I get a lot of requests to do guest posts for Four Pillars so I thought I would publicize some guidelines for these.   As well, I’m also interested in paid writers as well.

Benefits of writing for Four Pillars

Writing for Four Pillars is a great opportunity to share your experience and knowledge with a large readership and gain experience and feedback about your writing. If you are a blogger or writer, this is a great way to build your professional portfolio and/or drive traffic to your website.

Writing opportunities

I am interested in publishing articles by guest authors as well as adding a paid writing position or two for selected topics. The paid articles would be on a freelance basis.  Please contact me for more information including article requirements and payment details.  My email is qffpillars at gmail dot com.

Guest post guidelines for Four Pillars

Guest Posts do not receive payment but are a great way to gain experience and exposure for your website, or to build your portfolio. Please use these guidelines:

• Articles should be well-written, must be original, and should not have been previously published elsewhere.
• Articles should be related to personal finance in some way.  Please e-mail me with proposed topics if in doubt.
• Please include a short author bio with a link back to your website and RSS feed if applicable.
• Feel free to add a reasonable number of links back to your own web site within the content, but please do not use this as an opportunity to stuff the article full of keywords.
• I retain full editorial and approval rights, including removing and/or substituting links.
• No affiliate links.
• Feel free to send image recommendations with the article. Please only include images that allow for derivatives unless you own the image (Flicker is a great source of images that allow for derivatives under the Creative Commons License).
• Guest posts can be republished on your site after a minimum of 3 months have passed.
• Please send articles in html or in a Word document (html preferred).

If you are a writer and would like to submit an article for consideration, please send me a message via my contact form or email to qffpillars at gmail dot com. I look forward to working with you!

The differences between the paid articles and guest articles:

• Ownership – Paid submissions become the property of this website; guest articles may be republished by the author after a minimum of 3 months has passed. Anyone can apply for either position at any time.
• Links – Guest posters will be allowed more leeway in terms of links back to their own sites.

Thanks to Cash Money Life, Moolanomy and Good Financial Cents for their inspiration for this post (ie I copied them).

One and a half years ago I did a post about Labour vs. Investment Income and Mike did a post about Do You Really Earn Your Investment Income? The point of both of our posts was that there is an expected investment return (ROI) that an investor can’t really take credit for.  If you match the average market return, have you proven your skill as an investor, or have you just been in the pool when the water level went up for everyone?  In my post I focused more on whether you want to improving your ROI or on just increasing your income, depending on how much you have to invest.

Beyond these considerations, I also think there are a number of investments that blend labour and investment. Flipping real estate is a prime example. You can’t buy the run down property without some cash to invest, but then you get the (sometimes) crazy returns because you work 80 hour work weeks fixing the place up. Someone without many marketable skills might be best served starting their own company that they run (such as a convenience store or a franchise).  This, in a sense, lets them “buy” a better exchange rate on their labour then they might be able to get from a job by putting capital in with their labour.

In situations like this, it becomes very easy to fool ourselves about how well (or badly) we’re doing.  As Mike points out in his post, if someone was day-trading full time, they have to be making MORE money than they would get from an index-fund and a full time job to really justify it (which I think would be highly unlikely).  The day trader who looks at his account and is proud of the money he’s made is ignoring the opportunity cost of his lost salary.

Flippers are notorious for this.  Even when you get them to be honest about their actual costs (often they like to omit transactions costs from their profit statement), you’ll NEVER get them to even account for the amount of time they put into repairs.  Get them to include this and the time they spent setting up that deal, investigating deals that didn’t work out, marketing the repaired property, meetings with partners and completing the purchase and sale transactions and you’ve got a proper picture of their real investment INCLUDING their time (which will let them accurately calculate their profit).

Even people who buy-and-hold real estate long term are guilty of this.  If you aren’t hiring a property management company (and I’d personally be very cautious before you do this), you have to account for doing this work yourself.  The best way to do this is to pretend to “pay” yourself what a PM company would charge, and add this to your cost.  John T. Reed estimates that self-managed real estate takes 3.6-4.6 hours / unit / month to manage (remember although some months you don’t do anything, you’ll have the times where Murphy strikes and you keep having to go back to a unit to do one thing after another).  An index fund or GIC takes FAR less time and this has to be factored in if you want to honestly compare the investments.

One approach to honestly compare such investments is, as already mentioned, determine what others would charge for this and add it to your costs.  For real estate this would be what a property management firm or contract would charge, while for a self-run business it would be what you’d pay a clerk at your convinience store or a manager at your Subway® franchise.  If you’re unhappy working for such a low wage, then you’d be best served to hire someone to do that work for you, and get a job earning the higher wage you think you can make.  Don’t fool yourself into lumping the franchise profits into your salary and think of yourself as the highest paid convenience store clerk in the world.

Similarly, once you have an honest appraisal of the ROI from your venture, if it no longer looks lucrative with your time factored in, dump it and put your money where the ROI (based on your time and money) *IS* reasonable.

Some delicate harness work.

Recently my daughter puked in the car.  On herself, on the car seat and a little bit on the car itself.  Was it a mild case of H1N1 flu?  Too much Halloween candy?  Who knows?  And it doesn’t really matter – bottom line is that it smelled as foul as you could possibly imagine.  This was no little milk spitup which only smells slightly off – this was absolutely horrible.

Luckily, I was safe at work while this nonsense was going on but when I got home I got put in charge of cleaning up the car seat.  My plan was to just take off the car seat cover (ie the padding they sit on) and wash it.  I was hoping that all of the puke had landed on the car seat which would make it easier to clean since I wouldn’t have to take the seat out.

I’ll just take the cover off and wash it

Unfortunately, when I tried to remove the cloth cover I realized that it was attached so that you couldn’t easily remove it for washing.  Given that it’s just cloth I would have thought you could just make it so it could be removed/added while the seat was installed – maybe with a few velcro snaps here or there.  Well guess what?  That cover was carefully engineered so that it was tightly integrated into the seat and harness straps.  In order to take it off you not only had to remove the car seat which is  a small pain – you also had to remove all the harness straps and buckles etc.  This was a huge pain since I had never done it before – the seat came assembled when we bought it.

I was pretty annoyed when I realized it was going to take more than 1 minute to get the cover off – enraged is a more accurate word.  If you are wondering the car seat in question is called the Safety 1st Alpha Omega Elite Convertible Car Seat.

It was so difficult that I had to get the instruction book just to figure out how to take it apart.  Total time to get cover off – 45 minutes. 

Figuring out how to put Humpty back together again.

Putting it back in

Once the cover was washed then I used my handy instruction book to put it back together.  It took a while but that was partly because I kept forgetting parts and having to redo everything.  Even once I got the seat back in the car I realized I forgot to put the base on. I will say one thing – once I did it then I realized it wasn’t that hard so the following weekend I took the other car seat apart for washing and it wasn’t a big deal (since I knew what I was doing).  His seat had been installed for about 2 years so I figured it wouldn’t hurt to wash it. 

Are all car seats this poorly designed?

All the parts - harnesses, buckles, doodads all came off.

