I’m expecting to be named as executor of a couple of estates and will likely help out in others. So, I was interested to read The 50 Biggest Estate Planning Mistakes ... and How to Avoid Them by Jean Blacklock and Sarah Kruger. In addition to mistakes in planning an estate, the authors cover mistakes in serving as an executor and in being a beneficiary. Although the book is framed as a list of common mistakes, it serves as a how-to guide and provides some entertainment value with numerous anecdotes.
My main criticism of this book is that it comes on a little strong in promoting the services of trust companies and various other experts that may be needed in preparing a will or settling an estate. I don’t doubt that these experts are sorely needed in many cases, particularly for larger estates, but this theme is overdone in the book.
The strength of this book is the experience it draws from. Reading through the various mistakes people make I realized that I could make many of these same mistakes myself. Although this may not be the most fascinating subject in the world, the anecdotes kept me reading and picking up useful advice.
Here are a few interesting parts:
Dying with dignity
“Phrases such as ‘heroic measures’, ‘dying with dignity’ and even ‘life support’ have little or no meaning in the medical community.” It is better to think of your wishes in terms of quality of life. The important thing about a medical intervention is whether there is “a reasonable opportunity to recover and enjoy more time, with a good quality of life.”
Naming executors
It is tempting to demonstrate equal love for all your children by naming them all as executors, but this often causes problems. For one, “the law requires that executors must act unanimously.” It is tempting to think “when I’m gone, they will work it out,” but what usually happens after the parent passes away “is that the gloves really come off.”
Communicating your wishes
“It sure is a mistake to think that people can read our minds. They can’t – and their skill at it doesn’t improve after we are dead.” It’s better to get everyone together and explain what you want than to incorrectly assume that they know. This is doubly important if there is anything about your will that could be interpreted as favouring one loved one over another, even if you think there is a good reason for your decision.
Changing the locks
An item on an executor’s checklist that wouldn’t have occurred to me is to quickly change the locks on the house. Even if you trust family members to not take things because “that’s what Mom would have wanted,” maybe neighbours with emergency keys would fail a temptation test.
Executors’ openness with the progress of the estate
Handling an estate takes longer than it seems it should. This can create bad feelings between siblings when one is the executor and the other is impatiently waiting for the estate to be settled. Providing updates on progress can smooth out potential troubles.
Monday, January 30, 2012
Friday, January 27, 2012
Short Takes: New Investment Option, Hedge Fund Disappointment, and more
Blue Hedge Investments are shaking things up in the Canadian investment landscape. I've had a few people express concern that I've either lost my mind or have sold out to scam artists. Click on "INVEST NOW!" to see what this is about.
Larry Swedroe reports that hedge funds had another lousy year.
The Blunt Bean Counter warns that new rules could lead to punitive taxes for incorporated contractors who are declared “incorporated employees” by CRA.
Larry MacDonald reports that most Boomers are still getting advice suitable for the accumulation phase of their lives rather than advice suitable for heading into retirement. Sadly for too many Boomers, this isn’t too much of a problem because they haven’t saved enough to retire yet.
Potato has some interesting thoughts on the debate about whether to prepare for financial emergencies with cash savings or a line of credit. He believes that it makes more sense to invest extra cash above one month of emergency savings. I think this depends on your situation in life. As many experienced tech workers with high-paying jobs found out a decade ago, your job can disappear and it can take years to find a new one at just 75% of your previous pay at the same time that your stock investments tank badly. I agree that emergency preparedness should be a combination of cash and a line of credit, but the appropriate cash amount can be very different from one person to the next. My cash buffer varies, but it is rarely under $20,000. When I was in my twenties, I considered a cash buffer of $1000 to be quite a lot.
Retire Happy Blog makes the case for low cost passive investing based on 20 years of experience in the investment industry.
Preet Banerjee reports that higher commodity prices are driving up food prices and we’ll see higher restaurant prices as well.
