Home Refinance

Money Smarts Blog

2011-11-01T20:12:00.001+08:00

Money Smarts Blog

If You Could Buy A Gold-Plated Government Pension, Would You?

Posted: 01 Nov 2011 02:00 AM PDT

Workers who don’t have access to a defined benefit pension are often quite jealous of workers who do. We wish we had something similar, so that we wouldn’t have to worry about our retirement income. A defined benefit pension is where a worker makes regular mandatory contributions during their working career and then receives a [...]

Money Smarts Blog

2011-10-28T20:21:00.001+08:00

Money Smarts Blog

LinkStuff – Halloween Edition

Posted: 28 Oct 2011 02:00 AM PDT

Happy Halloween in advance! Pushups update I had a question about the pushup challenge recently, so I thought it was time for an update. I’m still doing them faithfully twice a week, however I’m not making much progress in terms of the numbers. I’m doing sets of 10,13,10,10 and around 30 for the final set. [...]

Money Smarts Blog

2011-10-27T20:05:00.001+08:00

Money Smarts Blog

Calling Home From Another Country – Long Distance Voice Plan Vs. Skype

Posted: 27 Oct 2011 02:00 AM PDT

This post is long and a bit technical. To make things easier, I’m going to start off with the conclusion for the people who don’t read the entire post. Summary If you are traveling to another country and are planning to phone home on a smart phone using Skype in combination with a data roaming [...]

Money Smarts Blog

2011-10-21T20:22:00.001+08:00

Money Smarts Blog

LinkStuff – First Hockey School Edition

Posted: 21 Oct 2011 02:00 AM PDT

Last weekend, my son started his first hockey school. It’s basically a learn-to-skate with a bit of hockey thrown in. He seemed to like it and more importantly, I loved it! It was quite exciting to see him skating around in hockey equipment and I knew a couple of the other hockey dads which made [...]

Money Smarts Blog

2011-10-19T20:17:00.001+08:00

Money Smarts Blog

RESP Book Giveaway At Boomer & Echo

Posted: 19 Oct 2011 02:00 AM PDT

Just wanted to let everyone know about an interview with me that is published over at Boomer & Echo. There is also a book giveaway, so if you want a chance at a free RESP book – head on over to enter. Thanks a lot to Robb for doing the interview. The RESP Book - [...]

Money Smarts Blog

2011-10-18T20:17:00.001+08:00

Money Smarts Blog

Separating Financial Advice Fees From Mutual Fund Fees

Posted: 18 Oct 2011 02:00 AM PDT

Rob Carrick recently wrote an article called Let’s stop hiding the cost of mutual fund fee in which he suggests that unbundling advisor commissions from mutual fund fees will allow investors to understand how much money they are paying for financial advice. This is a good idea and is in the works for England and [...]

Money Smarts Blog

2011-10-14T20:23:00.001+08:00

Money Smarts Blog

LinkStuff – Short RSS Feeds and Emails Edition

Posted: 14 Oct 2011 02:00 AM PDT

I hope everyone had a good Thanksgiving. I don’t think the weather can get any better than that. We were in Northern Ontario and I took my kids swimming at the beach. If you read this blog through an RSS reader or via email, you’ll notice that you have to click through to the site to read the [...]

Money Smarts Blog

2011-10-10T20:31:00.001+08:00

Money Smarts Blog

LinkStuff – Turkey Day Edition

Posted: 10 Oct 2011 02:00 AM PDT

A Happy Thanksgiving to all the Canadians out there! If you don’t feel like reading any money articles – check out Funny food turkeys, which is a post my wife did a couple of years ago. Last weekend I went to Chicago for the first annual Financial Blogger Convention. I can’t begin to tell you [...]

Money Smarts Blog

2011-10-06T20:26:00.001+08:00

Money Smarts Blog

The Seven Links Of MSB Project

Posted: 05 Oct 2011 06:04 PM PDT

Mark from the Blunt Bean Counter challenged me to do the seven links project thing. Basically I have to pick the seven best posts on this blog in various categories. This is surprisingly hard, especially when you can’t remember half the posts you have written.

Most beautiful post

Dream Wedding – There aren’t many things of beauty on this blog, but Mr. Cheap’s extremely frugal wedding is one of my favourites. In an unrelated note, ladies – Mr. Cheap is still available!

Most controversial post

Why you can’t trust real estate agents – This still gets a lot of traffic and angry comments. Guess who leaves the angry comments?

Most helpful post

RESP Withdrawal Rules – RESP withdrawals have some expensive pitfalls, but not much has been written about them. I think this post helped a lot of people save money with their RESP withdrawals. Incidentally, I noticed a major site published an RESP withdrawal article lately which was clearly a rewrite of my post without any kind of credit to me. I’m debating whether to post a comparison so you can judge if I’m paranoid or not.

Post who's success surprised you

Energy sales scams – I wrote about my experience with a slimy energy reseller and it was very popular. It still gets traffic and comments and I was interviewed by the Globe & Mail on this topic.

A post that didn't get the attention it deserved

Canadian Discount Brokerage Comparison – The amount of time I spent on this post was just silly. I should have written another book instead.

Post that I am most proud of

Will there be a second stimulus check in 2009? – This may seem like an odd post for this blog, but it’s the reason I’m still blogging today. I like to try to make money from the site and I’ve found that American topics are far more profitable. This post was my first big money maker. I still do American topics, but they are not visible to regular readers.

Part of this project is to nominate other bloggers which I’m too lazy to do. If you are a blogger and you want to write about this – go ahead.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-10-04T20:14:00.001+08:00

Money Smarts Blog

2011 Stocking Picking Contest – Q3 Update

Posted: 03 Oct 2011 03:40 PM PDT

Here are the results of the 2011 stock picking contest after three quarters. No time for discussion, I just got in the door from Chicago and I’m then on my way out the door to go play hockey. Ta ta!

Rank	Site	YTD Return (%)
1	DividendGrowthInvestor	3.39%
2	IntelligentSpeculator	3.19%
3	MillionDollarJourney	-5.98%
4	MoneySmartBlog	-13.14%
5	WhereDoesAllMyMoneyGo	-18.12%
6	TheFinancialBlogger	-20.31%
7	MyTradersJournal	-35.82%
8	TheWildInvestor	-37.26%
9	BeatingTheIndex	-45.07%

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-30T20:49:00.001+08:00

Money Smarts Blog

LinkStuff – Nice Weather Edition

Posted: 30 Sep 2011 02:00 AM PDT

Last weekend I took my kids to the beach at Ashbridges Bay. It was sunny and about 24 degrees Celsius which is pretty amazing for the end of September.

The waves were fairly large, which was a lot of fun for the kids and myself. The water wasn’t as warm as it had been during August, but we weren’t complaining.

As you can see from the picture, kite boarders were in abundance.

Ashbridges Bay

On with the links

Rob Carrick warns about outrageous bank fees and gives an example of a senior who paid $1305 to transfer three accounts to a new financial institution. This is robbery – normally you wouldn’t pay more than $150/account to move.

Steadyhand had a related post about the inefficiencies of investment account transfers between institutions. The aforementioned $1,350 fee is one such type of inefficiency.

Garry Marr had an interesting story about buying gold level Leafs tickets for $25.

The Finance Buff says that buying on the dips is just fine.

Canadian Mortgage Trends had a nice tribute to Fraser Smith who created the Smith Maneouvre.

Canadian Capitalist reveals that dividends are not the only way to get money from your portfolio.

Seeking Alpha reminds investors not to get complacent about dividend champion stocks.

Echo wrote about his net worth. This is part of the MoneySense guide to financial freedom.

Michael James said that buying on the dips isn’t necessary the best way to invest.

Million Dollar Journey explains what a pension adjustment is.

My Own Advisor is all about stock dividend dripping.

The Oblivious Investor is demanding portfolio rebalancing in his brokerage accounts.

Retire Happy had a good post on why you shouldn’t sell when the stock markets drop.

Carnivals

Totally Money Blog Carnival

Festival of Frugality

Carnival of Wealth

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-28T20:27:00.001+08:00

Money Smarts Blog

How To Avoid Cell Phone Data Roaming Charges When Traveling To The United States

Posted: 27 Sep 2011 07:01 PM PDT

Or more accurately – “How to get ripped off a little bit less by your phone provider when traveling to the US”.

I’m going to be traveling to the United States in the near future and one of the things I’ve been researching is data charges for my iPhone in the US. I need to use my iPhone when traveling, but I was quite worried about the mysterious data roaming charges and the various associated horror stories that I’ve heard of.

Just to clarify, if you have a “smart” phone like an iPhone or Blackberry – there are separate charges for voice calls (ie normal phone calls) and “data” usage. “Data” refers to the amount of information that you download from the internet through emails or web surfing. A short text email will have a small amount of data, whereas an email with several photos attached will use a lot more data. Text messages are in another charge category altogether.

In my case, I need to check emails, monitor my web sites and use my Skype application to phone home, since we aren’t taking the kids with us (thanks Mom!). If I use the phone in the US, I will be paying a rather high fee of $30 per MB of data (or $50/MB depending on which rep I talked to was correct). My average data usage in Toronto is about 500 MB per month or 17 MB per day. I don’t plan on using the phone as much as I normally do, but I anticipate using 5 MB of data per day. At $30 per MB of data, three days at 5 MB per day would cost $1350, which is quite excessive.

I decided to give my friendly Rogers call centre a ring and see what the deal was with US data plans. I felt a bit of trepidation, since the last time I dealt with Rogers about the phone, they made up a bunch of stuff and then denied it later. I was worried they would sell me a data plan and I would still end up with some ridiculous bill after my trip because they just pretended to add the data plan to my account.

The roaming data plan I bought

After a number of phone calls, I decided to buy a data plan which costs $10 for one month. With this plan, my data charge is $1 per each MB of data that I use. Since I roughly estimated I’ll use 15 MB data on my trip, the total charge will be $25. I’m fine with that.

I can check my usage from my phone via my Rogers account, so I should be able to monitor my data costs as well.

Use WIFI to save roaming charges

If you can tap into a WIFI network when using your smart phone in the US, there will be no data charges. The hotel I’m staying has WIFI, so I’m hoping to use this as much as possible. If you are visiting relatives in the US that have WIFI or can find free WIFI spots, this could save you some money.

Summary

If you are going to be traveling outside Canada – consider the following tips:

Find out what international roaming packages are available for your needs – data, voice, and text messaging (which I just learned how to do).
Look at your regular usage and try to estimate your usage while traveling.
If you use Rogers – phone several times with your questions (see next section of article).
Use WIFI wherever possible.
Use a Skype app for voice calls – then you only have to worry about data and possibly text packages.

The journey to the answer

One of the fun things about calling Rogers is that you can call several times, ask the same question and get a different answer each time. It might be an interesting game to see how many times you have to call before getting an answer that you heard before.

I ended up calling four times about roaming data plans and it was clear that three of the four reps had no idea about any of the data plans and were just reading (incorrectly) from various web pages. Or perhaps they were just making it all up.

Rep #1 told me that I could pay $25 and get a 10 MB roaming data plan which would last for one month. This plan included alerts if you approach and reach the 10 MB level. This sounded good to me, but I wanted to think about it.

Rep #2 agreed that I could buy a 10 MB roaming data plan, but it costs $30, not $25. She did offer that if I bought it online, I would save 5%. Unfortunately, when I went online, I could not find any kind of data roaming plan like this.

Rep #3 said the first two reps were mistaken and the 10 MB roaming plan was a summer offer which expired. When I told her I had just been told about the plans an hour prior, she then said it was only available to business accounts. This rep then told me about the roaming data plan which I ended up buying. She seemed to know what she was talking about, except for the little white lie about the summer offer/business account.

Rep #4 – I called again to ask a different question, but asked to confirm the roaming data plan which I had signed up for. He confirmed it was set up, but he thought the $10 monthly charge included 10 MB and only cost $1/MB in excess of 10 MB. When I questioned him, he reread the web page and agreed that my initial understanding was correct.

After all these phone calls, it was clear to me that I hadn’t been mislead when I initially bought the phone. The rep I talked to at that time just didn’t have a clue what he was doing.

I would like to clarify that I use several Rogers services (internet, cable and iPhone) and they are all excellent. It’s just the call centre that can be a bit frustrating at times. I don’t mind if a rep doesn’t know the answer to a question, but I wish they wouldn’t just make stuff up.

Anyone have any more tips for travelers? Any roaming charges horror stories out there? Any fans of Rogers out there?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-23T20:10:00.001+08:00

Money Smarts Blog

LinkStuff – Kingston Visit Edition

Posted: 22 Sep 2011 06:50 PM PDT

Last weekend we went to the lovely city of Kingston, Ontario. It was a short trip – we left early Saturday morning and got home at dinner time on Sunday. A friend of mine invited us for a bbq and we decided to go (at the last minute), since I hadn’t seen him and a few other friends in attendance for a long time.

The weekend cost a small fortune – super expensive hotel room and a couple of restaurant lunches, but it certainly was fun. Now that we know how nice Kingston is we will certainly do a return visit. Possibly combining it with a trip to Sandbanks provincial park.

View from hotel balcony

On with the links

Moneyville was kind enough to publish an article I wrote, Why I have a $20,000 emergency fund.

Canajun Finances has some RESP back-to-school reminders.

Canadian Dream had a great post called the war on stuff. I need to clean out my basement too.

Sustainable Personal Finance canceled his cable and came up with 10 reasons to cancel your cable. I’m quite impressed by the amount he is saving. I’m not canceling my cable though.

Rob from Canadian Mortgage Trends wrote a very good article about why a fixed mortgage is a better choice over variable. Very good analysis.

Oblivious Investor says that you can’t assume your effective taxes will go up when deciding between a tax-deferred account or an after-tax account.

Nicolas Johnson from the Globe & Mail wrote about the lessons of Japan’s lost decades. Diversify!

Retire Happy extols the virtues of low fee mutual funds.

Kevin Press “Today’s Economy” is now blogging at the new Brighter Life website – go check him out!

Krystal had an interesting article about four lies we tell ourselves about home ownership.

