Book Review: Money Logic by Moshe Milevsky

York University finance professor Moshe Milevsky (with co-author Michael Posner) takes us through a series of investment issues in this very worthwhile book, valuable both for its impeccable logic debunking certain common misconceptions and for its informal, readable, common sense approach to providing the explanations. The focus is on principles not on assessment of specific products from individual companies. That is not to say the analysis he presents to the reader is general and not actionable. On the contrary, Milevsky gives us the tools to make our own decision about the topics he covers.

The list of topics includes:

• assessing mutual fund performance
• dollar cost averaging as an investment approach
• the value of segregated mutual funds
• the whys of international diversification
• index-linked GICs
• how to do-it-yourself to get the same benefit as offered by index-linked GICs
• the mortgage paydown vs RRSP invest decision
• asset allocation in retirement - how much equity vs fixed income and why
• after the RRSP years - RRIFs vs annuities
• general discussion of risk or uncertainty in making future decisions and how to factor it in

For each of these topics, Milevsky first explains the nature of the product or issue, with analogies and simple examples, then he brings to bear the logic and the results of research (sparing us the details of the math or the computer models used) to draw out the conclusions or principles. His constant reference to probabilities makes us understand how many of the decisions depend on certain circumstances. For instance, in the annuities vs RRIF chapter, he uses life expectancy statistics to show how the benefit rises progressively (and differently for men and for women due to the longer life expectancy of women) the later the purchase of the annuity is made. His conclusion does not waffle however: "... it therefore makes very little sense in my judgment to convert an RRSP to a life annuity at age 69. The odds say that it makes more sense to wait." Hint: it's age 75 for men and 80 for women. There is also a handy short summary at the end of each chapter.

Though not revised since its publication in 1999, there is little feeling of it being dated. In some cases, like the admonition to us to diversify internationally, it has become more relevant, since the federal government has since removed the RRSP foreign content limit, advocated by Milevsky in the book.

Many people could benefit from reading this book and understanding and accepting some basic conclusions that still rage on as debates in the blogosphere. For instance, dollar cost averaging as an investment approach is stupid because it lowers investment returns, though regular automatic savings that are invested make a lot of sense because most people don't save. In other words, if you have a lump sum available from a lottery win, don't wait to invest it for reasons of dollar cost averaging. If you want to see why, buy Milevsky's book or borrow it from the library. Another topic of this sort is the RRSP vs mortgage payment debate (see here at MillionDollarJourney for example). Hint: There is only one factor to consider - anyone want to guess what it is? ;-)

In short, get the book and read it, it's only 200 big print pages and won't put you to sleep. Five out of five stars.

Buy this book at
chapters.indigo.ca

Investing in Canadian vs International Equities

Just came across a fascinating article on the CTV website titled "The identity crisis that will change the TSX" that was published in Saturday's Globe and Mail. Midway through it is a key phrase - "the Toronto Stock Exchange is becoming a market of smaller companies clustered in a narrow range of industries". The narrow range works out to financial, energy and mining.

The article is another good reminder about the need for Canadian investors, me included, to reduce equity holdings in the TSX to a minor portion - 10% or less - of the equity portfolio.

One of the benefits of moving to Scotland is that the distance adds perspective. It is easier to see how foreigners view Canada and to see Canada in its true place in the world. With respect to investment, Canada is a minor player, valuable primarily as an additional diversification element through resources.

The article also mentions the small cap nature of most of the TSX, so it can also play a small cap role in a portfolio (as we all know, small caps over long holding periods like twenty years, have been shown to give higher returns and to have weak correlation with the overall market, which in turn offers diversification benefit). Martin Gale over at Efficient Market Canada has an excellent article showing how the actual world equity market proportions work out - Canada is just over 3% of the total - and he uses this to show how a truly global portfolio would be structured, even to the names of the funds to buy. The reassurance of investing in what one knows about - domestic companies - is a great hazard as a result of the extra risk through inadequate diversification. (It's the same here in the UK. I'm in the midst of helping a friend do a portfolio makeover and that portfolio was 100% in UK equities yikes! ... through a raft of different mutual funds yikes! ... more on that in a future post).

Since I was due to do my semi-annual portfolio re-balancing in May, I will be doing some fairly drastic re-allocations along these lines, about which I will be posting down the road.

