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Nelson Smith

Freelance writer. Contrarian investor. Watcher of baseball. Owner of financialuproar.com. At least my mom thinks I'm funny and/or handsome.

Apr 172015
 
"This old thing? Oh, I only keep it around because it gets good gas milage."

“This old thing? Oh, I only keep it around because it gets good gas milage.”

If we got together and made a list of reasons why the average person buys a brand new instead of gently used car, it would probably look a little something like this:

  • Reliability
  • Actually frugal since they intend to drive it into the ground
  • Uh, I dunno
  • New cars aren’t *that* much more than a used car
  • Stop asking me, geez

Let me add another reason, one that exists but nobody ever mentions.

Vanity.

Yes, even though the PF world constantly likes to point out that we’re not the same as the rest of those dumbasses who do stuff like finance vacations and regularly exchange money to kill brain cells, the fact is we’re hardly the epitome of smart decision making.

I can forgive mistakes that are from screwing up an analysis, or even because your wife told you that “God dammit, there’s no way I’m driving a used car.” But what I hate is when we conveniently leave out facts that will make us look bad. But that’s exactly what we do when it comes to cars.

I guarantee you that some of your decision to buy a new car was motivated by having a new car. Hell, I’ll go further and say I’m pretty confident in saying that damn near 100% of the decision was motivated by vanity. We associate success with driving a spiffy set of wheels. That’s the way it is, and will always be.

Answer this question honestly. If I gave you a chance to buy a car from 2005 with only 10,000 kilometers on it for the price of $5,000, would you do it? Or would you spend six times that on something new?

I don’t think many would. They’d hem and haw, making up excuses about how they don’t know if it’s been maintained, or that the deal is too good to be true.

But Nelson, a new car is more reliable! And depreciation doesn’t matter, since I’m going to drive it into the ground!

Man, my straw man arguments are stupid. There has been very little progress made in making engines and tires better in the last ten years. A car with 10,000 kilometers on it that’s been sitting in a garage for 10 years and one that’s only been driven for six months are virtually identical, with the exception of fancy tech doodads. Cars do not deteriorate just by existing. You have to use them.

How about the depreciation myth?

That one is even easier to bust. Assume a more realistic scenario, between a car that’s three years old with 50,000 kilometers and the equivalent brand new one. Assume the used one costs $20,000, while the new one costs $30,000. The first has a projected life of 12 years, while the second will survive 15.

Here’s what your car is worth, assuming 10% depreciation per year

Year Used Car New Car
1 $18,000 $27,000
5 $13,122 $17,714
10 $7,748 $10,460
12 $6,276 $8,472
15 N/A $6,176

Some observations:

  • After their projected lives, the two cars are worth within $100 of each other
  • Used car guy paid $13,724 in depreciation, or about $1,100 per year
  • New car guy paid $23,824 in depreciation, or about $1,600 per year
  • New cars suffer their greatest depreciation in the first three years, meaning we were probably a little generous

Okay, how about reliability? I won’t argue that, in general, newer cars are more reliable than older cars. But there are ways to mitigate those costs, by either using backyard mechanics or other lower-cost options like Mr. Lube. Besides, the difference in repairs in the lives of those two cars above will be next to nothing. The first guy will have a bunch of repairs starting at about year 6, while the other guy will have his start at year nine. Each will put up with 6 years of fixing their car once or twice per year. All the first guy did was push his repairs further into the future.

That leaves us with variations of “X model is practically cheaper to buy new rather than used.” Sure, that’s true for certain models, mostly Toyotas and Hondas. People buy them because they’re perceived to be the most reliable. Think of them as the buy-and-hold of the car world.

Here’s a novel concept. Instead of you buying one, buy American. Most U.S. models are almost as reliable as their Japanese cousins, but come with a much lower price tag as used vehicles. Stop being so inflexible with your model and you’ll save money.

If more people came out and admitted they wanted something new because of vanity, I think I’d be cool with it. But instead we come up with other reasons that dance around the truth. So from now on, every time I see somebody write an “analysis” of why they bought a new car, let’s just go ahead and put vanity at the top of the list.

Apr 152015
 

otto-taxes

It’s tax day for the nine Financial Uproar U.S. readers, but it isn’t a big deal. I know you kids are up with what’s down (or is it down with what’s up? Lingo confuses me) and had your taxes all completed by January 2nd.

Whenever I think of someone scrambling to finish their taxes, I’m reminded of The Trouble With Trillions, one of my favorite Simpsons episodes.

Homer: Marge, how many kids do we have? Oh, no time to count, I’ll just estimate! Uh . . . nine!
Marge:Homer, you know we don’t have–
Homer: Shut up! Shut up! If I don’t hear you, it’s not illegal! Okay I need some deductions. Deductions… Oh, business gifts! [hands Marge the sailboat painting from above the couch] Here you go, keep using nuclear power.
Marge: Homer, I painted that for you.
Homer: Okay, Marge, if anyone asks, you require twenty-four hour nursing care, Lisa’s a clergyman, Maggie is seven people, and Bart was wounded in Vietnam.
Bart: Cool!

