I met Andrew Hallam by accident in my email’s spam folder. It’s a bad day when a notable financial writer (and a super nice guy) gets banned from my inbox along with thousands of cheap Viagra offerings.

I have nothing against Viagra ads. Every month I spend a whack of time sifting through dubious drug company prices in the hopes I’ll find the golden email that got away.

In Hallam’s case, I found three. THREE REAL EMAILS! That’s like a million spams to one Andrew Hallam. The odds were against him.

Now, you wouldn’t think that Hallam, a high school English teacher, would take a lot of stock in playing the odds. It’s the math teachers, after all, who spend their days calculating Calculus formulas, integrating integer ratios, studying statistics, and perhaps dabbling in a little bit of probability theory.

But Hallam isn’t your average 40-something English teacher. He’s a millionaire. And he became a member of this elusive club by being a bit of a numbers guy.

“I didn’t take exceptional risks with my money and I didn’t inherit a penny from anyone,” he writes in his book. “When I went to college, I paid the entire bill myself. How did I pay for my own schooling and amass more than a million debt-free dollars before my fortieth birthday?”

Hallam poses good questions. After reading Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School I now know the answers.

Raise your hand for a little money help.

Money is a taboo subject, and schools haven’t done much to untabooify (new financial word) the wacky world of personal finance. Heck, many high school teachers wouldn’t know where to start! That’s why a bunch of them banded together and asked Hallam for money help. The teachers wanted to know how best to save, invest, and prosper like the millionaire English teacher.

Hallam, being a generous kind of guy, started clubs and taught his fellow teachers his money ways. Being a finalist in the National Publishing Awards for financial writing, he is known for his penny-wise prowess.

It was within these clubs Hallam learned first hand how the majority of money books fail to connect with real people — you know, human beings. Written by economists and other super-smart people, too many investing tomes use jargon and financial language that barely skims the minds of well-meaning folks.

So with the help of over 100 colleagues and friends, Andrew Hallam went on a mission to bring his money lessons and rules to the masses. Jargon-free, fun to read, and easy to follow, Millionaire Teacher is the tome that could take you to the head of the class and add a few zeros to your portfolio.

The ‘Nine Rules’ you didn’t learn in school. Sorry.

Andrew Hallam lays out his nine rules of wealth in under 180 pages. I don’t know how he packed so much good stuff into so few digestible sheets of paper. Others agree — Millionaire Teacher has graced the Top 10 and Top 100 lists on Amazon.ca and Amazon.com for months. Yeah, MONTHS!

You won’t find any ‘get rich quick’ schemes here. Hallam is a practical fellow who believes in hard work. He advocates a sensible savings strategy, steers clear of the financial service industry (many advisers charge hidden fees), and invests in low cost index funds to grow his modest income into unimaginable wealth. He shows you how to do it.

The ruling lessons I love

I won’t review every single rule in Millionaire Teacher — I don’t think I could do each chapter justice. But the rules that resonate strongest with me are as follows:

Rule 1: Spend like You Want To Grow Rich

Readers of Squawkfox will love the first chapter, since Hallam outlines how to be frugal without becoming a miserable miser. Hallam has a witty sense of humor about choosing to live on less, and shows you how to live life to the fullest while not spending buckets of money.

Rule 5: Build Mountains of Money with a Responsible Portfolio

I’ve always been great at saving money. But after paying off my student debt, I had little clue how to invest. Enter chapter five, where both newbie and intermediate investors can benefit from Hallam’s down-to-earth explanations of stocks, bonds, and those newsworthy market movements.

He shows how you can build wealth over time by investing in low cost index funds and building a ‘Couch Potato Portfolio’. And yes, most everyone can do this.

Rule 6: Sample a ‘Round-the-World’ Ticket to Indexing

Rule six makes this book worthy of the international audience who reads this blog. Whether you live in the U.S., Canada, Australia, or Singapore — or any other English-speaking country — you’ll find huge value in this chapter since Hallam outlines possible funds to invest in.

Read this chapter at least five times. You’ll learn investing lessons from the American section even if you are a Canadian. If you hail from Australia, the Canuck section is eye-opening. Even the personal stories Hallam shares throughout the Singaporean indexing part are enlightening to an international readership. Really!

Who should read Millionaire Teacher?

