Becoming a better investor

So, how do you do a better job managing your investments, either on your own or with a financial adviser? About 70 people, keen to brush up their skills, have enrolled in the course I’m teaching at the University of Toronto’s school of continuing studies.

In the first week, we focused on the role of emotions. Behavioural finance shows that investors handicap their performance if they react impulsively to fear and greed or if they fall prey to overconfidence. I found interesting examples and useful lessons on reining in your emotions (or building in an overconfidence discount) in Jason Zweig’s new book, Your Money and Your Brain and an older book, Why Smart People Make Big Money Mistakes and How to Correct Them, by Gary Belsky and Thomas Gilovich.

In the second week, we looked at controlling costs. This is one area where investors have some degree of control. It’s hard to predict moves in the economy, interest rates and stock and bond markets. It’s hard to predict how fund managers will perform or how individual companies will perform. But if you can get a handle on your costs, you can improve your investment returns.

To keep costs low, you can avoid buying mutual funds with deferred sales charges and above-average management expense ratios. And instead of chasing hot fund managers, you can use passively-managed index funds or exchange-traded funds in your portfolio. Also, do-it-yourself investing with a discount brokerage account can reduce costs, as long as you don’t get addicted to trading online.

We also looked at the importance of marketing in the financial services industry. Companies can create demand for new products by manufacturing a crisis that needs the solution they offer. That’s all too common in selling retirement products and trendy new mutual funds.

An example of marketing hype is Manulife’s Income Plus, which talks about providing guaranteed income for life and all the upside of the markets. But at the website, you can barely find any mention of the high-priced guaranteed investment funds Manulife sells and the added cost of providing the guaranteed income for life. Maybe Manulife wants to leave “investor education” to commission-paid financial advisers, but too many of them push products without proper explanation. (Just look at Portus principal-protected notes linked to hedge funds. As the biggest seller of this product, Manulife had to pony up almost $240 million in refunds when the company collapsed.)

A low-key marketing campaign seems to be working for Steadyhand, a new fund company keen to differentiate itself from others (all too rare in a copycat industry). The president came from Phillips Hager & North, which has low fees, a limited product line and average performance, except in Canadian stocks and bonds where it outperforms. Here’s something I found at the company’s blog about its costs.

Providing top-notch money management at a reasonable price is what Steadyhand is all about. And our fee structure rewards clients that stick with us and grow their assets here. As their account grows, the fee is reduced and if they’re with us more than 5 years, it is reduced further.

I acknowledge that there are lower priced options out there, namely exchange-traded funds. But for truly active management, Steadyhand has few peers.

I’ve never had a formal contact with this new fund company, though I know their people are writing blogs and posting comments at other blogs (including mine). Blogs are a new marketing channel for many firms. There’s a trick to keeping them conversational and informative. You don’t want to read an ad masquerading as a blog.

Why are Canadian prices higher with U.S. dollar parity?

The big price gaps between identical Canadian and U.S. products are making people irate. That was the topic of my column today, which got many comments.

Canadians realize that prices take awhile to adjust along the supply chain, but wonder why the adjustments are taking so long. And why do some products still sell for as much as 30 per cent to 40 per cent higher in Canada? That’s unfair.

Cars are a topic of great concern, because the savings could be so impressive if shared with customers. Henry Juroviesky, the lawyer behind the car conspiracy lawsuit, says he’s received more than 1,000 emails and calls from people who’d like to join the class action or share their frustration at the roadblocks to buying vehicles in the United States. The biggest obstacle is being told you won’t get warranty coverage in Canada dealers if you buy from a U.S. dealer and bring your car across the border.

My life with Bell

If you read this blog, you know the most active area is Bell Blues. It keeps expanding with comments from disillusioned customers and employees.

Lately, I had my own Bell experience when my home phones stopped ringing. I called 310-BELL and yes, I ended up speaking to someone in India. (I asked where he was, just to be sure.) He said he’d send a technician to my house, but couldn’t give me a specific time. It could be any time from 9 a.m. to 5 p.m. the next day.

That’s wrong, I later found out from Bell. Customers can ask for, and get, a morning appointment or an afternoon appointment. There are three-hour windows for service. Bell even pulled my call to India to see what was said and promised that this CSR would get more coaching

Anyway, a couple of hours after my call, the technician was already at my house. No one was there, but he wanted to check the wires outside to look for the problem. After working all afternoon and into the evening, he fixed the wires and left us an invoice that said nothing. Absolutely no information. All he had written was a mysterious numerical code.

