Before reading her latest book “Women & Money,” I didn’t know much about Suze Orman other than the fact that she is a TV personality who talks about money. I wasn’t expecting much from her book but was pleasantly surprised. The book is billed as “for women only,” but this mostly applies to the first 55 pages devoted to motivating women to read (and act on) the rest of the book. If you have thoughts on how useful these 55 pages are, I’d be interested in hearing them; they didn’t really apply to me. The actual financial advice starts in Chapter 6, and most of it applies to men as well. The section on retirement investing (page 115) is particularly good. Much of the detailed advice is intended for Americans, but the broad advice is useful for Canadians as well. Orman recommends that until you are a few years away from retirement, 100% of your retirement money should be invested in stock index funds. She prefers low-cost index exchange-traded funds (ETFs), but considers low-cost ...

In an earlier post I was looking at what fraction of your portfolio should be in stocks. I also listed Larry Swedroe’s table of time horizon vs. stock percentage from his book “Rational Investing in Irrational Times”. His table basically says to put everything in stocks if you won’t need the money for 20 or more years. The stock percentage then drops steadily to zero when you are three years from needing the money. I’ve been looking for some justification for this advice. The answer comes from considering the utility of money . The basic idea of utility is that the wealthier you are, the less an additional dollar is worth to you. An Example Suppose that if you invested your entire portfolio in risk-free investments, you would have $1 million when you retire. A game show host then makes you the following offer. You can just take the $1 million or you can toss a coin to get either $800,000 or $2 million. Would you take the sure $1 million or would you take the chance? What I r...

A strategy is said to be dominated if it is guaranteed to give the same or worse results than some other strategy. This term is usually used in game theory, but it can apply equally well to investing. Most of the time when we have a choice between two alternatives, we don’t know for certain which choice will lead to a better outcome. Should you buy stocks or bonds? In a given year, stocks might give better returns or bonds might give better returns. In some cases, the choice turns out to be clearer. Suppose that I offer you a bet: we’ll toss a coin, and the winner gets $100 from the loser. I see you hesitate, and I make a second offer: I’ll give you $10, and then we’ll toss the coin for $100. No matter which way the coin comes up, you’ll be ahead $10 taking the second offer rather than the first. This means that the first choice is dominated by the second. This doesn’t necessarily mean that you should go for the second offer. Depending on your circumstances (and whether you thi...

Most commentators advise people to reduce the percentage of stocks in their portfolios as they age. Some popular rules of thumb are to make the stock percentage 100 minus your age or 120 minus your age. Larry Swedroe in his excellent book “Rational Investing in Irrational Times” offers his own advice. Swedroe expresses his advice in terms of how long until you need the money (time horizon) rather than age. Here is Swedroe’s table of time horizon vs. percentage in stocks: 0-3 years: 0% 4 years: 10% 5 years: 20% 6 years: 30% 7 years: 40% 8 years: 50% 9 years: 60% 10 years: 70% 11-14 years: 80% 15-19 years: 90% 20 years or longer: 100% How do we test this advice? Unlike almost everything else in his book, Swedroe offers this table with no analysis of where the numbers came from. I decided to try to come up with my own answer to this question. It is surprisingly difficult to come up criteria for optimizing a portfolio for some end time. The best I have come up with so...

There was an interesting discussion earlier this week over at Canadian Financial DIY about how much people should invest in stocks. This post pointed to an article by Zvi Bodie and Paul Hogan that discussed the cost of insuring a portfolio against loss among other things. You may remember Bodie as a co-author of the book “Worry-Free Investing” (see my review of this book starting here ). He is a big proponent of investing in inflation-protected bonds rather than stocks. His reasoning is basically that stocks are too risky, even though they are expected to give higher returns. In their article, Bodie and Hogan make the following claim about insuring a portfolio: “proof positive of how stocks are risky even in the long run is that if you try to insure a portfolio against a shortfall, you will find that the premium rises as the time horizon lengthens.” An Example Let’s look at an example to explain what they mean. Suppose that you are about to invest $10,000 in a stock index, but...

Researchers at the University of Cambridge have found simple ways to compromise bank card readers. The next time you’re at a store punching your PIN into a debit card reader, if there is a paperclip or needle sticking out the back of the reader, you should be suspicious. The researchers Drimer, Murdoch, and Anderson have documented their findings in this technical report . They chose two different models of card reader and bought two each of them online for a total of $80 for the four readers. They then took one of each type apart to see how it worked and were then able to compromise the other readers simply. The card readers they examined were actually a type that is intended to work with higher security bank cards called smart cards. Instead of just a magnetic stripe, these cards contain a microchip that gives higher security. These cards are being deployed throughout Europe and are currently being tested in Canada. The researchers were able to probe the inside of the reader to get P...

How you ever wondered what all the fuss is about with pension disputes? We often hear about battles between a company and its workers over pensions. The workers accuse the company of stealing from the pension fund, and the company denies it. The stories rarely make it clear what is going on. In his usual clear and compelling way, Warren Buffett discusses pensions in his latest letter to shareholders on page 17 in a section called “Fanciful Figures – How Public Companies Juice Earnings.” Why Should Pension Funds Exist at All? Let’s consider the case of a 45-year old worker William who works for the fictitious company SomeCorp. A traditional pension is a promise made by SomeCorp to pay William certain amounts of money each month after he retires. Given this situation, it’s not immediately clear why a pension fund should exist at all. As long as SomeCorp makes the promised payments, the company should be able to run its affairs as it sees fit, right? Not so fast. What happens if SomeCorp...