I needed to read Millionaire Teacher. Even though I already invest in a ‘Couch Potato Portfolio’ of index funds and I’m great at saving moolah, I learned a lot from Andrew Hallam’s nine money rules.

I love Hallam’s style. Not only is he fun to read, but he explains challenging financial concepts (well, challenging for me) in an understandable way that’s rare in personal finance books.

Where to buy the book:

• Millionaire Teacher (Amazon)
• Millionaire Teacher (Amazon Canada)

Whether you’re a newbie saver or an advanced investor, this is a great investment book for all levels, ages, and incomes. No wonder Millionaire Teacher is topping the Amazon charts around the world. It’s that good. Heck, I may just send a few copies to those spammers who fill my inbox with marketing drivel — saving smartly and investing wisely are by far the best ways to make it to a million.

Happy investing!
Love, Kerry

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Anyways, after downloading a few money podcast stinkers (they gave me the snores), I’ve wiped my iPod clean and I’m ready to reveal my playlist of money podcasts worth a listen. Whether you’re driving to work, walking the dog, or jogging a few morning miles, one of these ten money podcasts could teach you something fun about frugality and family finances for free. Buying an iPod thinger will cost you a few bucks though.

1. NPR’s Planet Money

Calling all Earthlings! The fiscally responsible (and highly entertaining) vocal stylings of NPR’s Planet Money podcast will beam you down to the same level as high rollers, brainy economists, and regular folks in a fun and accessible way. Easily my favorite, this down-to-earth 30-minute podcast makes sense of the global economy without a single note of pretentious babble. Recent shows — Freddie and Fannie’s Rise and Fall, Economic History of Cheapskates, and 4th Graders Read A Credit Card Agreement — are educational, entertaining, and a whole lot of interplanetary fun.

2. Money Girl’s Quick and Dirty Tips

Only have time for a quickie? Money Girl’s Quick and Dirty Tips for a Richer Life is a podcast for those pressed for time. Each episode — running around 6 to 12 minutes each — is a polished show by host Laura Adams, a personal finance author and trainer. Episodes are short, informative, and offer practical tips for managing money. Recent shows include: How Being a Lazy Investor Can Pay Off, How to Find a Second Source of Income, and Three Money Rules You Should Never Break.

3. APM Marketplace

American Public Media’s Marketplace can be heard on public radio stations across the United States, and it’s also available as a free podcast to download for the rest of us. Covering major national and international stories in under 30 minutes, each episode relates business and economic news to the average listener’s wallet. This program boasts a lot of positive reviews in iTunes.

4. The Dave Ramsey Podcast

Besting selling author of The Total Money Makeover: A Proven Plan for Financial Fitness and Southern star, Dave Ramsey is no stranger to talkin’ tough financial love with listeners on his hour long call-in radio show. If you’re into a little Southern drawl (with some right-wing attitude), give the The Dave Ramsey Podcast a download — it’s a 40-minute abridgment of his regular talk show. Every episode features Ramsey’s brand of common sense coaching while advocating a stocked emergency fund, a balanced budget, and a debt-free lifestyle.

5. Canuck Content, eh!

You don’t need to carry loonies in your pocket to connect with some real Canadian content. Both the Canadian Business Podcast and the Financial Post Big Picture Podcast offer in-depth views of the week’s top finance and business stories. Go ahead, give both a listen for a distinctly Canadian focus.

6. Fareed Zakaria GPS By CNN

I asked the fine people on the Squawkfox Facebook Page (go ahead and join us over there) for their top money podcast picks. Boy am I glad I did, ’cause Kevin Press from Today’s Economy Blog recommended Fareed Zakaria GPS By CNN. I love this program for explaining complex global economic events in an understandable way. Host Fareed Zakaria is an exceptional interviewer. Download this one today and you’ll feel at least 10 IQ points smarter. Maybe.

7. Sound Investing

Money Magazine named Paul Merriman’s Sound Investing Podcast the “Best Money Podcast” in 2008. Three years later this program continues to air interviews with “some of the best and brightest minds in investing”, current market analysis, and a myriad of topics focused on everyday investing.

8. Weekend Business By The New York Times

Catch up with the weekly business and finance news by tuning into Weekend Business by The New York Times. Hosted by Jeff Sommer, the Times assistant business editor, this fast-paced 30-minute show is a surprisingly fun listen. Recent podcasts include: Lessons From I.B.M., Consensus On Health Care, and Financial History That Rhymes. Yeah, rhymes.

