Derek Foster who claims to be Canada’s youngest retiree wrote an interesting book called The Lazy Investor . Before I read the book, I thought the “lazy” part referred to the effort required to handle investments, but it actually refers to being lazy by quitting your job once your investments produce enough income. What sets this book apart from most other investment books is that he recommends specific investments and gives detailed instructions on how to open accounts and acquire shares as cheaply as possible. I tend to agree with most of his general advice: minimize fees, buy stocks rather than bonds, and minimize personal spending in areas that aren’t improving your life. I don’t think it’s necessary to focus exclusively on dividend-paying stocks, but following Foster’s advice would be a big improvement over how the average person invests. The book gives detailed advice on how to get started with very small amounts of money to invest without wasting too much of it on fees b...

The Big Cajun Man over at Canadian Personal Finance wrote an interesting post about Nortel’s recent pension cuts . He puts it into historical context and captures the employees’ feelings of betrayal. I would add that whether Nortel’s actions were legal or ethical, they were predictable. Complicating this story is the switch from a defined benefit pension plan to a defined contribution plan. A defined benefit plan guarantees employees a certain amount of money per month after they retire. With a defined contribution plan, the company sets aside a fixed amount of money per pay period for each employee, and the ultimate retirement benefits will be determined by how well the money is invested. It would be easy to misinterpret Nortel’s actions as simply changing to a new system. Make no mistake that this is a significant pension cut. Nortel expects to save $100 million per year in the first four years with the new system. Could we have seen this coming? With defined benefit plans, t...

In yesterday’s post , I showed that the interests of homeowners and the real estate agents who work for them are poorly-aligned. The concept of alignment of interests is an important one for understanding why people do the things they do. It can also be useful for predicting how others will surprise you or disappoint you, or maybe try to take advantage of you financially. I used to play on a softball team that was sponsored by a sports restaurant/bar. We were young and took our commitment to our sponsor seriously. We would sometimes show up after a game with more than 20 people including players, friends, and family. We were developing a great relationship with this sports bar, or so I thought. After the third or fourth time we arrived at this sports bar on a Monday or Wednesday around 9:30 pm, it became clear that they weren’t very happy to see us. They would tell us we couldn’t sit in one section or another, and would try to hustle us out quickly. We weren’t rowdy, and the...

The fundamental problem with incentives for real estate agents is that the extra commission on a higher price is too small to be worth the extra effort.  Agents have little incentive to work hard to sell a house for the highest price possible.  The interests of the agent and homeowner are poorly aligned. Let’s look at an example. Suppose that a fair price for Hanna’s house is $375,000, and that her current mortgage principal is $275,000. After she pays off her mortgage and pays the real estate fees, legal costs, and other costs, she’ll have about $75,000 left over. If the sale price is $25,000 higher or lower, it would make a big difference in how much money Hanna gets. Let’s say that Rick, the real estate agent, gets to keep 2% of the sale price of the house for himself. Of course, the full cost to Hanna is much higher than this, but Rick only gets a fraction of what Hanna pays. This works out to $7500 for Rick. If the sale price is different by $25,000, it only mak...

According to Bloomberg, General Motors will begin offering no-interest car loans on certain pickup trucks and SUVs for as long as 6 years. I suppose that this indicates a certain amount of desperation to sell these gas-guzzlers, but what strikes me is the “no-interest” part of this story. Surely most people understand that they’re not really getting a no-interest loan. In reality, they are paying an inflated price that includes the real vehicle price plus the loan interest amount. For loans extended to 6 years, the advertised price is just inflated by more. Even worse, no-interest loans are often only available on fully-equipped vehicles with many overpriced options. When it comes to paying cash versus financing a vehicle, Phil Edmonston’s Lemon-Aid Guide explains the dealers’ preference for financing: “Let’s clear up one myth right away: Dealers won’t treat you better if you pay cash. They want you to buy a fully-loaded vehicle and finance the whole deal. Paying cash is n...

Canada’s Supreme Court has decided that the planned BCE takeover does not violate any agreement with bondholders, and that the bondholders are not due any consideration beyond the contents of their contract. Like the Asset-Backed Commercial Paper fiasco, the BCE battle illustrates the risks of fixed-income investing. The safest bonds are offered by the government. If the government doesn’t pay on its bond obligations, then money probably isn’t worth much either. On the down side, government bonds pay the lowest interest rate among available bonds. Corporate bonds pay higher interest rates to compensate the bondholder for the risk that the corporation won’t be able to meet its obligations. It can be tempting to buy corporate bonds to get the higher interest, but there is always a slim chance that something will go wrong. In the case of the Bell Canada bonds, the promise to pay the bond principal and interest has not changed. But the huge amount of added debt to be taken on by BCE i...

Stéphane Dion’s Liberals have released their Green Shift plan that would make big changes in our tax system. Dion plans to shift some of the broad-based tax burden on all individuals and companies to just those who pollute. So, the final price of goods and services that cause pollution would go up. Whether you support this type of taxation or not, it is clear to me that this is the only way to cause people to change. Begging people to be green is mostly ineffective. But taxing people less and making some items expensive may cause people to make different choices. There are a number of big ifs in this plan. It will work if the Liberals get elected (does not seem likely right now), if there are no loopholes for polluters to get around the new legislation, and if the government doesn’t cave to pressure to make exceptions for certain polluting industries. It may not seem like it makes any difference to tax you $250 less and simultaneously make your living costs for the yea...