In fact, retirement for many of us is going to be an exercise in calculating odds and balancing one probability against another. Should we treat ourselves to that grand tour of Europe? Or deny ourselves because we may need the money years from now to pay for a nursing home? Should we invest aggressively to increase our chances of growing our nest egg? Or play it safe and take as few chances as possible?

These are anxiety-inducing questions and, ironically, you can blame that anxiety on the long, healthy lives we’re now living. Back in the 1920s, a newborn Canadian could expect to live for less than 65 years. Today, a baby born in Canada can expect to live to 80. So while our grandparents and great-grandparents didn’t spend a lot of time thinking about retirement—and with good reason!—we now have to budget and plan for 20 years or more of not working.

A lot can go wrong over a couple of decades. And even if you set things up perfectly for a nice 20-year retirement, fate has an odd sense of humor. After years of planning, you may die young—or live long, long past what you thought would be your expiry date.

One of the most common mistakes that people make in retirement planning is basing everything on the notion that they will live to what they believe to be the average life expectancy. You should remember that the average life expectancy is just the midpoint in a huge range of possibilities.

Among other things, bear in mind that the life expectancy figure you read in the newspaper is usually expressed in terms of what a newborn child can expect. The figure assumes there will be a steady number of deaths at every age along the way—a few people will die in childhood, a few others in adolescence, and so on. Those early deaths drag down the overall figure. So if you’ve dodged disease and accidents and made it all the way to 65, your life expectancy is considerably greater than the average for a newborn would suggest. Someone who is 65 today has a better than even chance of living to 85.

Remember, too, that the average life expectancy figures are just that: averages. Some people enjoy far fewer years; some enjoy many more. The average life expectancy for seniors may be 85, but that doesn’t mean you can ignore anything past 85. About half of seniors will live beyond that point— sometimes well beyond. The 30-year retirement is not uncommon and you have to be prepared for the possibility that you’ll be blowing out the candles on your 100th birthday.

The problem, from a financial perspective, is that there are no guarantees. Moshe Milevsky, associate professor of finance at York University in Toronto, points out that a 65-year-old man who retires today faces an 8% chance of dying before he turns 70. He also faces a nearly identical 8% chance of living past 95.

Think about the practical implications of those figures. Our 65-year-old man may expect to die relatively young. He may burn through his cash and treat himself to lots of expensive indulgences—only to find that, gosh, he’s a Methuselah who has to live the last quarter century of his life trying to make ends meet on a meager budget.

On the other hand, he could play it safe and pinch pennies to ensure he will have enough to last until he’s a centenarian. But, if so, he faces a real possibility of finding himself in a hospital bed at 68 or 69, listening to a doctor deliver a grim diagnosis, and cursing himself for not enjoying life more when he had the chance. The odds of disappointment are identical no matter which option our hypothetical 65-year-old chooses, so how does he—or you—make a choice? The following plan can help you make the most of the retirement odds.

Calculate your must-haves

You often hear retirement planning boiled down a single figure: “you need $1 million to retire well.” A smarter approach is to think of your retirement plans as consisting of two separate figures: one for things you must have, the other for things it would be nice to have.

The first and most important part of retirement planning is taking care of things you must have. You want to ensure you have enough to live on without feeling deprived of anything vital.

You can estimate your target figure by toting up how much you spend in all areas, then deducting the expenses that will disappear in retirement, i.e. no more mortgage payments (because the house will be paid off), no more child care or tuition payments (because the kids will be adults), no more retirement savings (because you will be retired). You should also deduct any luxuries you could live without in retirement, such as a second car. You can also subtract the cost of commuting to the office, work clothes, and so on.

The amount that’s left represents what it would cost you to maintain the essentials of your current lifestyle in retirement, and that figure is probably a lot lower than you think. Most middle-class couples arrive at a must-have figure of $30,000 to $40,000 in after-tax income.

Calculate your nice-to-haves

We all have dreams and you should budget for those, too. Maybe you want to take that African safari, golf every day, or winter down south. You should size up what it would take to pay for whatever bliss you desire and regard that figure as the second part of your retirement planning.