9. The Consumerism Commentary Podcast

The Consumerism Commentary Podcast is a professional show by veteran personal finance bloggers Flexo and Tom Dziubek. When not blogging at Consumerism Commentary, these guys keep busy by interviewing guests about money management, debt, budgeting, consumer issues, and investing. Heck, they even interviewed me here: Podcast 6: Frugality and 397 Ways to Save Money

10. Motley Fool Money

This weekly podcast calls itself an “irreverent, fast-paced look at the world of business and investing.” Meh. Motley Fool Money has a lot of positive reviews for dissecting Wall Street’s headlines, but this predominantly investing podcast spends many minutes looking at stocks. If you’re into the stock market, then go ahead and give this one a listen — I’ll stick to investing in ETFs and index funds to happily avoid all the ‘market forecasting’ banter.

BONUS: RadioLab

BONUS: My absolute favorite podcast on the whole dang internet is WNYC’s Radio Lab. There’s nothing like it. It’s not about money, but if you love amazing stories featuring interesting people, science, music, and a wealth of experiences then this show is a MUST. Hosted by Jad Abumrad and Robert Krulwich, Radiolab is produced by WNYC public radio.

Your Thoughts: Go ahead and share your top money podcasts. I’ve missed a million of them, that’s for sure.

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And fees? What fees? My financial statements didn’t tally any fees for me to be concerned about, and I never wrote a single check to my advisor for her services. So where were all the fees? As far as I could tell, my investments were fee-free. Awesome!

Fee Hungry: A smorgasbord of mutual fund fees devours your savings.
 

What wasn’t awesome was the day I read an article similar to this one: Do fees really matter? In this article, financial journalist Duncan Hood argues that paying a single percentage point more in fees can cost most portfolios tens of thousands of dollars in lost savings. That much?

No way. Not possible. Never. Nope. Ok, I was in denial. So I did some financial fee sleuthing, number crunching, and nearly chocked on my myriad of mutual funds. It turns out I was paying fees. A lot of fees. A smorgasbord of fees that was slowly, and stealthily, devouring my savings and consuming my portfolio. WTF? (Yeah, What The Fee?)

Anyways, my gut-busting numbers mirrored those in the article’s math — indeed, paying one percent more in fees really was hosing my savings. Don’t believe me? Let’s do some simple mathy math that won’t cause your eyeballs to roll back into your head. Promise.

Fees: A tale of two mutual funds

Ok, let’s assume you’ve invested $25,000 for 25 years and managed a pithy return of 4%. Now let’s look at what happens to your delicious savings when they’re invested in two different mutual funds: Fund 1 boasts a hungry fee of 1.30% while Fund 2 chews one percent less at 0.30%.

Results: Over 25 years, greedy Fund 1 consumes $11,393 of your cash in fees, while Fund 2 costs just $3,000. Which portfolio would you rather retire on — the one devoured by fees at $48K, or the one barely tasted at 62K? That’s the price of one percent, people.

Now take a peek at this chart for another perspective, and see how much pie is gluttonized (new financial word) by one single mutual fund fee, called the Management Expense Ratio (MER).

Note: These numbers were crunched using the Investor Education Fund’s Mutual Fund Fee Calculator.

Do you want more pie for yourself? Time to learn about your fund fees.

Investing Fees: I see where you’re hiding!

A quick tour of the greediest fees lurking in your portfolio.

1. Management Expense Ratio (MER). It’s called a MER. Saying it out loud sounds a little like cooing in your lover’s ear. But I assure you, the only ones cooing over this lovely fee are your financial advisor and fund company. That’s because whether your mutual fund makes or loses money, you’re still paying a percentage of that fund’s value to cover administration costs, management, and perhaps trailer fees paid to your financial advisor. The MER charged can range between fund companies and countries, but I’ve seen anywhere from a super low 0.07% to a super high 5.50%. Yep, the MER can be an expensive fee if you’re not watchful. The less MER you pay, the more money you keep.

2. The front-end load. This sales fee will shave a little off the top when you purchase a fund, right before the money is invested. So investing $5,000 with a 2% front-end load costs you a cool $100 and leaves $4,900 invested. Poof, your money is gone.