I always enjoy features in MoneySense or the Globe and Mail where they profile a family, highlight their current money issues, then consult with a panel of financial planners for suggestions on what the family should do moving forward.  Some time ago in MoneySense, they talked to a couple who worked, lived a frugal lifestyle, were paying down their mortgage on an accelerated schedule and fully funding their children’s RESPs, but at the end of the day had nothing left for retirement savings.  They asked what they were doing wrong.

Most of us remember at some point seeing the chart or hearing the idea that if you saved $200 / month from your 25th birthday until you retired, you’d have more than someone who saved $400 / month from their 35th birthday until they retired.  That’s the magic of compounding!  Many of us see this type of thing and it motivates us that start saving early and often.  HOWEVER, there’s another side to the issue.

It’s probably MUCH easier for the typical 35 year old to save $400 / month than it is for a typical 25 year old to save $200.  As you get older, usually your earning power goes up, and at a certain point your expenses go down (once your mortgage is gone and the kids have left home).  Even though you have less time for compounding to do its thing, you have the capacity to save more.

This was the response from the experts to the couple mentioned at the beginning of this post.  They were already taking care of a number of big expenses, and the experts said they needed to put retirements savings on hold.  With a paid off mortgage, and significant savings for the children’s education in place, at a later date they’ll be capable of directing far more of their income at retirement.

The other comment, which I also felt was worthwhile, is the experts warned that they shouldn’t live an impoverished life NOW to avoid living an impoverished retirement.  As Buffett might say “it’s like saving up sex for your old age“.

I was talking to a friend in a roughly analogous position recently.  She’s a mind-30s professional and opened an office in the last couple of years.  She’s paying all the bills and funding her modest lifestyle, but doesn’t have a lot left for retirement savings or investing.  When she was worrying about this, I told her that she should be patting herself on the back for having a successful business (that’s far beyond ramen profitable).  Her financial focus right now is growing her business, which is what it should be.  It will naturally compound and begin growing organically (word of mouth and all the marketing she has in place), at which point she can start directing more money toward retirement (and keep increasing this as her business grows).

This all certainly isn’t to say that saving (and especially retirement saving) is unimportant.  If someone says they aren’t at a stage in life to be saving for retirement then buys a plasma television or an expensive furniture set, I’m not going to be able to get behind their decision.  Instead, I’m saying that if you’re saving for your kid’s education, paying down your mortgage or investing in a business, you ARE preparing for retirement (just not using an RRSP).

Don’t beat yourself up.

Kite surfers on Lake Ontario

I often see kite surfers zipping around Lake Ontario on windy days and I think it would be a great sport to pick up.  The only problem is – what do I do with the kids?  I can’t very well go flailing around in the water with my young kids patiently waiting on the shore for hours at a time.  You might be thinking that maybe my wife could look after the kids – but she is home with the kids all week so I’m not sure that “playing around in the water” qualifies as a bonafide excuse to leave her with the kids.

For those of you with young kids – how do you do activities that don’t involve the kids?  Do you just give up on them altogether?

Here are some pics I took last weekend of kiteboarders:

Catching some air

Surfing along

All photos taken with my trusty Canon 200sx.

Moolanomy had a great post wondering what exactly is so bad about credit cards and why are debit cards better?

Amateur Asset Allocator talks about his experience “activating” a credit card – a rather funny description of the up-sell attempts.

Momma’s blog had a post on the 7 sins of fashion – some interesting pics.

The rest of the links

ABCs of Investing had a familiar post with a great stocking stuffer idea – a short beginner investing book.  I say familiar because it’s almost the exact same post as the 4P – stocking stuffer idea post. 

The Financial Blogger made 6 figures this year and he’s not shy about it!

Budgets are Sexy ponders the riches he would have if he moved back home with his parents.

Million Dollar Journey covered the top low-cost Canadian drip stocks.

Canadian Capitalist reviewed the book “Understanding Wall Street”.

No Debt Plan wonders if debit cards are riskier than credit cards?

The Weakonomist answers the question of why competing stores open up next to each other.  He also points out that you can donate money to help pay down the national debt.  Mr. W correctly observes that donating money to someone who spends more than they make is not such a great idea.

Amateur Asset Allocator lays down the Roth IRA Rules.
Free From Broke compared Similarities of Running a Marathon and Personal Finance

Cash Money Life loves watching tv while his little one sleeps through the night – which prompted this – Netflix Review : Online DVD Rentals.  He also had time to expore Open Enrollment Health Insurance Options.

Redeeming Riches explains why you shouldn’t fall in love with your 401(k) plan.

The Wisdom Journal has Interview Your Interviewer.

Carnivals

Carnival of 20 something finances

Carnival of Financial Planning

I’ve travelled in developing countries such as Thailand, and one of the interesting things is that they won’t protect you from yourself.  You might be climbing up a mountain and where in the West there’d be a massive fence to prevent anyone from falling over the edge, in a developing country there’s a single chain around the outside.  Perhaps the message is “if you’re dumb enough to fall off a mountain, we’re not going to kill ourselves trying to prevent it”.  Another example is the ability to come into close contact with wild animals.  At a Thai zoo they were letting visitors bottle feed a tiger cub (which was VERY cool, but I suspect even a baby tiger could do some damage if it got its claws or teeth into you).  They also have elephant shows that involve things such as having the elephant step on an audience member.  Having a 10,000 lbs animal standing on you isn’t very bright, but if the audience member is willing to volunteer, the people running the show are happy to let it happen.

We all have our bone-head moments, and it’s no good if it leads to serious injury or death.  I remember one time at a camp fire I decided it was a good idea to move one of the rocks around the fire, reached out to grab it and gave myself a good burn.  The people with me were sympathetic but (rightfully) told me it was a pretty dumb thing to do.  And you know that elephant thing?  Yup, I did that too (it put one of its feet right on my chest, knocked the wind out of me).

Beyond physical danger, there’s also numerous people looking to take advantage of consumers by selling shoddy products (or outright fraud).  All levels of government try to protect their citizens from this but, as with many government endevors, they do a painfully bad job of it.  I’m certainly not blaming the victims, but I sometimes suspect there’s an unintended consequence happening where such attempts end up leading to MORE harm to consumers.

Because people living in a western country are protected so much, they start counting on it.  Some people ask, after seeing a commercial for the “$49.99 Path to Instant Wealth!”, if it isn’t true, how can they be advertising it?  Wouldn’t the TV station or someone in government quickly shut them down???  Others may not be so upfront about their feelings, but in their heart-of-hearts they can’t believe a scam artist would be advertising in the Globe & Mail’s classifieds or on network television.

I’m planning at some point to do a post on the anatomy of an infomercial, but basically there’s a group of people who’ve made an art of quickly gearing up some bogus product, advertising the heck out of it, then shutting down the company and draining all the cash as the regulators come knocking.  They re-brand themselves, and start pitching something similar, rinse and repeat.  The laws to prevent this type of thing (and people enforcing them) just can’t keep up.

As an aside, you sometime get a similar justification on the other end FROM the scam artist.  Apparently a number of people involved in running “Nigerian advance fee scam” truly believe that Western government reimburse citizens for money they’ve lost to the scam artists.  This is how they morally justify what they’re doing (”they’ll get all the money back from their government, so it’s ok if I steal from them”).