The Wealthy Canadian explains RRSPs.

Michael James has a different approach to explaining index investing.

My Own Advisor learned some financial lessons from his wife.

Boomer & Echo also had some financial goal discussions with his wife.

Canadian Capitalist builds a diversified portfolio using commission-free ETFs.

Million Dollar Journey talks about Scotia iTrade offers commission free ETFs.

Carnivals

Best of Money Carnival - I was fortunate to be selected as one of the top 10 posts.

Festival of Frugality – My article was the #2 editor’s pick.

Carnival of Wealth

Canadian Finance Blog

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-22T20:23:00.001+08:00

Money Smarts Blog

Can Home Owners Benefit From Falling Real Estate Values?

Posted: 21 Sep 2011 05:17 PM PDT

Real estate values have been holding up in Canada reasonably well, but the American real estate market is down 33% from the peak in 2006 as measured by the Case-Shiller index.

Most people view falling real estate values negatively and would prefer to see their houses increase in value. The net worth of an average person is largely influenced by their debt (including mortgage) and their house value. If their house value go up and their debt level goes down, net worth goes up and they feel good about themselves.

But what about the person or family that wants to upgrade from a starter house to a larger, more expensive family house? Do they also benefit from rising real estate values? Sure, their starter house is worth more, but the more expensive house they want to buy probably increased by an even larger dollar amount, which means they might not be as well off compared to if real estate values had fallen.

In the investing world, it is said that an investor in the accumulation phase should be happy when markets fall so that they can buy more stocks on sale. They shouldn’t desire higher markets until they get close to retirement.

When you upgrade from a starter house to a family house, you are accumulating more real estate for your portfolio and should therefore want lower, not higher prices at that time.

Don’t believe me?

Let’s look at a couple of scenarios:

Martin bought a two bedroom condo several years ago and has seen the value drop by 25%. Now that he is married and has a young daughter, he would like to upgrade to a three-bedroom single family house.

He’s not happy about losing money on the condo, but he understands that three-bedroom houses are also cheaper after the market dropped.

I’m going to make a number of assumptions to simplify the calculation. These assumptions are not true, but the errors are not significant to the analysis.

A three-bedroom single family detached house in Martin’s city is always worth twice as much as a two-bedroom condo in the same location.
No transaction or insurance fees of any type.
Martin has an interest-only mortgage and makes no payments to principal.

I’ll run two scenarios – one scenario involves the real estate market dropping 25% from the time he bought his condo, so both the condo and three-bedroom house drop 25%. The second scenario involves the market increasing by 25% from the time he bought his condo and both the condo and house go up by similar amounts. Then I’ll compare and see which scenario is better for Martin assuming he sells the condo and buys the house.

Real estate market drops 25%

Initial condo value = $160,000
Initial down payment = $50,000
Current condo value = $120,000
Current Mortgage = $110,000
Cash remaining after sale = $10,000

He buys a three-bedroom house for $240,000 (twice what the condo is worth). After using the $10,000 left over from the condo sale as a down payment, Martin is left with a $230,000 mortgage.

Real estate market increases 25%

Initial condo value = $160,000
Initial down payment = $50,000
Current condo value = $200,000
Current Mortgage = $110,000
Cash remaining after sale = $90,000

He buys the same three-bedroom house for $400,000 (twice what the condo is worth). After using the $90,000 left over from the condo sale as a down payment, Martin is left with a $310,000 mortgage.

Which scenario is better?

When the market dropped, Martin ended up with a mortgage of $230,000. In the scenario where the market rose, his mortgage was $330,000. Clearly, from a debt and monthly payments point of view, Martin benefited from the dropping real estate market.

However, it should be noted that in the rising market scenario, Martin has $90,000 of home equity which is $80,000 more than in the dropping market scenario.

Which is better – higher debt and more equity or less debt and less equity?

In my opinion, the scenario which provides less debt is the more desirable scenario. The home owner will have smaller monthly payments which will allow them to build wealth quicker by paying down the mortgage sooner or using the difference to invest.

If he was planning to sell the house in the near future, then he might be better off with more equity and more debt.

Which scenario would you prefer?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-16T20:25:00.001+08:00

Money Smarts Blog

LinkStuff – Erasure Edition

Posted: 15 Sep 2011 07:18 PM PDT

Last weekend I went to see the band Erasure who played at the Sound Academy (used to be the Docks) here in Toronto. It was the first concert I had been to in a few years and was it ever good! Andy Bell can really sing (still) and they put on a fun show. The venue is right on the Toronto harbour and has a great view from the patio.

Here are a few of their songs that I like:

View from the patio

On with the links

BrokeTO wrote a funny post protesting some of the crappy money saving advice on the internet. It’s hard to cut back when you already have.

Preet Banerjee wrote an excellent post about mutual fund survivorship and backfill performance enhancing tricks. Well worth a read.

Mimi Lee, a financial advisor has some warnings about investing with the banks. She wrote this in response to a comment on my Globe & Mail online chat, where I recommended people set up RESPs at a bank.

Scott Adams wrote a great post on applying systems to your life.

This article about client segmentation was written for financial advisors, but might be useful for clients in case they wonder if their advisor has “fired” them.

Business Insider says that Canada is not a good place to invest.

Retire Happy Blog explains living benefit insurance.

Michael James is sad that the Motley Fool website has come full circle. Unfortunately, there is a lot more money writing about get rich quick investing ideas than there is in passive investing.

The Oblivious Investor came up with a better option to buying equity options.

Canadian Capitalist discusses Vanguard’s best practices for portfolio rebalancing.

Echo wrote about mutual fund fees: the high cost of Canadian funds.

Million Dollar Journey says it’s time for a financial checkup.

My Own Advisor discloses his favourite international equity ETFs.

A few more links

Having Trouble with Your Student Loans? 3 Options to Help You

Income Statement Basics

Should You Automatically Reinvest Your Dividends?

Are You Missing Out on These Credit Card Perks?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-15T20:23:00.001+08:00

Money Smarts Blog

A Practical Way To Estimate And Budget For Home Maintenance Costs

Posted: 15 Sep 2011 02:00 AM PDT

As a home owner, I’ve seen various methods of estimating annual home maintenance costs. These methods involve calculating a percentage of your home value – usually between one to four per cent, and using that value as the annual maintenance estimate.

Being a bit of a skeptic, I never had much faith in these estimation methods, since there is never any kind of logic to them or analysis supporting the numbers.

It doesn’t make sense to me that your home value should determine maintenance costs, especially if you live in an area where the land value is the majority of your house value. The cost of maintaining your land is far less than the cost to maintaining a house.

Another problem with these estimates is that a poorly maintained, older home will be worth less and consequently have a lower estimated maintenance cost than a new, well-maintained house – clearly this makes no sense at all, since the poorly maintained house will likely need more maintenance and should have a higher estimated maintenance cost.

A third issue is that from a budgeting perspective, home maintenance often involves high cost items that occur infrequently. For example; a $12,000 roof that lasts roughly 20 years. Calculating an annual cost for that roof might be an interesting exercise, but it’s unlikely to actually help you efficiently budget for it. And will you still be living in that same house 20 years from now?

A better way to calculate your home maintenance costs

A better method is to look at the major components of your house that will need replacing at some point and do the following steps for each component:

Estimate the replacement cost
Determine the life expectancy
Determine the current age of each item
Calculate the estimated remaining life expectancy
Rank the house components in order of increasing estimated remaining life expectancy and then plan for any expenses expected in the next five years.
Watch for any upcoming “expense clusters” – A high amount of maintenance costs in a short time period

Let’s do this exercise for my house

First I will list all the big items in my house that will need replacing at some point:

Gas stove
Refrigerator
Dishwasher
Dryer
Washing machine
Deck
Furnace
Air Conditioner
Gas water heater
Roof
Gutters
Windows
Fencing

The next step is to determine the estimated life spans.

Here is a source for the life expectancy of home components which has good data.

Then we find out the current age of each component.

The current age of most of my items was fairly easy, since a lot of them were replaced just after buying the house. For older items, you can often look on the component itself to see if there is a date on it. Windows, furnaces, air conditioner, hot water tanks should all have a date on them somewhere.

If you don’t know the age of an item, just take a guess. For example if you bought your house 12 years ago and haven’t replaced the roof, there is a very good chance that the roof is at least 12 years old. If the roof isn’t falling apart or leaking, it’s probably less than 20 years old. Pick a number halfway between 12 and 20, say 16 years and there’s your estimated roof age.

Now we need to figure out the replacement costs.

This can be difficult since there can be a wide variety of options when replacing an item. I wouldn’t worry about trying to get accurate figures – for this exercise, any reasonable guess will do. Once you get close to replacing a component, then you can worry about the exact cost.

Check here for some cost estimate guidelines.

If you are really clueless about how to collect any of this data, see if you have a copy of the original inspection report which should contain some of this information. A more expensive option is to hire a home inspector to check out your house – they can give you an idea of the condition, age and replacement cost of the various parts.

Calculate “Remaining life expectancy”

Finally, I need to calculate the “Remaining life expectancy” for each item by subtracting the current age of each item from the life expectancy. For example if my roof is 14 years old and the life expectancy is 20 years, the “remaining life expectancy” will be 20 minus 14, which is six years.

Here is a table showing all my major maintenance costs, ages and life expectancies. Note that I put in a “purchase year” for each item, so that I can look at this table again in a few years and the current age (calculated) will be automatically updated. Most of my estimated costs are very ball park.

Just for fun, I took all the items, calculated an individual annual cost and summed that up to get an idea of my average annual maintenance costs. It came out to $3,186 per year. Throw in a few bucks to cover smaller maintenance costs not listed and my annual house maintenance costs are $3,500 per year. But as we’ll see later, that annual figure is not very useful for planning or budgeting.

My maintenance expenses

Now that we have all the data we need – let’s rank all the items by the remaining life expectancy so we can get an idea of upcoming maintenance expenses by time period.

I suggest that you focus on the next five years only. Beyond that is just too far in the future. Most single maintenance items are not so expensive that five years isn’t enough to save up for them.

Look at any expenses in that five year time period and think about how you can plan for them. If your budget is tight and you need a furnace in four years, setting aside some money each month might be a prudent idea. On the other hand, if you have a high savings rate and a decent emergency fund – perhaps you can wait until closer to the actual replacement date to save some cash or even just buy on credit and quickly pay back the loan. The estimated life expectancy dates are not very accurate, so you don’t want to have $5,000 cash sitting around waiting for a furnace to die, if you have better uses for that money.

It’s also worthwhile to look beyond five years for the case where there are a lot of items up for replacement at the same time (“expense cluster”). This situation could require more advance planning (which could include moving). This might happen where someone moved into a new build home or did major renovations.

Ok, let’s get back to my case study:

Maintenance items by time period.

I’ve ranked the items by the expected expiry dates. While I’m mainly going to focus on items that need replacing in the next five years, I’m also going to note the “expense cluster” that I’m going to face in about 12 years.

Now I will look at the list and do some planning.

These two items are overdue for replacement:

Air conditioning – This item is old and could die any minute. However, it works fine and I’m not planning to replace it until it stops working. Because of our emergency fund and high savings rate, the $3,500 replacement cost will not be an issue. Action plan: Monitor indoor air temperature on hot days.

Deck – My deck might actually be a funny story if it belonged to someone else. It is ancient – I’ve estimated it’s 21 years old, but it could be 50 for all I know. Every year I replace a couple more rotten boards. The reason I haven’t replaced the deck is because we have water problems with our basement that will be addressed in the future. There is no point in getting a new deck if we might need to dig up around the house for water proofing. When we tackle the basement project, a new deck will be included in the budget at that time. Action plan – Keep rebuilding deck one board at a time.

The following items are due for replacement within the next five years:

Refrigerator, dishwasher, gas water heater, washing machine – These items have a total replacement cost of almost $4,000, which is not a worrisome amount. Given that the estimated expiry won’t happen for at least four years, I’m not going to worry about these expenses at this time. Action plan – Nothing.

Fence – This is another item I have no idea of how old it is. It’s not in bad shape and the reality is that I will probably just do small repairs if it starts having problems. It’s extremely unlikely that the fence will get replaced anytime in the next ten years. Action plan – Don’t lean on fence.

All the remaining items have expiry dates that fall outside of my five year window of concern, so they will be ignored for now. I will take note of the last four items in the list – furnace, windows, roof and gutters. These items represent $35,000 of costs within a 3.5 year window. This is what I was referring to when I mentioned the idea of an “expense cluster“.

This expense cluster will eventually require some planning, but it’s still too far off (11+ years) to plan for now. It’s likely that we’ll start saving an extra $5,000 per year starting a year or two before the cluster hits in order to be able to pay for those expenses.

This exercise shows why an annual maintenance estimate is not very useful. In my case, I don’t have a lot of costs coming up in the next several years, so if I saved $3,500 per year – that cash would be sitting around doing nothing. I’d much rather put it into my mortgage. Conversely, if you have a house where there are a lot of upcoming expenses, the $3,500 per year budget probably won’t be enough.

Conclusion

Because I have a decent emergency fund and a high savings rate, I don’t need to do any kind of special budgeting for house maintenance now, since I don’t have a lot of costs coming up in the next few years. Someone with a tight budget might have to set aside a “house maintenance” fund to handle these costs.

Every house will be different – It’s important to analyze the components of your house in order to plan out your future house maintenance costs.

Some more thoughts

This concept of future budgeting can include items other than house maintenance items. If you are planning/hoping for renovations in the future – add them on the “maintenance calendar” as well. Even big ticket non-house items like new cars, “trip of a lifetime” vacations can be added in.

Specific budgeting for future items is not always practical. If you just bought a new roof for $10,000, are you really going to start saving $500/year in a “roof fund” for the next 20 years? That’s just not a good use of your money.

One of the best ways to deal with future expenses where it’s not certain about the timing is to have an emergency fund and a high savings rate. Anything you can do to improve your current financial position will help you deal with future expenses.

Problems with using percentage of home value estimates with examples

Land value skews the estimates

As I discussed in this post; How to value real estate, the land value can make up a majority of a house purchase price. Especially in an urban setting.