Let’s take a minute and talk about tax brackets, one of the most misunderstood concepts of personal finance. I’m going to consult the Canadian Government’s federal tax guide for this, because yes, I was just talking about U.S. taxes a minute ago. I just like confusing people. Makes me feel smart.

Screen Shot 2015-04-15 at 5.12.12 AM

There’s obviously provincial taxes on top of these, but we’ll ignore those. Let’s keep this exercise as simple as possible.

For your first $44,701 in income, you’re paying the feds 15%. Pretty straightforward, huh?

For your next $44,700 in income, you’re paying 22%. No, I don’t know where there’s a dollar difference STOP ASKING GEEZ LOOK THIS CRAP UP YOURSELF.

Let’s stop there. What’s your tax rate so far?

It’s a simple question. You paid 15% on the first half of the income, and then 22% on the other half. So if you made exactly $89,401 in 2014, you’d pay income tax of 17.5%.

Here’s where it gets a little more complicated. Say you made $100,000 hitting up fat kids for their lunch money, and for some reason are declaring it as income. What’s your tax rate?

On the surface, it looks to be a pretty simple calculation. You’re paying 26% of each extorted dollar back to the feds, probably going towards Stephen Harper’s hair gel.

But is it that simple? Or should you look at the average tax rate paid?

Let me communicate this in a table.

Income Percent Taxes Total Tax Paid
$44,701 15% $6,705
$44,700 22% $9.834
$10,599 26% $2,755

In total, on $100,000 in income, you’re looking at a tax bill of $19,294. My crack math skills tell me that’s a tax rate of 19.3%.

The point is this. Even though each additional dollar is being taxed at a 26% rate, the amount you pay is still being weighed down by all your previous income in lower brackets. Instead of being in the 26% bracket, I’d argue someone who makes $100,000 is in the 19.3% bracket, which grows at 26%.

Is it shoddy accounting? Well, maybe. But wouldn’t you do the same in your portfolio if you were looking at straight dividend yields? Or if you ran a store and was looking at your total margin? So why should taxes be different?

“I refuse to make more. It’ll put me in the next tax bracket.”

Raise your hand if you’ve ever heard a version of that idiotic statement.

(You did it, didn’t you? Nice work, dingbat. Now Phyllis from accounting things you’re extra special.)

I think you should do everything legally possible to avoid taxes. You can start a business for the deductions and the ability to shelter the earnings inside the company. You can use spousal RRSPs or income splitting or buying assets in the lower earning spouse’s name. Hell, you can even pay her to look pretty, although I’d advise pretending she does your books.

I’m all for minimizing taxes.

But after that, you should pay. Without taxes, Canada’s healthcare system resembles Murica’s, toll roads exist everywhere, and we’re all going to school at Bill’s barn, which smells exactly like you’d expect. Okay, maybe not, but the point stands — taxes pay for these things. If you use them, you should pay.

If you’re successful enough to make it into the 3rd or 4th tax bracket, I say stop bitching and go to work. You’re in a position that millions of people would kill to find themselves in, and you’re not taking advantage of it to screw over the government? That’s more shortsighted than Martha Stewart’s decisions around her Imclone stock.

Again, take all the legal steps you can to minimize your tax bill. But after that, I expect you to go out and build all the wealth you can, taxes be damned. Like my dad likes to say, embrace paying taxes. The more taxes he pays, the happier he is, because he knows a high income translates to wealth. I think we’d all be better off if we had the same attitude.

Apr 142015
 

Graph With Stacks Of Coins

Investments can sometimes be rather fickle things. You receive a tip or have a good feeling and pop your money in a company, only to receive a paltry return; or perhaps rampant speculation takes hold of a few of your key picks, only for the bubble to burst alongside any chance of a solid return. These are events a fair few investors end up experiencing, and can sometimes be unavoidable, but in order to truly get the most out of your investments, there are a few key things that you can keep in mind to ensure that your money is on the correct path.

Do Your Research

Far too often, investors, both experienced and not, will get carried away with optimistic profit projections, sunny expansion plans and exciting speeches, only to find that the company they bought stock for wasn’t really up to the task. To avoid this, make sure that you do an exhaustive bout of research before you make any purchases. Look at the company’s history, the previous experiences and postings of the chief staff, and ensure that you understand completely the dynamics and direction of the business and its products.

Up and Coming

Whilst it can be easy to think that popping your funds in to traditionally ‘safe’ stocks is a good idea, to do so is to forget the nature of business itself; constant change. Some of the best stocks now, for instance, aren’t in oil companies or resources, but in online gambling and ‘the internet of things’. Gaming sites such as http://cad.SpinPalace.com and others aren’t just small start-ups these days, instead having millions of customers every day, and many are floating on stock exchanges the world over.

Buy Cheap

One of the best ways to get fast returns on your initial investments is to find stocks that are undervalued or that are about to experience explosive growth. These can obviously be rather difficult things to ascertain, but low share prices (for good quality companies) can be very lucrative. Don’t just buy the cheapest though; the company in question could simply not be a very well-run company!