Just one tip: when assessing your nice-to-have list, remember that age takes its toll. Right now you may dream of traveling the globe. Once you’re past your early seventies, however, you’re likely to discover that your wanderlust is diminished. Similarly, you may find that golfing every day is no longer a pleasure once you’ve hit 75. So by all means budget for luxuries, but keep things within reason. You’re not likely to be globe-trotting for 30 years nor whacking iron shots to the green on your 95th birthday.

Count on government

Despite what the fear mongers would have you believe, Canada Pension Plan (which is funded by contributions from you and me) is in fine shape. Old Age Security (which is funded out of general government revenues) looks to be on solid ground, as well.

If you’ve worked in Canada all your life, you can expect to receive $11,000 to $16,000 a year from those two sources, depending upon what you made during your working years and how early you start collecting your pension cheques. A husband and wife who have both worked until retirement at 65 can expect $22,000 a year or more between the two of them. That money will keep pouring in as long as you live, with no particular planning required on your part.

You should compare what government will provide you with what you figure your minimum retirement needs will be. If you and your spouse figure you can maintain the must-have parts of your current life on, say, $33,000 a year, the good news is that retirement becomes a very affordable proposition. You may have to add only $11,000 a year in after-tax income from corporate pensions or savings to ensure the key components of your retirement plan.

Factor in pensions and RRSPs This brings us to the thorny issue of pensions. You may be fortunate enough, if you’re a public servant or work in the right industry, to be the recipient of a pension that guarantees you a “defined benefit” in retirement. If so, you can simply contact your employer’s human resources department to find out the size of the monthly retirement cheque you can expect.

If that amount is enough to bridge the gap between government stipends and your retirement needs, then congratulations! Your retirement planning is largely done. You may still want to contribute to an RRSP to finance luxuries, to provide you with a buffer against inflation, and to guard against the possibility that your employer will go bust and renege on its pension promises, but, in all probability, those RRSP contributions will simply increase your security, not determine your retirement lifestyle.

Most of us, though, aren’t in that position. Maybe you don’t have a pension plan. Or perhaps your employer’s pension plan is a “defined contribution plan” that only promises how much your employer will contribute each year you work, but leaves the actual investing up to you. Or maybe your employer’s defined benefit payouts aren’t enough to bridge the gap between government pensions and what you need. In any of those cases, you’re going to have to deal with uncertainty.

So get a handle on risk

This is where playing the odds becomes vital. Some retirees insist on playing it safe and keeping all their money in bonds and GICs. Others go for the gusto by betting on high-yield real estate investment trusts, penny stocks and small growth firms in hopes these high-risk, high-reward bets will provide them with the income they want.

Both approaches are flawed. Stashing everything in bonds and GICs raises the risk that inflation will whittle away the real value of your savings. On the other hand, betting on high-risk stocks or trusts raises the odds that you’ll make a big mistake and wipe out a chunk of your savings.

The best solution for nearly everyone is a well-diversified portfolio that has 30% to 50% of its assets in various fixed-income investments, such as bonds and GICs, and the remainder in a wide variety of stocks from Canada and other countries. One good approach to building such a portfolio is outlined in our article about couch potato investing.

No portfolio, though, can guarantee a given return. What makes retirement planning so difficult is that you’re drawing down your portfolio for living expenses at the same time as the markets are bobbing up and down. The first few years of your retirement are particularly crucial. If you have the bad luck to retire at just the moment that the markets head into a bear market plunge, your withdrawals combined with stock market losses could put a hole in your portfolio from which it will never recover. On the other hand, if you retire at the same moment the markets decide to go on a tear, the surging market returns may more than cover your early withdrawals. You may actually increase your net worth in retirement.

If you want to make your money last for 30 years, count on withdrawing no more than 4% of its initial value each year, adjusted for inflation. You should begin your retirement by withdrawing $4,000 a year for each $100,000 you start with. If inflation is running at 2% a year, you would withdraw $4,080 the next year, $4,162 the following year, and so on.

