Just Business

There’s been so much going on this week that I barely know where to start.  We found a place to rent for the summer until our new house is completed, and it looks like we’ll be able to save a bit of money in the process.  Boomer will be coming down to visit for our daughter’s 2nd birthday party on Saturday, and then of course Mother’s Day is on Sunday, which will make for a busy and fun-filled weekend.

I wrote about The Pros and Cons of Investing in Canada over at the Mint.Com blog earlier this week.  And on Tuesday I posted on Canadian Finance Blog about how to Balance your Savings and Investments While Raising a Family.  Go on over and check out those articles.

Boomer and I were also very humbled and excited to learn that we were nominated in the Globe and Mail 2011 Best of the Blogs Contest as a top personal finance blog in Canada.  A special thanks goes to Preet Banerjee, Globe and Mail personal finance writer and author last year’s best investing blog:  Where Does All My Money Go for nominating us.

Please take a moment to visit the contest site at the Globe and Mail and vote for Boomer & Echo

Now let’s take a look at some other interesting articles from the personal finance world this week:

1. Wealth Pilgrim explains Investment Losses – When To Call A Securities Attorney
2. Soldier of Finance shows How to Properly Probe your Credit Report for Landmines
3. Oblivious Investor asks Is a Single Target Retirement Fund Really OK?
4. Million Dollar Journey shares Financial Strategies for the New Stay at Home Parent
5. Money Smarts Blog discusses RESP Withdrawals From Family Plan Accounts
6. Free From Broke explains How to Figure Out How Much Life Insurance You Need
7. Money Under 30 shows How to Make Your Budget Stick
8. Moolanomy has 8 Relocation Costs to Consider Before Moving
9. Cash Money Life shares 15 Inexpensive Mother’s Day Gift Ideas
10. Couple Money is Changing Our Financial Strategies
11. PT Money lists 7 Retirement Excuses You Can Overcome
12. Frugal Dad discusses Home Exchange: A Frugal Quid Pro Quo
13. Bible Money Matters asks Should you Lend to Family Members?
14. My Own Advisor explains Why Become a DIY Investor?
15. Dividend Ninja concludes his Can You Live Off Your Dividends series

We were also included in the following blog carnivals this week:

• Canadian Finance Blog hosted the Canadian Finance Carnival and included Three Dividend Stocks On My Watch List
• Money Beagle hosted the Totally Money Blog Carnival and included Some Great Things That I’ve Bought
• Budgeting In The Fun Stuff hosted the Best of Money Carnival and included We Got An Offer On Our House!
• Live Real Now hosted the Carnival of Personal Finance and included Assessing Your Estate Plan
• Value Stock Guide hosted the Carnival of Value Investing and included Three Dividend Stocks On My Watch List

Thanks for reading everyone, please remember to vote for Boomer & Echo in the Globe and Mail Best of the Blogs contest.  And please subscribe to our posts in your RSS Reader if you don’t already.

Have a great weekend!

Share and Enjoy:

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The Fairholme fund is an actively managed mutual fund run by a fellow named Bruce Berkowitz. Since the fund’s inception in 1999, Berkowitz has had an impressive run. According to Morningstar, the Fairholme fund is in the top 1% of funds in its category (large-cap value funds) for both 5-year and 10-year annualized returns. That’s quite an achievement!

However, as esteemed investment author Taylor Larimore recently pointed out, the fund’s performance has been rather lacking over the last year. In fact, it’s been pretty bad. For the twelve months ending 4/29/2011, Fairholme is in the bottom 1% of funds in its category. Yikes.

So what does that mean for investors in that fund? Is Berkowitz’s hot streak over? Or is this just a short-term hiccup in what will turn out to be another decade of superstar performance?

I have no idea.

And that’s the point.

Actively Manged Funds: You Can Never Be Sure.

When you own an actively managed fund, there will be periods during which your fund underperforms its benchmark and its peers–sometimes dramatically. When that happens, you have to decide whether or not you want to continue holding the fund, which means trying to determine whether:

1. The poor performance is just a fluke and your actively managed fund’s performance will soon pick back up,
2. The fund manager has “lost his touch.” (For example, he had previously succeeded by exploiting a particular market inefficiency, but that inefficiency has now become public knowledge, rendering it ineffective and leaving your manager scrambling to find a new trick.),
3. The fund has grown so large that the fund manager can no longer handle it effectively, or
4. The fund manager was never anything but lucky in the first place, and his luck has now run out.

Years later, with the benefit of hindsight, you may be able to tell which of those scenarios was actually the case. But while it’s actually happening, all you can know with certainty is that your fund is losing money and falling behind its peers.

Yet Another Reason I Like Index Funds

When you invest in index funds, the overwhelming majority of your funds’ performance will be explained by two things:

1. The performance of the underlying indexes, and
2. The funds’ costs. (Lower costs = better returns.)

As a result, you don’t have to spend time researching fund managers. You don’t have to spend time trying to determine whether a particular manager is skillful rather than just lucky. And you don’t have to spend time worrying about whether your fund’s manager has “lost his touch.”