Be Willing to Book

Booking your losses – getting rid of failing stocks before you incur a really big hit – is something that many investors can be loath to do, but sometimes it’s simply a good idea to cut your losses and start anew. If stocks are falling temporarily but long term trends seem good, buying more (now cheaper) stock to reduce the average portfolio cost can be a good idea, but this should never be done if the company in question really has its back against the wall.

Do you have any other hot investment tips you’d like to share? Let us know below!

Apr 132015
 
"Oh my God! Look at where we're eating!"

“Oh my God! They have restaurants AND graffiti here!”

If I was in a Starbucks, I’d be the living embodiment of a digital nomad’s wet dream.

But I’m not. I’m currently sitting in a Dunkin Donuts in Ulsan, South Korea, listening to the same shitty half Korean/half English Dunkin theme song, which plays approximately every six minutes. Come on, Dunkin. You ALREADY have me here. I’ve already exchanged $3 for an english muffin so bad that even Guy Fieri hates it, and we’ve established that guy would eat a pizza laced with motor oil. There’s no need to repeat it 14,392 times.

Here is said song if you’re interested. Warning: it will get stuck in your head and you will be tempted to stick a rusty hook into your brain in a misguided attempt to make it stop or kill yourself. As long as there’s silence, it’s all good.

(In the amount of time it took me to find this song on Youtube, IT CAME ON AGAIN. I’m gonna need a longer hook.)

Since showing up in South Korea about 9 months ago, I’ve had some great adventures. I got lost in Seoul, watched several baseball games, done all sorts of things around “home”, went to a cat cafe, and even managed to commit approximately 3.1 million different cultural faux pas. Oh, and I’ve photobombed at least two selfies, because you people are asking for it.

I’ve also made two trips to Japan, and have an upcoming vacation planned to Hong Kong, where I will likely dump at least 30% of my net worth into cheap electronics. COME ON PEOPLE IT’S A LIGHT BULB THAT YOU CAN CONTROL WITH YOUR PHONE. And here I am, using the light switch like a some sort of 20th century commoner. God, I hate myself.

But once you take out the trips, my life here is pretty much the same as home, but crappier. I have very few people to talk to. Many Canadian staples just don’t exist at the grocery store, so we do without. Korean food is mostly terrible; even the good stuff they’ll ruin by spicing the hell out of it. Sure, McDonalds, Subway, and other Western restaurants exist here, but they’re different enough to not quite be right.

At first, this was part of the fun. Go to a baseball game where I don’t know any of the players? Sure! What an odd experience! This is great! But as time has worn on, I crave the normalcy of normal life.

I’m tired of going to coffee shops to work because I don’t have a proper workspace at home.

I’m tired of trying to deal with stuff in the other part of the world but struggling because of time zones.

I’m tired of a million other things too, but I won’t complain too much. Let’s just say I crave the stability of having somewhere permanent to live.

The grass is always greener

I’ve always considered myself an inner scorecard guy. I’ve never owned a flashy car, and I can barely pronounce Gucci. As some of you can attest, I still wear potato chip logo’d polo shirts I got three years ago as a free perk of being a chip guy. I have zero interest in proving to anyone I’m worth listening to by bragging about my net worth. The only reason why I’m tracking part of my portfolio is so I can see whether actively managing it is worth my time or not. If I lose to the index consistently, I’ll stop.

And yet, when it came to the whole digital nomad stuff, I think I got caught up in the hype. I wanted to be that guy, the guy who has a life cool enough to emulate.

I like the idea of having a business where I can take off and go on vacation for a week, taking my laptop with me and working while I’m gone. But what I’ve found is that I’ll fly somewhere for a week and spend 3-4 days of it holed up in a hotel room doing the same stuff I do at home. Sure, the scenery is different once I decide to leave the room, but is this a really good use of my time or money? Or am I just doing this stuff because some of the other bloggers I follow have made it seem a whole lot sexier than it really is?

Kind of like the early retirement argument, the disadvantages of a digital nomad lifestyle are glossed over in favor of tweets that are nothing more than a blatant commercial for the lifestyle. And when selling a lifestyle, there’s no such thing as a disadvantage. It’s all puppies and blow jobs.

You know how when you were 15 and interviewing for your first job and the “what’s your greatest weakness?” question comes up? And because you’re young and stupid, you give a terrible answer like “you might say I work TOO HARD”? Digital nomads talking about the lifestyle are the same way. “What’s wrong with being a digital nomad? Probably that it’s TOO AWESOME.”

Seriously? Kill yourself.

In hindsight, I could have probably scratched this itch with a three week tour of Japan and Korea. That would have given me enough time to show up, get culture shock, and understand enough about the place to tell a good story to my friends back home. It might not have been enough to satisfy me permanently, but it would have been a good start.

What did I learn?

Do I regret my time spent abroad? Yes and no.

I’ve been able to save some serious coin by squatting in my girlfriend’s apartment. And even though most of my year abroad was spent the same way as my years at home — dicking around on the internet, mostly — it’s still much cooler to do it here. Plus, the weather was much nicer than in Alberta.

But if I had life to live over again, I’d probably just take a month long holiday and tour the area that way. This has been an experience, but the digital nomad lifestyle just isn’t for me. I’m looking forward to having some stability.

