reading:

Robb Engen explains how to get lots of inexpensive life insurance.

The Blunt Bean Counter explains the steps of a year-end financial clean up. 

Big Cajun Man shows how to guess someone’s salary from the date they stop paying CPP for the year.