Should You Borrow To Invest in Your RRSP?

Many Canadians wonder whether or not they should borrow money to help them maximize their RRSP contributions. Never was this idea touted more than in 2002 onward when interest rates were very low. There is no reason why it is not a good idea now, and interest rates are still historically low. This article, “Should clients borrow to catch up on RRSPs this year?” discusses why it can be a good idea.

Even though many experts discourage the use of long-term RRSP loans, most people would actually benefit from them, claims Talbot Stevens, a London-based financial educator, author, and industry consultant.

“If you just look at the math, RRSP catch-up loans always make sense when investment returns match or exceed the cost of borrowing,” explains Stevens. “If you can borrow at 6% interest and get returns of 6% or higher, you will come out ahead by borrowing to catch up on RRSPs, even if it takes 10 years or more to repay the remaining balance of the loan.

He does not go into detail here but the math is fairly simple. If the return in your RRSP matched the interest on the loan, the amount the RRSP increased by in the first year would match the amount you owed in interest on the loan. Once you take into account the tax refund that will be generated due to the RRSP deduction (at your marginal tax rate multipled by the amount of the deduction) you can see that you will wind up ahead. But I am neglecting something. We will be taxed on the RRSP’s returns later, when we withdraw it. This will reduce our effective return inside the RRSP. Not only that but we will be taxed on the contributions we made as well. The math does get a bit complicated, and it is always made even more difficult by the fact that it is impossible to predict future returns on an investment inside an RRSP. As the author of the quoted article says, however, behavioural factors are often overlooked when considering the advantages and disadvantages of borrowing to invest in your RRSP:

Stevens also likes the investment discipline afforded by long term RRSP loans. “When you also account for the behavioural reality that most investors spend their RRSP refunds, the scales tip heavily in favour of long-term RRSP loans, even when returns are half of the cost of borrowing,” says Stevens.

“For most investors, the catch-up RRSP strategy generally produces a larger retirement fund because the loan locks in a higher level of commitment. Once started, the loan becomes a forced savings plan, like a mortgage, where we don’t have a choice but to continue the payments.”

At first I did not understand what “the behavioural reality that most investors spend their RRSP refunds” had to do with the scales tipping “heavily in favour of long-term RRSP loans.” I think what he means is that if you have a long-term RRSP loan, you will be less-inclined to spend (in other words, waste) your RRSP refund. Instead you will be more likely to put it down towards the loan in an effort to lower interest payments and/or get rid of the debt sooner. Of couse it is better to contribute to your RRSP with cold-hard cash, but if you cannot maximize your contributions with cash, there does not seem to be anything fundamentally wrong with getting an RRSP “catch-up” loan.

Of course most of the arguments for and against borrowing to invest in your RRSP also apply to the pay down your debt vs. contribute to your RRSP argument. Special Offer

I never thought I would write a blog post with the words “special offer.” I hate gimmicks. Anyways, I just wanted to let my fellow Canadian taxpayers know that you can you save $4 at (regular price $14.99) by going to this special offer page and filling in your name and email address. I used last year for the first time and it was great. The previous years I used a free trial version of TaxWiz and then printed out the information and mailed it my return but I got tired of doing that. is free for anyone with less than $25,000 income as it was for me last year when I was a student. I liked it so much that I think I will use again this year. I think it’s definitely worth the $10.99 price after the discount. A filed return for a second family member such as a spouse is an extra $5 and extra dependants are free.

The other big online tax service, TurboTax Canada (formerly QuickTaxWeb) is $19.99 for the first return and $10.00 for each additional return. So for a family of 2, you are looking at $30 vs. $15.99 for after the discount. QuickTaxWeb’s website is also filled with promotional crap for Norton products.

Update: to the deal, you actually have to pay by February 28. This means you will have to fill in some basic data then go to the payment tab and pay by credit card. Then you can return to as much as you want to get your return all ready to file.

Rewards, Rewards, Rewards

Rewards programs, especially cash-back credit cards, seem to be all the rage these days especially on personal finance blogs. I think I mentioned on my blog a while back how a fellow employee of mine charges everything to his credit card because he gets 1% cash back for every dollar of purchases. Does he actually think he is getting ahead? People invariably think that they can make themselves richer by using a cashback credit card, than if they did not have a credit card at all. This boggles the mind but it is something that is not surprising. The 1% cash-back, the Air Miles points, the HBC Rewards Club Points are all easy to measure. Determining how much more you spend by using a credit card vs. cash is something that for most people is impossible to quantify.