Apr 112015
 

There’s a lot of power in the cloud. Multinational companies and regular folks like you and me use the cloud everyday to access, store or share anything – from music to cat videos, documents to family photos – the cloud is happening, baby. The cloud has clout. Personally, everything I own that can be digitized like documents, books, magazines, pictures and music all sit safely in a cloud somewhere-out-there on a cloud server that I pay a monthly subscription for.

I like this set up better than the alternative, which is to purchase a pricey shockproof external hard drive, store all my important stuff in it and pray that it won’t go bonkers on me and erase all my data. That happened to me before, you know. A virus that wormed its way into my PC infected my external HDD and rendered all my files useless.

Online POS for your Business

If you run a business, I don’t need to tell you that you need a point of sale system to reach your targets and to make more money. You should’ve invested in one already or at least invested in the idea of getting one. What’s that? You’re still using a cash register? WTF?! It’s a miracle you’re still in business and that you have all your hair, even if it’s all frizzled and white!

OK, if you haven’t made the investment of getting a point of sale system for your business yet, now is the time to get one. And since you’re moving towards being a part of the “cool kids”, go for the cloud-based online POS systems that are bound to replace all the old legacy systems that many retailers and restaurants still use because they’re afraid of the new.

The Case for Cloud

Choosing between an online POS system and an old Legacy POS system is like choosing between two girls at a club. The first one is lightweight, sleek and has literally no strings (wires) attached. You can take her anywhere you want to go – she’s always game as long as she has enough juice. She’s colorful, full of information, easy to use and blazingly fast. Plus, she’s updated regularly, so you get the newest version of her all the time. Say goodbye to mood swings!

The second one is big, heavy, carries a lot of baggage and has quite an entourage. Her sister has to be with her all the time, but chooses to always hang around in your office (the server). You can take her with you, but she’s not as colorful and fun to be with and you may fumble with her buttons. Her updates are done manually, with her ex-boyfriend (technician) the only one authorized to do it.

I don’t know about you, but if I had a business and I needed to invest in a point of sale system, I’d get the cloud based POS in a heartbeat. So, to wrap things up, here are a few more benefits of getting an online POS system:

  • They look better. You and your staff will be using iPads or iPhones for pete’s sake…how cool is that?
  • You’re more agile and efficient. Take orders and send them directly to the kitchen if you run a restaurant. Settle bills tableside. Easy as pie.
  • Your store will have a lower footprint. Cloud based systems are smaller and don’t need their own server because everything is cloud based.
  • Your data is safe and secure in the cloud, guarded by an army of nerds who eat computer viruses for breakfast. OK, I’m exaggerating, but you get the picture. Your stuff is secure.
  • Access your sales data anywhere in the world, from the Bahamas to Iceland. Just make sure you’re connected to the internet.

I hope I made a strong case for online POS systems. It’s all about leveraging the power of the cloud and the speed/reliability of the internet. Just make sure the provider you choose guarantees that the POS solution you get can run offline. Also, it’s always a good idea to have a backup ISP for those “just in case” moments, and for streaming Netflix during your break.

Apr 102015
 
"Christmas Eve is a fine time to work. Look, I've seen your mother-in-law. You're better off here."

“Christmas Eve is a fine time to work. Look, I’ve seen your mother-in-law. You’re better off here.”

If you listen to the internet (which, I cannot stress enough, is something you should never do), there are a few things that are greater than whatever this generation’s sliced bread is. FaceTime? (My MacBook did that edit automatically, because Steve Jobs lives inside. Oh, you actually believed he’s dead? His body is dead, but his mind is very much alive.) Taking crappy pictures of your food? Selfies? I assume the kids all like these things.

Traveling the world is probably tops on that list, because travel has become the new thing the bourgeoisie lusts over. If you need any reminder of that, just check your Facebook timeline. Oh hey, Jim hasn’t posted in months and suddenly you see his pictures from Hawaii? HOW INTERESTING. But Jim totally isn’t bragging.

These same people will often own a MacBook or an iPhone, regaling you with the kind of zeal that’s usually reserved for the newly religious about how paying $500 more for a laptop is somehow the frugal choice because it might last slightly longer. I can’t judge these people too strongly, because during times of weakness I became just as insufferable.

The current trend circling the personal finance world is that of early retirement. Why work until we’re old, the refrain goes, when you can duck out of the workforce at 35 and MAKE A DIFFERENCE by hanging out with your kids all day until they turn 14 and tell you to GO AWAY FOREVER DAD YOU’RE SO ANNOYING GOD.

I don’t even have kids and I’m already looking forward to when my kids are too cool to hang out with me. Oh, I don’t have to hang out when you go bowling? Excellent. Now I can watch real athletes.

I’ve tackled the subject of early retirement before, stating that I don’t really get it. Firstly, their definition of early retirement is largely made up. The literal definition of retirement is when you don’t work any longer, at least according to any dictionary I’ve ever read. And I read several daily, just for fun. But according to the early retirement folks, “retirement” really just means becoming moderately wealthy and then quitting your job to do whatever the hell you want. Most of the time, that actually includes another job that just pays a whole lot less.