Big Cajun Man is trying to coordinate the federal government and his bank to sort out his pension and RRSP savings. He’s only been at it for a couple of years, so he’s probably got a while to go yet before things settle down.
My Own Advisor reports on the austerity measures planned for Greece including a 20% public-sector wage cut. This is some painful fallout from ignoring growing public debt.
Million Dollar Journey answers some investing questions from a new grad just entering the job market.
Larry Swedroe reports that hedge funds had another lousy year.
The Blunt Bean Counter warns that new rules could lead to punitive taxes for incorporated contractors who are declared “incorporated employees” by CRA.
Larry MacDonald reports that most Boomers are still getting advice suitable for the accumulation phase of their lives rather than advice suitable for heading into retirement. Sadly for too many Boomers, this isn’t too much of a problem because they haven’t saved enough to retire yet.
Potato has some interesting thoughts on the debate about whether to prepare for financial emergencies with cash savings or a line of credit. He believes that it makes more sense to invest extra cash above one month of emergency savings. I think this depends on your situation in life. As many experienced tech workers with high-paying jobs found out a decade ago, your job can disappear and it can take years to find a new one at just 75% of your previous pay at the same time that your stock investments tank badly. I agree that emergency preparedness should be a combination of cash and a line of credit, but the appropriate cash amount can be very different from one person to the next. My cash buffer varies, but it is rarely under $20,000. When I was in my twenties, I considered a cash buffer of $1000 to be quite a lot.
Retire Happy Blog makes the case for low cost passive investing based on 20 years of experience in the investment industry.
Preet Banerjee reports that higher commodity prices are driving up food prices and we’ll see higher restaurant prices as well.
Big Cajun Man is trying to coordinate the federal government and his bank to sort out his pension and RRSP savings. He’s only been at it for a couple of years, so he’s probably got a while to go yet before things settle down.
My Own Advisor reports on the austerity measures planned for Greece including a 20% public-sector wage cut. This is some painful fallout from ignoring growing public debt.
Million Dollar Journey answers some investing questions from a new grad just entering the job market.
Thursday, January 26, 2012
Second Look: Trying My Hand at Stock Picking
Writing this blog has taught me a lot about personal finance and investing. This is one of a series of articles where I argue with my former self by disagreeing with one of my previous articles. Unlike politicians, I’m allowed to change my mind as I learn more from my readers and my own research.
In a post on the costs of trading stocks I said
For stock traders, 80% to 90% of their competition is institutional investors. This is just not a game I want to play any more. Most individual investors who try to win this game will fail, but no doubt some have the skill to succeed. My guess is that the percentage of stock pickers who have the skill to consistently beat the market is extremely low.
I’d love to be able to go back to talk to my former self just after my last successful huge bet and convince myself to give up this game and just invest in indexes. Even better would be to give myself a stock recommendation, like Apple, but I don’t want to be too greedy.
On the Positive Side …
Here are a few of my older articles that I still quite like:
Insurance is not the same as protection even if it seems that way.
A game show illustrates an important lesson about the utility of money.
My visit to a doctor shows when insurance can be a bad deal.
When trying to transfer your long-term savings, it’s easier to pull than to push.
In a post on the costs of trading stocks I said
“I’m not against direct ownership of stocks. I happen enjoy tracking the progress of the businesses that I own, and I’m hopeful that I will prove to be slightly above average at stock picking.”I followed up with my prescription for success in stock investing:
“Predicting the long-term future of a stock is best done by trying to predict the future success of the business rather than looking at wiggles in the chart of stock prices.”I’m still not against direct ownership of stocks for highly skilled investors, and I still believe that fundamental analysis beats technical analysis. However, I’m no longer hopeful that I’m a good enough stock picker to be able to consistently beat the market averages. My record during my stock picking years beat the market, but only because of a couple of huge bets more than 10 years ago. Since then my results consistently lagged.
