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.