Once people become more trusting, because they’re used to this protection, it becomes easier for them to harm themselves, which leads to greater protection, and people making worse choices in a vicious spiral (every time you make it idiot proof, they invent a better idiot).

“Well Mr. Cheap,” you may ask, “do you want us to go back to a wild-wild west marketplace where scammers operate with impunity and there’s little protection for consumers?”  Yes, I suspect in many ways this would be better (or at least should be taken into account when considering expanding consumer protection).  We’d all get burned early and often, and learn that you have to factor the merchant’s trustworthiness into any transaction.  People such as Ellen Roseman would become even more important, as they’d propograte information about who is behaving well and who is behaving badly.  I think the door-to-door energy marketers are scum, but I also think they’ve made Ontario consumers far more cautious about doing business with strangers who come knocking at the door (which is good).  The obvious counter-argument would be that the barriers to commerce of having to evaluate the trustworthiness of everyone we want to do business with (and the varying ability of each of us to do so), would lose us more than any gains that would be made by encouraging more cautious consumers.  I don’t believe this, but I don’t have anything but a gut feeling for doubting it (and would be delighted if someone could provide compelling evidence that this is the case).

Canadian Capitalist wrote a very interesting post yesterday highlighting the fact that there are some disabled former Nortel employees that paid into the “self-insured” LTD (long term disability) plan offered by Nortel and now might lose their benefits.  As Thicken My Wallet pointed out in the comments – this basically a loophole in the law – the contributions made by the employees that were in the LTD plan did not belong to Nortel and shouldn’t be considered part of the assets available to creditors.

Ram correctly points out that the government should fix this – I find it ridiculous that they were able to change the RIF minimum payment rules last year thanks to CARP’s constant nagging which was a complete waste of time yet something important like this can’t get changed.  Even though I said differently in the comments (since I didn’t fully understand the situation prior to TMW comments) I agree that the government needs to help those people and fix the rules on this matter.,

That said – I still want to talk about government bailouts of company defined benefit pensions!

One of the big problems with government bailouts of company pensions is that is that those are private contracts or “deals” between the employee and the company – often via a union.  It has nothing to do with you or me or the government.

Technically it’s not anyone else’s responsibility to help someone who made a private deal with a company and it didn’t work out.  It’s the same thing as if someone had all their investments in their own company stock and it goes bankrupt.  Anytime you make a long term deal with someone else then you face the risk of the other party not fulfilling their end of the bargain.  Whether it’s your pension or a lawn care contract – it’s your responsibility.

Now I’m not so hard-hearted that I think these people shouldn’t be helped at all – I would have no problem with the government helping them out if necessary.  But what I would really like to see are some changes for the future to prevent it from continuing to happen.

Some suggestions

Outlaw employer-run defined benefit pensions.

This is a bit extreme but it does take care of the problem where employees base their financial planning on an expected pension and run into trouble if the pension is reduced (especially if it reduced to zero).  Most workers use some combination of rrsp, tfsa, CPP and OAS for their retirement so it’s not like there aren’t alternatives to defined benefit pensions.

Allow opting out of defined benefit plans.

One problem that exists now is that normally someone working for a company that provides a defined benefit plan has to participate in it.  This doesn’t give the worker any choice in their pension since the contributions made by the employer and employee count against any RRSP contribution room so the employee might not be able to save enough outside the company pension.  Allowing the employee some choice will give the employee more responsibility and will reduce the obligation for the government if things go bad.

Only have government run DB plans

In this case companies would not be allowed to run their own plans but could participate in a government run (the CPP would run it) pension plan.  The main difference is that the liability would be on the government so everyone who participates in these plans would be on equal footing.  These plans would also be fairly conservative so they might not be as overly generous (and risky) as some existing pension plans.

Employee education

I think this one is a complete pipe dream but if you could educate the employees that:
1)  Their pension plan is only as solid as the company and the pension management and things don’t always work out.  The pension might not be there for them in the amounts promised.
2)  Saving outside their pension might be a good idea.
3)  Buying company stock is very risky because they work there too.

Don’t allow employees to own company stock

This one has nothing to do with pensions but always seems to come up when public companies such as Enron go out of business.  This is too hard to regulate and really falls under the category of “education” but it would be one way to force employees to diversity – Bad Money Advice had an excellent article regarding the follies of owning company stock. Bottom line is that you shouldn’t own any – if you do have some because of special deals/payments etc then sell it as soon as you can.

Conclusion

While I do feel bad for employees and retired employees who have retirement plans go bad – bailing out each group when they run into problems isn’t the answer.  Leaders of public companies have shown that they manage for one reason and one reason only – for the mega-bonuses they can get if the company outperforms.  They generally do this by taking extra risks – worst case scenario is that they get let go with a big severance package.  Or sometimes they just cook the books to make more money for themselves.

If you favour more regulation then don’t let these companies be responsible for the future of their employees.  If you favour less regulation then give employees some education on the risks of having a company pension plan and allow them to opt out.

A friend gave me a copy of “The Alchemist” by Paulo Coelho and it’s one of the few books that I’ve liked well enough to keep in my personal library (I move a lot, so I try to keep the weight to a minimum). I’m not usually into “personal motivation” style books, however this book is the odd exception that I greatly enjoyed it (and have re-read it a couple of times and loaned it to friends).

The book centers on the shepherd Santiago, who has happily tended his flock of sheep and felt quite content for the lifestyle he has chosen. One night he dreams of a treasure buried at the base of the pyramids. Unsure what to do with this information, he eventually embarks on a quest to find this treasure (his personal legend) and encounters a host of people who help him, hinder him and provide insight on his journey.

As an allegory, the book explores the author’s views on the meaning and purpose of life, and how we get sidetracked from doing what we truly desire (and value). At one point he meets a Muslim man who has dreamed of traveling to Mecca his entire life, but has always found excuses why not to go. Eventually, after his interactions with Santiago, the Muslim man realizes that he has not gone to Mecca because he fears realizing his life’s dream, and losing his reason to live:

“Because it’s the thought of Mecca that keeps me alive. That’s what helps me face these days that are all the same, these mute crystals on the shelves, and lunch and dinner at that same horrible cafe. I’m afraid that if my dream is realized, I’ll have no reason to go on living.

“You dream about your sheep and the Pyramids, but you’re different from me, because you want to realize your dreams. I just want to dream about Mecca. I’ve already imagined a thousand times crossing the desert, arriving at the Plaza of the Sacred Stone, the seven times I walk around it before allowing myself to touch it. I’ve already imagined the people who would be at my side, and those in front of me, and the conversations and prayers we would share. But I’m afraid that it would all be a disappointment, so I prefer just to dream about it.”

Other characters have similar obstacles that prevent them from pursuing what they desire in life. Conversely, some characters are in pursuit of their personal legends, and their interactions with Santiago help them both on their journeys (he meets an Englishman trying to learn how to turn lead to gold, and falls in love with a woman whose personal legend was to find and love him).

Other concepts include paying to pursue our legends (he promises a gypsy 1/10th of his treasure to interpret his dream, and gives a king 1/10th of his flock of sheep for information about how to find his treasure. Between them they teach that everything in life has its price.

