Big week around here. Mr. Cheap announced on Tuesday that he would be leaving the blog and on Wednesday I mentioned that I’ve written a book.

The book is completed, but I’m working on some of the final publishing details. The final copy was submitted to the publisher and I received a proof copy yesterday. The idea of the proof copy is to make sure the book looks ok and doesn’t have any errors. Unfortunately, there was a major problem with the cover, so there wasn’t much suspense about whether I could approve it or not.

There is always one more step.

My fave links

My Journey to Millions says that money does buy happiness. Funny post.

Invest It Wisely had a great post on Vanguard ETFs. These are a good deal for Canadians.

I really enjoyed this story, which is about the results of taking deal-making too far:  The Parson’s Pleasure by Roald Dahl.

I found out about this story from some commenters on a recent yard sale post. The post (which wasn’t worth linking to) asks if it is ethical to buy something at a yard sale which is underpriced.

The rest of the links

Canadian Capitalist says that investment advisors are a lot like babysitters.

Larry MacDonald explains how mortgage rates are determined.

Boomer and Echo have some advice on dividend growth investing.

The Oblivious Investor shows how even cheap hedge funds are not cheap.

The Financial Blogger tells how to get a raise on top of a raise.

Today’s Economy takes a look at the truth about health care inflation.

Preet reveals an investment banker’s portfolio.

Million Dollar Journey says his net worth is on track.

Michael James does some analysis on when to start taking CPP payments.

As Mr. Cheap announced yesterday, our blog partnership has come to an end.  It’s been a great three years and I only hope that he continues to write elsewhere, so I can still enjoy his posts.

Future direction of Money Smarts Blog

My plan for Money Smarts Blog is to make the blog more focused on personal finance.  There will be the usual range of personal finance topics, but there will be an increased emphasis on investing topics such as investing accounts and investing products.

I’m going to do one post on Wednesdays and a roundup on Fridays.  I may try doing the occasional extra post, but my hope is that by only having one “real” post per week – the quality will be higher than if I try to do several posts per week.

I wrote a book!

I have written a book – it’s very, very close to being published.  I’m not going to reveal the book topic just yet, but I hope to announce it sometime this month.  Writing and self-publishing a book has been a very interesting project. It’s a lot like doing home renovation – there is always one more thing to do. You might have noticed the name change underneath the post title – this is a result of the book. It’s hard to sell books that are written by “Mike”.

Thanks a lot for reading Money Smarts Blog and thanks to Mr. Cheap for all his great posts!

Mike recently hinted at some upcoming changes and got frequent commenters intrigued. In the past, it’s often take us a couple of stabs to clearly convey changes to the blog, so this is my half of the description of what’s happening.  Mike should be providing more details tomorrow.

Mike recently called me up, reminded me that when I sold him my half of the blog we’d agreed that either one of us could opt-out of the paying me $20 / post agreement we’d made, and that he wanted to bring it to an end. My reaction was actually to laugh, because I’d been planning for a while to tell him I was ready to wrap it up as well, so we were completely on the same page (the official credit for the “dump” goes to Mike, but it was a very mutual decision! ).

My understanding of Mike’s perspective, which I’m sure will be explained further in future posts and be put into effect in September, is that he’s interested in making the blog more practical, with posts that explain precisely how to do things. I certainly have a “navel gazing” element to my take of personal finance, musing about what it all means more often than detailing alternative asset allocations.

My current plans are somewhat up in the air. Part of me wants to go back to blogging on my own, with a more experimental approach (incorporate pod-casts, shorter daily posts, longer essays, instructional videos and the like). Part of me is drawn to moving to a totally different area and starting to blog on something other than personal finance. Part of me is also drawn to using my “blog writing” time to move forward on one of my book ideas. The current twice a week, close-to-1000 word blog posting has gotten somewhat stale for me, and if I’m going to keep learning I think I need to move to something new.

At a conference recently I talked to a woman who said that she feels every grad student needs something outside their studies to “feed their soul”. She said she cooks gourmet dinners for a dinner party every Sunday night and that feeds her soul (and her friends’ stomaches!). In “Better“, Atul Gawande talks about something similar when he discusses how writing makes him a better surgeon (and he recommends to every surgeon that they have another activity that they’re passionate about outside the hospital). Blogging has served that role for me for the last couple years of my PhD program, so it’s time to find a new outlet for this part of my life.