There’s nothing wrong with taking a job that requires less time so you can spend more time doing whatever. But back in my day, we called that taking a pay cut. These people transition from regular employment to a form of self-employment that they enjoy, and then call themselves retired.

They’re not, of course. I’ve struggled with a term for what they’re doing for years now, and now I have it.

They’re selfishly employed.

As far as I can tell, selfish employment is the brainchild of a guy named Jeff Yeager, who decided after accumulating a bunch of capital that he just wanted to do his own thing. So he launched a business that taught people how to be really cheap and grew a bitchin’ mustache in the process. And good for him. What’s the point with having money if you can’t use it selfishly?

(And what’s the deal with early retirement guys having mustaches?)

But Nelson, why do you care so much? Why can’t we just call it early retirement and just ignore what these guys do after they tell their boss to kiss the hairiest part of their ass? Why go as far as calling it selfish employment?

While I’ll admit arguing about the definition of retirement is the very epitome of first world problems, my beef is simple. By hijacking the word, these people are selling a dream that all you need to do is save your ass off for a decade and you can have financial freedom for the rest of your life. That’s a dangerous thing, for a couple of reasons.

First off, it’s really easy to look at the stock market over the last few years and assume we’ll get 10% forever. It’s easy to project a world where you can make it when the market goes up consistently. But what about periods of years where the market is flat or even down, like between 2000-2010? The S&P 500 lost 18% between March of 2000 and March of 2010. Telling people a $500k nest egg will last for decades is a dangerous assumption, especially during multi-year highs in the market.

Secondly, I question the wisdom of removing people who are smart and dedicated enough to save half a mil in a decade from the workforce. If you have the earnings power and dedication to save that much, I’m going to assume you’re smarter than the average bear. You owe it to your fellow man to keep building things.

I remember when my grandmother died and my mom was talking about her life. “Grandma,” said my mom, “had a good life. She had kids, grandkids, got to travel to a bunch of places…” her voice trailed off. That was pretty much all she did.

Times were different when she was young, of course. She had jobs throughout the years, but mostly just dedicated herself to her family. That’s not to disparage her for doing so, because I have many, many fun memories of time at my grandparents’ house.

But imagine being smart and ambitious enough to actually do things that matter, even if it’s just in your mind. But instead, you wrap it up at 35, content to hang out, work on your handicap, and make sure your kids don’t become juvenile delinquents, apparently without realizing that, chances are, they won’t end up that way even if you do go to work. 50 years later when you kick it, all your family really remembers is you being around, not really doing a whole lot.

Does that motivate you? If it does, what the hell is wrong with you?

I will never discourage anybody on a quest to become financially free. All things staying equal, living life with money trumps living without it. But being financially free is not a valid excuse to hang up your skates and do nothing.

Besides, here’s what you see every time. Somebody works really hard, “retires”, and is back tackling big projects within a year or two. It happened to me, that’s for sure. Hell, I lasted about three months of being retired before I transitioned back to full-time work.

Embrace taking breaks. Embrace selfish employment. But saving your ass off for a decade just to live like you’re poor for the next five? No thanks. Work is something to be embraced, not avoided.

Apr 082015
 

This week, the feds sent the personal finance community into a bigger tizzy than that time I flexed my pecs by letting it leak that the TFSA contribution limit would double to $11,000 per year, starting in 2016.

For savers, this is pretty good news. According to stats I found in the deepest depths of the internet (next to the horse porn), only 17% of Canadians have be able to sock away the maximum allowed contribution, which currently stands at $31,000. In fact, the TFSA is so poorly used that the average account has about $5,500 in it, most of which is stuck in either cash or GICs.

Cash and GICs? You people are boring. Get some stocks, yo.

Reactions to the news were mixed. Personal finance types lamented the change, complaining that $11,000 per year is just too aggressive of a number, and now they can’t max out said account any longer. I know, I don’t get it either.

Other people said the change was nothing more than a blatant attempt by the Conservative government — which will likely call a federal election shortly —  to buy votes from rich constituents. Like every time something like this happens, the usual cries of the government “screwing the poor” arise from the usual suspects. Just take a look at this Twitter search.

But how true is this? Does the TFSA contribution limit increase really screw over the poor?

Newsflash: The poor are already screwed

I won’t pretend it’s all gumdrops and cheese sandwiches for people who are poor. Especially in a place like Vancouver or Toronto where real estate is expensive, it’s tough to get ahead. Add on things like student loan debt, child care, and credit cards, and it’s a pretty crappy existence. We can certainly make the argument that much of that pain is self-inflicted, but that still doesn’t mean it’s a fun life to have.

But this increase doesn’t mean squat for the 20 million Canadians who can’t afford (or haven’t gotten around to it) to make a TFSA contribution in the first place. They’re in the same financial situation whether the limit is $1 million, $10,000, or $1. If you’re just making ends meet, RRSPs or TFSAs don’t matter at all. Thus, you could argue that every tax advantaged account favors the rich.

But they don’t really favor the ultra-rich either. If you have a net worth of $1 million or more, $5,500 per year in extra TFSA contribution room is nice, but it’s not something you’re about to get excited about. Wealthy folks get to the point where they max out all of their contribution room and still have plenty left over. Sure, they’ll take the extra contribution room, but only because it’s easy. It’s the financial equivalent of the girl at the bar with no self confidence.