Since I subscribe to a bundle of Bell phone services that includes the wire care plan, I didn’t have to pay anything for the work (which would have cost $100 without it). But even if I didn’t pay, I still wanted to know what was done to my phones. Bell promised to do some coaching with the technician, too.

This week, I spoke to the Bell Pensioners Group , which had several hundred people at an annual meeting, keen to hear the latest news about pensions and privatization and taxable capital gains on BCE shares. I talked about investing, but couldn’t resist the opportunity to talk about Bell’s customer service.

Here’s a response from someone in the pensioners’ group, who sent me an email the following day.

Just a quick note to a busy lady to say thanks for taking the time to speak to the Bell pensioners on Thursday afternoon. These are the folks who made the company what it used to be and solved the customer issues usually in person. We all understand the issues now, and I, for one, am glad that I am no longer part of the “problem” in customer service.

Keep up the interesting column. You likely gained a few more readers as well.

Here’s the best line I heard that day. After the pension expert’s speech, someone went to the microphone and asked a question that made everyone laugh: “Is Emily going to be retired when the new management comes in?”

Just think of it! Getting a real person to answer when you call the phone company. What a radical concept.

Keeping your credit and debit cards safe from harm

I’m really concerned about payment fraud and identity theft (an occupational hazard, given what I do). So, I can’t help noticing how often companies ask for personal information without paying attention to privacy or security concerns.

My travel agent asked me to fax my credit card number and three-digit security code. No way, I said. I’ll give you the forms in person, but I’m not giving you my three-digit code (or CVV2). Show me why you need it and if you can’t, you won’t get it.

The University of Toronto wanted both a credit card number and CVV2 for my son’s meal plan. But since that was an online transaction I initiated, I agreed to supply it. The code provides extra security for the retailer and the cardholder in situations where the card can’t be handed over in person.

Tonight, we went out for dinner with friends who had been the victims of debit card fraud. They were driving home from their cottage and stopped at a gas station, where the wife used the CIBC automatic teller machine to take out cash. Later, while checking her bank statement, she noticed a couple of withdrawals with extra fees. But that didn’t make sense, since she never used other banks’ ATMs, only CIBC ATMs.

When she called the bank, the first question was: “Did you withdraw cash at a gas station?” Fraudsters install hidden cameras that take pictures of your debit card and PIN at places that aren’t as secure as bank branches. And unless you check your statements really carefully, you might not even spot those small withdrawals that aren’t yours.

Thicken My Wallet, a personal finance blog, found a rather large ATM withdrawal ($361.29) on his bank statement. He discovered that his card had been skimmed and withdrawals made from outside the country. The odd amount was because of currency conversion.

He had two observations to make after this experience, while waiting for the money to be reimbursed by his bank:

If someone wants to commit fraud they will. Just try to catch it as quickly as possible to minimize the damage. I caught the withdrawal by pure dumb luck – it appears I found it within 6 hours of it happening. The moral of the story: don’t wait until you get a bank statement to check your balance. Check it often for cash flow and fraud prevention purposes and report anything out of the ordinary immediately.

As dumb luck on my part and not part of any design, I never raised the withdrawal limit on my bank card in the 15 years since I’ve had this account. Thus, they hit the ATM withdrawal limit quickly. If you don’t need large amounts of cash at one time, limit your ATM withdrawal maximum for both budgeting and fraud prevention purposes.

One day, Canadians will have much more protection from card fraud. That’s because every card will have a computer chip embedded in it. It’s fun to read the fancy footwork in a Q&A published by the Interac Association, trying to say the chip is safe without saying the magnetic stripe is not so safe.

Here’s what you need to konw:

Financial institutions will be required to store the same type of information on the chip that is currently stored on the magnetic stripe. But while the information is the same, it will now be stored within the chip, which is personalized with data unique to the financial institution and is more difficult to duplicate. This will significantly reduce debit card skimming and the production of counterfeit cards.

If only chips were here now! But the transition will take years. Interac has a deadline of Dec. 31, 2012, after which magnetic stripe transactions will no longer be accepted at ATMs. And it won’t be until Dec. 31, 2015 that magnetic stripe transactions will be phased out at the point of sale.

So, pay attention to your cards and your monthly statements. Your scrutiny is all that’s keeping you from losing money to sophisticated thievery.

Investing for beginners, part two

Some people save enough to retire at an early age and do it without the help of a financial adviser. That’s the life lesson taught by Derek Foster, the Ottawa man who built a portfolio of $400,000 or so, less than half of what many financial advisers think you need to quit work. He’s 37 and left the full-time work force three years ago, staying home with his wife and four kids. Meanwhile, he’s writing and publishing books, Stop Working and The Lazy Investor, to help others follow his strategy.