Using a percentage estimate for a maintenance budget means that a home owner in a popular area will have a higher maintenance estimate than someone who lives out in the country and has a lower land value.

For example – Take a two-story 1,200 square foot house. Let’s say the house value (not counting the land) is $150,000. If this house is sitting in an expensive area of Toronto, the total value might be $700,000. If the house is out in the country, perhaps the total value is only $200,000. If we use a maintenance estimate of 2% of the house value, that gives us $14,000 per year for the big city house and only $4,000 per year for the country house. Given that this estimate methodology gives us two very different results on identical houses indicates that it’s quite flawed.

Older, crappier houses will negatively influence maintenance estimate, but probably need more maintenance.

If we ignore land value, a house that is in great shape will be worth more than a run-down house that needs lots of maintenance. The percentage estimate will incorrectly conclude that the run-down house needs less maintenance, which is nonsense.

Example – Let’s take our $200,000 country house which is made up of $50,000 land and a $150,000 house. This house is very well maintained. Let’s say there is a very similar house on the adjacent lot, except this house is much older and hasn’t been well maintained. The second house is only worth $150,000, which is made up of $50,000 land and a $100,000 building value.

The percentage estimation method will tell us that the well maintained house should have an annual maintenance budget of $4,000 (2% of $200,000), but the run-down house only needs $3,000 per year (2% of $150,000). This is clearly incorrect, since it’s very likely that the cheaper house will need more maintenance.

How do you budget for home maintenance? Anyone else miss the good old “rental” days?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-09T20:34:00.000+08:00

Money Smarts Blog

LinkStuff – Globe & Mail Online Chat Edition

Posted: 09 Sep 2011 02:00 AM PDT

On Wednesday I participated in a Globe & Mail online Q&A chat on RESPs – you can read all the questions and answers here.

The Q&A was a lot of fun. I wasn’t sure what to expect in the way of questions, but there were a lot of good topics covered. Thanks to Roma Luciw and Katherine Scarrow for setting it up.

The Globe & Mail also published an excerpt from my e-book “How to withdraw from your RESP” this week.

For those keeping track at home, I was in the Globe twice last week and twice this week. I’m wondering when they will have had enough of me?

On with the links

Dan Ariely says that investment advisors ask the wrong questions when discussing retirement planning.

Blunt Bean Counter had a good article called Who is your wealth management quarterback?

Echo is sitting around and wondering what he should do about his RRSP.

Michael James warns that some brokerages won’t give you the preferred rate unless you ask.

My Own Advisor reveals his favourite Canadian equity ETFs.

The Oblivious Investor discusses a conflict in retirement savings. Is the money for living or for your estate?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-08T20:34:00.001+08:00

Money Smarts Blog

Compare Unit Prices – Especially When Buying Steam Whistle Beer

Posted: 07 Sep 2011 05:17 PM PDT

When people fill up their cars with gas, they try to get the best price. All the gas stations list their price for a litre of gas (gallon for Americans), which makes it very easy to compare unit prices. One litre of gas at gas station A is exactly the same as a litre of gas at gas station B.

For most other items, it’s not that simple. Grocery stores (or more accurately the food manufacturers that supply them) are the worst. They will shrink your favourite product, so you don’t even think to compare unit prices. They also like to put out an “economy size” which has a higher unit price.

Smart consumers cut through all the bull and compare the unit prices, so they know exactly how much they are paying.

Four pack of large cans - $11.00

I can’t claim to be the smartest consumer, but I did feel duped the other day after buying some Steam Whistle, which is my favourite beer.

They used to just offer regular bottles (341 ml) and large cans (500 ml). It was obvious to me that the cans represented a much better deal. In fact, the cost for the bottled beer was $0.66 for 100 ml which is 25% more than the $0.53 for 100 ml of canned beer. A significant difference, I’d say.

Recently, I paid a visit to the local store and one of the clerks told me about a new six pack of cans from Steam Whistle. The case of six cans was $3.50 more than the cost of buying four separate cans, but she made it sound like the six pack was made up of the large cans. After buying the six pack, I realized that the cans were in fact, not large (500 ml), but disappointingly normal in size (355 ml) and I knew I’d been had.

Sure enough, the pricing for the small cans was $0.65/100 ml, which is just a bit less than the bottled price, but a whopping 23% more than the unit price of the large cans.

Conclusion

Don’t ever assume anything from anyone. If you want the best deal for an item, you have to understand the pricing and the sizes involved.
Steam Whistle is already one of the more expensive beers on the market – don’t make the same mistake I did and over pay for it!

Please note that I have subtracted the cost of the deposit, before calculating the unit beer costs.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-07T20:20:00.001+08:00

Money Smarts Blog

How To Find A Fee-Only Financial Advisor

Posted: 07 Sep 2011 02:00 AM PDT

I received a question from Lily Leung of ExploreForAYear.com who asked about finding a fee-only financial advisor in Toronto for a younger investor:

Quick question on financial advisors – a friend was asking me about how to a financial advisor (she’s in Toronto), do you have any suggestions on resources on:
1.) How to select an advisor
2.) Directory of financial advisors (esp. fee-based ones)?

First of all – the type of advisor she is talking about is one who charges for specific services. For example they might charge $300 for a financial plan. This type of advisor typically won’t handle the actual investments. They are like financial architects – they draw up the blue prints and then you (or someone else you hire) has to start building.

I don’t think the fee-only advisor business model has been all that successful in Canada. It might be easier to find a commission-based advisor who also has a fee-only advice service.

Fee-only advisors are not perfect

Word of warning – Fee-only advisors may not have conflicts of interest because of commissions from investment products, but they do have a conflict because of their fees.

The more financial analysis they do for a client, the more they can charge. I think for someone fairly young, having a detailed financial plan is useless because there are just too many unknowns in your future.

An expensive financial plan might be a good idea for someone who is about to retire, needs to get a handle on their finances and has a good idea of what their retirement income, needs are.

For most young people, the “rules of thumb” are as good as any detailed financial plan. Avoid/reduce debt, save 10% of your income is a great start. An advisor can give good advice about investing ie how to set up an appropriate portfolio, risk level etc. But it shouldn’t cost too much. I wouldn’t spend more than a couple hundred dollars for an analysis.

How to find an advisor – resources

These articles will provide a good background for someone who is looking for a new financial advisor of any type:

Here is an interesting case study by Canadian Capitalist where he actually tries to find a fee-only financial advisor:

Here are a couple of fee-only advisor lists:

Find an advisor – Canadian Couch Potato
Where to find a fee-only advisor – Money Sense

Does anyone use a fee-only advisor? Any advice on how to find one?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-09-02T20:20:00.001+08:00

Money Smarts Blog

LinkStuff: Globe & Mail Mentions and Canadian Tire Parking Lot Edition

Posted: 02 Sep 2011 02:00 AM PDT

I bought a few more camping supplies last weekend at Canadian Tire. There were no price discrepancies this time, but it wouldn’t be a CT trip without some kind of incident.

I was walking along the sidewalk to our car with my two kids riding in the shopping cart. Up ahead there were two carts perfectly positioned to completely block the sidewalk. I mentioned this to my kids and they volunteered to move them. My five year old son moved one of the carts, but unfortunately it rolled right off the sidewalk onto the parking lot. There were no cars where the cart rolled onto - I think they were “customer pickup” spots or something.

The parking area has a slope where the cart was and it started rolling towards the driving lane. The three of us stood there and watched as the cart ended up crashing into a mini-van trying to park.

I thought “oh no”, thinking that the driver was going to be mad and expect money or something. However, he didn’t do anything at all. As I got the kids into my car, he had his trunk open and was just acting normal. Later I went over to apologize and the guy was super nice. He said he had two little kids in the back as well and understood what it’s like. It was just an accident, so no problem.

Thanks to the Canadian Tire parking lot stranger for being such a nice guy and sorry about the dents!

The Globe & Mail

I chatted with Roma Luciw of the Globe & Mail recently and she quoted me in two separate articles.

A primer on how to withdraw from RESPs. Find out my little RESP secret.
Are you getting the most from your RESP?

I’ll be doing an online chat with the Globe & Mail site answering RESP questions on Wednesday, September 7th at noon.

On with the links

Susan Crossman wrote a beautiful piece on her kids going to summer camp and what it all means.

My buddy Matt Jabs has put together a neat book of 60 natural DIY cleaner products. Matt is really into DIY everything (to put it mildly) and cleaning products are a pretty good application of this. I might have to make some of these for my housekeeper.

The Globe reports that schoolyard design is contributing to child obesity. This is the biggest bunch of b.s. I’ve ever read. The schoolyard at my old public school was right out of a prison movie set sans the high walls and guard towers. One big flat expanse of asphalt and black rock gravel with the obligatory basketball court. That was 35 years ago when there was only one fat kid per school. I mean come on – kids today are not as active, they have more access to crappy foods and they are fatter because their parents are fatter. The other problem is that parents won’t let kids do anything on their own anymore. Fine, but it’s up to the parents to stay active, so their kids will stay active.

Canadian Financial DIY says we need to include total returns when talking about stock market returns.

My Own Advisor brags about how old his car is.

The Oblivious Investor explains why markets are relatively efficient. Even if they don’t seem that way at times.

The Wealthy Canadian bought one ounce of gold.

Rob Carrick had a very good list of 20 things I don’t understand about personal finance.

Sustainable Personal Finance advises to pay yourself first.

Canadian Capitalist lists the things he liked about the Wealthy Barber Returns.

Echo explains why he doesn’t need a mortgage broker. I couldn’t get my bank to budge without one.

Michael James doesn’t think that high gas prices are changing behaviour.

Million Dollar Journey wrote a primer on futures contracts part deux.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-31T20:09:00.001+08:00

Money Smarts Blog

Why I Have An Emergency Fund

Posted: 31 Aug 2011 02:00 AM PDT

I was reading an interesting forum thread recently about emergency funds. Some people are for them, others are not. Three years ago, I went from being a firm non-believer in emergency funds (if you have debt) to having an emergency fund myself, even though I still have debts.

I’m well aware that it is not financially logical for someone like me to have an emergency fund, but I like to have one anyway.

Why I didn’t have an emergency fund before

I had long term debt (mortgage) - This means that the “cash pile insurance fee“, will go on indefinitely. If there is a 2.5% spread between the mortgage rate and the interest earned on the emergency fund, it will be an annual cost for at least 10 years or more. That’s a significant amount of money.
No TFSA – Prior to 2009, any interest earned on the emergency fund was taxed at over 40% marginal tax rate. This meant that the “cash pile insurance fee” was even larger – maybe 3% or more, which was unacceptable to me.
HELOC (Home equity line of credit) - Contrary to what some fear mongers say, banks won’t pull your HELOC if your finances are in decent shape. I’ve known lots of people who have divorced, been laid off etc and nobody has ever lost any credit.

Why I now have an emergency fund

Layoffs – About three years ago, there were several rounds of layoffs at my company. Screw the math – having several months worth of expenses in the bank makes those days a lot easier to handle.
TFSA – Interest earned in my TFSA emergency fund is tax-sheltered. This isn’t a huge benefit with the current low interest rates, but it helps.
Short term mortgage – My long term debt has been turned in to short-term debt. Whatever “cash pile fee” I have to pay, will disappear next year when my mortgage is paid off.
Wife – My wife has been out of the workforce for six years – it is getting more and more unlikely that she will ever work full time at the salary she used to. I think we are a single income family, and having an emergency fund helps psychologically with that as well.

Bottom line is that there is no one right answer when it comes to emergency funds and it’s not just about the math.

Do you have an emergency fund? Are they a waste of money?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-29T20:25:00.001+08:00

Money Smarts Blog

New Ebook Announcement – How To Withdraw From Your RESP Account

Posted: 29 Aug 2011 04:06 AM PDT

I’m happy to announce that the long awaited (by me at least) Kindle e-book called “How To Withdraw From Your RESP Account Whether Your Child Goes To School or Not” is finally available. For the bargain basement cost of $4.99, you can learn everything you need to know about maximizing the amount of money you get out of your RESP account.

Please note that you don’t need an e-reader in order to read this e-book. Instructions for reading this e-book on your computer or iPhone are included later in this article.

The withdrawal phase of the RESP is the time when there are the most pitfalls – extra taxes, lost grants and potential penalties are all things to be avoided or minimized. Knowing the withdrawal rules and being aware of various strategies will ensure you don’t make any expensive mistakes with your RESP withdrawals.

Who should buy this e-book

You have an RESP account (obviously).
At least one beneficiary (child) is either currently attending post-secondary education or will be attending in the next year or so.
Your child is not planning to attend post-secondary education or quit early.

Who should not buy this e-book

You have read my full length The RESP Book (it’s the same RESP withdrawal material in both books).
Your RESP account is a group/pooled/scholarship RESP plan. Follow the link if you are not sure what you own.
Your child is more than a couple of years away from attending post-secondary education.

How do I buy this e-book?

There is only one place to purchase this e-book and that is the Kindle Store located on Amazon.com.

Note that the Canadian Amazon site does not have a Kindle store.

Can I read this e-book without an e-reader?

Yes! You can use the “Kindle for iPhone” app to buy Kindle books for your iPhone. If you wish to read Kindle books on your PC or laptop (Windows & Mac) then download the free Amazon e-book reader. Go to the end of the page where the section is called “Download Kindle Previewer 1.61” for download instructions. It’s quite easy to set up.

And don’t worry – I don’t have an e-reader either.

If you want to open an RESP account or have recently started one or you would prefer a regular print book

Consider buying my full length guide The RESP Book. It will take you through the entire RESP process from setting up an account to completing withdrawals. It contains all the material in the RESP withdrawal e-book.

How big is the e-book?

This e-book is not a full length book. It is about 7,500 words which would be approximately 40 pages if it was a 6″ by 9″ print book. It is roughly one third of the size of my full length RESP book.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-26T20:24:00.001+08:00

Money Smarts Blog

LinkStuff – Camping Trip Edition

Posted: 26 Aug 2011 02:00 AM PDT

We did our big camping trip last weekend at Awenda Provincial Park which is about an hour north of Barrie, Ontario.