Who this really benefits is the person somewhere in the middle, but admittedly closer to the top than the bottom. But even then, it’s not a huge benefit for years.

Remember Warren Buffett talking about the difference between his tax rate and his secretary’s? That’s because Buffett gets paid in dividends, while his secretary takes home a salary.

Unless you’re in the 1%, chances are most of your cash comes from your job as well. Which means that even if someone is able to sock away the new maximum amount for years, it doesn’t really matter if they do so in a tax advantaged or a regular account.

Say year one you put away $10,000 in your TFSA, in stocks that pay a 2% dividend and that grow 6% per year. We’ll assume you don’t sell for a while.

After year one, you owe tax on a whole $200 in dividends, which comes out to $37. Compare that to a salary of $50,000 per year, which would set you back more than $10,000 in taxes. One of those numbers is bigger than the others.

Do you see how this doesn’t become a big deal until the TFSA is very large? Yeah, it’s a tax advantage, but until you keep at it for a decade or longer, it’s not a very big tax advantage.

Besides, Canada has a major spending problem. Personal debt levels keep hitting record levels. The savings rate is barely above zero. Our housing market is ready to implode. Collectively, we do a terrible job putting money away. Things like this increase encourage savings, even if it directly benefits the upper class.

There’s a bit of a circular argument at work here. We all want to encourage things that increase savings. But how do we conceivably do that without giving the folks who are most able to save tax breaks? If we gave 10 rich guys $10k each in tax breaks or 1000 McDonalds employees $100 each, I guarantee you the amount saved would be far higher with the former group. There’s a reason why the rich get tax breaks — because they won’t squander it.

Does the TFSA contribution limit increase help the rich? Sure, although I’d argue it helps the middle class more. But the fact is if you’re trying to encourage an increase in savings, these are the exact people you should be helping. They’re the ones with the ability to save. And ultimately, an increased savings rate is good for the economy.

Apr 052015
 

I try to keep this blog free of OMG THIS THING HAPPENED TO ME IN KOREA because nobody needs to hear all the tiniest of details that only the 1% of you that have spent considerable time outside of the country can relate to. This blog is about your money, not a diary of my life.

But seriously guys. Korean basketball is the bomb. I vowed to go to a game back in November, and then promptly forgot about it until the team set up a display in front of the local mall. I assumed it was the first round of the playoffs, but I was very wrong. It was the finals.

Everything was like an NBA game — even as far as the DE-FENCE chants — but yet slightly different at the same time. There was a man who led the stadium in cheers. The mascots were a man and a woman troll who, along with the cheerleaders, did elaborate dance numbers during TV timeouts. Each team also had a maximum of 3 ex-U.S. players, who, according to my best Googling skills, were pretty decent college players back in the day, but weren’t good enough to crack the NBA. That goes to show you the skill level of this particular league.

Tickets cost $9 each, and you can wander over to one of the modestly priced restaurants surrounding the arena before the game for food, which they’ll let you bring into the stadium. What a great way to watch sports.

Song I like and therefore you should too

I’m writing this dump in a coffee shop, because I’m one of those guys now (Dunkin Donuts, if you must know). I really want to blare this song very loudly to see how many people give me dirty looks.

AH WA AH AH AH AH

The Office quote

Kevin Malone: My worst breakup was with Stacy. It was a Sunday morning. We were reading the paper and I said, “Oh, my God, I think the Eagles could clinch the NFC East.” And she said that we’re done.

What you might have missed

The thing about having a blog that has close to 1,000 previous posts is that there’s a lot of crap in the archives. There’s a lot of good stuff that never gets read because no one stumbles upon it, and there’s stuff that’s just junk. It’s like Tiger Woods’s career, but in reverse.

You know how everyone tells you to value experiences rather than stuff? Well, it turns out that experiences can be just as toxic if you’re not careful. As always, the secret is making sure you don’t blow your brains out, no matter what you value.

Nelson’s so funny

I’m not that mean. I also wrote some meaningless platitude on her Facebook. Thanks to technology, I can only pretend to care in a much easier way than before.

What a time to be alive.

The more you know

Hit us up, random Wikipedia machine.

The 536th Tactical Airlift Squadron is an inactive squadron of the United States Air Force. The unit was last active at Cam Ranh Air Base Viet Nam, where it was inactivated on 15 October 1971.

The squadron was first established during World War II as the 536th Fighter Squadron. It served as a Replacement Training Unit for Republic P-47 Thunderbolt pilots until it was disbanded in a major reorganization of the Army Air Forces in 1944 designed to streamline training organizations.

In 1952, the squadron was redesignated as the 536th Troop Carrier Squadron, and activated at Atterbury Air Force Base to replace elements of the 923d Reserve Training Wing. The following year the squadron was inactivated and replaced at Atterbury by the 72d Troop Carrier Squadron.

The unit was activated again in Viet Nam as a C-7 Caribou squadron assigned to the 483d Tactical Airlift Wing; the squadron was awarded three Presidential Unit Citations for its actions during the Viet Nam War.