Allegorical Structure

This book probably wouldn’t have worked if it was presented as a literal guide to getting what you want in life.  I’m not sure if this is a good thing or a bad thing.  Perhaps the structure gives the impression of meaning to ideas that are tired clichés?  Perhaps it is the best vehicle to convey ideas about universal human experiences – as soon as you become concrete, you lose the ability to convey your ideas to some readers?  I have trouble pulling out specific strategies that I got from the book, and I’ve been hard in past reviews on other books that are short on specifics.  This book did a good job of getting me reflect about what I want to do in life and what’s holding me back from doing it (conveying knowledge and a fear of failure respectively for the record).

How To Get It

The author doesn’t mind having his books pirated, however he doesn’t own the copyright for foreign translations (the original is in Portuguese) so you can decide for yourself if you’re comfortable finding and downloading a copy.  It’s a very fast and easy read, and while some of the ideas are quite meaty, it’s digestible at multiple levels.

In your heart of hearts, what do you think you should be doing with your life?  Or, if you don’t mind the theological overtones, what do you think is the purpose of your life?  If you’re not actively pursueing this, what’s holding you back?

To order this book:

This week I did a book review on Mike Piper’s excellent intro to investing book – Investing Made Simple – I had suggested this would be a good stocking stuffer idea since most of the 4P readership seem to already have pretty good investment knowledge.  The links that were on that post were for Amazon.com – I didn’t realize until later that the book is also available on Amazon.ca which of course is better for Canadians.  So if you had clicked on the links and then gave up in disgust after realizing you were on Amazon.com then you can go back and try again if you wish.

ING $25 referral bonus

A while ago I wrote about the ING $25 referral bonus code a while back and wanted to mention it again.  Each customer only gets 50 referrals and they are going fast.  Last time I checked there were only…ummm…50 referrals left on my account.  So act quickly because they are going fast!    The code is 33089336S1.

Some Canadian links

Kathryn had a great story about how she almost lost a loved one.    The comments were quite interesting even if some of them were written by complete idiots.

Squawkfox is a crack pot crock pot connoisseur – go find out what to look for if you want to buy one. AnySquawkPot.

Ending the Rat Race thinks he’s getting a raw deal from Chapters.

Canadian Tax Guy has some resources if you are thinking of starting a business.

West Coast Woolies had some stats about H1N1/Swine Flu which should make you want to get the vaccine.

Blessed by the Potato who has the greatest header (image at top of site) in all of blogland – also explains why the H1N1 vaccine is pretty safe.

Investing Intelligently (who updates once a year) announced that he got laid off yesterday.  He also had a baby recently (congrats) so at least he won’t be bored.

Ray from Financial Highway thinks that financial literacy in schools is a good idea.

Get Money Energy has some information about income trusts and what to do about them before 2011 (when they turn into dust).

Brip Blap wrote a pretty neat post about how working overseas helped his career.  Steve isn’t Canadian but he would fit in well here so he makes the roundup.

The Wealthy Boomer relays a great story about a 17 year old who had a financial turnaround.  Very entertaining.

Michael James on Money did a book review on “Super Trader” and he said it sucks.

The Money Gardener says that Walgreen is recovering nicely from the flu.

Thicken My Wallet asks what does it mean when Buffett (yes, it has 2 “t”s) buys railways and India buys gold.  It probably means that TMW asks too many questions.    Wasn’t Buffett the guy who got a “great insider deal” on GM bonds a while back?

Shevy is thinking about Hanukkah.  Already?

Canadian Capitalist reports on the Globe and Mail top brokerage rankings.

Canadian Dream wonders if we still have a housing bubble.

Preet explains what sovereign wealth funds are and why you should be terrified of them.  Ok, maybe just he explains what they are.

Congrats to the Canadian Finance blog who had a little baby boy in October.

The Financial Bloggers wrote about Primerica IPO.  Mike has written a lot of stuff about Primerica – none of it positive!!  And Mike is a pretty positive guy…

Intelligent Speculator wants to know if hedged ETFs are good or bad?

Carnivals

Carnival of Money Hackers

Hi Mr. Cheap, I just wanted to get your opinion on this theory and if you think its wortwhile in the long run. The theory goes like this; for every dollar you have in a trading in account, you can borrown a dollar on top of that. In some accounts, even more than that. Now, I’m a young guy(21) and plan on investing in dividend stock that offer me a decent yield(over 5%). I have an account with scottrade and the most they will charge you on inteest in a given year is 7.5%.

My question is, if I started off with $2,000 in account and therefore have buying power of $4,000(due to the 1 for every 1 rule), would it be better to buy $2,000 worth of  shares as I can of a stock like MO(altria) using only my cash which gives me a 7.5% dividend or $4,000 worth of shares? The idea behind this question is that in the first year, the money I make on the extra shares earned on the first year would be canceled out with the interest paid to scottrade for the borrowed money but every year after that, my extra shares earned off the borrowed money would be able to compound interest free. Another note is that as time goes along after my initial deposit of $2,000 into my account, I would coninue to put in about $200/month and hopefully more as I earn more. This would allow me to buy more shares and therefore earn more more interest on the shares as time went along. Does this make sense? After the first year, am I right that I would be making pure profit off the extra shares that I earned from the bowwored money?

To start with, I’m not 100% sure what changes after the first year.  If you borrowed $2000 and bought stock with them, and if the dividend payments EXACTLY matched the interest payments, you’d keep paying on the debt forever (not just 1 year).  If you mean that you’d be paying off the margin debt with $200 added to the account each month, yes you’re right (I guess you’d pay it off in about 10 months ignoring dividends from the stock you bought that wasn’t on margin and decreased interest payments as you paid down the debt each month).  I wrote a post about doing something similar to this.

I always enjoy question / discussion about buying on margin (or with other borrowed funds). I share you sense of excitement when considering constructing such financial vehicles, as it almost has the feeling of playing alchemist, creating wealth out of nothing. Please be aware that this feeling is *FALSE*, and there’s nothing magical about buying on margin. Basically you’re exchanging increased risk for increased reward (as they say, there’s no free lunch).

To begin with, Altria is a great company and a great dividend payer. At it’s current dividend yield of 7.36% you’re right that its dividends almost match the interest you’d be paying, and it *looks* like you’d be owning the stock for free. That’s how I felt when I bought Bank of America (BAC) on Feb 4th, 2008 for $44.46. At that point it had a dividend yield of 5.8% and had been increasing its dividend for 30 consecutive years (read over the analysis and look some more at the company’s recent history since this was posted if you want to be impressed by Dividend Growth Investor and his analysis).

To make the analogy perfectly clear, Altria may be a great company but you never know what the future holds. I was shocked that BAC cut their dividend. I was floored when Washington Mutual went bankrupt. The future isn’t certain, and nothing makes it impossible for Altria to cut its dividend or go bankrupt (perhaps Obama might decide everyone in America has to stop smoking since Michelle made him quit).