It went very well, although Saturday was pretty rainy. Luckily our friends thought to bring a big tarp, so we had a dry place to hang out. The weekend ended up being really fun.

We learned that we need to organize our camping gear better. It was difficult to get everything packed into the car and the fact that we had an extra air mattress and extra tent didn’t help much. We also had a sleeping bag which I’m sure is rated for -100 degrees. It’s very cushy, but we just don’t need something that big for summer camping.

That’s it for camping this season, but we’re hoping to go several times next year.

On with the links

Fascinating article on decision making and how tiring it can be.

Adrian Liston pokes some amusing holes in the US government debt vs family debt debate. Apples and oranges.

Canadian Couch Potato had a very funny post on the suitability of gold as an investment.

Financial Uproar (one of my favourite bloggers) had an excellent piece – debt isn’t evil. He’s right.

Nelson from Financial Uproar wrote another great post on fixed or variable mortgages. Great analysis.

The Oblivious Investor came up with an innovative way to plan for variable withdrawal rates in retirement.

Big congrats to Potato who has finally finished his PH.D.

Boomer & Echo explain real return bonds.

Canadian Capitalist announced that BMO Investorline will allow US$ registered accounts.

Kevin Press didn’t have a successful yard sale. I think he just can’t let go of those couches.

Michael James talks about the problem with currency hedging.

Million Dollar Journey wrote about futures contracts.

My Own Advisor doesn’t like online investment calculators. Probably because most of them lie.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-24T20:17:00.001+08:00

Money Smarts Blog

Vanguard Group Unveils Canadian ETF Offerings

Posted: 23 Aug 2011 06:48 AM PDT

Earlier this year Vanguard Group announced they would be setting up shop in Canada. At that time, there was no information on what kind of products they would offer or if they would be dealing directly with the investing public or through advisors.

Today, Vanguard announced they have filed the preliminary prospectus for six exchange traded funds (ETFs) which will trade on the Toronto Stock Exchange (TSX).

Here are the ETF details:

Vanguard MSCI Canada Index ETF, which will seek to track the performance of the MSCI Canada Index;
Vanguard Canadian Aggregate Bond Index ETF, which will seek to track the performance of the Barclays Capital Global Aggregate Canadian Float Adjusted Bond Index;
Vanguard Canadian Short-Term Bond Index ETF, which will seek to track the performance of the Barclays Capital Global Aggregate Canadian Government/Credit 1-5 year Float Adjusted Bond Index;
Vanguard MSCI U.S. Broad Market Index ETF (CAD-hedged), which will seek to track the performance of the MSCI U.S. Broad Market 100% Hedged to CAD Index;
Vanguard MSCI EAFE Index ETF (CAD-hedged), which will seek to track the performance of the MSCI EAFE 100% Hedged to Canadian Dollars Index; and
Vanguard MSCI Emerging Markets Index ETF, which will seek to track the performance of the MSCI Emerging Markets Index.

The ETFs themselves are not a surprise – a Canadian index, Canadian bond with medium duration, Canadian short term bond, US market index, EAFE market index (EAFE is short for Europe, Australia and the Far East) and Emerging markets.

These are the basic building blocks of a diversified global portfolio. The big surprise in my mind is that the US & EAFE index ETFs are Canadian dollar hedged. This is similar to the approach taken by iShares that hedges most of their non-Canadian ETFs as well.

I disagree with this approach as I believe that currency fluctuations in a non-hedged ETF offers more diversification than the more expensive hedged ETF.

The big question regarding these ETFs will of course be the fees. Unfortunately, there was no word on the management expense of these ETFs. Currently, Vanguard offers low-cost ETFs trading on the New York Stock Exchange which are available to Canadians. Most discount brokerages charge high currency exchange fees, so having cheap ETFs available on the TSX will reduce currency exchange fees considerably.

Check out the comprehensive Canadian discount brokerage fee comparison.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-23T20:30:00.001+08:00

Money Smarts Blog

Scanner Price Accuracy Code – Get A Discount If Items Scanned Incorrectly

Posted: 22 Aug 2011 07:01 PM PDT

Have you ever bought something and the price at the cashier was different than the sticker or shelf price? If so, you might be able to score a discount on that item.

The Scanner Price Accuracy Code is a voluntary code of practice which seems to be pretty common in larger stores and chains.

The way it works is that if an item is scanned incorrectly, the customer is entitled to up to a $10 discount on that item. If the item price is less than $10, then it is free.

The discount can be applied to multiple unique items. If you buy three cans of Campbell's chicken soup and the price is wrong, you only get the discount on the first can. If you buy three different types of soup and they are all incorrectly priced, the discount will apply to each unique product.

I've had two occasions to use this code, both times at Canadian Tire. The first time was when I bought some light bulbs on sale at 50% off, but the scanned price was the regular price. I paid for the items and then went to customer service to get my $7.38 refunded. Given that I spent about 10 minutes of my lunch hour getting that money, it wasn't really worth it, but I wanted to check out the process. That time I had no problem getting my money back.

Recently however, I bought some camping items at Canadian Tire and there were two scanning errors. Unfortunately, I had my kids with me and by the time we got to the cash, I didn't pay any attention to the scanned prices, since I just wanted to get the hell out of there. The bill ended up being more than I thought, so when I got home I checked the receipt and there were two items with the incorrect prices.

A cooler I bought was on sale for $24.95, but I was charged the regular price of $44.95. I also bought two small propane tanks which were supposed to be $3.89 each, but I was charged $10.98 each. After checking the website, I realized that these tanks were also sold in 3-packs which cost $10.98.

I went back to Canadian Tire the next day and asked for price corrections which they did without complaint. However, when I mentioned the Scanner Price Accuracy Code, she wouldn't give it to me on either item.

For the cooler, she said that the sale had ended when I bought it, but she would honour the posted sale price. She also added that she couldn't verify that the sale price had been posted on the shelf when I made my purchase.
As for the propane tanks, she said that the tanks I bought had been part of a 3-pack and had probably been broken up by another customer (I doubt it). She said there was no error because the price reflected the 3-pack price.

I disagreed – in both cases the items were on their proper shelf and had the prices below them. The fact that there were reasonable explanations for price differences and that it might have not been the fault of Canadian Tire, doesn't change the fact that the prices I was charged were different than the posted prices and as far as I'm concerned, they should have given me the discount.

Tips for getting the scanning discount

Look for a posted sign at the cashier station to see if the store adheres to this practice.
Watch the prices as the scanning occurs. It's a lot easier to prove an error at that time, rather than later on.
Make sure you ask about the Scanner Price Accuracy Code if applicable. It's very unlikely the cashier will mention it unprompted.
Don't shop with your kids.

What do you think? Should I have gotten a scanning error discount? Have you ever gotten a discount (or been refused) using this code?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-19T20:17:00.001+08:00

Money Smarts Blog

LinkStuff – Windy Lake Edition

Posted: 19 Aug 2011 02:00 AM PDT

I’m on holiday this week (from the day job at least) and one of our activities was a day trip to Windy Lake Provincial Park. We had a great time – the lake is beautiful and there is a very nice beach which the kids loved. We checked out the campsite area and it appears that all of the sites are quite large and most are very private.

Beach at Windy Lake

Best of all they have some sites with Yurts – which are basically a cabin in the campground. A yurt site has a building with electricity along with a propane bbq. This will make camping a bit easier as you don’t need a tent or stove.

Of course purists will say it’s not “real” camping, but I don’t care. All I know is that camping with two little kids is a ton of work and if “cheating” a bit allows us to go more often, then that’s what we’ll do.

Media/book stuff

I did an interview with Roma Luciw of the Globe & Mail this week. She does a weekly “tips” column and I should be in the one next Monday or the week after. The topic will be “Withdrawing from the RESP”. We are also looking at doing an online discussion on that same topic which should be fun.

Work continues on the RESP Book 2nd edition and related projects. I have three deliverables:

2nd edition of the RESP Book (print edition).
Release a Kindle version of the RESP Book (2nd edition).
Release a Kindle mini-book which will just contain the withdrawal information from the RESP Book. This will be called “How to withdraw money from your RESP” or something similar. This mini-ebook will be aimed at people who are ~~too cheap~~ don’t want to buy the entire book, since they only want to know how withdrawals work.

On with the links

One of my posts with the highest traffic is Why you can’t trust real estate agents. For some reason, most real estate agents don’t like that article. Lots of interesting comments on that post. My response is the following quote:

It is difficult to get a man to understand something when his salary depends on his not understanding it. – Upton Sinclair

In other news – Mike Holman came up with 8 reasons why you should use a real estate agent.

Squawkfox wrote a hilarious post on the costs of collecting. Just go read it.

The Finance Buff says that most investors don’t sell everything in a panic.

The Blunt Bean Counter writes about some common investment errors he sees in his practice.

Moshe Milevsky asks the very good question – How long can home prices keep rising?

Five Cent Nickel did an interesting analysis of the stock market last week. He calculated how much of a loss a buy and hold investor had for the week compared to someone who tried market timing and got it all wrong. The results are quite interesting.

My University Money reviewed the excellent Michael Lewis book “Liar’s Poker”.

Boomer & Echo has an amusing article of useless gadgets you shouldn’t spend money on.

Jim Yih come up with 5 very good realities of the stock market.

David Swenson who runs the Yale endowment fund, slams the mutual fund industry.

Canadian Capitalist comments on the Swensen article.

Michael James says that mutual fund MER charges are still significant during turbulent market swings.

Million Dollar Journey has 5 tips to buy your dream house.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-18T20:29:00.001+08:00

Money Smarts Blog

How To Sell An ETF Or Stock Using A Canadian Discount Brokerage

Posted: 18 Aug 2011 02:00 AM PDT

Most Canadian investors use a financial advisor or a bank and invest their money in mutual funds. When it is time to sell, they just have to call their advisor and ask them to do the sell.

Selling individual stocks or ETFs (exchange traded funds) at a Canadian discount brokerage is a bit more complicated because you have to enter the sell order yourself instead of just telling someone else to do it.

If you own a stock or ETF, then you obviously figured out how to buy a stock or ETF at your discount brokerage. Sell orders are a bit different than purchases and this article might come in handy if it’s been a while since you have placed a trade of any kind.

General steps:

Decide what to sell. It’s out of scope for this article, but you should know which stock or ETF you wish to sell.

Sell a stock or ETF. This is the topic which will be detailed here. I’ll be using the interface at Questrade discount brokerage to demonstrate how to make a trade, but whatever brokerage you use should have something similar. If you notice differences with your brokerage, please let me know and I’ll add that information to this article.

Here are the steps to sell a stock or ETF.

1) Know which security you wish to sell and how much.

I’m assuming at this point, you already know what stock or ETF you want to sell.

In my case, I wish to sell a real estate investment trust security that I own called RioCan. I have 204 shares of RioCan and I wish to sell all of them. This will be the example security I’m going to use for this article.

2) Find out the stock ticker symbol for the security

Every security that trades on a stock exchange will have a stock ticker symbol. This symbol will be needed to enter the sell order.

Since you already own the security, finding the stock trading symbol should be as simple as looking at your discount brokerage account.

In my Questrade account I log into the trading platform QuestraderWeb. I select “Positions” and I can see that the Symbol for RioCan is “REI.UN.TO”. Note that the “.TO” suffix refers to the Toronto Stock Exchange.

3) Find out which exchange the security trades on

There are different stock exchanges in different countries and the security you want to sell will be traded on one or more exchanges.

If the security you wish to sell is Canadian, it will likely be traded on the TSX (Toronto stock exchange) and you have to select that stock exchange when making the order. In the case of Questrade, you don’t select the exchange – you just include the “.TO” extension for any trades. If the security is American (such as a Vanguard ETF), you don’t need an extension – just enter the basic ticker symbol (ie VTI for the Vanguard total American stock ETF).

In my case, the REI security trades on the Toronto stock exchange. I need to use “REI.UN.TO” when attempting any trading of this security with Questrade.

Understand that some stocks are traded on both the Toronto stock exchange as well as the New York stock exchange. If we look at Bank of Montreal, the symbol “BMO.TO” is the ticker symbol of the security that trades on the Toronto stock exchange. The symbol “BMO” is the ticker symbol of the security that trades on the New York stock exchange. Make sure you use the proper ticker symbol and select the proper exchange!

Note that other discount brokerages have their own methods of notating the exchange.

Questrade – For TSX stocks, use the suffix “.TO” ie XRB.TO, for NYSE – use basic symbol ie XRB.
RBC Direct and TD Waterhouse – Choose the desired exchange and then enter the basic symbol ie XRB.
Interactive Brokers – Enter basic symbol and choose the appropriate choice from the list. Ie enter “RY” and you will see a list of exchanges.

Some brokerages will have shortcut links in the “positions” or “balances” page which will allow you to easily sell shares of any stock you currently hold.

5) Find the security price and calculate how many shares you should sell

Typically when an investor wants to sell a stock or ETF, they either want to sell a specific dollar amount or they want to sell their entire position.

If you want to sell all your shares, you just need to determine how many shares you own. If you look at the screen shot just above, you can see that I have 204 shares of REI.

If you want to sell a specific dollar amount of shares, you have to find out the most recent price for the security and calculate how many shares to sell. Unlike mutual funds which can be sold in partial units, stocks and ETFs can only be sold in whole shares. This means you probably can’t sell the exact dollar amount you planned, but you should be close.

Every major financial website will have a “get quotes” section where you can enter a security ticker symbol and it will tell you what price the security is trading at. This can also be done on the trading platform at your discount brokerage. I use Yahoo Finance for this purpose.

When I enter REI.UN.TO, I find out that the last trade was $26.72. If I want to sell $1,000 of REI or as close to that amount as possible, I have to divide the desired sell amount by the share price and then drop any decimals.

$1,000 (desired sell amount) / $26.72 (share price) = 37.425 shares. I drop all the decimals and I’m left with 37 whole shares which will net me $988.64 minus the trading commission.

Of course I can also choose to sell 38 shares which will give me a bit over $1,000.

In my case, I want to sell all the shares, so I just need to know how many shares I have.