I know divisions in the army are numbered for convenience, but that’s gotta be a bummer to be in the 536th Airlift Squadron. You just know those guys’ grandmothers are secretly disappointed, especially if they’re Italian.

Kevin O’Leary’s stock pick

kevin-olearyEach week current BNN personality and Shark Tank investor Kevin O’Leary is kind enough to give us his favorite stock pick.

Nelson, this week my favorite stock pick is none other than Philip Morris International, which sports a 5% yield and can kill people at a much faster rate than I could ever dream of. Naturally, I love this business.

Everyone wonders how it is to work for Mr. Wonderful after closing a deal with him in the Den or the Tank. Let me tell you, I’m a great boss. I haven’t decapitated anybody and displayed their head like a trophy AT ALL, which I used to do all the time at The Learning Company. Besides, I don’t need to. I let Robert Herjavec do that. You might think he’s a little… festive after appearing on Dancing With The Stars, but I assure you he can and will chop a man’s head clean off.

Babe loosely related to finance

Go Daddy had its IPO this week. It’s overvalued and doesn’t make any money. There’s no reason why you should be buying it. But it does give me a good excuse to post a picture of Danica Patrick.

danica-patrick

 

Time for links

Planning on visiting my part of the world anytime soon? I give you some tips on how to do so without spending like a Kardashian, over at Lowest Rates, which, for some reason, continues to allow me to write for them.

Some folks who get paid to shill real estate in Toronto (and Garth Turner) got together to talk about the future of the Toronto real estate market. It’s a good read. Mostly, I’m impressed Brad Lamb and Turner didn’t kick each other in the nads.

Need more evidence you should be a value investor? You shouldn’t, but maybe some of you are dense enough to not get it yet. From 1975-95, value strategies outperformed growth strategies by a whopping 7.6% per year, and won out in 12 of 13 international markets. Go read the whole paper, it’s interesting.

Marie from Boomer and Echo has some issues with retiring early. I agree with every word of this, and have more thoughts scheduled about it for Friday. If you come back and read them, you’ll get a lollipop.*

*And by lollipop, I mean nothing. You will literally get nothing.

If you’re looking for a good primer on how to write covered calls, Liquid Independence has a nicely illustrated example. I can’t say I’d ever invest in a strategy that limits my upside so much, but I know there are plenty of people out there who like the idea of getting more income.

Oh, and there’s also gratuitous nudity in that covered call post. That’s probably the real reason I liked it.

Moneygeek has a bunch of words on investing in REITs that are worth the effort of a mouse click and your eyeballs moving back and forth a few hundred times. And yet, sadly, most of you won’t even bother to do even that. God, your laziness sickens me. And I’m pretty much the laziest guy in the world.

And finally, in the most damning piece of evidence that I’m going soft on you guys, here’s a post I wrote about things my dad taught me about investing.

Have a good week everyone.

 

 

 

Apr 032015
 
Fitting in more ways than one, really.

Fitting in more ways than one, really.

Let’s talk a little bit about benchmarks. No, those aren’t benches in the park. COME ON PEOPLE THIS IS IMPORTANT SHIZZZZZZZZZ.

The argument goes something like this. If you’re not beating the S&P 500, or TSX Composite, or The Dow Jones Industrial Average, or whatever easily matched index, then you might as well switch to passive funds and help the investors of Blackrock Investment Management get slightly richer. Those suckers, trying to “actively” invest. Let’s all point our fingers in scornful laughter! Don’t piss yourselves, morons!

Sorry. I am a mean person.

But the more I think about benchmarks, the more I’m convinced measuring investment success is about much more than just comparing your results to an appropriate benchmark.

Retirement

I don’t care what dividend growth investors tell you, please don’t have 100% of your assets in stocks when retirement age comes. I’d say the ideal split is about 50-50, but conventional wisdom says you should probably have a 30-70 equity to bond split.

Because interest rates are lower than the average single lady on Valentine’s Day, it takes a pretty big nest egg to pull off that percentage of bonds in 2015. So retirees bridge the gap by buying things like REITs, high yield debt, and yes, dividend growth stocks. I’m quite okay with that, provided the whole damn portfolio isn’t made up of dividend growth. Mix in some debt, it’ll be okay.

At that point, what benchmark should a retiree follow? It isn’t just as simple as splitting the difference between the TSX and whatever bond index you choose, since chances are the equities chosen will be less volatile than the index.

The whole point of modern portfolio management is so retirees don’t have to take market risk anymore. So as much as I hate the answer, I’m not exactly sure retirees should really care about an index. A properly constructed portfolio will likely only go up a little each year (if at all) while throwing off income so Grandpa doesn’t have to pawn his shorts that go up to his armpits. There’s probably an index to watch, but I say just allocate the money in the appropriate way and forget about it except for occasional rebalancing.

Picking stocks

If you’re into picking stocks, you gotta be careful while benchmark you’re using to compare results.

Say you’re like me and invest in a lot of Canadian small-cap companies. The S&P 500 is not the index I should be comparing results to, especially after you consider currency conversions. The TSX Composite is better, but it’s dominated by the financial, energy, and precious metal sectors. It’s still not great, especially if you’re like me and have nothing in financials, squat in precious metals, and not a lot in oil.

