I highly recommend having a look at a 54-minute movie called Passive Investing . The discussions are mostly non-technical and fairly easy to follow. They even cover the lifestyle advantages of switching to passive investing. For more details about this movie see Canadian Couch Potato’s description . What prompted me to write a post about this movie is an issue that is more technical than the film itself. Canadian Couch Potato made the following remarks about the movie’s mention of the capital asset pricing model (CAPM) : “CAPM—which predicts the expected return of a security based on its beta —is still widely taught, but it doesn’t do a particularly good job of explaining returns in the real world. (The Fama-French three-factor model is a dramatic improvement.) So I’m surprised the film’s website describes CAPM as ‘the mathematical foundation of passive investing.’” He is right that the three-factor model is better at modeling past investment returns than CAPM. However, wha...

When we buy shares in a company, one of the things we count on is that all shares are treated equally and get an equal slice of the company’s profits. The Financial Post reported on research into changing this equal treatment : “A global research project launched Wednesday by Mercer, Stikeman Elliott LLP and the Generation Foundation will look at the concept of granting ‘loyalty’ dividends or warrants, or additional voting rights, that would ‘reward’ certain corporate shareholders for retaining their shares for a specified number of months or years.” On the surface, this seems like a great idea. You get a bonus for holding your stock for a long time. However, all shareholder claims on company profits come from the same pie. If some shareholders get more, then others must get less. But so what if some high-frequency trading jerks get a smaller slice of company profits? Who is to say that companies will only use their long-term shareholder bonus programs to shaft day traders? ...

My Own Advisor explains how he considers his defined benefit pension to be like a large bond that allows him to take more equity risk with the rest of his portfolio. This makes a lot of sense, but something that many people don’t consider with defined benefit pensions is the risk that you won’t collect as much as you think. If you decide you can’t stand your job or get laid off, you may be left with only a very modest pension (or none at all if you take a commuted value when you leave). Even government jobs aren’t as safe as people used to think, particularly with all levels of government facing huge deficits. When balancing a portfolio, it makes sense to consider only the value already accumulated in the pension rather than the entire future value if you stay until retirement age. Boomer and Echo tells a story of parents financially supporting spendthrift adult children at the expense of their responsible children. Perhaps living only for today pays off if you have wealthy pa...

Having spent much of my working life around type A personalities who pour all their effort into their careers and have little in the way of personal lives, I’ve always respected those who sacrifice some career advancement to get life balance. This doesn’t include just high-powered business executives; I’ve seen it in a mechanic as well. The way we pay for car repairs usually involves book hours instead of real hours. A book lists the number of hours each type of repair is supposed to take. Then you pay for this number of hours no matter how long the repair takes. Mechanics vary greatly in how long they take to complete repairs. A former mechanic friend (I’ll call Dan) used to routinely take less than half the book hours to complete his work, but he says that he worked with some mechanics who would spend all day on a 2-hour job. Dan was well-liked by his employer because he made maximum use of the space he took up in the garage (i.e., he made them lots of money). And he was ...

I get the feeling that enthusiasm for Christmas gift exchanges is mostly limited to children and shopaholics. I think this comes from the fact that most of us already have the small things we want. There was a time when gift-selection was quite easy. When everyone one needed food and clothing it wasn’t too hard to pick a gift to make or buy. But now it’s hard to find the right gift for everyone on your list. Most people have the basic things they need and want. A gift sweater may never be worn again after the obligatory trying it on for the camera. It’s normal for the enthusiasm for Christmas to fade with age, but the age where this begins seems to be getting younger. And it’s hard to blame teenagers of well-to-do parents for losing some interest in Christmas, unless their parents buy extravagant gifts like a new car. How excited do you really need to be about getting an eleventh gaming system? It would be nice to see all the wasted money and energy that goes into wanderin...

There is an uneasy relationship between emotions and rational thinking in investing. I’m a believer in using careful rational thinking when making big life decisions like how to invest your life’s savings, but it isn’t possible to keep emotions out of the equation entirely because most of life’s core goals are fundamentally emotional. To the extent that I have any philosophy in life it would be “sustainable happiness”. Without the sustainable part, drugs would be a good solution to produce a burst of happiness. But this is hardly sustainable. So, I try to eat well, get regular exercise, and treat others well in a bid to be happy for the long term. The pursuit of money is not an end in itself, but a means of achieving freedom, comfort, interesting experiences, and ultimately, happiness. There are those who say that money doesn’t matter. They are partly right and partly wrong. Of course money matters, but what you give up for it matters too. I’ve consistently turned down car...

Years ago I noticed that my wife and I have different payment dates on our credit cards. Until recently, I never really thought about the implications of this difference, but it does present an opportunity to “optimize” cash flow. The following calendars illustrate the differences in our credit card statements. My next statement will cover purchases from roughly Nov. 16 to Dec. 15, and the payment will be due Jan. 5. I indicated a full week for the payment to illustrate that it is sensible to pay somewhat early to avoid interest charges. Note that my wife’s credit card dates are shifted forward 19 days. This creates an opportunity that I hadn’t thought much about before, but I’m sure that many people use. For purchases between Dec. 16 and Jan. 3, my wife will have to pay before Jan. 24, but I won’t have to pay until before Feb. 5. Similarly, for purchases between Dec. 4 and Dec. 15, I’ll have to pay sooner. To optimize cash flow, it’s always better to use one credit car...