At this point I have the:

Stock ticker symbol – REI.UN.TO
Number of shares to sell – 204
Approximate share price – $26.72

Now I know exactly what I’m selling and how many shares. I’m still not ready to place a trade, because there a few more things to cover.

6) Market order vs limit order

When placing a sell order, you can indicate that it be placed as a “market” order or a “limit” order.

A market order means you don’t put any conditions on the price of your order. Once you place the order, the sell will get completed (or filled) as soon as enough shares are offered on the exchange. For larger companies and high volume ETFs, this will happen instantly.

A limit order means you specify a lower limit for the sale price of the shares. For example my REI shares are trading at $26.72. If I put a sell order with a limit price of $26.85 (higher than the current price), the order won’t get filled until the stock price goes up a bit and someone agrees to pay $26.85 for my REI shares.

On the other hand, I might place a sell order with a limit price lower than the current market price – say $26.50. The reason I would do this is to avoid the possibility that trading is light and you end up selling the shares at a rate well below market. This is practically impossible if you stick to liquid, high volume stocks that have many shares trading at any given time. Note that in this case, your order will still be traded at “market” as long as your limit price is below the market price. So putting a limit of $23.50 does not mean I’m offering to sell my REI shares for $23.50. It just means I won’t accept a price less than $26.50 for the shares.

I would strongly urge that you don’t place orders when the exchange is closed, unless you put a limit on the order.

In theory, limit orders are safer than market orders. However, I’ve completed a fair number of market orders and limit orders and never had a problem with either. My current process is to always place a limit order just to be on the safe side.

7) Log into your discount brokerage account

At this point we’re ready to log in. With Questrade, you have to log into your main account at myquestrade.com and then log in to your trading platform. Other discount brokerages will have just one login.

Once I’m in the account, I select MY PLATFORMS and then Login to equities platform. If this is your first time, you have to select which trading platform you want to use. I use QuestraderWeb which is the free trading platform.

Now I choose “QUICK ORDER ENTRY” and then “Stocks” from the drop-down menu. The form on the right hand side is used to enter an order.

I’m going to break up my sell order, so I can demonstrate one sell with a market order and one sell with a limit order.

How to enter a market order

For my market order sell I’ll fill in the fields like so:

Symbol = REI.UN.TO
Quantity = 100
Transaction = Sell
Order Type = Market
Duration = Day*
Preferred ECN = AUTO
All or None* = Leave unchecked

*Duration – “Day” means that the order will only exist until the end of the trading day. If it is unfilled at that time, then it disappears.

Market sell order

The next step is to verify the share price by clicking on the QUOTE button at the bottom of the form.

Now we see a pile of new information on the quote screen.

Quote feature

The main info I’m interested in is the Last Price which is $26.68. This has gone down a bit since I looked at the price earlier.

Next step is to click on PREVIEW ORDER

Preview order

This is your last chance to verify the order information. Everything looks good, so now I will click on “SEND ORDER”.

The order was filled (or executed) instantaneously at $26.68.

Sell order execution

If I want to review the order details, I can click on “YOUR ACCOUNT” and “Messages”.

Order details

From this I can see the commission ($4.95) and the trade total of $2,663.05 which represents the share proceeds and commission.

Some brokerages (including Questrade) add another fee to the commission called ECN fees. They are fairly small, but if you are doing high volume trades, it can be a factor.

How to enter a limit order

Most of the steps for a limit order are the same as for a market order.

Start with “QUICK ORDER ENTRY”. The form on the right hand side is uses to enter an order.

The key difference with a limit sell is that I will be specifying a price which represents the lowest price I’m willing to sell the stock for. In the case of REI, the current market price is $26.68. If I select a limit that is lower than $26.68, the order will likely get filled at market (just like my market order) and the limit will just be there for protection.

Another strategy is to put a limit price that is higher than the current market price and hope that the market goes up and you can sell at a higher price. In this case you will have a pending order which can be cancelled. This is a good scenario for using the “GTC” or good till cancel order type so that the order doesn’t get cancelled at the end of the day.

I like to select a limit price that is just below the market price – perhaps 1 or 2% lower. In this case I’ll try setting the limit at $26.40 which is just below the market price of $26.68. If the stock is more volatile you might have to set a lower limit because the stock could jump through the limit before you place your order.

It’s not a bad idea to monitor the price movements of a stock for a little while to get a feel for the volatility. You want to set the limit low enough below the regular price points in order for the order to get filled quickly. For example if you check the price of a stock every 60 seconds and see the following: $23.12, $23.09, $23.14, that stock price is not moving around much and you can probably set a sell limit price of $23.00 and be fairly assured it will be filled.

For my limit order sell, I’ll fill in the fields like so:

Symbol = REI.TO.UN
Quantity = 104
Limit Price = $26.50 Note, you have to select the order type of “Limit” before this field becomes active.
Transaction = Sell
Order Type = Limit
Duration = Day
Preferred ECN = AUTO

Limit purchase order

The next step is to verify the share price by clicking on the QUOTE button at the bottom of the form.

Now we see a pile of new information on the quote screen.

Quote

I can see that the last price for REI is $26.68.

Next step is to click on PREVIEW ORDER

Sell limit order preview

This is your last chance to verify the order information. It look good, so now I will click on “SEND ORDER”.

The order was filled (or executed) instantaneously at $26.68 which is the exact same price as my market order.

Sell limit order completed

Some suggestions

If you are not familiar with placing stock or ETF trades, it can be a bit stressful if you are placing large sell orders. I suggest starting off with a small trade or two just to get familiar with the process. Yes, you will be burning a couple of commissions, but trust me – it’s worth it.

Another suggestion is to see if your brokerage offers a “test” area where you can place dummy trades to get familiar with the trading platform. Questrade offers a free trading platform trial which you can access to try some test trades.

Another option is just to use cheap index funds – they are a heck of a lot easier!

Please let me know if you have anything to add to this information based on your experience with different brokerages.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-12T20:13:00.001+08:00

Money Smarts Blog

LinkStuff – Market Volatility Edition

Posted: 12 Aug 2011 02:00 AM PDT

Pretty exciting week in the markets this week. Maybe a little bit too exciting for some.

I’ve been below my 75% equity allocation for several months due to an RRSP transfer and general portfolio neglect. I find it hard to buy a big chunk of equities all at once after the market has risen so much, so I’ve been waiting for a drop to buy.

I still haven’t reached 75%, but I’m a lot closer than I was.

Have I mentioned I’m doing a 2nd edition of the RESP book? I’m hoping to announce something on this in the next couple of weeks.

On with the links

A fantastic post about market volatility and how to deal with it. At the Bogle Heads forum.

Barrie McKenna had a great article about taxation levels in the US and how they have plenty of capacity to raise taxes.

Economics of Contempt wrote a scathing article on the compentency of S&P raters, or the lack thereof. Entertaining read.

Rob Carrick says that the recent interest rate “hold” in the US means that if you have a secure job and lots of debt, you’ve got it made.

The Boston Globe reports on a very poorly designed lottery that is easy to game. Very interesting story.

The Oblivious Investor addresses recent market activity with risk tolerance in action. I like how he says that “rebalancing isn’t supposed to be easy”. And neither is investing in equities.

MoneyVille had an article about a good hard drive with an easy backup system. I think I’m going to buy one.

Preet Banerjee says that the debt markets disagreed with the S&P downgrade.

My Own Advisor reveals a love affair with his bond ETFs.

Million Dollar Journey lists the top 5 pension myths.

Michael James says that rebalancing can be hard to do, because there is no instant gratification.

Canadian Capitalist thinks that he is above average – and so are you.

Boomer & Echo had some good thoughts about should you make RRSP contributions if you have a DB pension?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-11T20:41:00.001+08:00

Money Smarts Blog

Sunk Costs And The $900 Plane Ticket

Posted: 11 Aug 2011 02:00 AM PDT

JD from Get Rich Slowly recently talked about a decision he made to cancel a trip to England. He had a $900 plane ticket which was non-refundable, non-transferable, non-everything. The $900 was gone.

In his post, he makes the argument that the $900 he spent on the ticket was a sunk cost since he couldn’t get it back.

With respect to Jd’s argument, I don’t think the $900 was really a sunk cost. Yes, the money was gone and he couldn’t get it back, but he could still use the service that the $900 paid for. By deciding not to go, he was giving up a plane flight worth $900.

Whether you give up $900 cash or give up an item worth $900, in my mind it’s the same thing. Since he could have still taken the $900 flight at the time he made his decision, it wasn’t a sunk cost.

I think of a “sunk cost” in the context of money that was spent on something and now you have a decision about a course of action which will ensure that you can’t get the original money back.

For example, let’s say you have a business that you have invested $50,000 in and it loses $1,000 per month. You’ve given it lots of time and work very hard, but it’s clear that you have to close the business.

It would be very tempting to say “but I put $50k into it, I can’t close it down since I’ll never get that back”. However, you have to turn it around and ask yourself – would I buy this business for $1 which requires 50 hour weeks and loses $1,000 per month? If the answer is no, then the business should be shut down. Note that the original $50,000 was not part of that analysis because it is a sunk cost and is irrelevant to the decision.

Similarily, maybe someone buys a stock at $100 and it drops to $50. Some people won’t be able to sell that stock at $50 or anything less than $100, because that decision will ensure they won’t get their original money back. Again, the proper analysis is to decide if that stock would be worth buying at $50 – if yes, then keep it, otherwise sell it. The difference in value between the current stock price and the original stock price is a sunk cost and is irrelevant.

In JD’s case, he paid $900 for a plane ride. When he decided to give up the trip, he can argue that the $900 was gone and is a sunk cost, but I would argue that he still had the option of getting on the plane (a $900 value) and therefore it is not a sunk cost. Or at least not a very good example of it.

What do you think? Was JD on the money when he used the “sunk cost” argument? Is my argument “sunk”?

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Money Smarts Blog

2011-08-09T20:10:00.001+08:00

Money Smarts Blog

Another Bad Day In The Stock Markets, But Don’t Sell

Posted: 08 Aug 2011 02:46 PM PDT

Another big drop in the markets today. The TSX fell a bit more than four percent and the American S&P500 dropped almost seven percent today. I’ll admit I wasn’t too upset that my “flat” prediction I made after the S&P downgraded U.S. government debt was very wrong, since I was able to do some more buying.

Today’s market drops were bigger than last Thursday and add on to what has been a couple of very bad weeks in the market.

It might be tempting to bail out of the markets if you are nervous about your investments, but that would be a mistake.

Stay the course.

Don’t sell anything and keep on making your regular contributions.

Here is an excellent, easy to read post on market volatility and how your asset allocation should reflect your risk tolerance. Thanks to Mike @ Oblivious Investor for pointing out that post.

Here is a post I wrote back in 2008 about how to handle market volatility which still holds true today.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-07T20:21:00.001+08:00

Money Smarts Blog

S&P Downgrade Of US Government Debt Was A Mistake

Posted: 06 Aug 2011 06:08 PM PDT

The big news this weekend in investing circles was the announcement that Standard & Poor has lowered the US Government Debt rating from AAA to AA. This is the first time in 70 years that US debt hasn’t been rated triple-A. The other two major rating agencies Fitch and Moody’s kept their rating at AAA.

The United States has some economic problems, but there is no danger of it defaulting on its debt. Even if the recent “debt ceiling” debacle hadn’t been resolved, it is extremely unlikely that any interest payments on U.S. debt would have been missed.

The reasons why U.S. debt is safe is because they still have the largest economy in the world and they have plenty of capacity to raise taxes. Not only is the U.S. not broke, they aren’t anywhere near close to being broke.

Part of the reason given for the downgrade was that recent debt ceiling agreement will not reduce the deficit enough over the next decade to satisfy S&P. The problem with this logic is that S&P is extrapolating current events fairly far in the future and concluding that things won’t get better. The U.S. might not be going in the right direction in terms of finances, but there is plenty of time for the American government to turn things around, especially if they can raise taxes. Can the Americans get to the point where their debt ratings should be downgraded? Absolutely – but they just aren’t there yet.

Will the markets crash on Monday because of the downgrade?

I’m hoping so – only because I’m looking to make some equity purchases and lower prices would please me greatly. However, I doubt the downgrade will affect the market significantly. The reality is that whatever is good or bad about the U.S. government’s finances will be the same on Monday as it was on Friday. The downgrade won’t change very much. In theory, it’s possible that government borrowing rates will increase, but that is not certain. If U.S. treasuries remain as a “safe haven”, borrowing costs will not increase at all. The reality is that there aren’t many other “safe haven” options for large investors.

On the other hand, the stock markets have been trending down lately (especially on Thursday), so perhaps the downgrade will set off a stampede for the exits.

I’m predicting a flat U.S. stock market on Monday. Please note that I’ve assigned a probability of 51% success for that prediction.

What’s your prediction for the Monday stock trading session?

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Money Smarts Blog

2011-08-05T20:11:00.001+08:00

Money Smarts Blog

LinkStuff – A Great Day In The Markets Edition

Posted: 04 Aug 2011 06:36 PM PDT

I’ve been negligent with my portfolio rebalancing this year and have way too much cash in my accounts. Although I don’t think I can time the markets, I am loathe to buy equities after they have gone up a lot.

Today – I finally pulled the trigger on some ETFs for my couch potato portfolio. The markets have been in a slump lately and today was just a great time to do some buying.

I purchased:

XIU (iShares Canadian large cap ETF) at $17.70
VEA (Vanguard Europe & Asia equity index ETF) at $34.12
VTI (Vanguard US equity index ETF) at $62.37

These ETFs are all lower than the beginning of the year and well off their recent highs.

I still have a lot more cash to get rid of, so I’m hoping the markets will fall even further.

On with the links

The Wealthy Canadian wrote about opening an RESP account for his little boy. He also said some nice words about my book.

In Japan, they have subway employees who’s job it is to push people into the trains. I had heard of this, but I just couldn’t believe this YouTube video – they really know how to jam people into subway cars in Japan.

The Oblivious Investor had some very good advice in asset allocation – set to your maximum loss.