If Altria cut its dividend a number of things would happen:

• Your dividend payments would no long cover your interest payments and you’d have to make up the difference yourself
• The value of the stock you own would probably plummet, meaning that you’d owe more money than the stock you used it to purchase is worth
• If the stock price dropped enough, you’d get hit with a margin call, which would force you to repay a portion of the money you owe, otherwise they’d sell stock (at a loss) from your portfolio to cover it.  We regularly get people complaining on our brokerage posts about having been forced to sell at a loss due to a margin call.

One of the other considerations is that borrowing to invest is great from a tax perspective, but as a young guy, your income probably isn’t in the highest bracket, so you won’t be able to benefit from this (as much as a 50 year old medical doctor might for example).  I’ve been backing off on my margin debt for partially this reason:  I’m a poor grad student, so the tax deductions don’t help me.

I know I shouldn’t make investment recommendations, but I can’t help myself.  Personally (and remember, I’m just some guy who likes to blog) I’d suggest you save up cash in a high-interest savings account (and keep adding the $200 / month to it).  As a 21 year old, who knows what the future holds and you may find capital preservation most valuable at this stage in your life (you could use that money to start a business, deal with a financial emergency, as a down payment on a condo or house, to pursue further eduction, to get married without going into debt, etc, etc, etc).

If you *insist* on getting the cash into the stock market, I’d follow Canadian Capitalist’s sleepy-mini portfolio (or one of the other easy, passive investment vehicles).

If you *insist* on buying an individual company, and understand that you’re massively increasing your risk & volatility by doing so, I’d buy MO (or whatever company you decide on) in a low fee brokerage account (Scottrade is pretty good at $7 / trade) WITHOUT using margin.

If you *insist* on buying on margin, I’d suggest you consider a strategy I mentioned at the start on using margin to lower trading costs and keep the margin debt below 10% of your portfolio value.  When I was 58% on margin, the Canadian Capitalist wisely assessed this feelings on this as “Ouch. What are you thinking Mr. C?” (read over the comments on that post, a lot of smart people there recommend approaching investing on margin VERY cautiously).

Do any commenters have additional / alternative suggestions for a 21 year old thinking about getting into margin investing?

Please note that Mr. Cheap wrote a very good post yesterday about H1N1 so check it out if you haven’t already – a lot of great comments.

H1N1 (Swine flu) vaccine hysteria has hit my city in a big way – last week there were people lining up for 6 hours to get shots for their kids and presumably themselves as well.  Since the initial clinics the vaccine has only been allowed for high risk groups:

• Pregnant women.
• Children aged 6 months to 5 years.
• People under 65  with chronic conditions.
• People who live with infants under 6 months and/or with immunocompromised people.
• Healthcare workers.

I personally haven’t been that worried about Swine flu so far this year but once the vaccine became available it seemed that the public awareness and concern went up a notch or two.  I know lots of my friends who have kids are worried about the flu and naturally are also worried about the vaccine.  Is it safe?  Will there be side effects?  Will the needle hurt?  (ok, that was my concern).  Here are some vaccine myths.

I think we are going to get the vaccine for our kids – as I read recently, while there might be some risk from the vaccine, it is dwarfed by the risk from the flu itself.  The analogy they used was seatbelts – in some cases seatbelts (and airbags) do more damage than good but overall your odds of survival in a car crash are far better if you are wearing a seatbelt.

What do you think?  Should everyone line up for 6 hours to get a shot?  Are you going to wait a few weeks to let things settle down?  Are you going to avoid the shot altogether?

I’ve been amazed at people’s reaction to H1N1 for a number of reasons.  I was *SHOCKED* that they were able to get the name changed from “Swine Flu” to H1N1 (people involved with the pork industry started oinking immediately after the pandemic started and amazingly managed to get it renamed).  I still like to call it “the pig flu”.

I’ve also been amazed at the crazy reaction people have been having, trying to avoid contact with other people and lining up for hours to try to get vaccinated (and coming close to rioting when they’ve run out of vaccine).  Pandemic is a scary word, but I’m going to go on record saying that we’ll look back at H1N1 and say (much like Y2K or SARS) “what did we get so worked up about?”

Please check out Mike’s post – Should I get H1N1 Vaccine for my kids?

As of Oct 26th, 86 Canadians have died.  This is sad.  Since the flu debuted in April, let’s call this 13 people / month or 0.41 Canadians a day.  The average Canadian has a (0.41 / 33,212,696 [Canadian population]) = 0.00000123%) chance of dying from the pig flu.  Another way of expressing this is you have a 1 in 81,006,575 chance of dying from the pig flu EVERY DAY!!!

Given that Americans have a 1 : 280,000 ANNUAL chance of being struck by lightening (for the sake of simplicity, let’s assume comparable odds for Canucks),this would give us a 1 : 102,270,000 (280,000 * 365.25) daily chance of being struck by lightening (slightly less likely than dying from catching the pig flu).  How many precautions are you taking to avoid that?

In 2005, 2,860 “road users” died.  At 7.83 / day, this gives us 19.1 TIMES the chance of dying on a road (in a car, as a pedestrian or as a cyclist) than from H1N1.  This actually UNDERSTATES the comparison, because we considered all Canadians with the flu, but only “road users” are at risk of dying on the road.  Remember also, this is just fatalities, we’re ignoring non-fatal injuries.

To switch it around and consider a happier thought, the chance of winning the Lotto 649 is 1/13,983,816 = 0.000007151%, or more than double your daily chance of dying from the swing flu, EVERY TIME YOU PLAY!!!  Should we all run out and buy tickets?

Of the hordes stampeding to get vaccinated, how many are avoiding roads?  If we consider the risk of death associated with road use to be reasonable (which, clearly, most of us do), how can we be panicking over something that is far less likely to affect us?

Some may say “well, yes, but there’s a CHANCE it’ll kill me, so isn’t it worth taking some small precautions to avoid it?”.  Yes, sure, but remember there are INFINITE ways to die.  Some of the actions you’d take to avoid some, will INCREASE your chance of others (say you become a shut-in to avoid the dangers outside your home, you’ve now increased your exposure to all the ways you can die at home).  If you can easily get vaccinated and it’ll reduce your stress level, knock yourself out.  Just to pump up the stress back up a little, think about all the things that are more likely to kill you that you haven’t even thought of!

What does this mean for a personal finance blog?

First of all, behaving rationally is worthwhile in life, but it’s VITAL in investing.  Getting caught up in the madness of crowds is what leads to dot-com (or tulip) bubbles.  Just by identifying the craziness as craziness (and getting off of the ride), you can improve your returns MASSIVELY.

Secondly, I’m not sure what they are but I think there must be some killer deals to be had based on the public’s over-reaction to this.  Perhaps now is the time to book a flight and travel on the cheap?  Maybe some stocks are beaten down with investors expecting the next black plague.

How worried are you about H1N1?  Can you think of any investments that would pay off if H1N1 turns out not to be a big deal?

This is my review of Investing Made Simple written by Mike Piper who is the author of the investing blog Oblivous Investor. I’ve highlighted both Mike’s blog and book before and I was quite happy to review the book for him.  I think it’s a great resource for a non-investor or someone who is just getting started and needs a good introduction in one quick book.  It’s reasonably short at 100 pages and contains a lot of good basic investing information to help someone get started with investing.