3. The Deferred Sales Charge (DSC). Do you like wearing handcuffs? Then welcome to the DSC, also called a back-end load, where you’re charged a hefty fee for selling your fund before a certain number of years, usually 6-7. Investing in a fund with a DSC handcuffs you to that fund and perhaps the advisor, because it can be too expensive to pay several percentage points to get out of it. I fell for this killer fee once, but never again.

4. Trading costs or commissions. Selling or buying funds at a rapid pace will cost you dearly in commissions. Consider the commission cost before buying a financial product with only a small amount of cash — you could be paying a hefty commission with a humble investment to show for it.

5. The annual account fee. Newbie investors with smaller accounts should pay close attention to their annual account or administration fee. Always ask to have a $25, $50, or $100 annual fee waived if you’ve only got a few hundred or thousand bucks saved since that fee will eat into your return.

Where to find your fees

Financial disclosure of investing fees varies around the world. Some countries protect their people with stiff rules and regulations, so you may see your total fees paid in dollars on your financial statements, rather than stated as a percentage of the fund. Lucky you!

Since I’m Canadian I speak from my personal experience, and financial disclosure is the pits here in the land of EH! — that’s why I was clueless about the actual amount of moolah (in dollars) I was paying in fees eons ago. So I learned to do the math. To best protect yourself, it’s a smart financial move to READ each fund’s documentation and use that knowledge to find your total fees paid.

Every fund you purchase comes with documentation. Here’s where to find it:

1. Ask your advisor, fund company. Your financial advisor or fund company should be providing you with investment fund documents (such as a mutual fund prospectus) detailing each fund’s holdings and fees. Also, check your fund company’s website for this vital information — it may be available online for download.

2. Check with Morningstar. Surf on over to Morningstar for snapshot information on all sorts of financial products, such as stocks, ETFs, and mutual funds. Americans can use the tools on Morningstar.com while Canadians can access fund information on Morningstar.ca.

3. U.S. Securities and Exchange Commission. Americans can use the SEC’s Search Tool to lookup mutual fund prospectuses.

4. Canadians can use SEDAR. If you’re a Canuck and you’re stuck looking for a fund’s details, try the SEDAR Search Tool. Filing securities related information on SEDAR is mandatory for most reporting issuers in Canada.

Investment Fee Calculators

Now that you’ve got the numbers, use of these handy tools to total your fees paid. Yes, you can do it.

• Americans — give Bankrate’s Investment fees calculator a spin.
• Canadians — see the Investor Education Fund’s Mutual Fund Fee Calculator.
• For those looking for a quick tool, try my Portfolio MER Calculator — it’s perfect for tallying the average MER on your entire portfolio as well as the total yearly expense incurred. This handy financial tool may just inspire you to find lower-cost investments!

About those fee calculations…

Don’t be surprised if your fund fees are much higher (or lower) than those in my examples. Investing fees can vary greatly between countries, among fund companies, and within fund classes. Canadians should pay special attention to their mutual fund fees though — a recent Morningstar report shows that Canada pays the highest fees among the 22 countries surveyed.

“The report found the median asset-weighted expense ratio to be 1.31% for fixed-income funds, 2.31% for equity funds and 0.80% for money market funds.”

– Morningstar Grades Canada an F in Mutual Fund Fees, Moneysense Magazine

I’m the first to admit that investment fees can be a tough subject to face up to. But it’s important, so please do it.

Question: Ever get bitten by these investing fees? What have you done about it?

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A mortgage meltdown is what happens to nice people when the dream roof over their heads costs more than they can afford. Now I’m not squawking about that whole subprime lending mortgage mess, but rather the case when well-intentioned folk go to the bank to get a regular mortgage and fail to add up all the real costs before moving in.

For most of us, our mortgage represents our biggest debt and the only kind financial experts consider good debt. But an over-your-head mortgage is one of the quickest routes to serious financial trouble, or even bankruptcy!

So before looking at current mortgage rates or shopping for that perfect home, perhaps take a second, chill out, and consider these 6 surefire ways to avoid a property with a mortage that leaves you in the poor house. Avoiding a mortgage meltdown and living in a home you can afford is preferable.