Truth be told, I don’t even know the names of the people who run the funds I own. It’s not that I don’t appreciate their work. It’s just that the information isn’t particularly relevant to what I do with my portfolio.

If you’re an index fund investor, management risk–the risk that your fund’s performance will be harmed by the manager’s poor decisions–is one thing you don’t have to worry about.

Retiring Soon? Pick Up a Copy of My New Book:

Can I Retire? Managing a Retirement Portfolio Explained in 100 Pages or Less (Click here to see it on Amazon.)

“You can get poor a lot faster than you can get rich.” – Bob Miller

There is a lot more to investing than just setting aside money every month and hoping it turns into a large nest egg in retirement.  Here are 5 common mistakes that investors make:

Not Paying Attention To Your Investments

You don’t have to make investing a full time job but you have to put in some effort besides perusing back issues of Money Sense magazine.  How well your investments perform can determine when and how you can retire, how big of an estate you can build and whether you will ever get to do the things on your personal wish list.

Whether you’re a do-it-yourselfer or have an investment manager, make sure your assets are managed in a systematic, disciplined way.  Have a plan that covers both the short and long term – your life goals.  Have a strategy to achieve your goals.  Monitor how well the plan is working and adjust it if necessary depending on your results and changing conditions.

Trying To Time The Market

Many people are still searching for the secret of buying low and selling high but it’s almost impossible to pull this off.  Even though the market’s overall, long-term trend has been upward, many stocks make most of their gains in short, dramatic spurts.  Consequently, the price you pay for being out of the market at the wrong time is enormous.

Not only can you miss out on positive returns, but you’ll also pay transaction costs for making all the wrong moves.  Overall, it’s easy to see why buy-and-hold investors have an advantage over those who try to outmaneuver the market.

Letting Emotions Drive Investment Decisions

Money is an emotional issue.  It has a lot to do with our feelings of success, security and self-worth.  When you use those emotions to make reactive, short-term decisions, you’ll get into trouble.

Irrational fear is usually the force behind the classic investment mistake of selling all your stocks after the market takes a plunge.  Those with cooler heads and a longer view know this actually may be the time to commit more money to equities.

Some investors are too conservative and let inflation eat away at their low returns.  Others ride a tide of enthusiasm and go for the “get rich quick” schemes and super-aggressive investments hoping for a quick score and ignoring the higher risks.

To guard against emotional reactions you need a well-thought-out investment plan that you are willing to commit to.

Underestimating How Much Income You’ll Need

The biggest risk you’ll face is not the chance of losing your principal, it’s the risk of not accumulating enough so that you outlive your money.  Calculate how much income you will need and factor in inflation (easier to do when you’re closer to retirement than when you’re just starting out).  Life spans are getting longer with each generation so you may be drawing on your savings for thirty years or more.

Don’t assume you’ll stay healthy.  The cost of chronic ill health can mean huge financial setbacks especially if you will eventually need long-term care.

Solely Measuring Performance Against Market Indexes

It’s gratifying to learn your portfolio has outpaced the TSX or the Scotia Bond Index and indeed that is how portfolio managers have measured their performance relative to their peers, but it’s much more important to know how well your investment program is doing in relation to your personal goals.

Your results may look great against market benchmarks, but still fall short of the asset growth you’ve targeted.  If your portfolio loses money in one year, you’ll have to earn a greater amount in the next year to stay on track.

Look at your actual return after taking into consideration taxes, inflation and other expenses.

By avoiding mistakes you will build your wealth steadily and consistently over time without taking unnecessary risks.  You’ll know where you’re going and how quickly you are getting there.

Share and Enjoy:

• Three Dividend Stocks On My Watch List
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Many people are beginning to feel the pinch as rising inflation has started to impact our overall cost of living.  Gas prices have skyrocketed, the cost of food has soared and even insurance rates are starting to increase, leaving consumers wondering if inflation is getting out of control.

One of the benefits of creating and sticking to a budget is that you can analyze data from previous years and identify the expense categories that have been increasing.  I thought it would be interesting to compare the first 4 months of this year with the same time last year to determine my personal rate of inflation.

Income

We are a single income family now with my wife staying at home full time to look after our daughter.  Last year my wife was still receiving maternity leave benefits (until mid-March), so we didn’t have that income to count on this year.  Meanwhile, my salary increased by 4.4% year-over-year after receiving an annual raise last July.

Net Income = plus 1.5%

Energy Costs

Our energy costs consist of our electricity bill, natural gas bill and water bill.  Our electricity provider charges a fixed rate of $0.07/kwh, while we pay a floating rate for natural gas at around $3.50/GJ (compared to the fixed rate of $6.59/GJ).  Our energy costs are fairly cheap, but likely due to a colder winter our consumption has increased year-over-year.