The Steadyhand blog is doing a financial profile on a guy named Bruce. I love financial profiles and the fact that this Bruce fellow sounds a lot like me, makes this one all the more interesting.

Michael James thinks that most active stock pickers are working for a negative wage.

Michael’s post reminded me of a post I did called Do you really “earn” your investment income. It’s easy to think you are making money in an up market, but you have to compare your performance to that of a passive strategy. Even if you can beat the market, is it worthwhile to do so unless you have a large portfolio?

Boomer & Echo has some interesting stories about dealing with elderly parents.

Canadian Capitalist doesn’t mind if you mash couch potatoes. But he demands a reasonable alternative.

Today’s Economy blog has some followup discussion on the great debt ceiling debate.

Million Dollar Journey talks about little known Canadian benefit programs.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-08-04T20:25:00.001+08:00

Money Smarts Blog

Why Rebalance Your Portfolio Asset Allocation?

Posted: 03 Aug 2011 11:33 AM PDT

The Canadian Capitalist recently wrote about couch potato investing and Sampson left some interesting comments about rebalancing and passive investors.

Here are a few thoughts I have about portfolio rebalancing:

1) The main reason I rebalance is to maintain a consistent risk level in my portfolio. For example if I decide I want a portfolio made up of 60% equities and 40% bonds and then after a couple of years, the portfolio is 70% equities and 30% bonds, my portfolio is now riskier than I planned and I will want to rebalance back to 60% equities and 40% bonds.

2) Asset allocation is not something that just couch potato investors do – every investor has an asset allocation and likely rebalances. Of course if you have 100% equities, your asset allocation never changes, so no rebalancing is required.

3) I’m not a believer that rebalancing (in any form) will increase returns significantly or at all. It really depends on the market activity and an assumption that asset classes will “revert” to the mean. In some markets it will help – in other markets it will hinder.

4) Rebalancing assumes that your different asset classes are not correlated. In my case, I use a short term bond ETF for my fixed income – I’m fairly certain that short term Canadian bonds are not very correlated with various world equities. Even if they were, my asset allocation would never change much and I would have no need to rebalance.

5) Rebalancing can take many forms including tactical asset allocation. The reason a lot of people like to use a specific rebalancing rule is because it makes things easier. I don’t have a firm rebalancing rule, but I will try to check my portfolio once a year and if the allocations are significantly out of what, I’ll rebalance.

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Money Smarts Blog

2011-08-02T20:22:00.001+08:00

Money Smarts Blog

How To Lower Your Mortgage Interest Rate Without Paying Any Penalties

Posted: 02 Aug 2011 02:00 AM PDT

One of the many challenges of owning your own home is the decision between a variable rate mortgage or locking in for a longer term. Currently, the variable rates (2.2%) are significantly lower than the 5-year fixed rates (3.8%), so going variable is very tempting.

But what if interest rates shoot up? Then the fixed option might end up being cheaper. It’s a tough decision without a crystal ball available.

When my wife & I renewed our mortgage almost four years ago, we decided to get a 5-year fixed rate mortgage with an interest rate of 5.19%. We chose a fixed-rate mortgage so we wouldn’t have to worry about increasing interest rates. At the time, our budget was a bit tight and the last thing we needed was higher mortgage payments.

Of course, interest rates continued to decline after we locked in. While I wasn’t too annoyed since we locked in for a good reason, it was still a bit aggravating to think about how much money we could have saved with a variable mortgage.

Luckily, I came up with a face-saving method to lower the amount of interest we were going to pay by making use of our line of credit, as well as our fixed mortgage prepayment option.

Our home equity line of credit (HELOC)

Along with our fixed mortgage, we also have a home equity line of credit (HELOC) which has an interest rate equal to the prime rate (currently 3.0%).

When I first got the mortgage, I was using the HELOC to borrow money for my Smith Maneuver attempt, which involves borrowing money to invest in the stock market. When I ended the Smith Maneuver in the Fall of 2009, this freed up my HELOC and I could use it for other purposes.

The mortgage prepayment option

Our fixed mortgage has a generous annual prepayment option, which is equal to 20% of the original mortgage value. In our case, that annual prepayment amount was $40,800. This means that we could make lump sum payments against our mortgage principle at any time totalling up to $40,800 per year.

We’ve never come close to using the maximum prepayment amount, since it’s just too much money. But it occurred to me that this large prepayment feature could be used in conjunction with our HELOC to lower our effective interest rate.

The solution – use the HELOC to pay off the fixed mortgage

Every August, when a new “prepayment” year started, we made a $40,800 withdrawal from our HELOC and paid down the fixed mortgage by $40,800.

In the first year, this resulted in converting $40,800 of our 5.19% mortgage to the 3.0% HELOC for a saving of $893 in interest.

In the second year, we moved another $40,800 and saved $1,786. We saved $2,679 in interest over two years.

In our case, our mortgage wasn’t big enough to continue the huge annual pre-payments. We will be doing our last prepayment this August for about $20,000 and that will be the end of our fixed rate mortgage.

However, we will still be saving each year by having all the mortgage in the HELOC instead of the higher fixed mortgage.

Savings are not guaranteed

The way I’ve described this method, makes it sound like easy money right? Not so fast. The only reason we’re saving so much money is because the interest rate on the HELOC is significantly lower than our fixed mortgage rate.

If the HELOC interest rate rises, the interest costs will be higher on the HELOC and our savings will go down. Worst case scenario is that the prime rate goes over 5.19%, at which point we will end up paying a higher interest rate on the HELOC than on the fixed mortgage.

I'm not predicting that interest rates will stay low forever, but I do think that it will take a while for the prime rate to surpass 5.19%.

Why not just break the mortgage?

If you are stuck in a high interest mortgage, there is always the option of breaking the mortgage and getting a lower rate. The problem is that the banks will charge you a fee to make up the lost profit on the terminated mortgage. Ellen Roseman recently wrote an excellent article on these fees called How to reduce the pain when you break a mortgage. Here is another article I wrote which analyzes if it is worthwhile to refinance your mortgage (hint – it probably isn't).

Don’t forget to pay off the HELOC

One of the biggest risks of this plan is forgetting to pay off the HELOC balance once the fixed rate mortgage is gone. Unlike a fixed rate mortgage which has a defined amortization period and requires principle payments along with interest every month, most HELOCs only require a payment large enough to cover the interest.

It is very easy to just make the minimum interest payment each month and enjoy the extra cash in your pocket.

Once your fixed-rate mortgage has been completely converted to the HELOC, you should make total monthly payments equal or larger than the amount you used to pay on your fixed-rate mortgage. This will ensure the HELOC balance will get paid off in a reasonable amount of time.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-07-29T20:15:00.001+08:00

Money Smarts Blog

LinkStuff – Depressing House Edition

Posted: 29 Jul 2011 02:00 AM PDT

One of the links below discusses how expensive houses are. I like my house, but when I think of all the money we have to put into the basement (it’s a complete disaster down there) and a new garage, it is a bit discouraging.

We’re going to be mortgage-free next year and while I had hoped that might open up some different career options, in reality I think the fixes we need to do to the house will just be another form of a mortgage for the next several years. Oh well – as they say on Twitter – #FirstWorldProblems

On a more positive note – I have finished the 2nd edition of The RESP Book. I hired an editor to check for grammar and typos and then I will do the formatting necessary for the printer. So my goal of a September release is still possible.

On with the links

The Wealthy Canadian (a brand new Canadian personal finance blog) breaks down his investment portfolio by sector. Go check it out and subscribe!

My University Money wrote a funny inside look at financial literary programs for high school students. Worth a read.

Scott Ronalds from Steadyhand reviews the ironically named “Manulife Simplicity Balanced Portfolio” fund. Simple it ain’t!

Krystal Yee says that there is nothing wrong with not loving your job. Exactly – that’s why it’s called a “job”.

Michael James explains how you can lose money on a leveraged ETF regardless of how the market performs.

My friend Ruth talks about her Mom who passed away one year ago. A great tribute.

Blunt Bean Counter discusses some of the pros and cons of buying vacation property in the United States.

Canadian Business had a great article about why renting a house is better than buying. I like owning a house, but when I think of all the work involved and the huge sums of money we need to fix up our basement and garage, I have to question why we are doing this.

Financial Uproar makes a great case as to why professional athletes are not overpaid.

Jim Yih wrote a very good article about the new PRPPs and how they should look.

The Oblivious Investor questions whether an emergency fund is essential for everyone. Some good points.

Today’s Economy blog discusses the “Grand Experiment” taking place in a country near you.

Boomer & Echo came up with several ways to save inside your TFSA.

Million Dollar Journey talks about getting pre-approved for a mortgage.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-07-25T20:06:00.000+08:00

Money Smarts Blog

What Are Pooled Registered Pension Plans (PRPP)?

Posted: 25 Jul 2011 02:00 AM PDT

Pooled Registered Pension Plans (PRPP) were first announced by the Conservatives during the last election campaign. As is my custom, I ignored it since most campaign promises never see the light of day after the election.

Now that the Conservatives have a majority government and recently issued more information on PRPPs, I thought it would be worth a quick look to see how the plan works and who can benefit from a PRPP.

What exactly is a Pooled Registered Pension Plan (PRPP)?

A PRPP is a defined contribution pension system offered by third party financial institutions such as banks and insurance companies. The plan administration and fiduciary duty will be the responsibility of the financial institutions. This should make it fairly easy for small to medium sized companies or self-employed workers to set up a PRPP.

The actual investment instruments have not been clarified, but the government has mentioned large “pooled” investment funds with low costs.

Group RRSPs are an option for companies who want to offer a workplace savings plan, but they are a fair bit of work to administer and the employer has the fiduciary duty as well. Group RRSPs are not as practical for smaller companies or the self-employed.

What is the reason behind PRPPs?

The government is proposing PRPPs as a way to “improve the range of retirement savings options for Canadians. Unfortunately, improving the range of options doesn’t necessarily translate into any extra retirement savings.

The goal is to provides access to 3.5 million Canadians who don’t have access any kind of registered pension plan through their workplace (such as a defined benefit pension plan or a group RRSP).

Those people currently have access to RRSPs and TFSAs, but a lot of them are not properly utilizing either account type. Lack of saving discipline and investment knowledge is likely the main reason. It takes a bit of work to get an investment account at a bank or through a financial advisor and some people can’t be bothered.

Since the plans aren’t going to have mandatory contributions, they will basically just level the playing field for employees of smaller companies, so they have easier access to what is essentially a group administered RRSP.

There are some big benefits of a workplace savings plan. Contributions made from payroll deductions are very convenient. The ability to make a contribution from your pay cheque into a registered account without having to pay any withholding tax is also a great feature.

Who will benefit from PRPPs?

Employees who work for a company that does not currently offer any kind of workplace pension saving program will benefit from having access to a PRPP. Even if the employer doesn’t offer a PRPP, employees or self-employed workers can still join one on their own.

Employers that are too small for group RRSPs should be able to offer a PRPP, which might serve as a good recruiting and retention tool.

Employers that currently offer group RRSPs might be interested in switching to a PRPP in order to reduce administration costs and remove their fiduciary duty.

Who won’t benefit from PRPPs?

Employees that have a defined benefit pension plan or an employer-sponsored defined contribution pension plan (such as a group RRSP) won’t have access to a PRPP, which makes sense since they don’t need one.

Anyone who is not currently employed will not benefit from PRPPs.

What kind of investments will be offered through PRPPs?

This part of the new pension plan type is not clear. The government has referred to an “investment pool”. I’m not sure what that refers to. Will there be specific funds run by a private company that any worker can invest in? Will there just be a few big funds that everyone will invest in? Ie Will employees of XYZ Autobody shop will be investing in the same Canadian equity fund that the employees of the local pizza place are investing in? Or can the plan administrator offer any funds/ETFs publicly available?

Hopefully more details will be forthcoming on this issue.

On the PRPP government framework page, it says “lower costs that result from large pooled funds.”

That statements seem pretty naive to me. How exactly will the fees be kept low? Will this be mandated by the government? Economy of scale means nothing – just look at Canada’s largest mutual fund – the $14 billion Investor’s Group Dividend fund for an example of how economy of scale saves money for investors. The MER on that fund is a whopping 2.68% in spite of the massive size of the fund. In this case, all the economy of scale savings are going straight to the Investor’s Group shareholders – not the mutual fund investors.

Will money in a PRPP be locked-in?

According to the PRPP framework, employer contributions will be locked-in – similar to money in a LIRA account. This is really dumb and will add a lot of hassle to the plans. It should be up to the employer to decide on a vesting period for any employer contributions, after which the employee can do whatever they want with the employer contribution money.

Will the PRPP be mandatory for employees?

No, it will be up to the employee to make use of the PRPP. It’s possible that employers might have to auto-enrol every employee, but they can’t force the employee to contribute.

Will the PRPP be mandatory for employers?

It’s up to each province to decide if offering an PRPP will be mandatory for employers.

Will PRPP contributions affect RRSP contribution room?

Contributions to an PRPP are treated like RRSP contributions as far as taxes go. Any employer contributions are also considered contributions. IE If you have $8,000 of RRSP contribution room available for a particular year and your employer contributes $2,000 to an PRPP and you contribute $3,000 to the PRPP – that means you have used up $5,000 of RRSP contribution room.

Summary

These plans will close a gap in workplace pension saving coverage by offering a defined contribution pension plan to workers who don’t currently have access to one. The term “coverage” only refers to giving access to these workplace plans. It doesn’t mean that any employees will use them.

I’m skeptical that PRPPs will make much of a difference, but if this plan is offered with financial advice and the costs are low, it might help some people get started with their retirement savings.

This won’t do anything for the large segment of the population that can’t or won’t save money for their retirement. You can lead a horse to water….

Check out the Canadian discount brokerage fee comparison.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-07-22T20:04:00.001+08:00

Money Smarts Blog

LinkStuff – Tour de France Edition

Posted: 22 Jul 2011 02:00 AM PDT

I’ve been having trouble finding time for posting lately – work, holidays, exercise, and the Tour de France have all been taking up a lot of my time.