In my poking around thegoodwebguide.co.uk review of UK online brokerages, I came across TD Waterhouse, the UK version. It offers what seems to be a wonderful account for those interested in international investing and diversification. Through one account, it is possible to trade directly on 15 different exchanges around the world, including Canada, the USA, the UK, various other European exchanges, Australia, Hong Kong and Singapore. In addition, the holdings can be in four different currencies - Canadian and US dollars, sterling and euros. The trade costs are not the lowest at £12.50 for online trades (around CDN$ 30) but that's a lot better than the $100-200 BMO Investorline had told me a few years ago that it would cost to buy UK securities. Unfortunately the account is only available to UK residents and it doesn't look like TD Waterhouse Canada offers a similar one but it sure looks to me like it would be a smart thing to offer.

Review: #4 QuickTaxWeb Web Tax Software

Here is my review of the QuickTaxWeb package that I ranked fourth amongst the Canadian web-based tax preparation packages with a score of 7.5 out of 10.

Have a look at the inserted screen image for QuickTaxWeb.

What I Liked About QuickTaxWeb

• the screen is very clean and attractive; it's easy to navigate, the tab and other links are clear and the whole screen is uncluttered
• the program is very polished and complete, with details such as separate forms for the T2202A Tuition and Education Amounts - no spelling mistakes on this package
• complete and well presented context-sensitive help throughout
  

What I Disliked

• SLOW!! the screens seem to refresh at a crawl; this is a major annoyance and a real customer experience quality issue in my view
• no on-site convenient password recovery mechanism; I forgot my password after over a month of non-use; the only way I managed to sign in again was to phone the customer support line, which did give me the info right away but why can Intuit not create a serve yourself procedure?
• pricing is outrageous at $24.99 and no free returns at all. Actually, there was a free return policy till early April for income under $20k but that has been suspended ... could that have anything to do with trying to alleviate the horrible response time?
  

Review: #3 WebTax4U Web Tax Software

Here is a review of the third-ranked WebTax4U web-base tax preparation software package for Canadian taxes. I gave it a score of 8.0 out of 10.

I've included a screenshot of this program too.

What I Liked About WebTax4U

• it has a clean, uncluttered, well-organized interface with tabs and links that take one directly to all forms and parts of the program; the colours are pleasing and easy on the eyes
• data entry boxes are grouped within the top screen area; I found this program required the least amount of scrolling down
• Help is reasonable though not nearly as extensive as UFile's; links go to CRA pages
• it clearly explained that the $25 student residence Ontario tax credit was only applicable if the school is in Ontario, not the student's home
• price is reasonable at $11.99 for one return and $5.99 for extras; free filing for returns with under $25k of income
  

What I Disliked

• upon entering one T3 slip, it did not offer the opportunity to add another; it was necessary to return to the main menu
• for the tuition amount to transfer, it does not calculate on the spot/screen the maximum amount that can be transferred; instead it says this will be calculated automatically and shows only on the final pdf
  
• some superficial quality control problems like spelling mistakes e.g. on T3 screen "Instituttion" or on ON479 "Residense"
• speed of screen refresh is slow enough that it is starting to be noticeable
  

Review: #2 CuteTax Web Tax Software

Here is my review of the CuteTax package that came out number two in my testing of web-based Canadian tax preparation packages with a score of 8.5.

I've included a screen capture of the program to give an idea of its look.


What I Liked About CuteTax

• it has a clean, simple look which makes it easy to find one's way around a page; data entry boxes are a different colour so it's easy to know where data can be entered
• the left-hand menu shows all parts of the return so it is possible to easily and quickly go back and forth between different forms and sections, which I always find myself needing to do
• the Direct Message link on the top right allows one to send a message to the support team; I tried it because I found something the program did different from several other packages I tried and I thought it was an error. To my delight and surprise, the folks at CuteTax, a) responded within a day (3 hours to be precise), a major customer service plus in itself; b) provided a detailed answer with a reference to a CRA publication supporting its position. If one keeps in mind that right now is the extreme busy point of the year, I'm doubly impressed by this experience. (Can anyone with a tax accounting background confirm that if you do not need the foreign non-business income tax credit on Schedule 1 line 431 to reduce your taxes because, for example, your personal exemption is sufficient to eliminate any tax liability, that same T3 box 34 amount can be entered on line 232 to reduce Net Income?)
• the program responds very quickly and there is little noticeable delay refreshing screens
• Help is reasonable with links to CRA website documents
• free filing for income under $25k
• modest pricing at $8.98 for one return
  

What I Disliked

• one cannot use accented characters, e.g. in a French name
• typing in lowercase in the identification section produced lowercase in the final pdf but on the screen this info looked ok as it was displayed all uppercase - I prefer WYSIWYG
  
• pages spill off the bottom of the screen a little more than I would have hoped, requiring extra time to keep scrolling down when that happens
  
• Help not as extensive and embedded everywhere as UFile
  

Review: #1 UFile.ca Web Tax Software

To follow up yesterday's summary rating of various web-based tax preparation software packages for Canadian taxes, here is what I liked and disliked about the best of the lot - UFile.ca, which scored 9.5 out of 10.