The 4% figure comes as a shock to many people, who assume that they can count on their portfolio for 10% or more in the way of annual payouts. To read more about the reasoning behind the smaller figure, refer to The 4% Solution below.

Balance the present and the future

Here’s where individual preferences become important. While a 4% withdrawal rate gives a well-balanced portfolio an excellent chance of surviving 30 years, it’s very much a pessimist’s strategy. Chances are that things will turn out better than the worst case. If they do, you stand a good chance of leaving behind a tidy fortune. Your heirs will no doubt like this arrangement and if you want to leave them a big bequest, that’s fine—but it’s probably not the optimal deal for you. In fact, if you apply the 4% withdrawal figure to your entire portfolio, you’re probably erring on the side of caution and living on less than you could in retirement.

A better idea is to treat the must-have and nice-to-have portions of your portfolio in different ways. When it comes to your must-have portion, play it safe and count on a 4% annual withdrawal rate. If you calculate, for instance, that you’re going to need to generate $16,000 a year on top of CPP and OAS to provide you with the necessities of your life, you should accumulate at least $400,000 in RRSP savings or the equivalent in corporate pension plans. That $400,000 should be able to fund an inflation-adjusted withdrawal rate of $16,000 for as long as you live.

If you don’t want to worry about the ups and downs of a portfolio, you can use some of your must-have savings to purchase an annuity that will provide you with a guaranteed payout for the rest of your life. Be sure to compare annuities from different companies to get the best possible deal. Look at all the different options available. Some annuities pay your heirs a lump sum if you die early; some are inflation-protected; some cover both you and your spouse. Seek the advice of a good fee-only financial planner before buying. Put particular emphasis on making sure that the insurance company that offers the annuity is as financially sound as possible. (Look for at least an AA rating from a rating firm such as A.M. Best. To learn more about these ratings, go to Ambest.com.) You may even want to split the annuity portion of your musthave money between two or more companies to ensure no single disaster can swallow up your savings.

Once you’ve built a fortress around the must-have component of your portfolio, you can treat the nice-to-have portion with more freedom. You can and should plan to run through a chunk of your nice-to-have budget in the early years of retirement, when you’re going to be most active. By the time you turn 75, your appetite for travel and other luxuries is likely to diminish and by the time you hit 85, many of your discretionary expenses will have dropped away completely. If your nice-to-have money is running low at that point, so be it. You will have extracted maximum value from your nice-to-have money when you were still healthy enough to enjoy it, while protecting your future by ensuring that your must-have needs are well covered. That’s the retirement we all want and it’s well within your reach.

The 4% Solution: More on making your money last

William Bengen, a financial planner in California, is the author of a long, but easy-to-understand explanation of how different withdrawal rates can affect your retirement. Originally published in the Journal of Financial Planning, “Determining withdrawal rates using historical data” is a classic in its field. His key finding? A 4% withdrawal rate is the most a truly long-term investor should consider. If you’re looking for a shorter take on the same subject, go to Scottburns.com and check out the “The Spender’s Portfolio and Portfolio Survival” section. The examples used are from the U.S., but the same math applies to Canada.

The Only Three Questions That Count
by Ken Fisher ($33.99, Wiley)

Fisher, one of the best-known money managers in the U.S., believes you should invest only when you have an edge on others. In this entertaining book, he explains how to look for that edge. He also explains why you shouldn’t worry about government deficits, overburdened consumers or giant trade deficits.

Our take: You have to respect a guy who’s managed to beat the market over the long haul. Fisher comes out swinging and makes you think twice about many of your most cherished investing beliefs.

The Big Picture
by Barry Ritholtz (free, BigPicture.typepad.com)

Ritholtz, a market strategist who runs an institutional research firm in New York, delivers his take on what’s ahead for stocks in this smart and funny blog. Count on healthy doses of music and humor to go along with a heaping helping of economics and market stats.