1. Crunch ALL the numbers.

It pays to crunch ALL the numbers and know ALL the costs before viewing homes and falling in love with a property. A too-high mortgage coupled with unaccounted for monthly costs could leave you resorting to credit cards and lines of credit to pay everyday expenses – a downward spiral that could cost you thousands in interest. And forgetting to add up all the costs of property ownership could leave you scrambling for extra cash.

So before setting foot in any property find out all the costs, even hidden fees, and do the math with a simple Mortgage Calculator.

Don’t Forget These Costs or Fees:

• Buyer’s or seller’s taxes
• Property taxes
• Paperwork filing fees
• Lawyer, realtor, banker, or land transfer fees
• Condo fees
• Maintenance costs
• Utility costs
• Parking costs

Also, don’t be afraid to see the impact that various mortgage rates have on your monthly costs by using the Mortgage Calculator. You’re less likely to feel the chill of a mortgage meltdown if you face the financial facts and crunch the numbers.

2. Practice Your Mortgage

Knowing what you can afford could spare you financial catastrophe in the future. An excellent way to see how a mortgage feels, and to know if you can truly afford it, is to practice paying it before you buy. Seriously.

How to practice your mortgage:

Pay your landlord your rent, and then take the difference between that amount and your anticipated mortgage cost and put this additional money into a high- interest savings account to use later for your down payment.

If you can’t come up with this additional monthly cash, then you know the mortgage price is too steep and you need to either continue saving for a bigger down payment or look at lower-priced homes.

3. Get a Home Inspection

Getting a home inspection done before you make an offer on a home may be the best money you ever spend. A home inspection costs around $500 and uncovers unseen problems that may cost you thousands of dollars down the road. A home inspection also serves as a negotiation tool with sellers, as they may fix flagged issues or reduce their selling price. Take the time to find the right home inspector, and be aware that it might not be the one your real estate agent recommends. Check references, ideally from homeowners who have been in their home for a few years so that any potential troubles have surfaced.

4. Don’t Buy Someone Else’s Renovation

Falling in love with the seemingly fresh look of paint, new flooring, or a freshly planted garden can be a financial disaster if the structure of the home is not sound. The previous homeowner may be trying to disguise something that really needs an expensive repair underneath. Be sure to look past a new bathroom or kitchen renovation and learn what lurks beneath the surface. You may discover that new plaster and paint are a facade disguising mold, water damage issues, or a cracked foundation. These repairs could cost you thousands and make your dream home a nightmare.

5. Buy a Smaller Home

Palatial palaces cost big bucks in terms of buyer’s fees, down payment size, mortgage interest, home maintenance (don’t forget lawn care), and utilities. Buying a smaller home can reduce all of these costs. For example, let’s assume you pass on a $300,000 mortgage in favor of a less expensive $275,000 loan. The mortgage price difference of $25,000 is substantial indeed. Assuming a 25-year mortgage at a 5% interest rate, your monthly payment is around $150 less, saving you a total of $18,844.26 in interest over 25 years, compounded monthly. Add it all up, and a $25,000-less-expensive home saves you $43,844.26 in interest plus principal on the mortgage. And this calculation doesn’t even include closing fees and maintenance costs! With all this saved money why not retire a year sooner? This is the new math, people. Need more incentive to play with the numbers? Try the Mortgage Calculator!

6. Negotiate Your Mortgage

Don’t be afraid to shop around and ASK for a better deal. Asking for a better mortgage rate is free and could save tens of thousands of dollars over the years you live in your home.

But before sitting down with a prospective mortgage lender, get your credit score so you know where you stand. You can find your score online for around $25 at Equifax or TransUnion or write in and get mailed your credit report for free. If you have a good credit score then be set to bargain. Ask lenders for a better mortgage rate, shop around, and play multiple offers off each other. A half a percent rate reduction could save you thousands over the span of your mortgage, so it’s well worth your time.

If a lender offers you perks like gift certificates for furniture, loyalty card points or a trip, take a pass. These so-called perks come at the cost of a higher rate. If the banks are not budging on their offer, consult with a mortgage broker. Mortgage brokers are paid finder’s fees by banks and these fees generally do not differ from bank to bank, so the broker has limited incentive to act outside your best interest, thus finding you the best deal possible.