I've included a screen capture of the program.


What I Liked:

• before creating an account, it does an automated check of browser compatibility for such things as SSL 128-bit encryption, Javascript, cookies, pop-ups and acrobat to ensure problem-free operation
• the left-side menu shows everything that has been entered so far and provides easy navigational access back and forth
• the font choices, sizes, colours, use of white space, box reference numbers are clear and easy to read
• the ubiqitous ? mini-button beside virtually every conceivable spot where one might have a question is better by far than what any other package has and the help it leads to is complete; often there are direct links to the CRA website so one can read the original source for oneself.
• the program is so well organized I did not need to refer to the Tutorial at all, though it's there for re-assurance
• the explanations and guidance are well written - no awkward phrases, no grammar and spelling mistakes as seen in some of the other programs
• the program response is extremely fast, almost as good as working on a home PC with an installed package; those 10-15 second waits for the server to refresh the screen can add up and make the tax entry exercise slow and frustrating; to me, this is a major element, fast response is table stakes
• there's even a free-form notes and reminders-to-self section - good for doing the return over a number of days to mark where one got to or to note missing receipts for later follow up; little touches like this are a sign of a mature program where all the basics work fine and they have time for extras
  
• if your line 150 Total Income is under $25k, it's free; same goes for students as the Canadian Federation of Students has a deal with UFile.

What I Disliked (not much!)

• pricing is a bit strange with $15.95 for an individual return or $24.95 for a whole family; I have university students dependants who have income and this means I will have to pay the $24.95 (instead of $14.95 for my return alone), though individually each student would be under the $25k free limit and so would be free.
• it's the second priciest after QuickTaxWeb
• maybe they could add a "this is your Payable/Refund" monitor to amuse us as we go along entering data?
  

Review: Web Tax Software Packages - Update 2008

I've just spent some time updating my look at the various Canadian tax preparation packages available through the Web, focussing on those packages which have attained NetFile electronic filing certification from the Canada Revenue Agency. This year, a major new player has appeared - H&R Block.

The advantage of these Web-based programs is that the return is available through any computer connected to the web. Presumably the data is better protected than it would be on the average home computer - i.e. it is backed up and sits behind some sort of firewall in a secure data center. However, none of the companies explain exactly how well they do this job, whether they meet ISO specs or have been IT-security audited. At the end of the preparation process, all the companies allow the download to one's own computer of a pdf containing the paper form image as well as the .tax file to upload to the CRA.

A convenient list of these and the regular on-PC packages is on Wikipedia under Canadian Tax Preparation Software for Personal Use. For all the packages I tested using real data though the intent was not to test tax situations but ease of use, understandability, help features, navigation and speed to figure out value for money - Wikipedia gives all the prices.

Here are my ratings out of 10 on the packages:

1. uFile.ca - 9.0 Slick, polished, fast, the winner but by less than last year; good value, free for students or under $20k family income
   
2. CuteTax - 8.5 Clean and clear interface, fast, solid product; free for under $25k income
   
3. AceTax - 8.0 Works fine; good value for money, tied with WebTax4U - 8.0 Some quality control issues and slightly clunky but works fine and with H&R Block - 8.0 Slick and quick but pricey and the user agreement allows them to market their other products and services to you.
4. QuickTaxWeb - 7.5 Polished but very slow response, overpriced and doesn't support Firefox version 1.5 (used on Ubuntu Linux)
   
5. EachTax - 7.0 Looks like paper forms, sacrifices some ease of use
6. MBOTax - 7.0 Serviceable but not very user friendly
   
7. eTaxCanada - 5.0 Program didn't seem to work properly in 2007 - barely better in 2008; still awkward, frustrating and slow
   
8. FileTaxOnline - 5.0 Good for a laugh: home page has button for "Techincal Support" Why bother with it for $9.89 if there are better cheaper alternatives?
   

Tomorrow I'll post some observations on AceTax and then on H&R Block that led me to the above ratings.