Our take: Ritholtz seems like a nice guy. He’s also a great read, especially when he tears into shoddy statistics. Watch Super Barry punish the bad guys, then cheer as the data go flying!

Jim Cramer’s Mad Money: Watch TV, Get Rich
by James Cramer ($32, Simon & Schuster)

The title says it all. Cramer, the bald and bellowing host of the television spectacle Mad Money, pounds his chest, explains how he made his fortune, then delivers a lecture on how you can strike it rich too — by watching his television show.

Our take: There’s something fascinating about watching a huge ego sprawl in all directions, but if you don’t love Cramer’s show, you won’t like his book either.

Why We Want You to be Rich: Two Men — One Message
by Donald Trump and Robert Kiyosaki. ($29.95, Rich Press)

Trump, the real estate mogul, and Kiyosaki, the author of the Rich Dad, Poor Dad series of personal finance books, offer their philosophy of creating wealth. Expect a lot of emphasis on psychology and motivation, not much on financial specifics.

Our take: Remember those special edition comic books when two superheroes — Batman and Superman, say — joined forces to combat a particularly nasty villain? This work is in the same vein. Which is to say, it’s not to be confused with reality and will appeal most to 12 year olds.

Money, a Memoir
by Liz Perle ($17.50, Picador)

Perle, a former publishing executive, believes that women are raised to be voluntarily blind when it comes to money. Her own divorce opened her eyes to how little she knew about investing, negotiating or looking after her own financial well-being.

Our take: Whether you’re a man or a woman, we think there’s a lot to be learned from Perle’s frank discussion of the different ways in which the sexes regard money.

I’m talking about my portfolio, of course. For starters, let me reveal my single largest holding. It’s Wal-Mart. Yep, that’s right: the Beast of Bentonville, the much-despised colossus of discount retailing. And, no, there’s no need for you to phone. I can hear your boos and hisses as I type.

But, hey, you said no sneering, remember? So let’s move on. After Wal-Mart, I’ll also admit to fairly significant holdings in Dell — you know, the computer maker that’s shifting jobs to low-wage destinations overseas — and a stake in Anheuser-Busch, the giant booze merchant. I’m in bed with Molson Coors, which makes a lot of the suds that Anheuser-Busch doesn’t, and I’ll even ‘fess up to owning a chunk of Rupert Murdoch’s News Corp., which among other things purveys Fox News, the right-wing squawk box.

I think you get the idea. To many people, I’m someone who doesn’t let questions of right or wrong get in the way of his investing. I’m beyond shame, a black-souled capitalist, the very picture of an unethical investor. And you know what?

I’m OK with that.

Now no hissing, remember? And before you pick up that stone to cast at me, let me say that I have absolutely no problem if you want to see things the other way. Go ahead: invest using whatever ethical compass you choose. It’s your money.

My only point — and I’ve raised eyebrows for saying this at too many dinner parties to count — is that you probably shouldn’t expect your portfolio to perform chores that investing is not designed to accomplish. Trying to express your ethical viewpoints through your stock holdings is a bit like trying to express your musical tastes through your choice of a hacksaw. In other words, it’s fundamentally the wrong instrument for your purposes. If you can wait just a second before you cast that stone at my skull, I’ll explain what I mean.

Let’s imagine we live in a small country with only two publicly traded companies. Nice Inc. generates power from windmills, bakes organic tacos and bottles spring water. Nasty Corp. brews liquor, operates casinos and sells sugary, fat-laden treats. To keep things simple, we’ll say that each firm makes a million bucks in profit a year and each has a million shares outstanding, so each company earns a dollar in profit for each share it’s issued. We’ll also say that each stock trades at $10 a share.

You, being a public-spirited citizen, can’t help but notice the vast disparity between the niceness that is Nice and the nastiness that is Nasty. So you begin a campaign to encourage ethical investing. You succeed in getting many of the investors in Nasty to dump their shares. As these newly ethical investors purge their portfolios, the price of Nasty shares careen downhill. The shares that once changed hands for $10 plummet to $5. Nasty Corp. shareholders are screaming bloody murder and management is issuing press releases to reassure investors. Mission accomplished, right?