At every step of the way, Mike and I have been of almost the exact same mind about most issues (joining forces, how to run the blog, advertising policies, investing philosophies, acceptable and unacceptable behaviour on the part of commenters, and when to go our separate ways). From my end, I really couldn’t have asked for a better partnership (if I can find a woman like Mike I better marry her immediately! ).

Thanks to the Quest for Financial Security / Quest for Four Pillars / Four Pillars / Money Smarts Blog readers and commenters and the Canadian (and International) Personal Finance bloggers for the last three years, it’s been a blast! I’ve LOVED the comments and trackbacks (responses on other blogs to my posts)!!!

We have an interesting RESP question asked by Bea – who shall henceforth be referred to as “Grandma B”. 

Here is her comment:

Who supervises how the resp is spent–can a child remove all the funds and not use them for education–I am a grandmother of a family who have resp grants from me–I hold the papers in my name and know the father would love to grasp the funds on the 18th birthday–what is the protection–is there proof needed by the government that it was used for education? If the 2nd child turns 18 and the first one did not go on to school are they transferable? Appreciate your comments. Bea

Wow, I sense that RESPs are not a calm dinner table topic in that family!

Ok, let’s go through the questions:

Can a child (or beneficiary) remove funds from an RESP account?

No, they can’t.  The person who opens the RESP account (also known as the subscriber) is the only person who can authorize any payments from the account.

Can the child’s father remove money from the RESP account?

No, same reason as above.

What proof is needed that money from an RESP is used for education?

When you do a proper educational assistance payment (EAP) then you have to show proof of enrolment to the financial institution when you request a payment.  Contact the financial institution for the exact documentation they require.  You don’t have to provide receipts or prove that the money was spent on anything “educational”.

Can I transfer RESP money to a sibling?

Yes, you can.  If the older child does not use all their RESP amounts, then you can transfer to a sibling.  Keep in mind that the lifetime grant limit of $7,200 will still apply.  If you try to transfer grants which give one beneficiary more than $7,200 in grants, then the grants will be returned to the government.

You don’t need a family plan account to do the transfer.  This can be done between two individual accounts as well.

I hope this answers your questions, Grandma B!

The Toronto heat wave is finally over. I think it started sometime in February?

Lots of big announcements regarding Money Smarts Blog next week, so make sure you come back and check them out. One announcement on Tuesday and another on Wednesday.

My wife sent me a couple of great quotes regarding inactivity this week – I thought they were great.

You cannot plough a field by turning it over in your mind.

Nothing will ever be attempted if all possible objections must first be overcome.
Samuel Johnson

My faves

Michael James on Money wrote a neat post on exactly how much his in-ground pool cost in 2010 dollars.  You’ll have to read the post to find out the cost, but it is big bucks for an item that probably has a neutral effect on your house price.  It was worth it for him though.

Jonathan Fields had a great post about how the little things on your to-do list can prevent you from completing your important tasks.

More great links

My Own Advisor has switched his RRSP holdings to low-cost ETFs.

Remodeling This Life wrote about her adventures in Algonquin Park.

The Financial Blogger brags about his huge passive income while blogging from his yacht.

Saving to Invest shows how refinancing may appear to save money, but in fact often cost you money.

The Oblivious Investor says that most retirement calculators are garbage.

Landlord Rescue came up with 11 reasons to use a real estate agent.

Rachelle wrote a post for this blog called A Modest Income Tax Proposal.  The title was based on a Jonathan Swift story called A Modest Proposal which is an entertaining read, even though it was written a couple of centuries ago.

Million Dollar Journey exposes the downside of owning REITs.

Canadian Capitalist wrote about a site that will keep track of your ACB and capital gains.

Preet covers the news that ING has launched a free chequing account.

Larry MacDonald thinks the financial sector is too big.

Canadian Couch Potato offers some guidance for choosing a Canadian dividend ETF.

For the bloggers:

Blogthority warns don’t be a slave to your regular readers.

One of the best things about blogging is the comments readers leave. Far more than other publishing mediums, blogs allow the writers to get closer to having a dialogue with their readers.

On a number of occasions I’ve talked to people about comments, why readers comment and how to get them to do so more. I’m unwilling to follow a number of the approaches myself, but here they are for other bloggers to consider.

