With 5-year Canadian bonds paying about 1.2% interest, it’s hard to see how anyone could get ahead by borrowing money at 3% or more to invest in bonds. Yet this is what many people are doing, probably without realizing it. Let’s start with the example of the widow Mary whose Investors Group advisor had her borrow $50,000 to invest . Mary’s leveraged portfolio is currently invested 44% (about $22,000) in bonds. She pays 3.5% interest on her investment loan and pays a yearly management expense ratio (MER) of 1.75%. Even if we assume that the bonds will pay 2% to maturity, Mary is losing about $715 per year (pre-tax) on this part of her portfolio. Mary has about $28,000 worth of stocks in her portfolio. On these stocks she pays a blended 2.7% MER and 3.5% on the investment loan. To make up for the $715 loss requires an additional 2.55% return. Adding up these percentages, we find that the stocks must return about 8.75% just for Mary to break even for the year. One thought her...

In late 2006, Mary (not her real name), a 75-year-old widow, accepted the advice of her Investors Group advisor to borrow $50,000 to invest in mutual funds. She has maintained this loan for over 6 years now. Mary is an intelligent woman, but not an experienced investor. It’s easy to see how this move was good for Investors Group, but very hard to see how it was good for Mary. Mary’s recollection is that this strategy was somehow going to save her heirs money on taxes. The only connection to taxes that I can see is that she can write off the loan interest each year. But this just saves her a fraction of the interest; she still has had to pay the rest. The main thing this leverage did was add another $50,000 to Investors Group’s assets under management. As of the end of 2012, this figure has shrunk a little to about $49,800. The hidden management expense ratio (MER) cost on these assets is $1211 per year. After accounting for the tax write-off for interest, Mary has lost $91...

My posts for this week were Takeaways from Warren Buffett’s 2012 Letter to Shareholders Front-Loaded Expenses for the Year Renaming the TFSA: TFSP Here are my short takes for some weekend reading. SquawkFox pays $783 for her smart-phone, but ends up saving $480 over 3 years. Rob Carrick reports that Canada’s big banks are changing the way they charge overdraft fees. I’ll let you guess whether costs are going up or not. Canadian Couch Potato explains why right now GICs are better than bonds in taxable accounts. The Blunt Bean Counter has a list of the top 15 ways you can help your accountant focus on saving you money on your taxes instead of wasting time trying to figure out what is in your shoebox. Preet Banerjee interviews Larry Swedroe about his latest book Think, Act, and Invest Like Warren Buffett ( my review here ). Larry is an excellent speaker; this interview is worth a listen. Big Cajun Man explains that when it comes to splitting pension income, ther...

Two common misconceptions about Tax-Free Savings Accounts (TFSAs) are that they can only hold cash like a savings account and that they can be treated like a savings account with an arbitrary number of deposits and withdrawals. I suggest a subtle name change to counter these misconceptions: Tax-Free Savings Plans (TFSPs). Part of the motivation for this suggested name change is to make the TFSA name closer to RRSP. The idea is to help people understand that TFSAs can hold anything an RRSP can hold including stocks, bonds, mutual funds, and many other investments. The other idea is to help people understand that there are rules governing deposits and withdrawals. It turns out that the “savings account” part of the name has misled Canadians. I’m sure that the people who chose the name had no intention of misleading people, but the evidence suggests that Canadians have been confused by the name. It’s true that TFSAs are more flexible than RRSPs when it comes to deposits and with...

Recently, it struck me that many of my expenses tend to come in the first half of the year. Here are some expenses that I have to pay in January through June each year: 1. Property Taxes 2. Payroll deductions of CPP contributions and EI premiums (anyone whose income exceeds double the CPP and EI earnings limits will finish getting these payroll deductions before mid-year) 3. Car and house insurance (my renewal date happens to be in the first half of the year, and I pay the full year’s premium in one payment) In my case, this all adds up to about $11,000 of first half-year costs that I don’t have from July to December. If we toss in the RRSP contribution of nearly $24,000 that I’ll make before mid-year and the resulting reduced payroll taxes for the second half of the year (over $10,000), the imbalance grows to about $45,000! The rest of my expenses tend to be fairly balanced across the year. None of this causes me much difficulty because I spend so much less than my ful...

My portfolio consists entirely of index ETFs except for an investment in Berkshire-Hathaway, whose Chairman is Warren Buffett. Every year I read his letter to shareholders because it is so clearly-written and contains many useful insights. His 2012 letter is no exception. Instead of trying to summarize the whole letter, let’s hit some of the highlights. Re-investing in the U.S. While many businesses held back on re-investing in the U.S. because of uncertainty in the economy, Berkshire was “spending a record $9.8 billion on plant and equipment in 2012, about 88% of it in the United States.” Buffett declares “Opportunities abound in America.” Stock Trading “Charlie and I believe it’s a terrible mistake to try to dance in and out of [the stock market] based upon the turn of tarot cards, the predictions of ‘experts,’ or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.” Renewable Energy Berkshire-owned ...

Some late-breaking news:  Rob Carrick's latest round-up included a mention of my post this week on Handling RRSPs and RRIFs for Low-Income Seniors . Tom Bradley at Steadyhand explains the problems with surveys of investor attitudes toward their financial advisors. Canadian Couch Potato looks at the research on estimating future stock returns. I’m content to just use long-term historical real stock returns and their volatility as estimates for the future. The Blunt Bean Counter says you should be careful not to burn the goodwill of someone willing to give you a job reference by having too many employers call the reference. Canadian Couch Potato explains that while Real-Return Bonds offer inflation protection, they can be volatile in the face of changing interest rates. Tim Cestnick explains the tax rules for lottery prizes and other types of prizes. Preet Banerjee interviews an investor who left his advisor and went the DIY route. My Own Advisor explains that ...