I just read one common misconception a few days ago: “Hunting for rewards is worthwhile only if the entire credit card balance is paid in full every month.” While technically correct (in my opinion) for a small minority of the population, as the Wealthy Barber says, “many people who pay off their balance each month are still hurt by their use of credit cards.” Just because one pays of his/her credit card bill every month does not mean that the credit is just acting like a convenient replacement for cash. In fact most people spend more using a credit card without even realizing it, even those who pay it off every month. And if you accept this fact, than hunting for rewards programs is not worthwhile. Which brings me to one of the best blog posts I have read in a long time about cash-back credit cards.

Okay, the hottest thing going today, in the financial realm, is the “Cash Back” credit card. Almost every major credit card issuer is offering one of these “wonderful” things, promising you cash back for the purchases you make. Some promise cash back for groceries, gas, or everyday purchases. You can get bonus miles, bonus cash, and bonus gift cards. Wow! These things are wonderful…


Get real. These things are CRAP.

I strongly recommend everyone to read this article in full. He lists several counter-arguments to his position:

Now, there are several arguments against my position. I will list a few here, so that you don’t have to:
But ncnblog, I’m responsible with my credit and I pay off my balance each month.
But ncnblog, I was going to buy these things anyway, so I might as well get some cash back.
But ncnblog, I know how to handle my money, and I always make all my payments on time, and I am never going to be late or miss a payment. Relax.
But ncnblog, Credit cards are “safe” and they provide protection for me when I buy a product.
But ncnblog, Etc. Etc. Etc.

and then refutes them all . . .

One more thing, there may actually be one case where rewards programs are useful For people who are absolutely incapable of saving money, rewards programs are a forced savings programs. I am sure some people are incapable of saving up for a flight, for example. To them, earning more Air Miles by spending more money on groceries is not “spending more” than they normally would because this hypothetical person spends all their disposable cash anyways. They can then redeem a flight every 5 years or whatever, a flight that this hypothetical person would have never been capable of saving up for if their life depended on it. Although such a person would probably also have a tough time saving up their Air Miles for a flight anyways . . . So, on second though, rewards programs are in fact never useful.

Of course we all need credit cards at some point, for example, many online purchases require a credit card. So since at least one credit card is needed for these situations (when I use it for these purchases I pay it off instantly), you might as well get a rewards card rather than a plain jane card. On the other hand, the advantage to getting a plain jane credit card is that you never be tempted again to use a credit card for the rewards.

New Non-Market Cap Weighted Canadian ETF

There will be a new ETF in Canada starting tomorrow, February 22, the Claymore FTSE RAFI Canadian Index Fund (TSX:CRQ). You can find the press release here [pdf] and here. The FTSE’s RAFI series of indexes are part of a “new range of non-market cap weighted indices” and its “index constituents are weighted using four fundamental factors, rather than market capitalization. These factors include total cash dividends, free cash flow, total sales and book equity value.”

After a little digging I managed to find out exactly what stocks are in the Canadian RAFI index. You can view it in HTML, or you can also view it as a CSV (comma-separated values) file, import it into Excel or OpenOffice Spreadsheet and sort by whatever column you want. I did just that, sorting by weighting, and here’s what you get for the top 10 holdings. They do not say outright what the percent holdings are for each constituent stock, but they give the “% wght RAFI.” This is actually a stock’s percentage within the entire global RAFI index. I used those numbers to come up with the percentage holdings within this Canadian RAFI ETF/Index alone.

Royal Bank Of Canada 5.50%
BCE Inc 4.40%
Bank of Nova Scotia 4.28%
Alcan 4.22%
Manulife Financial 4.08%
Bank of Montreal 3.85%
Toronto-Dominion Com 3.78%
Canadian Imperial Bank of Commerce 3.50%
Sun Life Financial 3.04%
Thomson Corporation 3.00%

The next 10 stocks in the list are mostly energy/oil/gas stocks. No big surprises although I just had a quick look at the list. There are 63 stocks in total, of which all but 6 pay a dividend (or have paid “some” dividend before) and 27 of them yield greater than 2%. The stocks are still very much weighted by their market capitalization as you can see here:

FTSE RAFI Canadian Index Weightings vs. Market Cap

It makes me wonder why it is called a non-market cap index. They have used factors such as “total cash dividends, free cash flow, total sales and book equity value” which (I guess) are directly or indirectly correlated to the market capitalization (looking at the factors they used, it makes sense). Why is “total sales” used as a “factor”? I would never want to buy a stock just because it had high revenue. If they are spending 10 times as much it does not really matter now does it? Using “book equity value” makes some sense though. If a company stock has skyrocketed a la Nortel Networks, it’s book value may not necessarily go up, meaning that this index/ETF will not start overweighting in momentum stocks. On the other hand, all things considered equal, I am not sure that a stock with a higher book value really makes a better investment.