Get More Readers

There’s a certain proportion of readers who will comment on blog posts (I’ve heard the estimate of 1% from multiple sources), so the easiest way to get more comments is to get more readers. I’ve written before on some general ideas about this, but most bloggers are probably already doing everything they can to get as many readers as possible.

Write “Accessible” Posts

A friend’s father was talking about how the hardest decisions for an organization are often made the quickest. If a board of directors is considering building a new power plant, there’s probably one person who really understands what this entails and they’ll do what she thinks is best. If they’re deciding whether or not to buy new mops for the custodial staff, everyone has an opinion and the discussion may take a long time.

Similarly, complex posts will get fewer comments. I think Thicken My Wallet writes some of the most detailed and insightful posts in the personal finance blogosphere (I think 98% of his stuff is gold). A ton of his posts get 1 or 2 comments, and some don’t get any.

If a blogger writes nothing but rehashes on the themes of “avoid debt”, “investment X is AMAZING!”, “investment Y SUCKS!”, “latte factors”, or “spend less than you earn”, it will often be a blog that will get tons of commenters (as everyone can put together a comment on many of these topics).

I think Garth Turner at greaterfool.ca is pretty funny, but basically every one of his posts boils down to “real estate is over priced and the market is going to crash”. Each of his posts gets hundreds of comments.

This is something that I think has limited the comments I get, but I’m just not willing to write posts that keep going over the same territory repeatedly (it seems boring to me).

Write Inflammatory Posts

Casey Serin is the master of this, but bloggers learn when a post hits certain buttons among their readership. Writing a post on the subject is a good way to get passionate members of both sides posting comments. Our posts on real estate agents do this, although Mike and I have only written these posts when we have something to say, not to get people fired up.

A high traffic blog could easily be created around the idea of a daily post criticizing real estate agents. You’d get the agent rebuttals, people agreeing, people leaving anecdotes of bad experiences, and so forth. Each day, just write 400 words and get everyone going again. Other ideas would be daily posts on: why the government needs to give poor people money, why poor people are the cause of all of society’s ills, how you just need to *believe* in success to achieve it, how taxation is evil, how real estate is the easy path to riches, how Forex trading is the easy path to riches, how gold is the easy path to riches, or how some particular stock trading systems is the easy path to riches. Don’t do anything substantive on any of these topics, just keep saying the same vacuous things in different ways each day.

Respond to Comments

When I first dabbled with blogging I thought that it might make sense to not respond to comments at all. My thinking way that I have my say in the posts, so perhaps I should let readers talk it out between themselves in the comments. If your goal is to get more comments, DEFINITELY respond to as many comments as you can. People will be far more likely to leave comments in the future if they get a response. It also leads into discussions in the comments section, which will tend to draw more people in and get more commenting happening.

Encourage Commenters

I think we’ve had some AMAZING people commenting on this blog over the years, but there have been a couple of crazies that stuck around for quite a while. They’re often good at writing inflammatory comments and getting people going, and they leave LOTS of comments, so encouraging them may be a good idea if lots of comments is your goal. I always wanted to maintain a high value of commenting as well as raw number, so I’d ignore them and eventually the nuts would move on (probably related to my last point: if you ignore the good commenters they’ll move on too).

Mention Comments / Commenters in Posts

On occasion I’ve based a post around a good comment or highlight a commenter in a post. This is like the last two ideas on steroids (and is worth doing).

Link to, and Comment on, Other Blogs

It may only lead to a single comment, but most readers have probably seen the comments bloggers leave one another thanking them for links. Linking to other blogs and other blogs’ posts is worthwhile. When I get a good comment from a blogger I haven’t seen before, I’m VERY likely to go and check out their blog (and usually leave at least a couple of comments on interesting posts). Theoretically, bloggers should leave good comments since they got enough interesting ideas to write posts on their own blogs (and can toss a couple interesting ideas into the comment section of other blogs).

Keep Posts Short

My posts are too long, I realize many people just won’t get all the way through a 1,000 word post. Some commenters will leave comments without reading the entire post, but they’re jackasses for the most part. Keeping posts short and digestible will increase the number of people who finish reading it, and therefore may consider leaving a comment.

Ask Your Readers Questions

I suspect some people are willing to comment but just can’t think of anything to write. One technique is to try to encourage discussion with a few questions at the end of a post that you hope people will comment on.