Foster came to my investing class last week to talk about his philosophy. He believes in buying high-yield stocks in stable, recession-proof businesses, companies that are mature and that increase their dividends regularly to help you keep up with inflation. He uses margin to juice his returns. He holds for long periods and doesn’t pay attention to what the markets are doing. He has no RRSP, preferring to pay taxes on his investments today, instead of down the road. He doesn’t diversify overseas and buys only in Canada and the United States. He doesn’t diversify by sector and just buys companies he likes.

I don’t agree with much of what he says, but I can’t argue with success. His portfolio is growing and he lives on the income it generates. With no debt and a paid-off house, he can always put on a new mortgage if stocks go down and he gets a margin call. He’s given each of his kids $8,500 for a higher education fund and he’s managing the money until they’re old enough to take over. If they want more for university, they’ll have to earn it.

Foster is an engaging personality and enthusiastic speaker. The students liked hearing his story and asked lots of questions. It’s always inspiring to hear from someone who works hard to reach a goal, which in his case was leading a leisurely life outside of the daily rat race.

For many of us, however, it’s scary to follow our hunches and invest on our own. We may never get beyond a high-interest savings account or guaranteed investment certificate without a financial adviser. So, we have to know how to find good advice and avoid the “snakes in suits,” whose interests are not aligned with our interests.

In my class, I emphasize the importance of the new client account form. This is a document that must be signed at the start of a relationship, setting out your level of experience, investment knowledge and risk tolerance. It will be used as evidence in a dispute, so it has to be filled out properly.

Here’s a good booklet to read, published by the Canadian Securities Regulators, called Choosing Your Financial Adviser. On page 10, it says:

Before you sign the form, make sure that everything in it is correct. Errors in the form may lead to inappropriate advice and may erode the legal protections you are entitled to if something goes wrong. Get a copy of the form and keep it with your account records.

If you want to stay out of trouble with an adviser, take this advice. Find the form, keep it in a safe spot and refer to it often. Later, if your life changes or your investing style shifts, read it again and revise it, if necessary. It’s an important piece of paper. Treat it with the respect it deserves.

Is cross-border shopping worthwhile?

Douglas Porter, a Bank of Montreal economist, made waves last month by criticizing the high price of Canadian consumer products compared to identical products sold in the United States. He found a 24 per cent price gap on a basket of assorted goods.

In his report, The Price is Wrong, he said retail prices in Canada have responded to the loonie’s moonshot “with all the speed of a three-toed sloth on a hot summer’s day.” As a result, inflation is higher than it should be and interest rates could be even lower.

So, what can consumers do? How can we persuade companies to adjust more quickly to exchange-rate changes? Here’s my advice.

Check out the U.S.-Canadian price gap on products, such as books and greeting cards, where it’s clearly visible. Then, buy from companies that have lowered prices to reflect the soaring Canadian dollar. If you see a big gap, ask the manufacturer why it’s still there and when it’s coming down.

One of my readers wrote to Carlton Cards about what he thought was a hefty surcharge. The company replied that higher operating costs in Canada – and not the exchange rate – were behind the higher prices. That reader now makes his own cards using his computer. It’s only a folded piece of paper, he told me.

What about cross-border shopping? There’s been an increase in personal limits to $400 for 48 hours, up from $200 before. But you have to tell the truth about what you bought. Getting caught smuggling in U.S. merchandise above your limit can cost you plenty.

Don’t forget the long waits at border crossings and the higher gas prices. And since the last wave of cross-border shopping in the early 1990s, many big U.S. retailers have planted roots in Canada. Passports are now mandatory for airplane trips across borders and soon will be for road trips, as well.

Speaking of road trips, should you buy a U.S.-made car? I’m not sure it’s worthwhile.
Cross-border shopping for vehicles is not simple. You may have to get the car modified, inspected and certified to meet our safety standards – and pay Canadian sales taxes on top of the U.S. taxes paid. Don’t underestimate the paperwork needed to do it properly.
There’s good advice here on importing a car from the U.S. As well as the government guide, you can also look here for practical tips.

Finally, many people have complaints about customer service at Air Canada and find they get better deals from airlines across the border. Scott Pilkey, see below, got nowhere with his correspondence about Air Canada’s exorbitant change fees. Deb says that’s a problem she’s experienced only with Air Canada, not other carriers.