Well, maybe not. Remember that you haven’t affected either company’s profits. So once the initial selling binge ends, investors have a choice. They can pay $10 a share to buy a dollar of earnings through Nice — or they can pay a mere $5 a share to buy a dollar of earnings through Nasty.

The choice is clear: Nasty is now a far better value than Nice. Assuming an ample supply of profit-seeking investors (and, in my experience of the world, that’s a very realistic assumption indeed) Nasty shares are going to rocket back upwards as the market smells a money-making opportunity. The net result of your ethical-investing campaign is simply the creation of a highly profitable chance for other investors to cash in.

The unintended consequences of your campaign may not end there. Many of the investors you’ve shamed out of Nasty are likely to take the proceeds from their shares and invest them in Nice. By doing so, they’ll give Nice’s share price a one-time boost — which is great if you happen to be an original shareholder, but not so good if you buy in a bit later, at the inflated price. In that case, once the buying binge ebbs and the market readjusts, you’re destined to suffer a loss as a result of your flight to virtue.

As simplified as this example may be, Nice Inc. and Nasty Corp. demonstrate a fundamental reality. Most ethical investors figure they’re using the market to reward virtue and punish vice. Unfortunately, their actions — if they influence the market at all — are going to wind up having just the opposite effect.

This law of unintended consequences holds true in every stock market that’s populated by a significant number of greedy investors — which is to say, all of them. By discouraging people from putting their money into profitable but questionable companies, ethical investors clear the way for investors who don’t share the same ethical concerns to make even bigger profits. And by encouraging folks to put their money into virtuous enterprises, they dilute the payoff for other ethical investors.

If you’re like most people, this will strike you as backwards and maybe even a bit perverse. But the more you think about it, the more you’ll see how the logic works. Imagine, for instance, that everyone on earth — everyone, that is, except for a single person — refused, on ethical grounds, to hold shares in tobacco companies. That single nicotine-stained investor could buy up all the shares for a penny (since there would be no other bidders) and enjoy enormous profits from all the dividends that would flow to him. No, he would not be a particularly admirable person. But he would be very, very rich.

You can’t say the same for ethical investors. Fund companies that cater to the virtue market like to assure people they can do good while still getting strong portfolio returns. But the jury’s out on that. Ethical funds have been around in any number for the past 20 years or so. In that time they’ve enjoyed periods of both decent and dismal performance, but overall have been mediocre. If you invest in one, you’re implicitly signaling that you’re willing to sacrifice a bit of return in exchange for the quiet glow of doing good.

Is that sacrifice justified? At least in my experience, many ethical investors suffer from a misunderstanding of how the market works. They regard owning shares in a company much as they would regard voting for a political candidate or a Canadian Idol contestant. They assume that if they refuse to own shares in a company, the company will feel pressure to change its behavior, just as a political candidate or aspiring rapper would.

In fact, investing in most companies isn’t like voting at all. It’s much more like splitting up a pie at a big family picnic. If you happen to like a particular type of pie — strawberry-rhubarb happens to be my favorite — the last thing you want is for everyone else at the picnic to develop a taste for strawberry-rhubarb. You’re delighted if an anti-strawberry-rhubarb faction springs up and encourages people to eat apple or cherry instead.

In much the same way, most investors in cigarette or alcohol companies are quite happy if ethical investors shoo people away from these companies. By doing so, ethical investors leave hefty rewards on the table for those who stay behind. In fact, the more that ethical investors succeed in pushing others away from the table, the richer the treat that’s left for everybody else. Ironically, ethical investing winds up being the best friend of unethical investors.

Some people have done me the courtesy of listening to my opinions on ethical investing and have told me that I’m missing the point. These people have poured their money into mutual funds that bill themselves as being ethical or socially responsible, not because they have any great hopes that their actions will force companies to change their behavior, but because they don’t want any link between them and enterprises they think are immoral.