For stock traders, 80% to 90% of their competition is institutional investors. This is just not a game I want to play any more. Most individual investors who try to win this game will fail, but no doubt some have the skill to succeed. My guess is that the percentage of stock pickers who have the skill to consistently beat the market is extremely low.
I’d love to be able to go back to talk to my former self just after my last successful huge bet and convince myself to give up this game and just invest in indexes. Even better would be to give myself a stock recommendation, like Apple, but I don’t want to be too greedy.
On the Positive Side …
Here are a few of my older articles that I still quite like:
Insurance is not the same as protection even if it seems that way.
A game show illustrates an important lesson about the utility of money.
My visit to a doctor shows when insurance can be a bad deal.
When trying to transfer your long-term savings, it’s easier to pull than to push.
Wednesday, January 25, 2012
Locking in a Natural Gas Price
Rob Carrick says it’s time to lock in your natural gas price. He reasons that current prices are very low compared to previous highs. Buying a fixed-price contract for natural gas is like buying insurance against price increases, but for natural gas this insurance is quite expensive.
Carrick says that the current gas supply charge he pays is 12 cents per cubic meter. (He also points out that at this low price, the supply charge is only about half of what you pay. The other half is storage and distribution costs.) The peak price was 42 cents per cubic meter. The cheapest price he could find to lock in for the next 5 years is 19.7 cents.
To make these figures more real, let’s use my family’s consumption numbers. We used 4700 cubic meters of natural gas over the last year. This translates to a cost at current rates of $564 per year (plus roughly another $564 for storage and distribution). At the peak price, this would be $1974 (plus $564). At the best 5-year locked in rate, this would be $926 (plus $564) per year.
If natural gas stayed at 12 cents, the added cost of the fixed contract is $362 per year for a total of $1810 over 5 years. On the other hand, if rates were to suddenly shoot to 42 cents and stay there for 5 years, the fixed-price contract would save $5240 over 5 years. So, for an insurance premium of $1810, I could buy protection from big jumps in natural gas prices.
The difficult question to answer is whether this is a good investment. Are big price increases likely? If yes, then why are the suppliers dumb enough to supply gas at 12 cents right now? And why are fixed-rate suppliers willing to lock in 19.7 cents for 5 years? My guess is that like other forms of insurance, this is not a good deal strictly based on the expected outcome. After all, gas prices would have to rise steadily at 20.2% per year for 5 years for you to break even on this insurance.
The real value of insurance is protection from big losses. I buy liability insurance for my car because I don’t want to pay a million dollars if I’m at fault in a serious accident. In the case of natural gas, even in an extreme scenario where gas prices shoot up to 42 cents, it would cost me an extra $1410 per year for 5 years. I can handle this. I wouldn’t like it, but it wouldn’t devastate me.
So, I won’t be buying a fixed price natural gas contract. While it is possible that I’ll lose out by just paying market rates, I believe that the expected outcome is in my favour, and the worst case isn’t all that bad.
Carrick says that the current gas supply charge he pays is 12 cents per cubic meter. (He also points out that at this low price, the supply charge is only about half of what you pay. The other half is storage and distribution costs.) The peak price was 42 cents per cubic meter. The cheapest price he could find to lock in for the next 5 years is 19.7 cents.
To make these figures more real, let’s use my family’s consumption numbers. We used 4700 cubic meters of natural gas over the last year. This translates to a cost at current rates of $564 per year (plus roughly another $564 for storage and distribution). At the peak price, this would be $1974 (plus $564). At the best 5-year locked in rate, this would be $926 (plus $564) per year.
If natural gas stayed at 12 cents, the added cost of the fixed contract is $362 per year for a total of $1810 over 5 years. On the other hand, if rates were to suddenly shoot to 42 cents and stay there for 5 years, the fixed-price contract would save $5240 over 5 years. So, for an insurance premium of $1810, I could buy protection from big jumps in natural gas prices.
