I’ve been quite critical of the investing strategy called value averaging (VA) . I’ve explained the reasons why it doesn’t work, and why the methods used by its proponents to measure its returns are flawed. One reader, Lost Cowboy, challenged me to dig deeper, and I’ve done that with some experiments. In short, value averaging is a strategy where you choose some target investment return and buy or sell as necessary to keep your dollar-value in equities rising by this target percentage. If equities rise on their own by more than this target, then you sell some, and if they rise by less than the target, then you buy some. The theory is that this will force you to buy low and sell high. In practice, this strategy demands that you invest cash when you don’t necessarily have it available. Solutions to this problem severely undermine returns. I dug up some historical U.S. S&P 500 stock returns, short-term interest rates, and inflation rates from Robert Shiller’s online data . ...

Andrew Hallam is promoting value averaging again . This is an investing strategy that involves choosing a pre-determined rate of growth for your portfolio and then either making up the difference when markets disappoint or taking money out of the market when returns exceed your expectations. It doesn’t work. Several months ago I explained in detail why value averaging doesn’t work . A quick summary: you have to have a pile of cash on the sidelines available to pour into the market if needed. Either that or you have to borrow deeply if the cash isn’t available. Value averaging proponents calculate their strategy’s returns using the “internal rate of return” (IRR) . The IRR can be a good way to measure returns, but in this case it means that we ignore the opportunity cost of idle cash and ignore the interest costs on borrowed money. Hallam gives some results over a period cherry-picked to make value averaging look good: the 5 years from February 2008 to January 2013. Note th...

My posts for this week were A Strategy for GIC Investors to Maintain Deposit Insurance Job Losses in Real Estate Why Not Raise CMHC Mortgage Premiums? Here are my short takes and some weekend reading. Retire Happy Blog explains in full detail how to calculate your CPP retirement pension. I’ve been looking for this for a long time. Every other explanation I’ve ever seen leaves out a lot of necessary detail. Dan Hallett reports that BMO is cutting the distributions on some of their income funds. This was inevitable. Investors’ dreams of indefinitely collecting income that exceeds investment returns are becoming nightmares of eroded principal and reduced income. Big Cajun Man got a $113 RRSP account fee reversed. The Blunt Bean Counter has a more comprehensive list of questions to stress-test your finances and see if your estate is ready if the worst happens to you. Tom Bradley at Steadyhand finds the current consensus that interest rates will stay low for the ne...

We’ve been treated to a long-running battle between Jim Flaherty and mortgage lenders over the length of mortgage amortization periods and low mortgage interest rates. I wonder why we can’t just have a market-based solution. I don’t mean this in the same way as some critics of Flaherty who call for him to leave markets alone. Mortgage lenders lay off much of their risk to the Canada Mortgage and Housing Corporation (CMHC), and CMHC charges mortgage loan insurance premiums that make no sense. As long as this situation persists, we can’t just let the lenders go crazy lending to anyone with a pulse. This brings up the question of why CMHC premiums make no sense. The rules for calculating the premium you have to pay with your mortgage fit on a short web page . The premium amounts don’t take into account important factors such as the current ratio of house prices to rents. This guarantees that the premium you pay has little relationship to the real risk of default. It wouldn’t b...

According to Will Dunning, Chief Economist at the Canadian Association of Accredited Mortgage Professionals (CAAMP), as quoted by Canadian Mortgage Trends, “190,000 jobs will be lost between 2013-2015 due to the maximum [mortgage] amortization being cut from 30 to 25 years.” Apparently, people making their living building and selling homes are in for a rough ride. However, this is an inevitable outcome of the necessary reining in of Canadian real estate. This 190,000 figure is split between “70,000 lost jobs in the new build market and 120,000 in the resale market.” Let’s look at new housing starts first. CMHC has historical housing start statistics going back to 1955 showing housing starts over the last decade well above the long-term average. As for home resales, CREA has statistics on recent home resale showing that home resales are perhaps just slightly above long-term average figures. However, these above average sales levels are happening at a time when prices are very hi...

A common problem for GIC investors is to stay under the $100,000 limit for Canadian Deposit Insurance Corporation (CDIC) coverage in case a bank fails. This can involve the hassle of trying to maintain accounts at several different banks. I have a potential solution that also solves the side problem of having to fight with bank staff to get a decent interest rate. The rules for what deposits are covered by CDIC can be tricky. Some writers just say that you’re covered up to $100,000 in each account, but this isn’t exactly right. For example, if you have two GICs in separate accounts both in your name in the same bank, they count together for the $100,000 limit. Only banks that are CDIC members are covered. Further, accounts that have the same owners at the same bank and holding the same type of deposits get lumped together for a total of $100,000 coverage. So, you can’t just set up several GIC accounts all in your own name at the same bank to get around the limit. Knowing a...

My posts for this week were Investors Group Advises Leverage for 75-Year-Old Widow of Modest Means The Futility of Leveraging Bonds Here are my short takes and some weekend reading. Canadian Couch Potato looks into the difference between the market price of exchange-traded funds and the net asset value of their underlying securities. Million Dollar Journey gives us a peek at what he holds in his RRSP. Retire Happy Blog tackles a reader question about whether to pay the deferred sales charge to get out of an expensive mutual fund. Big Cajun Man says that passive investing doesn’t mean lazy investing, and he has been studying up on some of the ETFs he owns. He also has a very colourful description of how his career as an active investor was less than perfect. The Blunt Bean Counter has a guest writer who says that lawyers often fail to cover RESPs when they draft wills.