Final Thoughts

These six surefire steps spared Carl and me from buying a toooooo expensive property while living in the uber expensive Canadian city of Vancouver, B.C. years ago. In fact, after running ALL the numbers and crunching the hard financial facts we opted against home ownership and continued renting our affordable apartment. This single decision was heart breaking since we both wanted to own our home and had a solid downpayment – but the math just didn’t work in our favor. In hindsight I’m relieved we continued along the renting path and saved more money until we were in a better position to buy in another, less expensive, city. For us, putting emotion aside and letting the numbers keep us sane saved us from a mortgage meltdown.

Got some additional tips for avoiding a mortgage meltdown? Got a mortgage story?

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You might just be surprised with how much interest you’ll be paying with the wrong mortgage rate or be buried by the debt of a too pricy piece of property. It pays to do the math before falling in love with a home.

Use the Mortgage Calculator to:

• Learn how mortgage rates impact your mortgage payments.
• Evaluate if you’re ready for a mortgage refinance.
• Calculate monthly, weekly, or twice weekly payment schedules.
• Calculate mortgage rates, total payments, and total interest paid.
• Run the Mortgage Report to see how changing payment schedules lessens (or increases) the amount of interest paid.
• Make smarter financial decisions based on hard financial facts. You can’t argue with the mortgage calculator numbers.

How to use the Mortgage Calculator:

Step 1. Open the Mortgage Calculator.

Step 2. Mortgage Amount: Enter the total amount for your mortgage (for example: 325000).

Step 3. Term: Enter the length of the mortgage term. From the drop-down list, select the term duration (for example: Months or Years).

Step 4. Mortgage Rates: Enter your current mortgage rate.

Step 5. Payment Period: From the drop-down list, select the preferred payment period (for example: Monthly, Twice Monthly, Every Two Weeks, or Weekly).

Step 6. Click Calculate. Mortgage payments and mortgage rate results are calculated and display below. View number of mortgage payments, total mortgage paid with principal and interest, and total mortgage interest paid.

Step 7. Click View Report. A detailed Mortgage Calculator Interest Report opens.

Use this Mortgage Calculator Interest Report and Amortization Table to better understand the impact of current mortgage rates, to see how changes in mortgage payment schedules can lower or raise your interest costs, and to do the math before buying a too pricey piece of property.

Carl and I made this Mortgage Calculator just for you, so give it a try and use it as tool to keep you mortgage smart. Because banks are rarely our friends when it comes to signing up for a mortgage I think it’s best to take the initiative and DO THE MATH before shopping for a home or signing up for that so-called sweet mortgage rate. Lastly, before signing on the dotted line be sure to consider your total consumer debt and add your debt repayment to your monthly costs. You don’t want to get sunk by your dream home and turn the roof over your head into a nightmare.

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Since last week we boasted about our Best Financial Decisions, let’s go deep this week and squawk about the dark stuff many never mention. Let’s look at our money mistakes and consider the lessons learned from our financial folly. Your comment may just spare someone some grief.

Question: What were your worst financial decisions?

Fox’s Answers:

1. Years ago, I did not take responsibility for my own finances and deferred investment choices to a “Financial Planner” (sales person).
2. I did not understand the funds the “Financial Planner” sold me.
3. I did not understand the massive impact that mutual fund fees, called management expense ratios (MERs), would have on my returns.

Fox’s Lessons Learned:

• Since no one cares more about my money than me, it is my responsibilitiy to learn about how to invest and understand the costs of investing. I have also found that learning about personal finance and investing is neither scary nor hard. It’s just takes some time and effort.

Your turn! Share your financial mistakes by Squawking Back!

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Since the market has gone bonkers, or argumentatively into a bear or recession position, some fund companies have touted these inverse ETF products to get investors thinking about market opportunities. Could inverse ETFs be the solution to protecting one’s portfolio in a bear market and help one profit from market down swings? Or are inverse ETFs just a bunch of marketing muckity muck hype?

Let’s consider the following: what are inverse ETFs, why would one invest inversely in the market, and should you invest in inverse ETFs?

What are Inverse ETFs?

Inverse ETFs are a type of investment which sells like a stock or conventional exchange traded fund. Unlike conventional ETFs which move with an index, inverse ETFs track the reverse, or opposite, of the market.