If that describes your attitude, I respect your motivation. I would, however, encourage you to peer beneath the labels and look carefully at how your money is being invested. You may find that trying to define what’s ethical and what’s not ethical is tougher than you thought.

Consider Wal-Mart, a stock that I love but that I’ve grown accustomed to not mentioning in polite company. The giant retailer has become the favorite whipping boy of the U.S. labor movement, which denounces it for its low wages and shoddy treatment of workers. Both the Swedish government pension fund and the Norwegian Ministry of Finance recently divested themselves of any shares of Wal-Mart on the grounds that the chain mistreats its employees.

Strangely, though, many other ethical investors disagree. The Ethical Funds Co. of Vancouver as well as the Evangelical Lutheran Church in America, the Sisters of St. Francis of Philadelphia and many other similar groups were all recently listed as shareholders in the world’s biggest retailer. If nothing else, their presence among Wal-Mart shareholders indicates how difficult it is to arrive at a uniform judgment of what’s ethical and what’s not.

The ethical groups that invest in Wal-Mart recognize that the retailer benefits a wide swath of North American society by offering people access to a huge variety of goods at cheap, cheap prices. That’s not just opinion: a recent study by Global Insight, a well-respected economics consulting firm in Boston, calculates that Wal-Mart saves the typical U.S. household $2,300 (U.S.) a year through lower prices.

Am I claiming that Wal-Mart is the unrecognized Mother Teresa of commerce? Not at all. It’s a tough, efficient retailing machine that makes a scant three pennies in profit on every dollar in goods it moves off the store shelves. To squeeze out that profit, it pays most of its shop-floor employees just a bit above minimum wage. But think about it. Those low wages are one key part of how it offers low prices, which, in turn, is how it convinces customers to drop by. It’s also a big reason it can employ so many people — 1.8 million at last count. If you want to lambaste the chain for low wages, you have to be fair and praise it for saving consumers money and creating nearly two million jobs. Like most companies, Wal-Mart is neither wholly admirable nor wholly objectionable.

Many ethical investors don’t get that. They think of the world as being neatly divided into good and bad. But is it?

It’s my experience that as long as a company operates within the law, intelligent people can debate its ethical stature from now until dividend day without reaching a conclusion. Should brewers and cigarette companies be shunned for producing unhealthy but perfectly legal products? If so, where does that leave pop manufacturers or producers of those heavily salted pork rinds that my taste buds respond to with unnatural zeal? Similarly, should pharmaceutical companies be embraced for developing the drug that saved my mother’s life after her blood clot? Or should they be condemned for profiting from her misery?

Ethical investing assumes that somebody — an ethical fund manager, or a certain group of thinkers — knows more than lawmakers and more than the rest of us about what constitutes morality. Unfortunately, questions have a bad habit of having two sides. You may think a uranium miner is off-limits because it supplies fuel to nuclear generators. I, on the other hand, may think that nuclear energy is our best hope of reducing our dependence on fossil fuels and thus preventing global warming. You may condemn a company for employing workers in the Third World. I may applaud it for giving people in those countries the chance to start climbing the economic ladder.

Even the purest of hearts can wind up perplexed as to who the good guys are. Consider Pax World Funds, one of the oldest and biggest ethical investors in the U.S. It used to shun any company with even the slightest connection to gambling or alcohol. But then its zero-tolerance guidelines forced the fund company to sell its stake in Yahoo when the Internet search company was found to have some tenuous business links to Internet casinos. Shortly afterward, the same guidelines forced Pax to divest itself of its Starbucks shares, after the coffee company entered into a deal with Jim Beam, the distiller, to market a coffee-flavored liqueur. Tired of seeing basically good companies tossed out the door for petty infractions, Pax wrestled with its conscience, then changed its guidelines in October to allow it to invest in such companies, so long as their gambling or alcohol revenues are just minor sidelines.