Personally from what I have seen so far, I liked the TD Select Canadian Value Index Fund better. But this index/ETF compared to the TD/S&P 60 (iUnits XIU) or TD/S&P Composite (iUnits XIC)? I think I am definitely in favour of using those four factors mentioned above compared to just market capitalization for passive index investing. I will have to look into this RAFI Index methodology in greater detail (if I can find details that is). This is a start anyways. At least we now have some other choices available for large cap semi-passive ETFs in Canada after the demise of TD ETFs.

Thanks to the Canadian Capitalist for pointing this out to me in a recent comment to my blog post about non-market cap weighted indexes. He originally blogged about it here.

Regrets of the Retired: Didn’t Save Enough!

According to a survey done last year, “98% of retirees surveyed by Oppenheimer regret how they spent their money before retiring” according to this article, “Regrets of the retired — didn’t save enough!’.”

Of course, Oppenheimer is using these numbers to boost their own business (they are another company with baby boomers on the brain), but I think think the first statistic about regretful retirees it is something that everyone should consider, regardless of your current income. The lifestyle you enjoy when you are in your 50s and still working may take a drastic turn in your 60s when you decide to retire and have only your retirement savings, existing non-retirement assets, and social security to depend on.

In order to ensure that I do not have the same regrets when I retire, I have made retirement our #1 savings goal. Eventually we may get to the point where we have enough saved up such that we will have more than enough money at 65 without making any more contributions (and assuming a conservative return on investment). Until that day arrives though, saving for retirement is our #1 savings goal. My wife is not that happy about it. We could have more cash to spend on our “wants” every month if we contributed less towards retirement, but ever since I saw those typical examples of compound interest (and learned the compound interest formula in school) I have been hell-bent on the belief that people should start saving up for retirement as early as possible. This maximizes the compounding effect and takes cash out of your hands so you will not waste it. One of the comments on the blog post above had something to this effect:

I suspect that these retirees regretted spending money on things they didn’t need. At work I constantly hear my colleagues breathlessly talking about the flat screen TVs they have, plasma vs. LCD, etc. The big ones cost thousands, and even smaller models can cost between $600 and $900. I am pretty happy with the 25″ tube-based TV I bought last year — it cost $190 and does the job just fine!

We also have a 29″ tube-based (CRT) TV. We actually got it free as a hand-me-down. With so many people upgrading to the latest technology these are easy to find! I am no longer concerned about keeping up with the Joneses. An investment in retirement savings will grow. And investment in a new TV will depreciate. Either you invest a little bit in your retirement now (and let it grow) or invest a lot in your retirement later. I am pretty confident that by choosing retirement over TVs now means that others will be trying to keep up with US later.

Altamira Canadian and Global Blue Chip Notes

While I was driving home work today I just caught the end of an advertisement for something called “Altamira Canadian Blue Chip Note.” I did not really know what it was all about but it sounded interesting. I have never owned an Altamira fund before but they have the lowest cost index funds in Canada (besides TD’s eFunds which are only available to TD clients) so I like them.

It turns out there are not one, but two varieties of Altamira Blue Chip Notes, the Canadian Blue Chip Note and the Global Blue Chip Note. Here are the important facts:

  • The issue date is March 1, 2006
  • The maturity date is March 1, 2014 (8 years from now)
  • The issuer (National Bank of Canada) has the option of “calling” (redeeming) the note early after four years. They will pay out a premium of 46.41%, which corresponds to about (1+0.1)4, 10% compounded over 4 years.
  • The Canadian Blue Chip note is comprised of 20 Canadian Blue Chip stocks in equal proportion (5% each) and the Global Blue Chip note is comprised of 20 global companies (primarily US).
  • When the note matures after 8 years the return is based on the price appreciation of the diversified basket of 20 Canadian companies. Essentially you capture the growth of the underlying stocks over the 8 year period; however, if the return of the stock basket was negative, you are paid out the principal amount. So effectively, your principal is preserved no matter what happens to the stock market.
  • No income taxes payable during the holding period.
  • Notes can be sold in a weekly secondary market maintained by National Bank Financial
  • National Bank of Canada guarantees repayment and has an A credit rating from S&P and DBRS.
  • 100% RRSP eligible
  • Minimum investment is $500 (5 notes, at $100 per note)
  • “The Bank will not charge any management fee in respect of the Notes. However, purchasers should realize that the Ordinary Dividends paid in respect of the shares comprising the Benchmark Portfolio will not be reinvested in the Benchmark Portfolio.”
  • No rebalancing of weightings in the underlying stock basket

These remind me of Canada Savings Bonds, but a bit more exciting. Have these things existed before? The top 20 stocks in the S&P/TSX 60 Index make up about 70% of the index, so owning the basket of 20 stocks in the Altamira Canadian Blue Chip Note is not much different. Also it looks like there is no management fee (how is that possible?) This seems like a great alternative to iUnits XIU ETF with the added protection against a market downturn.