The good news is that I’ve been exercising a ton and I feel like I’m getting into decent shape. This morning I weighed in at 174.5 pounds which is probably a 15 year low.

On with the links

Krystal Yee from GMBMFB, put up some photos of herself wearing braces. If you’ve ever wondered what she looks like and how she got onto the vaunted Hot Personal Finance Blogger Chicks list, now you can find out. I don’t want to say too much (since my wife reads the blog), but I would definitely recommend that the guys go and check out her braces.

Canadian Couch Potato wrote about his experience with the Scotia iTrade US$-friendly RRSP. This option is not as good as a proper US$ RRSP which is available at Questrade, Qtrade and RBC, but it’s a reasonable workaround for high currency exchange fees.

Michael James had an interesting article on irrational risk avoidance.

Retire Happy put together a great list of questions to ask potential financial advisors before you hire them.

Million Dollar Journey talks about estate planning.

The Oblivious Investor says that risk means different things to different people.

Boomer & Echo says it’s time to check up on your employer sponsored pension plan.

Today’s Economy blog says We’re not frugal, just tired.

The amazing Preet Banerjee reveals that market research is sometimes just spin.

Canadian Capitalist wrote about John Bogle’s estimate of the behaviour gap. I’m always skeptical of these estimates. I’d like to know the methodology behind the numbers.

Larry Swedroe asks if Meredith Whitney could have been more wrong? She made a prediction that the American municipal bond market would collapse and so far – it hasn’t.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-07-21T20:17:00.001+08:00

Money Smarts Blog

Camping With Young Kids – Frugal Folly?

Posted: 21 Jul 2011 02:00 AM PDT

My wife & I have two young kids, age three and four. One family activity we’d like to get into is camping. As in sleeping in a tent, campfire, cook your own food on a Coleman camping.

Camping is much more affordable than staying in hotels and eating in restaurants. That said, camping isn’t necessarily all that cheap. We were fortunate to get most of our camping gear as hand-me-downs, but we are still buying a few items. If you have to buy all the equipment new, it would be fairly expensive. Camping site fees are not that cheap either.

Last fall, we went camping one night at Darlington (a bit east of Toronto) as an “experiment” just to see what it would be like with the kids. It was close enough that if things went too far downhill, we could easily bail and go home. As it turns out, it was a lot of fun.

So far this year, we camped one night at Glen Rouge, which is right inside Toronto (Kingston Road at the border of Scarborough and Pickering) and will be doing a weekend trip to Awenda (two hours from Toronto) in August. I wasn’t that impressed by Glen Rouge and would rather drive the extra 20 minutes to Darlington in the future.

I had hoped to go camping more frequently this summer, but after the Glen Rouge trip, it was apparent that maybe we aren’t ready for regular camping trips.

The kids had fun, but just because they are having fun doesn’t mean they were well behaved. Camping is a lot of work – you have to bring the shelter, food, cooking utensils and doing everything yourself. Having everyone in close quarters can take a bit of getting used to. Add a couple of young kids to the mixture and it can be quite a challenge.

I’m hopeful that as the kids get a bit older, it will be a bit easier to do a proper camping trip and we can go more often.

In the meantime, one option is to just do day trips to local parks. This doesn’t work that well for Toronto, but we were recently in Northern Ontario and spent part of a day at Fairbanks Provincial Park . It is a beautiful park and has a great beach which is perfect for swimming. There are canoes you can borrow and a few trails to explore. We checked out the campsites and there are a lot of nice private sites.

If you can do a day trip to a park, then you get enjoy some of the good things about camping, but there is a lot less hassle.

Have you tried camping with young kids? Was it fun or a disaster? Got any tips for me?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-07-15T20:29:00.001+08:00

Money Smarts Blog

LinkStuff – MoneySense And Sick On Holidays Edition

Posted: 14 Jul 2011 05:28 PM PDT

I’ve been on holiday this week and my best intentions of doing a second (and better) post this week as well as making some progress on the RESP book 2nd edition were thwarted by an illness. Oh well. I’m feeling better now and the holiday is not over, so hopefully I can salvage something.

MoneySense

I was quoted in the latest MoneySense edition in the “Ask MoneySense” section. The question had to do with where to put RESP over-contributions – into the RESP or a TFSA? It’s a great issue with lots of good retirement scenarios, so I would suggest picking it up.

On with the links

My University Money reviews the Wealthy Barber. I read this book ages ago and thought it was good as well. I talked on the phone with Mr. Chilton a while ago and he’s a pretty good guy.

Boomer and Echo interviewed the author of “The Big Cook“. The idea is to do batch cooking once a month or less. Sounds good to me! Head over to the post for a chance to enter in the contest.

Michael James has an interesting retirement living strategy that his wife is not so keen on.

Million Dollar Journey had enough of his Rogers cell phone.

Canadian Capitalist reports that TD Waterhouse is not allowing any asset swaps in RRSP accounts, even though most are still legal. I don’t blame TD for doing this, although they should be honest about why they are discontinuing swaps.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-07-11T20:07:00.001+08:00

Money Smarts Blog

Canadian Discount Brokerages – Phone Call Time Comparison

Posted: 11 Jul 2011 02:00 AM PDT

I’ve been spending some time recently updating the Canadian discount brokerage comparison which contains lots of information about all the Canadian discount brokerages.

I decided to re-test the average wait time (when phoning) to make sure the shortcuts were up to date as well as the wait times. I thought it would be interesting to share the results here as well as look at the biggest improvements and declines.

My method is fairly unscientific (described in the last paragraph of this post) and doesn’t cover all aspects of customer service, but I think for people who are concerned with wait times when calling their broker – it might give them some idea of how the brokers compare.

Brokerages ranked by wait time

Not surprisingly, the smaller independent brokerages that scored well on wait times last year also did well this year. The main reason for this is that the bank owned brokerages have a lot more messages and more extensive phone trees.

Qtrade and Options Express which have the shortest wait times, only make you listen to a short message and no phone tree. CIBC on the other hand wins the “worst wait time” award, mainly because of the ads, messages, and lengthy phone tree which took me one minute and 46 seconds to get through. When I used the phone short cuts (available on the brokerage comparison), it took a more reasonable 25 seconds to get through.

Brokerage wait time comparison:

Broker	Avg Wait Time (sec)
Qtrade	12
Options Express	14
Virtual Brokers	21
Credential Direct	26
Jitney Trade	38
HSBC	43
ShareOwner	43
Questrade	51
BMO	53
TDW	58
RBC	63
Scotia	68
National Bank	84
IB	85
Disnat	95
CIBC IE	107

Biggest changes from last year

None of the brokers did appreciably worse than last year, but on the improvement side – there were a number of brokers that answered the phone much faster.

Questrade was the big winner in this category. Last year they had one of the longest wait times of 168 seconds. This time they were a more respectable 51 seconds. Interactive Brokers, ShareOwner and Disnat also made some significant improvements.

Wait time improvements from last year:

Broker	Avg Wait Time (sec)	Last year	Improvement
Questrade	51	219	168
IB	85	224	139
ShareOwner	43	151	108
Disnat	95	182	87
HSBC	43	86	43
CIBC IE	107	147	40
Qtrade	12	19	7
Options Express	14	19	5
TDW	58	63	5
Jitney Trade	38	39	1
Credential Direct	26	27	1
RBC	63	63	0
Virtual Brokers	21	20	-1
BMO	53	44	-9
National Bank	84	64	-20
Scotia	68	47	-21

Phone call wait time methodology

The wait time was measured from after I finished dialing to when a customer service rep started talking. The automated message system was quite time consuming in some cases, which is why if you use the key prompt shortcuts, your actual wait times should be much less. The wait time averages were based on a minimum of five phone calls made on business days between the hours of 9:30 am and 4:00 pm.

It should be noted that I did not use any of the automated message system shortcuts to save time – I wanted to replicate the experience of someone who wasn't familiar with the automated message system.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-07-08T20:33:00.001+08:00

Money Smarts Blog

LinkStuff – Free Dividend Investing Book Edition

Posted: 07 Jul 2011 04:03 PM PDT

Mike from the Financial Blogger has written an ebook about dividend investing. It’s a pretty good resource which explains why dividend investing is a good idea, how to select stocks and how to get started with the whole process.

I might consider a book on the same topic in the future, but I can tell you that my price will be much higher than Mike’s. For some reason unknown to me, he has chosen to GIVE this book away.

I guess he is just a nice guy.

You can download the book for free from this dividend investing page.

On with the links

I found this article about a program that download your Facebook page into Excel pretty funny. The idea is that you could be sitting in your cubicle looking like you are working hard on a spreadsheet, when in fact you are just getting your Facebook fix.

Preet wrote a great article about Home renovation rationalization: investment or self-gratification. A must read!

Canadian Capitalist says that a blanket ban on RRSP swaps is a bad idea.

Boomer & Echo asks are rewards cards costing you money? Not me.

Michael James came up with a fun mortgage solution – make them like car loans.

Million Dollar Journey covered some benefit programs for people with disabilities.

The Oblivious Investor answers the question Should you own stocks in retirement?

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-07-04T20:39:00.001+08:00

Money Smarts Blog

2011 Top Stock Pick Contest – 2nd Quarter Standings

Posted: 03 Jul 2011 06:12 PM PDT

Time once again to update the big stock picking contest. The great news is that I’m not in last place!

My specific pick was to short the gold ETF CGL.

What is CGL you ask? It is the Claymore Gold Bullion ETF which trades on the TSX and only invests in gold.

Rank	Site	YTD Return (%)
1	Dividend Growth Investor	6.4
2	Intelligent Speculator	4.1
3	Million Dollar Journey	2.5
4	My Traders Journal	0.8
5	Beating The Index	0.5
6	Where Does All My Money Go	-3.4
7	Money Smarts Blog	-5.7
8	The Financial Blogger	-7.6
9	The Wild Investor	-12.4

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-07-01T20:43:00.001+08:00

Money Smarts Blog

LinkStuff – Canada Day And Lost Cheque Edition

Posted: 30 Jun 2011 05:49 AM PDT

Happy Canada Day for those of you who are Canadian.

I was doing some unpacking last week and I found a bunch of unopened mail and various other documents. I haven’t moved lately, but I still had a box or two of junk to go through from my 2nd last move (six years ago).

Anyway, I found an old birthday card from my Mom. She always gives me $100 for a birthday present. The card was opened, but the cheque was still in the card. Unfortunately the banks don’t take cheques dated from 2004. Luckily she was visiting at the time and give me $100. No mention of any accrued interest however.

On with the links

The Oblivious Investor says that portfolio perfection is not an achievable goal.

Sustainable Personal Finance details their financial plan for the future.

Million Dollar Journey covered some key stock ratios.

Retire Happy blog says that free financial consultations are not such a great deal.

Canadian Capitalist says that covered calls are not that great.

Boomer & Echo reveals their dark side with 4 sinful stocks to own.

Michael James calculates that currency exchange costs are far more significant than trading commissions.

The RESP Book - The simple guide to RESPs

Money Smarts Blog

2011-06-28T20:29:00.001+08:00

Money Smarts Blog

How To Buy An ETF Or Stock Using A Canadian Discount Brokerage

Posted: 28 Jun 2011 02:00 AM PDT

Most Canadians do their investing with banks or financial advisors. When they want to invest in equities, typically mutual funds are used.

Whether they are high priced or low priced, mutual funds are pretty easy to buy. You just tell your advisor which funds to buy and hand a cheque over. Even if you are a do-it-yourself investor, it’s still easy to buy mutual funds.

Buying individual stocks or ETFs (exchange traded funds) at a discount brokerage is an entirely different experience. YOU have to set up the account, YOU have to transfer money to the account and YOU have to make the actual purchase.

It can be a bit intimidating to place a order with a discount brokerage for the first time. It’s not rocket science, but there are some things to know which will make it a lot easier.

Note – This article will not cover asset allocation or how to decide which ETF or stock to buy. This article will be useful if you already know what stock or ETF you want to buy, but aren’t sure exactly how to go about making it happen. It might also convince you to stick with mutual funds.

General steps:

Pick a discount brokerage. Here is my Canadian discount brokerage comparison for reference. There are a lot of different costs involved when choosing a brokerage, so make sure you understand what type of investor you will be and how big your portfolio is. You can save quite a bit of money if you pick a brokerage that suits your investment style and portfolio size.

Set up the account. This is the most painful part of the process. You have to fill out documents, mail them in, set up logins etc. It takes a while, but you only have to do it once.

Fund the account. You can’t buy anything if there isn’t any money in your account. Send a cheque, move money electronically or transfer existing stocks or ETFs from another investment account. You have to move money into the investment account where you wish to make a purchase. For example if you have an RRSP and TFSA account at a discount brokerage and you want to make a purchase in the RRSP account – move the cash into the RRSP account. I have bill payments set up for my Questrade accounts and I just have to make a payment to move money from my CIBC chequeing account.

Decide what to buy. It’s out of scope for this article, but you should have some idea of what kind of asset allocation you want, then decide which securities you want to buy.

Buy a stock or ETF. This is the topic which will be detailed here. I’ll be using the interface at Questrade discount brokerage to demonstrate how to make a trade, but whatever brokerage you use should have something similar. If you notice differences with your brokerage, please let me know and I’ll add that information to this article.

Here are the steps to buy a stock or ETF”

1) Know what security you want to buy and how much.

I’m assuming at this point, you already know what stock or ETF you want to buy. Five per cent of my portfolio is made up of real return bonds. For this allocation, I use the iShares real return ETF. I need to purchase approximately $1886 for rebalancing purposes. This will be the ETF I’m going to use for this article.

2) Find out the stock ticker symbol for the security

Every security that trades on a stock exchange will have a stock ticker symbol. This symbol will be needed to make the purchase.

There are a number of ways to find out the ticker symbol. In my case, I can go to the iShares.ca website and look it up. The ticker symbol in this case is “XRB”. Another method is to type in the name of the security into a quote site like Yahoo Finance. If I type in “iShares real return bond”, it returns the symbol “XRB.TO”.

Hmmm…so why does the iShares site say the ticker symbol is “XRB” and Yahoo says it’s “XRB.TO”? The answer is that they are both right. “XRB” is the basic symbol, but “.TO” is the extension which indicates which exchange the security trades on.