What have you found to be the posts most likely to get you to leave a comment? For bloggers out there, what have you found to be the best ways to get readers to comment?

Dillon recently left a question about using RESP funds for CEGEP on my RESP withdrawal rules post.  For those of you who don’t know, CEGEP is an education program which students in Quebec must complete before heading to university.

Here is his question:

Hi, I am 16 years old and going to be attending CEGEP this fall. My father has saved some money in a RESP account (in which I am the beneficier) and I was wondering how can I “use” the money without being charged the taxes and without losing the accumulated income. Do I need to request a special reciept from my school?
Thanks a lot!

Great question Dillon, you are the first “beneficiary” who has ever sent a question to me. 

First, let’s answer the question directly and then look at a few other possible issues.

How to use RESP funds for CEGEP or other post-secondary education

To use money from an RESP account for eligible post-secondary education, you must provide some sort of proof of enrollment to the financial institution which holds the RESP.

I would suggest phoning the financial institution where the RESP account is held, tell them your situation, including which CEGEP school you will be attending.  They should be able to tell you exactly which documentation is necessary to complete an Educational Assistance Payment (EAP) from the account.

Your Father will need to provide this enrollment documentation to the financial institution each time a withdrawal in requested.

You don’t need to show any kind of receipts or justify the withdrawal in any way.  As long as you are a student, then the money can be withdrawn and used for whatever you like.

The subscriber or owner of the account controls the payments

One point I want to emphasize is that the subscriber (the person who opened the account) controls the payments.  The beneficiary cannot request any payments, they must work with the subscriber in order to use the RESP money.  In Dillon’s case, his Father has to request the payment and provide the enrolment proof to the financial institution.

Financial institutions will not provide info to anyone other than the account holder.

This ties in with the previous point, a beneficiary cannot call up the financial institution and make inquiries about the RESP account.  Only the subscriber can do that.  The beneficiary can call and ask about procedures, such as how to request an RESP withdrawal.  A beneficiary cannot call and ask anything specific to the RESP account, such as how much money is in the account.

Make sure you check out my post 8 things you need to know about withdrawing money from an RESP account.

Good luck with school Dillon!

This article was written by Rachelle: a real estate guru who works as a property manager and helps investors find rental properties in Toronto and surrounding areas. She has recently started a very interesting blog called Landlord Rescue. You can subscribe to the RSS feed here.

In the wake of Mike pulling the controversial post because of other bloggers like Canadian Capitalist taking offence to the strategy in a post called A Scheme to save 100% of Income Tax – No Thanks. Larry Macdonald of Canadian Business Online also had a word in his post Tax Schemes and Financial Tune-Ups. Preet Banejree of Where Does All My Money Go did an interview with Martin Horvath called Interview With a Marked Man.

Holy Moly!

It’s our very own tempest in a teacup! Awesome. I was blissfully unaware of the controversy surrounding the post until this morning when I got Preet’s email subscription. You can’t know everything… In any case you can’t rely on financial planners to come up with solutions to tax problems. You need a genius like me!

My tax reduction strategy outlined

First of all nothing in life worth doing is easy. I don’t want to hear any whining about how you can’t make this solution work. It’s 100% legal. You’ll need an accomplice to help you. Your wife or husband is probably the best candidate. Other women or men may be willing to assist, but this increases the complexity of the scheme exponentially and is NOT recommended. I have actually implemented this strategy myself once and will one day (hopefully) expand my use further.

You’ll also need some free time to devote to your project. Like any other venture, initial forays are exciting and pleasurable. Consequent implementations are more challenging because of the initial product. There will be challenges en route, stay the course and be strong.

My method relies on the production of numerous children each of which comes with a considerable tax deduction which lasts for at least 18 years. With today’s modern technology, tax deductions can be acquired in litters. For example this ambitious tax avoider had 6 and 8 children at once.  This is very beneficial if you get a large raise or bonus or are in a hurry to avoid paying taxes. Tax deductions are great and more is obviously better, like vitamins.

Wealthy Canadians may be reluctant to embrace my strategy. There is a often-perpetuated myth that children may be expensive. This idea totally ignores economy of scale and additional opportunities provided by hordes of tax deductions. For instance, during the first year of life, the children can be breastfed, which is free. If you have multiple children: don’t worry, small children take up less space. Storage may become an issue. If this occurs just start sending them out on “sleep overs” You may even find this an ideal time to work on next year’s crop.