This is a fantastic book to give as a stocking stuffer idea for that friend or relative who needs some investment guidance but you don’t feel comfortable broaching the subject or maybe you don’t know quite enough yourself to try to teach someone else. It might even be a good book for you if you lack confidence in the investment area.

To order this book:

Here are the chapters titles with some notes

Chapter 1 – Building blocks of investing.

Explanation of various investment products such as mutual funds, stocks, exchange traded funds and bonds.

Chapter 2 – Types of investment accounts

The basic concepts behind common investment accounts such as  Traditional and IRA Roths, 401ks – please note that this is the only chapter that doesn’t apply to Canadians.

Chapter 3 – Risk and Return

This chapter explores the idea about taking on higher risk for potentially higher return. Over the long term it can be worthwhile to take on some extra risk with equities.

Chapter 4 – How much money do you need to retire?

Mike goes over a very simple formula to do a rough estimate of how much money you will need to save up in order to retire.

Chapter 5 – Don’t bother picking individual stocks

He explains quite clearly why it is a waste of time to try and pick your own stocks and suggests low-cost mutual funds instead.

Chapter 6 – Index funds win.

Brief explanation of low-cost index funds and why they should be the cornerstone of your portfolio.  The perils of picking ‘hot’ funds.  A warning that not all index funds are low cost and he also discusses a strategy to lower the costs if you are mainly invested in a limited-option 401k plan.

Chapter 7 – Asset allocation

This chapter starts off talking about the tradeoffs between bonds/stocks. Buying home country stocks vs international – currency risks.  He concludes that it’s better to have an asset allocation that is too conservative than too aggressive.  I agree!

Rebalancing is also covered as well as target date retirement funds.  It is mentioned that while the concept is great -the execution can be weak with managers using expensive funds. Check to make sure the asset allocation is in line with your desired allocation

Chapter 8 – Putting it all together

Mike goes over how to implement your asset allocation plan – which indexes are good ones to follow. Also includes a very simple sample portfolio. Watch your expenses!

Talks about some more differences between index funds and etfs. One thing that might have been mentioned here is that index funds transactions  can be easily automated whereas ETFs trades can’t be.  You can construct an extremely well diversified, low-cost portfolio using just a few index funds.

Chapter 9 – Think long term

He covers the importance of not being spooked by drops in the market or the financial media (ignore them).  Don’t look at your portfolio too often and don’t panic.  Conversely – if the markets are doing well – don’t be tempted to buy more stocks – stick to your plan.

Chapter 10 – How to find a good advisor

He says that most investors don’t need an investment advisor but there are situations where one might be required. Various types of advisor compensation are discussed. He makes a good point that the dreaded “commission” based advisor can be the cheapest option for a lot of people with smaller portfolios.

Chapter 11 – Automate your investing

If possible then set up automatic contributions via payroll options at work or with your investment company. Pay yourself first.

Chapter 12 – Beware the hot fund

Not unlike the hot stove – hot funds are just as dangerous. Keep in mind that hot funds (and stocks) are not likely to stay hot and there’s a good chance that it took on extra risk to get the eye-popping return.

Chapter 13 – Turn off the tv

Good advice in general – this basically says don’t watch the daily market performance.

Chapter 14 – Steer clear of stock-picking newsletters

Don’t buy stock pick suggestions from anyone.

Chapter 15 – Conclusion

Keep it simple.

Another great month for traffic on 4P – 115,439 visits and 210,841 pageviews – both are records.

Top referrers for October

Occasionally I like to recognize the top referrers to Four Pillars – here they are for the month of October:

1. Million Dollar Journey
2. Canadian Capitalist
3. The Globe and Mail
4. Moolanomy
5. Bible Money Matters
6. Frugal Dad
7. My Money Blog
8. Canadian Mortgage Trends
9. Wisebread
10. Dividend Growth Investor

Thanks to those 10 sites and others that send traffic my way.

Visitors by country

I thought it would be interesting to show the percentage of visitors by country.

1. United States 73%
2. Canada 21%
3. unknown 4%
4. UK 0.3%
5. Australia 0.3%
6. India 0.14%
7. Costa Rica 0.14%
8. Germany 0.08%
9. Phillipines 0.07%
10. Ireland 0.07%

A couple of special links

Len Penzo is one of my favourite reads recently – he’s a great writer and quite funny.  Check out this family-oriented taste test to determine how store brands compare to brand name goods.

Thicken My Wallet had an interesting 2 part post on an issue that Mom2KG had when buying a house. Turns out there was an oil tank buried in the backyard – who knew? I find it interesting that she thought the real estate agent really stepped up to help. The fact is that the agent doesn’t get paid until the house deal closes so if something happens to put the deal in jeopardy – you can bet they will do everything they can to make it happen. Part 1 and Part 2.

The rest of the links

Million Dollar Journey aka Kathryn has some tips for using Kijiji or Craigslist.

Canadian Capitalist covers the cost of a future university degree.  This tied in well with my post this week on RESP – withdrawal of contributions.

The Intelligent Speculator looks at the charts for ValueClick (VCLK).

ABCs of Investing explains how to calculate capital gains and losses.

ABCs of Investing outlines the “bottoms up” investment method.

Carnivals

Carnival of 20 something finances

Carnival of Financial Planning

Carnival of Personal Finance 228

Earlier today, I published a You Need a Budget review – budget software to help you organize your finances.  I have set up a special coupon code with YNAB so that if you want to purchase this software you can save 10% off the purchase price.

To get the discount just go to the You Need a Budget website and enter the coupon code:

fourpillars

That’s it!  Also, YNAB informed me that if you download the free trial you can get another coupon code for 10% (if you purchase with 48 hours) thereby saving a total of 20%.  The price of YNAB is $49.95 so after the 20% discount the cost will be $39.96.

If you do try the software – either from the free download or from a purchase then please let me know what you think of it.

In this post I’ll be reviewing the budgeting tool called “YNAB” which stands for “You Need a Budget”.  There are quite a few financial software tools available on the market such as Microsoft Money (discontinued) and Quicken, so it can be difficult to sort out which tools (if any) are right for you.  YNAB is a much smaller company and the software is quite different than the normal all-encompassing money management tools.

I do all my budgets and financial “stuff” on Excel spreadsheets but I’ve been thinking of getting some proper financial software.  I have regular bank accounts, a multitude of investment accounts and a small business.  I’m doing ok with Excel, I’m thinking that maybe I should upgrade.  I’ll be taking a look at various financial software starting with this one.

What is YNAB?

YNAB is a financial budgeting tool.  On the simplest level you enter your various transactions into the software and it helps you determine how much money you can allocate to various goals.  It also comes with a set of financial rules which are worth reading by themselves if you are learning the basics of financial management.  It works on the principal of “zero balance” so that all your income and expenses plus savings have to be reconciled each month.

Here are the 4 “YNAB” rules:

1. Stop living paycheck to paycheck.  If you are currently living paycheck to paycheck then the software is designed to help you get ahead of your payments so that you have a bit of financial breathing room each month.
2. Give every dollar a job.   This isn’t an election campaign slogan – the idea is that if you don’t have a clear goal for each dollar then it will disappear (ie get spent on crap).  By assigning ALL your money to one function or the other, there should be less leakage of moola.
3. Save for a rainy day.  This is basically spreading out a future fixed cost over time so that you don’t get nailed with a large cost one month (ie annual insurance payment) that you might have forgotten about (or ignored).
4. Roll with the punches.  There is some important flexibilities build into the software so if you do have trouble in a particular month YNAB will make up for it the following month by reducing the budget.