The same argument could even present itself if you compare my results to the TSX small-cap ETF, which is what I currently use. Take a look at the sector breakdown:

Screen Shot 2015-04-02 at 1.45.01 AM

The Uproar Fund currently has about 30% of its assets in consumer discretionary, with another approximately 5% in energy, and the rest in other sectors. Should I really be comparing it to an index that looks like that? Probably not, but at some point you just gotta shrug and realize the comparison is good enough.

But I could even take it further. Currently, some 45% of my fund is in cash. I’m researching stuff pretty much daily, but I’m not finding much to buy. The comparison ETF is fully invested all the time. Basically, in bull markets, I should be lagging it and beating it in bear markets. It’s flat over the first quarter of 2015, and so am I, with just a few tenths of a percent separating my returns from the benchmark.

Is it silly to take it this far? Yeah, probably. I could have just plunked my money into the small-cap ETF last year and been further ahead, but I’ve decided I’m willing to give it five years of active investing before I pull the plug (assuming I consistently suck, of course).

The solution for most people reading this is simple. Figure out your ideal asset allocation, pick corresponding ETFs, and call it a day. And if you’re active, chances are you’re buying large-caps, so just use the TSX Composite or S&P 500 as a benchmark. Yeah, there are situations where you can do things different, but the whole point of comparing to benchmarks is to see whether you outperform a passive strategy. It’s probably best to not make it terribly complicated.

Apr 012015
 

Every year, I invite some of the best personal finance bloggers (along with Financial Uproar) to participate in a stock picking contest. This year, possibly because 93% of the personal finance world hates me, I invited some readers to participate as well. Because hey, like this all matters, right?

Unlike in previous years, I’ll just list off the results and make some general observations, rather than going through each person’s picks individually. There’s only so many jokes I can make about My Own Advisor’s picks being boring without the jokes themselves getting boring. Unfortunately for you guys, that moment passed us all in 2013.

So here are the results. A couple of reminders before you look at them:

  • I ignored all currency movements
  • Stocks that are listed in Canada used Canadian results on the TSX
  • Dividends are included in the returns, but sometimes I miss them
  • And if a stock gets acquired throughout the year, the owner is locked into that return for the whole year
Rank Entrant Results
1. Don’t Quit Your Day Job 31.8%
2. Blog reader Jeff 11.1%
3. 101 Centavos 8.3%
4. Vanessa’s Money 6.3%
5. Save. Spend. Splurge. 4.4%
6. Money Propeller 3.1%
7. My Pennies My Thoughts 1.6%
8. Blog reader Doug 1.3%
9. Avrex Money 0.3%
10. Freedom 35 Blog -0.1%
11. My Own Advisor -1.2%
12. Boomer and Echo -2.5%
13. Blog reader Ben -2.6%
14. Holy Potato -2.9%
15. Financial Uproar -3.5%

Total return for the S&P 500 (including dividends): 0.9%
Total return for the TSX Composite (including dividends): 1.7%

Number of people who beat the S&P 500: 8/15
Number of people who beat the TSX Composite: 6/15

Well, not a good showing for your boy Nelly, that’s for sure. Mostly it was Winnipeg Free Press that dragged me down, falling 28% including the dividend. I bought at $2.25 in real life, which means I’m essentially flat with real money. Like with most of my picks, I was early on Winnipeg Free Press. I also got good results from Village Farms (up 20%) and Hudson’s Bay (up 7%). Blog reader Doug also picked Hudson’s Bay.

Don’t Quit Your Day Job should obviously be quitting his day job to start a hedge fund. Hot damn, it’s not even close. He’s beating the rest of us more than Adrian Peterson “disciplining” his son. STILL TOPICAL. Buoyed by picks like Valero Energy, Methanex, and Credit Acceptance Corp, he’s up 31.8%. His worst performing pick, Trinity Industries, is up a mere 27.1%.

Winnipeg Free Press is the worst performing pick of the competition. The second worst performing pick is Lightstream Resources, which dragged down Doug and Holy Potato. Lightstream ended the quarter down 25.1%, and it’s really starting to look like the company is close to bankruptcy protection. They need oil to recover, that’s for sure.

Anne from Money Propeller had a respectable showing from her all energy portfolio, finishing up 3.1%. Vanessa did even better by choosing Russian ETFs for two of her picks, which are basically just energy companies. It’s interesting how some energy picks helped (Crescent Point for Anne, and the Russian picks for Vanessa), while others didn’t, like Lightstream and to a lesser degree, Penn West.

Kudos to Liquid Independence for finishing the closest to zero I’ve ever seen. All that thinking about what stocks to buy, only to break even.

101 Centavos’s 3rd place showing was mostly due to Sturm, Rutger, and Company, which makes rifles, pistols, shotguns, and revolvers. YESSSSSSSSSSSS. Here’s hoping he goes out to the desert and shoots something in celebration.

Feel free to look at the total results if you want to see details on how everyone is doing. Send all math errors to NobodyLikesYou@Loser.com. Or the comment section.