Inverse ETFs are also called Short ETFs or Bear ETFs since they “short” the market to make money when the market goes down and provide a way for an investor to make money in a falling “bear” market. For example, an inverse ETF tracking the S&P 500 will do the opposite of that index. If the S&P 500 goes down 3 percent, the fund will increase by 3 percent. If the index goes up 3 percent, the inverse ETF will go down 3 percent.

Some inverse ETFs work at a multiplier greater than 1X. For example, if an inverse ETF works at a 2X multiplier, then the ETF moves twice the opposite of where the market moves.

Inverse ETFs can invest in broad market indexes, such as the NASDAQ or Russel 2000. They can also be bought to focus on specific sectors, such as financial, energy (oil), or consumer staples. Investors who purchase inverse ETFs do so to “hedge” their portfolios against falling prices.

To learn more about regular ETFs:

• What are Exchange Traded Funds?

Reasons to Invest in Inverse ETFs (PROS)

Here are some positive aspects of inverse ETFs:

• If the market falls, you win! Profit from a decline in the value of an underlying benchmark. Who doesn’t like to make money when the market falls?
• Go short without a margin account. Since inverse ETFs are traded just as normal ETFs, they allow an investor to go “short” to some extent in any trading account. So you don’t need to have a margin account to take advantage of short positions. Although, if you’re savvy enough to want to go short in a market, you probably should be able to get a margin account anyways.
• Hedge investments. Many investors look to purchase inverse ETFs to hedge their portfolios against falling prices.

Reasons to Avoid Inverse ETFs (CONS)

Here are some negative aspects of inverse ETFs:

• If the market rises, you lose! When a bear market turns upwards, then you lose moolah.
• Betting against the market. Over the long term, history has proven the market trends upwards. So inverse ETFs are going against strong historical market data.
• Requires market “timing”. Inverse ETFs need to be purchased at the top and sold near the bottom to be profitable, especially since over the longer term markets trend upwards. Are you clairvoyant? Can you predict the bottom accurately enough? Think again!
• Expensive. Shorting stocks to do the reverse of an index requires more active work for the fund manager than passively tracking an index. Because of extra active management, inverse ETFs have higher management expense ratios (MERs) than standard ETFs. These little fees consume profits and principle if you’re not mindful of the true overall investing costs.
• Cannot “set it an forget it”. Since the market trends upwards, you cannot buy and hold inverse ETFs. You need to monitor and micromanage your portfolio.
• Newer and unproven. Conventional ETF funds have been around for decades. Inverse ETFs have not. How do these funds perform under a variety of market conditions and how do they fit into a good balanced portfolio? What are the tax implications? These are things to consider.
• Shorting restrictions. Recent market issues have caused regulators to introduce restrictions on shorting certain stocks. Will these restrictions be expanded? What effect will this have on the performance of inverse ETFs? (source)
• Complex investments. Reading about shorting, hedging, and the calculations that go into inverse ETFs is mind boggling. I strongly believe an investor should understand what s/he is invested in before plunking good money into a fund. If you don’t “get it”, then don’t buy into it. Yes, buyer beware.

Where to Find and Buy Inverse ETFs

Here is a list of some companies selling inverse ETF funds for both American and Canadian markets.

American Markets

ProShares: fund information

• ProShares Short Dow 30
• ProShares Short S&P 500
• ProShares Short Nasdaq 100
• ProShares Short Russell 2000

Rydex Investments: fund information

• Rydex Inverse 2x Russel 2000
• Rydex Inverse 2x S&P 500

Direxion Funds: fund information

• S&P 500 Bear 2.5x Fund
• NASDAQ 100 Bear 2.5x Fund
• Small Cap Bear 2.5x Fund

Canadian Markets

Horizons BetaPro ETFs: fund information

• HBP S&P/TSX 60 Bear Plus ETF
• HBP S&P/TSX Capped Energy Bear Plus ETF
• HBP S&P/TSX Capped Financials Bear Plus ETF

What the Experts Say!

Here are some technical sources and expert insights on Inverse ETFs.

• A Closer Look at ProShares Inverse ETFs | Seeking Alpha
• Shorting the Market with Inverse ETFs | The Motley Fool
• ProShares Ultra Inverse ETFs | The Big Picture
• Inverse and Leveraged ETFs | Canadian Business
• List of Inverse ETFs (Short ETFs/Bear ETFs) | Trader Mike

Your Turn!