You can import data from the YNAB spreadsheet version (not supported anymore) or just start fresh.  It also accepts financial feeds from any bank.  I tried importing some data from my bank (CIBC) and it worked great.

Who is it for?

I think this tool is mainly for people who are working to get control of their finances and need a bit of help to get organized.  If you want to improve your finances and aren’t sure where to start, living paycheck to paycheck and/or trying to get out of major debt then you might want to consider this program.  It’s not just a budgeting tool…it’s a way of life.    Ok, that’s an exaggeration.  It really is more than just a financial tool though- it’s almost like a financial tool with an “improve your finances” philosophy built into it.

If you are someone who is at the point in life where you don’t need to track every expense in order to meet your financial goals then this software might not be as useful to you.  If your investments are the only thing you want to track then Quicken is probably a better bet.  Keep in mind however that even if you don’t “need” to budget – it can help you achieve your goals quicker even if you are not in debt.  One of our goals is to pay off the mortgage and there is no doubt in my mind that we could achieve it faster with a stricter budget.

I won’t be buying this software because it doesn’t meet my current needs – there was a time when I was paying off debts when this software probably would have helped a lot but since it doesn’t track investments then it’s not for me.

I was impressed by the software itself – the original version of YNAB was Excel-based and I didn’t know what to expect with the new software but it is quite good.  The creators of this software are very passionate about debt reduction and financial management and it shows on the YNAB site.

More reviews

If you need some more proof that this is good software then check out the YNAB review page – there are plenty of comments from big media sites and well-known bloggers talking about YNAB.

YNAB U

One of the more interesting parts of the You Need a Budget website is the free financial educational programs that have been set up.  Check out YNAB U for a detailed look at how to get started with a budget.

How much does it cost?

The sticker price is $49.95 but I’ll be posting an offer later on today which will provide a big discount on this price.  Check out the “fourpillars” coupon code for big savings.

What doesn’t it do?

It won’t track investments so someone who is more asset-rich might not have as much use for this software.

Guarantee

Along with the 7 day free trial there is a 60 day guarantee on this software so you are pretty safe if you decide you don’t like it.

YNAB 3.0

In November there will be a major upgrade of this software, but don’t worry – if you end up purchasing the existing version (2.0) then you get a free upgrade to 3.0.

Free trial

You can do a 7 day trial if you are interested in checking out the software before buying.  Or if (like me) you just want to see what it looks like.  Basically you do the normal download and then at the end just click on the “7 day trial”.  There is no obligation and you don’t have to give any kind of information to do the trial run.

Here are the 4 different sections of the YNAB system and some screen prints so you can see what it looks like:

Register

Start by setting up your register – this is a list of all your transactions.  First step is to select a bank account or credit card/loan.  Then you enter the expenses/income etc within that account.  The register is set up like a spreadsheet where the different bank accounts are tabs along the top and you select each account/tab to see the details.

The register screen looks as follows – you can see I’ve set up two accounts by looking at the tabs at the top (checking and savings):  Click on the image to see the full-sized image.

You can import data from your bank account quite easily.  Just export the database from the online bank account interface and then import using YNAB.  I used the “Intuit Quicken” export option since that uses the same default file format as YNAB.  If you have set YNAB as the default application for financial downloads (it will ask you on installation) then YNAB will open up automatically with the new data.

Budget

Scheduler

Reports

Eaton’s was a famous Canadian department store which was famous for it’s catalog, being a pioneer in having a “no haggling” policy and for its slogan “Goods Satisfactory or Money Refunded.”  Combined with the Eaton’s reputation, this provided a powerful guarantee to customers:  either they’d be satisfied with a purchase, or they would get their money back.  It showed great confidence, on the part of Eaton’s, that they could deliver goods as advertised (and allow the customer to be the judge).

In “The Four Hour Work Week” Tim Ferriss discusses how he finds it hard to market with a “money-back guarantee” (saying that customers have become too used to it) and instead offers a “Lose-Win Guarantee” which is that not only will he refund money, but he’ll give a 10% bonus if someone requests a refund.  He explains the money-back guarantee being dead as people don’t want to have to spend an afternoon at the post office and that risk elimination isn’t enough.

I don’t think this is the reason money back guarantees don’t work.

It seems like EVERY infomercial offered on television, EVERY over-priced seminar or “boot camp” and EVERY scam posted in the classifieds, on a lamp post or bulletin boards offers a money back guarantee.  They can easily offer this guarantee:  if they’re prepared to lie about their product, why not lie about a fake guarantee?  Ripoff Report has 8,430 hits (as of writing) on the term “money back guarantee“.  I feel for some of the posts, where they say “they have a money back guarantee, I asked for my money back, and they WOULDN’T GIVE IT TO ME!!!”  Sadly, for people willing to mislead consumers about their products or services, lying about a guarantee is pretty easy.  They’re also experts at making sure you can’t cancel credit card transactions (one trick is to get you to sign a contract, even for a product, then the credit card company can’t do a chargeback).  A guarantee is only as good as the person or company offering it.

This wacky business idea is fairly straightforward, you set up a business that sells its reputation to honest small vendors who actually want to offer a money-back guarantee (or any variant on it).  For a flat-rate (or portion of the transaction), you provide the ordering services (phone, website or whatever) for the vendor, collect the money and hold it for a set “money back guarantee” period.  At the end of that period, if the customer hasn’t complained, you pass the funds on to the merchant.  If the customer complains during that period, you give the money back to them.  It’s like a very easy to use escrow service.

In order to gain (and build) consumer confidence, the company would require vendors to conform to set structures.  For example, the vendor couldn’t create complex return procedures to prevent return of goods, or very short return periods so customers would be out of the return period before the received the goods.  If the company found a vendor was getting an unusual number of complaints or returns, they would suspend selling for them until the problems were investigated and remedied.

Customers would use a single point of contact (one website and one phone number) so they’d always know they were dealing with the real escrow company.  Orders would always be recorded (including audio recording of all calls), and this transaction history could be made available, with the consent of the customer, in cases of dispute.  If someone was complaining about the escrow company mishandling things, they could say “do we have your permission to post details of the transaction and show that you were told about limitations or time limits?”.

Vendors would have their “terms of sale” vetted, and made to conform to a standard, straightforward agreement (that would always be presented to the customer at time of purchase).  Any terms that tended to be confusing to large numbers of customers would be removed from current agreements and not used in future agreements.  For example, if customers would be required to package and ship items back to the company for a refund, the escrow company would tell them this (and provide an estimate on shipping costs) at time of purchase

The escrow company could also be hired by the customer, so they could go to a company and say “I want to order your goods and pay through this escrow company, I’ll pay the extra fee”.  If the vendor consented, the buyer would then get the standard protections (and the vendor would be paid after the set period).  Vendors could also offer goods with and without the escrow protection (with different prices).