One disadvantage is that you are somewhat locked in for either 4 or 8 years. Although I would see this feature as an advantage, preventing you from selling early and locking-in losses, and instead forcing you to ride out the ups and downs of the market to a higher return than if you had gotten out of the market after a downturn. The less we buy/sell/trade the better in my opinion.

The Stock Market: A Look Back

I am a bit of a history buff. At least I have started to become one in recent years. This article, “The Stock Market: A Look Back,” takes a look at the last one hundred years in the global equity markets as told by a book, “Triumph Of The Optimists: 101 Years Of Global Investment Returns,” by Elroy Dimson, Paul Marsh, Mike Staunton. Particularly, they discuss the distribution of equity across the world’s markets, noting the “anomalous growth of the U.S. market during this time [1900-2000].” Furthermore,

“Many valuable lessons can be learned from history, but extrapolating historical returns into the future is difficult and complicated . . . despite the clear success of the U.S. markets since 1900, investors need to remember that this exceptional performance may be just that: the exception, rather than the rule for the twentieth century. “Triumph Of The Optimists” argues that economic and stock market performance in the U.S. has not been typical of other countries and, therefore, should not necessarily be extrapolated into the future.

There are some great graphs provided, showing the growth of the U.S. market, as well as some graphs showing the differences in sector allocation in world markets in 1900 vs. 2000. In 1900 railway stocks made up 63% of stock market equity vs. 0.2% today. Information technology and pharmaceuticals were 0% in 1900 and are now 23% and 11% respectively. Insurance was also (curiously) 0% in 1900 but is now 5%. The rise and fall of sectors also makes it difficult to extrapolate future market performance from past data.

Just as a country’s influence over global economics evolves, so do the sectors of an economy. As these two tables show, the economies of 1900 and 2000 had few similarities. Of particular note are the sectors that were small in 1900 and 2000. For instance, 84% of the sectors today (represented by market capitalization) were of immaterial size or were non-existent at the beginning of the last century. These sweeping changes also make extrapolating future market performance from past events difficult.


A few months ago I had an idea to create a Digg-like site for financial news when I found out there was some open source digg-code out there. Looks like someone beat me to it: StockDigg. I’m not too fond of their categories and their content as a whole, so maybe there still is a niche for a digg-like site focused more on conservative investing for retirement and personal finance, rather than “stock picks.” I’ve yet to see a digg-style site be successful outside the technology/IT news area, so we’ll see. Anyways, I won’t be subscribing to StockDigg’s feed just yet but it’s an interesting site nonetheless.

14+ Money Saving Tips for Computer Geeks

14+ money saving computer user ideas” has some useful advice for saving money on technology. I am proud to say that I have recently done a few of things on the list, including 1) ditching our local phone line (although we got cell phones rather than VOIP) and 4) building a MythTV box. I was most impressed by how I resisted buying new hardware for my MythTV box as well. I was originally going to buy a new 250GB hard drive so I would have 120 hours of recording time. Instead I opted to stick with an old 10GB hard drive with only 6-7GB free (so 3 hours of recording time). Somehow I resisted spending that extra money on a bigger hard drive. Initially I thought that my MythTV box hadn’t saved me any money as the TV tuner card I bought cost $175. But when our main DVD player had to be given back to a friend I realized that the MythTV box could be used as a DVD player as well, rather than buying a brand new system. I hooked up a DVD-ROM drive I had laying around and so that saved some money. I also recently 11) bought an eBook rather than print. I paid about half the price (when you include shipping for the book) and only printed the chapters I needed using a laser printer fueled by dirt cheap toner refills from eBay. One thing I have not done is backed up my data recently! As mentioned in 14), you never know when something might happen.

Worst Fed Chairman Ever?

I’ve seen a lot of criticism about Alan Greenspan as he hands over the throne of the US Federal Reserve to Ben Bernanke. Here are some of the articles that I have seen (I haven’t read all of them):