Got any experience with investing in inverse ETFs? Got an opinion? Feeling bearish? Would you invest in inverse ETFs? Do share and comment!

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Where have you excelled financially? What have you done to be in a good financial position? Perhaps your comment will help someone find their financial way in this crazy a$$ed market.

Question: What were your 3 best financial decisions?

Fox’s Answers:

1. I paid off my student debt in six months.
2. I invested in low fee index funds and exchange traded funds.
3. I bought life insurance without getting screwed.

Your turn! Share your financial wisdom by Squawking Back!

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Just say no to a diet rich in cat food in your later years by contributing to your retirement today.

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1. Invest It: index funds or ETFs

Yes, I know I keep squawking about index funds and exchange traded funds (ETFs), but I truly believe tracking an index is the most cost effective and wisest way to invest one’s dollars. Simply put, you cannot underperform an index and this form of passive investing keeps costs low. I figure since I index, I will not be paying an expensive mutual fund manager to sail a yacht whist pretending to have market clairvoyance.

I’ve written an article describing the differences between Index Funds and ETFs. I’ve also reviewed and compared two very popular index funds in the article: ING Direct Streetwise Funds Vs. TD Index e-Series Funds. Indexing is easy, cheap, and smart. I’ll stop squawking about indexing, for now.

2. Invest It: low cost mutual funds

If you’re really not interested in indexing and investing for yourself, then perhaps invest in a diversified portfolio of low cost mutual funds. This form of active management won’t cost (anywhere near) as much as the “big bad banks” or all those companies who constantly advertise on TV. In fact, you’ve probably never heard of the mutual fund companies I am about to list. The truth is some mutual fund companies actually want to keep costs low for investors, and choose not to advertise for this reason. I figure, why should I invest my retirement dollars with those banks and fund companies just to pay for their advertising? Forget it! Here are some awesome options:

• Phillips Hager & North: Depending on the selected fund series, you’ll need a minimum of 5K to start an account at PH&N. I’ve been an investor at PH&N for several years and have loved their high-level of customer service and LOW fees. Recently, the Royal Bank of Canada (RBC) bought PH&N, so who knows what will happen to fees in the future. Sigh. For a comparison, their Balanced Fund costs 0.88% per annum.
• Leith Wheeler: Since 1982, Leith Wheeler has provided Canadians another option in no-load, low fee mutual funds. To start investing here you’ll need 10K to open an account. For a comparison, their Balanced Fund costs 1.10% per annum.
• Saxon Funds: Of the three fund companies listed, Saxon Funds is the most expensive no load, low fee mutual fund company. To begin investing you need 5K to play. For a comparison, their Balanced Fund (F-Series) costs 1.18% per annum.

3. Park It: high interest savings account

Sometimes you just can’t decide where to invest your retirement dollars. For those of you looking for a liquid and risk-free place to park some cash, perhaps consider renting a spot in a high interest savings account. Don’t stay parked in these spots too long though as investment savings accounts barely beat inflation in the long term. Here are three of my favorite savings accounts:

• PC Financial: President’s Choice Financial offers an “Interest Plus RRSP Savings Account”. You will need to maintain a balance of over $1,000 to get PC’s best interest rate and an anniversary bonus.
• Achieva Financial: Maybe you haven’t heard of Achieva Financial? Well, let me introduce you to this division of Cambrian Credit Union in Manitoba. I’m not sure what’s in the Manitoban water, but credit unions in this fine Canadian province boast the highest interest rates in the country. Achieva’s “RRSP Savings Account” is an awesome option for those who want the best interest rate on parked retirement cash.
• ING Direct: The big orange machine that is ING Direct Canada hasn’t been too competitive with their interest rates in the past few years. They do offer an “RSP Investment Savings Account (RSP ISA)” for those who like the color orange though.

View all current interest rates before moving money to a savings account.

Happy RRSPing!
fox

Love the blog? Get the book: 397 Ways to Save Money

Top Squawks

• How to make a budget (series with downloads)
• How to write a resume (series with downloads)
• Frugalicious Recipes
• 50 Ways to Save $1,000 a Year
• Credit Card Calculator
• Download your free 92-page eBook: The Insider’s Guide To Frugal Food & Fitness