The new guidelines seem far more sensible than the old ones, if you ask me. To their credit, most ethical investment firms have already made, or are in the process of making similar moves. Rather than simply labeling companies good or bad, they judge them on a scorecard. And rather than kicking offenders out the door, they try to talk to management.

But that raises all sorts of questions for people who want to invest in these funds. What happens if a fund’s morality scorecard isn’t the same as yours? And exactly how does the fund manager balance ethics against return? If a company has shining principles but a mediocre profit outlook, does the fund keep it around for virtue’s sake? Or does it go looking for an investment with a better profit outlook, even if it has just barely acceptable morality?

Every ethical fund answers those questions in different ways. If you’re thinking of investing in one, I encourage you to look beyond the label and examine exactly what the fund holds. Compare it to other ethical funds and to similar funds that invest in the same area, but without the ethical banner. You may be surprised to see the differences — or the lack thereof. At the very least, you’ll get a better sense of how closely the fund’s sense of morality aligns with your own.

In my own case, as I’ve already confessed, I’m an unethical investor, at least by the standards of many so-called ethical types. But despite my stock-picking style I firmly believe that we should strive to leave this world a better place than we found it. My contention is simply that investing in the stock market is an awkward way to do good.

As we’ve seen, ethical investing — if it has any effect at all — tends to reward unethical investors and punish the virtuous. No matter how pure you may be, it’s difficult to come up with universal guidelines as to which investments are virtuous.

Given all that, I’m happy to invest my portfolio purely on the basis of potential return — but I also consider it my duty to express my moral opinions through other channels. Remember the story of Nice Inc. and Nasty Corp.? Ponder it and you’ll realize that the best way to affect a company’s behavior isn’t by buying or selling its shares, but by threatening its profits. If instead of convincing investors to sell Nasty’s shares, you had convinced consumers to boycott Nasty’s products, you would have gotten management’s co-operation with lightning speed. Ditto if you had lobbied government for changes that would have hobbled Nasty’s core businesses.

These methods are direct and effective in real life, too. I donate to charities and to political groups that I believe in. I vote to express my convictions, boycott products made by firms I don’t like, write angry letters to politicians and help in my small way to publicize wrongdoing. I think the world is too tolerant of lax morality — but I also think the most effective way to create change is through spreading knowledge, pushing for consumer action and calling for changes in laws and regulations.

By comparison, buying and selling shares doesn’t do much. So call me an ethical unethical investor. And please put down that stone.

Simone credits his quick response to the extensive training he received at a driving school put on by BMW Canada. “It’s totally changed the way I drive,” he says. Judging from the reaction of a police officer across the street from the near-collision, his new skills have already paid for themselves many times over. “I could see the officer’s face clearly as I passed,” Simone says. “She was standing just outside her car and she had this look of complete shock on her face that there wasn’t a serious collision.”

You, too, can learn to drive like a professional. Several advanced driving schools across Canada promise to break your bad habits and teach you the right way to steer clear of trouble. Prices range from $300 for a half-day session to more than $3,000 for a two-day, fully catered event. While those fees may seem expensive at first glance, they’re a huge bargain if the classes help you escape from just a single accident. Most schools start with class time then take you out to a skid pad for hands-on instruction in emergency braking and avoiding collisions.

“The biggest problem with basic driver training is that it all starts too late,” says Pierre Savoy, 51, a former professional racecar driver and the chief instructor of the BMW Driver Training Program. “By the time we get our driving licenses, we’ve already had 16 years of attitude training. When you mix that with hormones and a sense of invincibility, you have a recipe for disaster.”

Experience corrects some of those problems, but not all. Chances are you’ve developed a lot of bad driving habits over the years, especially in light of all the automotive technology that has come along since we were pimply faced students piled into the back of a driver’s ed car.

Savoy, who has taught such well-known drivers as Jacques Villeneuve, the former Formula 1 champ, believes that advances such as ABS, traction control and stability assist programs can help you drive better, but only if you understand how they operate. “We start off the course with no technology working then turn it back on,” he says. “We let our students see and feel how it works, but all these devices are just driving aids. They cannot tell you or show you what to do.”