Net Energy Costs = plus 6.7%

Other Utility Costs

Since we cancelled our landline, our other utility costs consist of my wife’s cell phone bill, our satellite TV bill and our home internet bill.  One thing I find interesting about these utilities is that as a shareholder of Telus, Shaw and BCE I really enjoy it when they increase their dividends, however I notice that the next month my bills have all increased by the same percentage.  All three of these companies increased their dividend in the past 12 months and our utility costs have risen right along with them.

Net Other Utility Costs = plus 4.4%

Grocery Costs

This is the big one where consumers are starting to feel the effects of rising inflation.  Of course, there are things you can do as a family to help lessen the impact on your wallet.  Our family creates a meal plan every month that keeps us on track and helps us to avoid impulse spending, and we also make sure to compare prices at different grocery stores to maximize our value for money spent.

Our grocery costs include baby expenses and cleaning supplies.  Overall I was surprised to see that our grocery costs only increased at a normal rate of inflation.

Net Grocery Costs = plus 2.0%

Fuel Costs

Gas Prices have been soaring this year.  Compared to the same time last year, the prices at the pump have increased by about 30%.  I don’t typically concern myself with the cost of gas since I live in a small city and have a very short commute to and from work.  Fuel costs make up approximately 1.5% of our gross income.

After reviewing this expense perhaps I should change my attitude.  Our fuel costs almost doubled from the same time last year!  The cause of this is difficult to pinpoint.  We redeem our Air Miles for gas gift certificates and could have had a large redemption last year.  We might have taken a couple of extra trips up to Calgary earlier this year.  Either way, I’m going to keep an eye on this category to make sure it’s not becoming a trend.

Net Fuel Costs = up 82.1%

Insurance Costs

Many Canadians have reported that their home and auto insurance premiums have increased considerably in the last year.  Luckily we haven’t seen this in our case.  Every year I call our insurance company and try to find ways to reduce our insurance costs, and last year we managed to lower our auto insurance premiums by over 25%.  I haven’t made that phone call yet this year, but since we are moving into a new house later this summer we will need a new home insurance policy and I’ll try my luck then.

Net Insurance Costs = minus 27.4%

Tax Expense

Our tax situation has changed considerably now that my wife is staying at home and we have a child.  I feel like single income families are taxed unfairly (ok, I’m a little biased) and we should have the ability to be taxed as a family rather than as one income earner.  However there are a few tax breaks that we can claim and our overall tax burden has decreased this year.

Net Tax Expense = minus 10.8%

My Personal Rate of Inflation

Everyone’s situation is unique and it is difficult to determine if inflation is truly impacting your budget or if certain circumstances have led to an increase (or decrease) in expenses.

With our net tax expenses reduced, our overall personal rate of inflation has actually decreased by 3.6% so far this year.  Without the tax expenses included (a more accurate measure of spending), our personal rate of inflation has decreased by $14 or 0.01%.

Have you determined how much inflation is impacting your overall cost of living expenses?

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Wow!  I am humbled to think that my blog has been nominated as one of the Best Canadian Personal Finance Blogs by the Globe and Mail.  For those of you checking out my blog for the first time, There is no shortage of content here as I have been writing for over 20 years.  Just check out my archive page and you will see there is something for everyone.

From Columnist to Blogger

I used to call myself a columnist when I wrote columns for the Edmonton Examiner, Edmonton Journal, MoneySense (Now Canadian Business), The Globe and Mail and many other mainstream publications.  About 2 years ago I transitioned from being a columnist to a Blogger and now after launching my new site earlier this year, I am very excited to have my site nominated as one of the best personal finance blogs. It’s a real honor to be among some other great blogging veterans like Canadian Capitalist, Squawkfox, Ellen Roseman and Gail Vaz-Oxlade.  Congratulations to some other great blogs like BoomerandEcho, MoneySmartsBlog,  Balance Junkie, Give Me Back My Five Bucks and Canadian Personal Finance Blog.

Get your votes in

Do us all a favour and get your votes in!  I’d love for you to vote for me but there are a lot of great sites on this list and even new ones I am not too familiar with that I am planning to check out.

Ways to use Retire Happy Blog

If you want to check out the site, I have lots of content here.  Use the search feature at the upper right hand side of the site to find an article on your favorite topic.  After 20 years of writing, there is a good chance I have something here for everyone here.

The other way to use the site is to simple visit the archive page, where I have organized the articles according to category.

You can also follow me on Twitter, Facebook, or Linked-in to get regular updates.

A Special Thanks

A special thanks goes out to Tom Drake of Canadian Finance Blog who has really helped me with the technical side of this site.  His other site MoneyIndex.org was nominated for the Best Canadian Investment Blog.  Also a much appreciated thank you goes out to Rob Carrick and Dianne Nice for their nominations.

Related posts:

1. Jim Yih on Canadian Finance Blog (2010)
2. More Jim Yih on Canadian Finance Blog
3. Top 3 common fallacies of personal finance
4. Is understanding economics important to personal finance?
5. Is a million dollars enough to retire happy?

Is Retire Happy Blog Canada’s Best Personal Finance Blog? originally appeared on Retire Happy Blog on May 3, 2011.