3) Find out which exchange the security trades on

There are different stock exchanges in different countries and the security you want to purchase will be traded on one or more exchanges.
If the security you wish to purchase is Canadian, it will likely be traded on the TSX (Toronto stock exchange) and you have to select that stock exchange when making the order. In the case of Questrade, you don’t select the exchange – you just include the “.TO” extension for any trades. If the security is American (such as a Vanguard ETF), you don’t need an extension – just enter the basic ticker symbol (ie VTI for the Vanguard total American stock ETF).

In my case, the iShares real return bond ETF has a ticker symbol XRB and trades on the Toronto stock exchange. I need to use “XRB.TO” when attempting any trading of this security with Questrade.

Note that other discount brokerages have their own methods of notating the exchange.

Questrade – For TSX stocks, use the suffix “.TO” ie XRB.TO, for NYSE – use basic symbol ie XRB.
RBC Direct and TD Waterhouse – Choose the desired exchange and then enter the basic symbol ie XRB.
Interactive Brokers – Enter basic symbol and choose the appropriate choice from the list. Ie enter “RY” and you will see a list of exchanges.

4) Determine the currency of the security

Basically if the security trades on the Toronto stock exchange, it will be in Canadian dollars and if it’s on the New York stock exchange, it will be in US dollars.

At Questrade, if you have a registered account or a non-registered account that is not margin-eligible, you can either convert money to the proper currency before placing the order or the brokerage will convert money for you if there isn’t enough of the required currency.
If you have a non-registered margin account, Questrade will draw into margin to fund any shortfall, they won’t convert any other currency to fund the order.

Check what options are available for currency conversion at your brokerage.

Once I calculate how much money I need for a purchase, I like to convert any money necessary to make sure that there is enough of the proper currency to cover the purchase.

5) Find the security price and calculate how many shares you can buy

Unlike mutual funds which can be purchased in partial units, stocks and ETFs can only be purchased in whole shares. This means you probably can’t buy the exact dollar amount you planned, but will only be able to purchase a lessor amount with some cash left over.

When I enter XRB.TO, I find out that the last trade was $23.12. I want to buy $1886 of XRB or as close to that amount as possible to complete my rebalancing process. To calculate how many shares I can buy, I have to divide the desired purchase amount by the share price and then drop any decimals.

$1886 (desired purchase amount) / $23.12 (share price) = 81.57439 shares. I drop all the decimals and I’m left with 81 whole shares which will cost $1,872.72 at a share price of $23,12.

If you have enough money in the account to cover, you also have the option of rounding up the number of shares to 82 shares.

Don’t forget to make sure you have enough cash to cover the trading commission when buying. The trading commission will be deducted from your cash in the account.

At this point I have the:

Stock ticker symbol – XRB.TO
Number of shares to buy – 81
Approximate share price – $23.12
Enough cash in the proper currency in my account – $1886 of Canadian bucks.

Now I know exactly what I’m buying and how many shares. I’m still not ready to place a trade, because there a few more things to cover.

6) Market order vs limit order

When placing a purchase order, you can indicate that it be placed as a “market” order or a “limit” order.

A market order means you don’t put any conditions on the price of your order. Once you place the order, the purchase will get completed (or filled) as soon as enough shares are offered on the exchange. For larger companies and high volume ETFs, this will happen instantly.

A limit order means you specify an upper limit for the price of the shares. For example my future XRB shares are trading at $23.12. If I put a purchase order with a limit of $23.05, the order won’t get filled until the market goes down a bit and someone accepts an offer of $23.05 for their XRB shares.

On the other hand, I might place a purchase order with a limit higher than the current market price – say $23.30. The reason I would do this is to avoid the possibility that trading is light and you end up buying shares at a rate above the market. This is practically impossible if you stick to liquid, high volume stocks that have many shares trading at any given time. Note that in this case, your order will still be traded at “market” as long as your limit is above the market price. So putting a limit of $23.30 does not mean I’m offering to pay $23.30 for XRB shares. It just means I won’t pay more than $23.30 for the shares.

I would strongly urge that you don’t place orders when the exchange is closed, unless you put a limit on the order.

7) Log into your discount brokerage account

Before I enter the order, I want to make sure I have enough Canadian dollars to fill the order. Check with your brokerage to find out what happens if you make a purchase without enough cash in that currency.

To check my Canadian cash balance, I click on the YOUR ACCOUNT tab and then “Balances”

I recently converted a lot of Canadian dollars to US dollars, so I don’t have enough for the trade. No worries, I’ll do the trade anyway and Questrade will automatically convert the proper amount of US$ to fund the order. At Questrade, this currency conversion costs 0.5% in a registered account, so you don’t want to be converting more than necessary. Other brokerages typically charge around 1.5% for currency exchange costs.

Now I choose “QUICK ORDER ENTRY”. The form on the right hand side is used to enter an order.

I’m going to break up my purchase order, so I can show one purchase with a market order and one with a limit order.

How to enter a market order

For my market order purchase I’ll fill in the fields like so:

Symbol = XRB.TO
Quantity = 41
Transaction = Buy
Order Type = Market
Duration = Day*
Preferred ECN = AUTO

*Duration – “Day” means that the order will only exist until the end of the trading day. If it is unfilled at that time, then it disappears.

Market purchase order

The next step is to verify the share price by clicking on the QUOTE button at the bottom of the form.

Now we see a pile of new information on the quote screen.

Quote feature

The main info I’m interested in is the Last Price which is $23.12. This hasn’t changed since I did my original share calculations.

Next step is to click on PREVIEW ORDER

Preview order

This is your last chance to verify the order information. Everything looks good, so now I will click on “SEND ORDER”.

The order was filled (or executed) instantaneously at $23.12.

Order was completed.

If I want to review the order details, I can go back to my main account page and check the “View Messages” and “Detail”.

Order details

From this I can see the commission ($4.95) and the trade total of $929.75 which represents the share cost and commission.

Some brokerages (including Questrade) add another fee to the commission called ECN fees. They are fairly small, but if you are doing high volume trades, it can be a factor.

When I look at the execution detail after the business close, I see there is an ECN value which has been charged as well. The ECN costs at Questrade are $0.0035 per share for XRB. My 41 share trade has an ECN fee is 14.35 cents which brings my total cost to $5.10.

ECN fees

How to enter a limit order

Most of the steps for a limit order are the same as for a market order.

Start with “QUICK ORDER ENTRY”. The form on the right hand side is the how you enter an order.

The key difference with a limit purchase is that I will be specifying a price which represents the highest price I’m willing to pay for the stock. In the case of XRB, the current market price is $23.12. If I select a limit that is higher than $23.12, the order will likely get filled at market (just like my market order) and the limit will just be there for protection.

Another strategy is to put a limit price that is lower than the current market price and hope that the market drops and you can buy at a lower price. In this case you will have a pending order which can be cancelled. This is a good scenario for using the “GTC” or good till cancel order type so that the order doesn’t get cancelled at the end of the day.

I like to select a limit price that is just above the market price – perhaps 1 or 2% higher. In this case I’ll try setting the limit at $23.20 which is just above the market price of $23.12. If the stock is more volatile you might have to set a higher limit because the stock could jump past the limit before you place your order.

It’s not a bad idea to monitor the price movements of a stock for a little while to get a feel for the volatility. You want to set the limit high enough about the regular price points in order for the order to get filled quickly. For example if you check the price of a stock every 60 seconds and see the following: $23.12, $23.09, $23.14, that stock price is not moving around much and you can probably set a price of $23.20 or $23.30 and be fairly assured it will be filled.

For my limit order purchase I’ll fill in the fields like so:

Symbol = XRB.TO
Quantity = 41
Limit Price = $23.20 Note, you have to select the order type of “Limit” before this field becomes active.
Transaction = Buy
Order Type = Limit
Duration = Day
Preferred ECN = AUTO

Limit purchase order

The next step is to verify the share price by clicking on the QUOTE button at the bottom of the form.

Now we see a pile of new information on the quote screen.

Quote

I can see that the last price for XRB has dropped from $23.12 to $23.05.

Next step is to click on PREVIEW ORDER

Preview limit order

This is your last chance to verify the order information. Every looks good, so now I will click on “SEND ORDER”.

The order was filled (or executed) instantaneously at $23.09.

Limit order completed

From this I can see the commission ($4.95) and the trade total of $951.64 which represents the share cost and commission.

Some suggestions

It is a bit stressful to be doing your first trade with a lot of money – I suggest starting off with a small trade or two just to get familiar with the process. Yes, you will be burning a couple of commissions, but trust me – it’s worth it.

Another option is just to use cheap index funds – they are a heck of a lot easier!

Please let me know if you have anything to add to this information based on your experience with different brokerages.

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2011-06-24T20:22:00.001+08:00

Money Smarts Blog

LinkStuff – Sub-180 Edition

Posted: 23 Jun 2011 08:17 PM PDT

I’ve managed to meet my weight goal of staying under 180 pounds for the last three weeks. I’ve always been able to lose weight quite easily, but keeping it off is the hard part.

I am determined to keep going with this lighter weight!

On with the links

Financial Uproar had a great post about the fact that he’s not a dividend or anti-dividend investor. He just wants to own best stocks. Oh, and you can find out what he looks like here.

Glenn Cooke from InsureCan has a great primer on disability insurance plans. I need to look into my plan.

The New York Times talks about the annuity puzzle where people who should buy annuities – don’t.

Boomer & Echo shows how to add gold to your portfolio.

My Own Advisor took some notes from his meeting with investment guru Larry Swedroe.

Canadian Capitalist says that Burt Malkiel gives contradictory advice. Malkiel wrote “Random Walk Down Wall Street” which is one of the couch potato bibles.

Today’s Economy wrote about buying an expensive house and losing his frugality. He also had a great tip about using mulch to help with emergency landscaping. I’ve done that in the past.

I always thought of the CRA as this jolly, benevolent sort who lives near the North Pole. According to the Blunt Bean Counter, that is not the case: report all your income!

The Oblivious Investor explains why he doesn’t overweight small-cap or value stocks, even though the empirical evidence suggests it might be a good idea.

Michael James says that sticking to your investment plan is more important than having the perfect plan. Couldn’t agree more.

Tamara Baluja of the Globe & Mail says that Canadians are more in debt than Americans with a debt-to-disposable income of 147%. I’m not sure what their definition of disposable income is but 147% doesn’t sound that bad, since it includes mortgages.

Million Dollar Journey covered some major stock market indices. A very good primer.

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Better Investment Fee And Performance Disclosure Might Help

Posted: 23 Jun 2011 07:25 AM PDT

Rob Carrick wrote about breaking the seal on the information vacuum where he covers recent proposals by the OSC and other regulators to force investment companies to disclose more information to investors. Mr. Carrick says that as a result of these changes “Things are going to be a lot different around here”.

The financial information that investors will start to see on their statements are:

Annual summary of all fees and commissions paid in the account in dollars, not as a percentage.
Annual investment performance.

While, I think these change are a great idea, I don’t think this will make much of a difference for most investors. This is not a Neo eats the red pill kind of breakthrough.

There are a number of reasons why I don’t think the information will help many investors.

Most Canadian investors are clueless

It’s my opinion that most investors fit the following profile:

They don’t read investment statements. Any statements received in the mail are quickly tossed, electronic statements go unread. It doesn’t matter what information is in an unread statement.
They don’t want to know about fees. It’s a chore for most Canadians to save money to invest and actually buy some investments. As long as their account balance is increasing, they are happy.
They think fees are irrelevant. Most investors buy actively-managed funds to beat the market. Who cares what fees are being charged if you have a great fund manager?

Fee and performance information won’t have enough context

With the new proposals, investors will see how many dollars they are paying for their investments and their advisor. The problem is that this information is really only useful if you can compare that figure to fees charged by other options such as other mutual funds or different investment products or even a do-it-yourself solution.

The services received by the investor has to be considered. If an investor with $100,000 is paying $2,000 per year in fees – is that too much for the investment management and financial planning (if any) they are getting? The investor would have to be aware of the various alternatives and their costs in order to make an informed decision.

Investment performance numbers are only useful in the context of the investor’s financial plan. Will the performance numbers be measured against an appropriate index? Annual performance figures are good, but the long term numbers are what really matter. I’m assuming that a good advisor will work with the investor to help them understand all this, but that won’t always be the case.

Hide the figures with bafflegab

The best way to hide information is to withhold it. As Mr. Carrick noted, Canadian investment companies are very adept at this strategy.

The next best way to hide information is to provide it in such great detail that nobody reads it. If I’m an investment company with over-priced, underperforming products I would implement these proposals in such a way that the current two page quarterly report will balloon to 12 pages of mind-numbing columns of numbers.

Conclusion

For an investor to truly appreciate the fees they are paying and make an informed decision on the value of those fees, they have to evaluate a lot of information. This information can only be gained by education – a quarterly or annual statement is just not going to do the job. It’s up the investor to educate themselves and most won’t do it – even if you hit them over the head with the proper information.

Home Refinance

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Most beautiful post

Most popular post

Most controversial post

Most helpful post

Post who's success surprised you

A post that didn't get the attention it deserved

Post that I am most proud of

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On with the links

Carnivals

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The roaming data plan I bought

Use WIFI to save roaming charges

Summary

The journey to the answer

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On with the links

Carnivals

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Real estate market drops 25%

Real estate market increases 25%

Which scenario is better?

More real estate articles

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On with the links

A few more links

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A better way to calculate your home maintenance costs

Let’s do this exercise for my house

Conclusion

Some more thoughts

Problems with using percentage of home value estimates with examples

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On with the links

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Conclusion

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Fee-only advisors are not perfect

How to find an advisor – resources

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The Globe & Mail

On with the links

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Why I didn’t have an emergency fund before

Why I now have an emergency fund

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Who should buy this e-book

Who should not buy this e-book

How do I buy this e-book?

Can I read this e-book without an e-reader?

If you want to open an RESP account or have recently started one or you would prefer a regular print book

How big is the e-book?

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On with the links

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