Commentators often advise stock investors to “buy on the dips.” Jason Zweig took a detailed look at this advice and came up with the counter-intuitive result that buying on the dips doesn’t work . This result is a tough sell, though. It just seems obvious that we’re better off buying stock just after a 5% drop than just before. What many investors don’t realize is that this is a false comparison. To be able to buy on a dip, you must have cash available that is designated for stock ownership but isn’t yet invested. The next thing to consider is that you must keep this money available for as long as it takes to get to the next dip in prices. What if stocks rise 40% before the next 5% dip happens? You’re better off buying at 35% higher prices than 40% higher prices, but buying right at the beginning before the 40% rise is the best option of all here. The fundamental problem with buying on the dips is the opportunity cost of holding cash that is not getting stock returns. Havi...

Big Cajun Man has a clever explanation of why lottery wins seem more likely than they are. Jason Zweig thinks that while gold may be in a bubble, gold mining stocks seem cheap. He observes that gold miners are only trading at 18 times earnings. However, if gold really is in a bubble, aren’t the profits of the miners inflated? Do we really need the earnings multiple to be inflated as well? The Blunt Bean Counter runs through the top 20 things he doesn’t understand about income tax. It’s well worth a read to better understand different areas of the tax rules. Andrew Hallam explains why he gave up stock picking and switched to indexing.

The math says that before costs, index investors must get the same returns as the average active investor. But, index investing has lower costs giving the edge to index investors. Because most active trading is done by professional investors, it’s not surprising that the evidence says that after costs indexing will outperform investing with the average professional. But few people understand this. Most people will never believe that they can get better returns than a brilliant professional can. After all, professionals in almost all other fields do better than amateurs. But what if there was a way to get advice from not one or two, but all professional investors? We could have all the professionals in the world get together and average out their best picks. Most people would be more than happy to follow this collective advice from the best investing minds. But how could we possibly convince all the professionals to get together like this? Of course we can’t, but this is a ...

U.S. President Obama’s plan to apply a “Buffett tax” has been widely described as a millionaire tax. But it doesn’t apply to those who have a net worth of a million dollars; it only kicks in for those whose income is a million dollars per year. These are two very different things. According to Wikipedia and U.S. census information, one out of every 11 U.S. households has a net worth of a million dollars or more. However, only 1 out of every 230 households has $30 million or more, which is closer to the wealth level needed to generate a million dollars in income per year. Coming back to Canada, many government workers retire with a pension worth more than a million dollars, but I’m sure that most of them would say they aren’t rich. We’re used to thinking of millionaires as wealthy people, but those who have just $1 million in total assets between a house and retirement savings are quite ordinary. It is very likely that you routinely meet millionaires, but you may not often co...

News of the big drop in RIM’s profits has many people predicting that RIM will suffer the same fate as Nortel. It’s understandable that Canadians are concerned about the future of a Canadian high-tech success story like RIM after they watched in disbelief as Nortel failed. However, there is a big difference between RIM’s financial results and Nortel’s. In the past three quarters, RIM’s profits have been $934 million, $695 million, and $329 million. This is a disappointing trend, but keep in mind that they still have profits. Nortel had massive losses over the course of a decade before they finally speared in. There is a big difference between lower profit and negative profit. To draw an analogy with retirement saving, consider Rick who has added the following amounts to his RRSP over the last three quarters: $9340, $6950, and $3290. By contrast, in 2001 Nora withdrew $257,200! Rick has reason to be concerned about his trend, but Nora is speeding towards a brick wall. I h...

Preet Banerjee explains how backfill bias artificially pumps up the average returns reported by mutual funds. I thought survivorship bias, where bad funds get closed and no longer affect the average, was bad enough. Now we find that some funds wait to see if they perform well before retroactively including them in mutual fund averages. The Blunt Bean Counter makes the case that an accountant is often more valuable than a lawyer when you’re in trouble with CRA. Retire Happy Blog goes through the different events that make it difficult to control when you retire. Big Cajun Man is literally sickened by misuse of the word “literally”. Million Dollar Journey explains how to calculate a defined-benefit pension’s commuted value.

When we enter into ventures with others, it's important that our interests are aligned so that we're working toward the same goal. This is true whether you're selling your house or investing your life savings with a financial advisor. Figuring out when intersts are well-aligned can be tricky. When you sell your house and pay a real estate agent a percentage of the house price, it may seem that your interests are well-aligned, but in reality they are not. One way to look at this situation is that the more you get for your house, the more the real estate agent gets paid. But this is too superficial. The real estate agent's main concern is her pay per hour worked. Selling your house for an extra $25,000 is much less important to her than selling it quickly. For you, that extra $25,000 makes a big difference. The agent's ethics may keep her working toward your best interests, but her compensation structure pushes her toward making sales fast even if the pric...