Once you have a substantial amount of CRA exemptions you may begin to think that you need to expand your living quarters. As usual every problem has already been solved and thanks to the wonders of the internet, the solution is readily accessible. I am so magnanimous that I will share the solution. I would like to add that charging your underage children rent is not really ethical… you have my permission to employ the fix without requiring payment.  Ignore negative thinkers.

There are actually considerable savings available to the creative parent who seeks to use their powers for good. For example, children enjoy bike riding. You can set up a electricity generating bike “farm” of your very own and help save the planet!

You will no longer require expensive tickets to sporting events, you can have your own personal hockey, football or soccer team ready to entertain you on demand. I can almost certainly guarantee you ringside attendance to numerous boxing matches. Entrepreneurial parents could even sell tickets.

Summary

As you can see there is no reason to employ dubious tax reduction strategies. There are perfectly legal methods allowed to reduce your taxation. These deductions are unlikely to be retroactively revoked. You don’t want to fall for any half baked and expensive schemes.

If you liked this article sign up for a free RSS subscription to Money Smarts Blog. Whenever I write, I offer additional promotions to entice people into joining great blogs like this one. Today’s special is unlimited fertility. What are you still reading for? Go get busy!

One of the things I find interesting about human cognition is how we handle different intellectual tasks.  Catching a ball is an INCREDIBLY tough task on the surface, the catcher needs to:  estimate the ball’s current location, estimate it’s current direction and speed of travel, apply the force of gravity to it to determine its trajectory, position her hand in the right location and tense the muscles at the moment of impact.  We do this so effortlessly that children can learn to do it after a few attempts.

Compare this to deriving the area of a circle.  The concept is quite simple, but you have to think pretty hard to get your head around it the first time you come across it. Our brains are clearly better optimized for projectile motion than for geometry.

One of the things that throws us is rates of change.  To really bake someone’s noggin get them thinking about non-linear rates of change, such as exponential growth.  We all know compound interest is great for our money, but it’s very easy to make mistakes when we start trying to reason about, and make extrapolations in, such situations.

A number of investing myths are based on such misunderstandings, and one of the most popularly believed is that location inherently affects the appreciation rate of property.  As one real estate software site suggests:

The location of a property can affect how fast it appreciates in value.  Water properties have been increasing in value at a fast pace.  There is a finite amount of water property available in the United States and demand has been increasing.  More and more people are reaching retirement age fueling the demand for recreational property.

Sounds reasonable, a commentor many moons ago made exactly this argument.  Similar arguments are made about different price tiers of real estate and properties in world famous towns appreciating faster than the market as a whole.

John Reed responds to this myth (and, in my opinion neatly demolishes it) with comments such as:

“No price category appreciates faster consistently. It would be mathematically impossible because that category would eventually cost too much for anyone.”

and

“However, I have never bought the notion that high-priced homes appreciate at a higher rate than moderate-priced homes. If it were true, the disparity between the two would grow greater as a percentage year by year. Say that in 2004 the median price of a high home were $400,000 and the median price of a moderate home were $250,000. That means the moderate home is 62.5% of the high one.

Then say the high home appreciates 10% and the moderate, 5%. That gives new prices of $250,000 x 1.05 = $262,500 and $400,000 x 1.10 = $440,000. Now the moderate home is only $262,500 ÷ $440,000 =59.7% of the high. Run those numbers since the beginning of home building and you get something that bears no resemblance to current reality.”

I was convinced the first time I read the first quote.  Mr. Reed only talks about appreciation rates for different categories of the housing market, but to my mind the same logic clearly holds for other situations.

To be clear, I’m *not* saying that all houses in a town have the same value, and I’m *not* saying that housing in all towns have the same value and I’m *not* saying waterfront property has the same value as non-waterfront property and I’m *not* saying that transitional areas can’t appreciate at a different rate during the change.  What I’m saying is that all properties, on average, tend to appreciate at the same rate (so if waterfront property is twice the value of non-waterfront property, it will tend to remain twice the value into the future).