I’m aware of E*Bay’s trusted partner Escrow.com, and this would be something along the same lines, but not just for online purchases.  You could use it for mail order, for phone orders, or for face-to-face transactions (like hiring a contractor to redo your kitchen).  Amazon does something half-way along these lines where they force customers to directly deal with vendors who sell through Amazon, rather than with Amazon themselves.  However, they say “You should be able to reach an amicable agreement with one another“, which I HOPE implies they’ve evaluated all vendors.

Obviously, once you’d done a few transactions with a company / person you could drop the escrow intermediary and deal directly.  The escrow company would just be there for transactions that you don’t know person or company (and would let customers deal with the escrow company, a company they WOULD know well, instead).

The trickiest part of this would be growing to be a well-known standard that people have heard of and trust (this would be very challenging at the beginning).  The company is selling its reputation, so building this would be the core of what they do.  Partnering with (or growing out of) established large companies like E*Bay, Amazon or Paypal would probably be a worthwhile way to “jump start” such an enterprise.

Whenever I’ve tried to figure out how much someone should contribute to an RESP for their child – I’ve always gotten stuck on the issue of whether the kid lives at home during his school years or goes to school out of town.  My rough calculations indicate that if you contribute the maximum allowed each year for an RESP then you will probably have enough money if the child goes to school out of town (roughly speaking).

But what if you save all this money and they decide to live at home?  In that case the total cost gets cut about 40-50% since they don’t have to pay for accomodation and food.  You can’t really plan for this since most students don’t know where they will be going to school for sure until less than a year before graduating high school.

I’ve always thought that you would just have to get the child to spend more money (drive a new car?) while in school to use up the funds.  Alternatively, you could save some money in an RESP and some in an open account which would cover both situations. In fact, the answer is to just withdraw any contributions that you made to the RESP.  They can be withdrawn by the account owner (ie Mom & Dad) once the child starts school with no penalty of any kind.  You wouldn’t have to withdraw all the contributions – just whatever you feel is the right amount. If the kid is starting her 4th year and there is still $50k in the RESP then that would be a good time to figure out how much the contributions were.

Make sure the student is getting non-contributions

If you run into a similar situation then make sure the financial institution you are dealing with is withdrawing non-contribution money when sending money to the student.  Similarily if you withdraw contributions for yourself – clarify with the financial institution that this is indeed happening.  You can just call the company that holds your RESP to find out what the total contributions are.

There’s probably a decent chance this post will make you angry.  Feel free to skip it if you want to stay in a good mood.  If you decide to read it anyway and are looking for ways to vent your anger, insulting the author (Mr. Cheap) or announcing that you’ve unsubscribed to our feed are both popular options .

Some time ago Larry MacDonald wrote an interesting article on socially responsible investing for The Globe and Mail. For those unfamiliar with the term, SRI is a mutual fund which only buys stock of companies that meet the ethical criteria of the fund. As an example, almost no SRI would ever buy Rothmans or British American Tobacco stock, since they wouldn’t want to profit from tobacco sales.

What was most interesting about the article, is that Mr. MacDonald points out that SRI funds have performed as well as general funds. The explanation for this is that ethical companies are less likely to be involved in a lawsuit or to have a business affecting PR nightmare if their unethical practices come to light.

I owned Rothmans stock and have actually suffered from ownership on two occasions. I was briefly corresponding with a reasonably famous investor and after I admitted that I owned Rothmans stock he stopped corresponding with me. Another time a reader (who was clearly crushing on me) and I exchanged a few e-mails, and after it came up that I unabashedly own tobacco stock she told me off and stopped writing as well.

I always wonder about social beliefs that the main argument for them is people who say “believe what I believe or I won’t be your friend”. I have friends who are pro-choice and pro-life, chums who are pro and anti gun control, religious (from numerous faiths) and atheist pals, I have socialist buddies and capitalist buddies. I have my own firm opinion on each of these issues, but it has never prevented me from enjoying the company of someone who has another point of view.

SRI are fine for what they are, but I somewhat disagree with the underlying philosophy.  To use my Rothmans stock as an example, not a single additional cigarette was sold because I’m the owner of part of the company.  If I had sold my Rothmans stock to Mike, the company would continue to function in EXACTLY the same way it had before the sale.  The only difference is that Mike would be collecting the quarterly dividend instead of me (and he would be able to vote on shareholder issues instead of me).  I was one owner of a well run, very profitable Canadian company that makes money selling legal products to people who want to enjoy them. I would have been delighted to continue owning it if the sale hadn’t been forced, and I’ve considered buying Altria on a number of occasions.

Say now, someone objects to ownership (fair enough).  They sell their Rothmans stock, because even though they aren’t materially affecting the operation of the tobacco company, they don’t want to profit from the supposed suffering it causes.  They can’t own most mutual funds (which might buy Rothmans or another unethical company at any moment), or index funds (which will almost certainly own unethical stocks).

If we object to being a shareholder in these companies, which doesn’t affect their day-to-day operation, we certainly can’t be CUSTOMERS:  which DOES affect their day-to-day operation.  If I buy Rothmans smokes, the company has more money to spend on advertising, improving their operations and other business activities (such as paying those nasty dividends to shareholders which I’m opposed to).  I also can’t sell Rothmans smokes, or patronize companies that do (for the same reasons I can’t buy their product).

At this point I’ve isolated myself from pretty big part of the economy (convenience stores, most grocery stores, etc).  Certainly if I can get enough fellow consumers to join me, we’ll be pressuring stores not to do business with Rothmans, and hurt their business. Alternatively I could lobby the government to make smoking illegal and criminalize people who choose to smoke and the companies that try to sell to them. If I’m not doing either of these things (and just not buying sin stocks myself), I’m not really accomplishing anything except letting others collect the profits from these companies (and if enough people refuse to buy them, it WILL drive profits up for the remaining buyers).

To focus on a specific example, tobacco companies, I can understand why people are against smoking: it kills people. If someone asked my opinion whether they should start (or continue) smoking, my advice in EVERY case would be “don’t smoke”. HOWEVER (and this is my personal politics creeping in), if an adult CHOOSES to smoke, with full awareness of the consequences, who am I to try to force them to stop? Should I try to stop obese people from eating junk food? Should I try to stop skiers from skiing (and other sports with a danger component)? Should I try to force people to stop drinking (and stop myself)? Putting aside the “addictions” argument, people engaging in “harmful” activities have weighed the possible consequences and made decisions for themselves. Without knowing everything about them, how could I possibly make a better decision for them then they could for themselves?

Some people bring up the health care costs, and how people engaging in self-harm drive up costs in taxes or health-insurance premiums. Again, look at the examples in the previous paragraph. Are we really ready to ban everything that’s harmful?

I have no problem investing in a company that I wouldn’t shop at (I *HATE* BMO as a customer, and it’s one of my main holdings). Given this, if a company does a good job delivering a legal product, why should I avoid investing in it? Not that it’s at all relevant to this post, but I don’t personally smoke cigarettes (I occasionally share a hookah with friends, and VERY occasionally enjoy a cigar).

Do you invest in “sin stocks” or do you try to follow a SRI approach?