The difficult question to answer is whether this is a good investment. Are big price increases likely? If yes, then why are the suppliers dumb enough to supply gas at 12 cents right now? And why are fixed-rate suppliers willing to lock in 19.7 cents for 5 years? My guess is that like other forms of insurance, this is not a good deal strictly based on the expected outcome. After all, gas prices would have to rise steadily at 20.2% per year for 5 years for you to break even on this insurance.
The real value of insurance is protection from big losses. I buy liability insurance for my car because I don’t want to pay a million dollars if I’m at fault in a serious accident. In the case of natural gas, even in an extreme scenario where gas prices shoot up to 42 cents, it would cost me an extra $1410 per year for 5 years. I can handle this. I wouldn’t like it, but it wouldn’t devastate me.
So, I won’t be buying a fixed price natural gas contract. While it is possible that I’ll lose out by just paying market rates, I believe that the expected outcome is in my favour, and the worst case isn’t all that bad.
Tuesday, January 24, 2012
Hidden Costs in Private Investing
An acquaintance of mine I’ll call Carl mentioned that he invests with RBC’s private investing service where he pays a fixed percentage fee on his portfolio each year rather than paying management fees on all of his funds. I asked what other fees he pays and Carl’s reply was that there were no other fees. He said that he only pays the percentage fee and is pleased that he negotiated it below 1% per year on his sizeable portfolio. I just had to check into this.
It turns out that Carl’s portfolio is mostly invested in RBC’s Series O Private Pools. Carl was partially correct in that he does not pay any management fees on these funds. But, he does pay a management expense ratio (MER) and a trading expense ratio (TER) on each fund.
Many people think that management fees and MERs are the same thing because of the similar names, but they have differences. MERs contain the management fees plus a few other things like administrative costs and taxes. Outside of the MER are trading costs. So, in addition to his negotiated yearly fee, Carl pays administrative costs, trading costs, and taxes.
All of this was explained in the fund facts sheets. For example, the RBC O'Shaughnessy Canadian Equity Pool Series O has an MER of 0.11% and TER of 0.26%, for a total cost of 0.37%. Among the equity pools, the average added cost was 0.36%. Among the bond pools, the average added cost was 0.04%.
These costs may not seem like much, but remember that they are on top of the yearly fee that Carl negotiated. Adding 0.36% to this fee for the equity funds makes Carl’s negotiating skills look less keen. And while the added costs for bond funds are very low, the negotiated fee is quite high for fixed income investments.
Carl was quite surprised to learn all of this. While this information is available on the RBC web site and may well have been disclosed to him in documents he received, Carl’s understanding from talking to RBC representatives was that his only cost was the negotiated fee. This misunderstanding likely stems from not realizing that there are fees other than management fees.
It turns out that Carl’s portfolio is mostly invested in RBC’s Series O Private Pools. Carl was partially correct in that he does not pay any management fees on these funds. But, he does pay a management expense ratio (MER) and a trading expense ratio (TER) on each fund.
Many people think that management fees and MERs are the same thing because of the similar names, but they have differences. MERs contain the management fees plus a few other things like administrative costs and taxes. Outside of the MER are trading costs. So, in addition to his negotiated yearly fee, Carl pays administrative costs, trading costs, and taxes.
All of this was explained in the fund facts sheets. For example, the RBC O'Shaughnessy Canadian Equity Pool Series O has an MER of 0.11% and TER of 0.26%, for a total cost of 0.37%. Among the equity pools, the average added cost was 0.36%. Among the bond pools, the average added cost was 0.04%.
These costs may not seem like much, but remember that they are on top of the yearly fee that Carl negotiated. Adding 0.36% to this fee for the equity funds makes Carl’s negotiating skills look less keen. And while the added costs for bond funds are very low, the negotiated fee is quite high for fixed income investments.
Carl was quite surprised to learn all of this. While this information is available on the RBC web site and may well have been disclosed to him in documents he received, Carl’s understanding from talking to RBC representatives was that his only cost was the negotiated fee. This misunderstanding likely stems from not realizing that there are fees other than management fees.
Subscribe to:
Posts (Atom)