So, say non-waterfront property was worth $100k and a waterfront property was worth $200k.  If the non-waterfront property went up $10K and the waterfront property went up $20K (over some period of time), their appreciation rates are identical (10% in both cases).

While factors exist that may temporarily distort appreciation (often economic issues that lead to more people moving into or out of a community), these WILL be temporary.  If an aging population fuels higher appreciation of waterfront property, then once this population gets to an age they can’t enjoy these properties any more there will be a lower appreciation as these properties flood back onto the market.

Let’s go through an thought exercise for anyone who still doesn’t believe it.  You (the reader) and I are two Roman siblings who move to Egypt in 10 AD (or, in 10 CE for people who are morons).  I buy a nice little villa in the heart of Alexandria for 10,000 denarii and you buy a similar villa (on the water) for 20,000 dinarii.  We each marry locals and have many children – our Greek slaves shout opa! – who each remain in these ancestral homes, maintaining them, updating them, dealing with political turmoil, and living their lives.  The properties get passed down through the next 2000 years at which point our descendants get together to compare the values of the identical modern houses they’ve each had recently built on our respective plots of land…

Say we accept that there’s a higher appreciation rate for waterfront property, and let’s make it TINY (a 1% difference).  Proponents of faster appreciation claim MUCH higher rates than this.  Currently, in Alexandria, your property is valued at LE 800000.00 (or $147,378.16 Canadian), quite reasonable for what looks like a beautiful place to live.

Given a 1% difference in appreciation, this would mean my comparable, inland property would be worth LE 0.0018 (800 000 / (1.01)^2000)).  This would be 0.03 CENTS Canadian.

As Mr. Reed eloquently puts it, “you get something that bears no resemblance to current reality.”

Are you willing to invest in oil company stocks if you had the money? A new poll commissioned by Edward Jones revealed only 23% of Canadians would! Whereas Calgarians were most likely to invest in oil at 40%, Quebecers were the least likely group at 10%.

Why?

Why are 77% of Canadians not interested in oil company stocks?

With oil companies dominating the headlines with mostly bad news, I think that by the end of July Canadians were fed up with BP’s oil spill fiasco in the Gulf of Mexico, followed by Enbridge’s ruptured pipeline in the Kalamazoo River in Michigan. Add to that a string of bad publicity aimed at the oil sands of Alberta and you got yourself an answer.

I can understand that while the result represents a reaction to the afore-mentioned events, it by no means justifies ignoring the Canadian oil sector totally for the following reasons:

Growing Demand: The combined populations of India and China represent one-third of the world’s total population but only account for 12% of global oil consumption. In comparison, the U.S. represents 5% of the world population but uses 25% of its oil. As these economies grow, they will be consuming more and more oil as they buy more cars, ships, planes and machinery. Keep in mind that they would like to reach the same standard of living we enjoy over here which will place a lot of pressure on supplies in the future.

International Exposure: Oil is an international commodity that gives you exposure to world markets. Many developing countries are increasingly dependent on oil as a cheap source of energy to fuel their economic growth.

Sector Diversification: A balanced portfolio with sector diversification is recommended having 15% in the energy sector. Holding a mix of Canadian integrated oil and gas companies would improve diversification and enhance returns.  One can pick a set of stocks or simply choose from a number of ETFs trading on the TSX.

Political Stability: By investing in Canada you do not have to worry about political stability unlike investing in far away lands under dictatorship regimes. You will be paying a premium in comparison to companies established overseas but this will be offset by reduced currency risks.

Currency Risk: You don’t have to convert your dollars into another currency in order to invest in this commodity. Moreover, the price of a barrel of oil will move inversely to any devaluation to the currency used for pricing.

Sector Stability: It should be noted that Canada has the second largest reserves of oil after Saudi Arabia and is the top exporter of oil to the USA. As such, the Canadian oil companies won’t be disappearing anytime soon.

Would you consider investing in the Canadian oil sector now?

If you wish to learn more about the case for oil be sure to read The Fundamentals of Investing in Oil. Besides the oil sands, Canada has one of the hottest oil plays in North America: Alberta’s Cardium Formation where several intermediate and senior Canadian companies are operating.

About the author:

Mich is the author behind Beating The Index: a personal finance blog with a focus on energy stocks and precious metals. You can follow his fight with the TSX as he tries to beat the index with a DIY approach.   Please subscribe to his RSS feed here.