Savoy begins reprogramming his student drivers by looking at what most of us take for granted. “We start at the basics — driving position. I tell my students it’s like a golf lesson. The first thing you have to learn before anything is the stance.” Begin by raising your seat until there’s 10 cm between the top of your head and the ceiling of the car. Sit in an upright position with both hands on the wheel in the 9 o’clock and 3 o’clock positions, not in the “10 and 2″ position that you may have learned. To see if your seat is adjusted properly, straighten your legs and plant both feet on the carpeted firewall behind the pedals. Now slide your seat forwards or backwards until your knees have a slight bend. This ensures you can press the pedals as far as they can go without locking up your legs. Next, place your right wrist on the top of the steering wheel (12 o’clock position) and use your left hand to adjust the seat back. Keep your shoulder blade in contact with your seat. Change the angle until your right elbow has a slight bend. This gives you maximum control and rotation of the steering wheel.

Savoy says the correct driving position is critical to reacting in time to an emergency. “A major European study a few years back concluded that if people had just one second of advance warning, 80% of collisions could be avoided,” he says.

Once you’ve learned the basics in the classroom, it’s out to the skid pad for some real thrills. At the BMW school, for instance, you’ll go through exercises designed to sharpen your reaction time. In one nerve-wracking test, you’ll pilot your car at a row of pylons at speeds up to 70 km/h. At the last moment, one of two instructors on either side of the cones will wave a flag, signaling you to brake and steer either left or right around the pylons and then come to a stop as quickly as possible.

Most beginners fixate on the pylons and turn them into orange plastic roadkill. “If you stare at it, you are going to hit it,” Savoy says. “Most people don’t bother looking for an out.” But with practice and the help of a good instructor, just about anyone can learn to “brake, look and steer” around unexpected obstacles.

That’s exactly what Simone did in his brush with disaster and he’s been spreading the gospel ever since. He’s even taken clients out for a day of advanced practice on his dime. “A number of them liked it so much they said they would be signing their kids up for the course,” Simone says.

Schools of hard knocks

Want to learn how to hit the skids — and recover? These driving schools tutor you in the fine points of crash avoidance.

BMW Driver Training
Cost: $300 and up
Where: Toronto, Montreal and Vancouver
Info: BMW.ca or 1-866-2BMW-SAFETY (1-866-226-9723)

Powell Skilldriving School
Cost: $395 and up
Where: Port Perry, Ont.
Info: PowellMotorsport.com or 905-985-1600

Skid Control School
Cost: $359 and up
Where: Oakville, Ont.
Info: SkidControlSchool.com or 1-888-516-6522

Canadian Traffic Education Centre (CTEC)
Cost: $495 and up
Where: Edmonton
Info: CTEC.ab.ca or 1-888-466-4962

Sidorov Advanced Driver Training
Cost: $300 and up
Where: Whistler, BC
Info: SidorovPrecisionDriverTraining.ca or 604-905-0146

Hot and steamy

Whether it’s pho — a steaming broth brimming with rare beef and rice noodles best eaten streetside in Hanoi’s Old Quarter — or juicy lemongrass prawns sizzling in a wok amid the colorful markets of Ho Chi Minh City, the food of Vietnam can wow your taste buds and inspire your imagination. But don’t count on experiencing the genuine article in fancy restaurants or tourist hotels. Many of the most unforgettable meals are to be found in humble surroundings. “As long as the food is being freshly cooked in front of you, you should consider exploring local street stands and family restaurants,” says Naomi Duguid, the Toronto-based co-author (with Jeffrey Alford) of Hot Sour Salty Sweet, an award-winning cookbook that chronicles the culinary landscape of Southeast Asia.

A good place to begin your exploration of Vietnamese cuisine is the town of Hoi An, located on the country’s central coast. This UNESCO World Heritage Site is best known for its white sandy beaches, 17th-century colonial architecture and silk shops, but its fusion cuisine is what draws food aficionados. You can trace the culinary legacy of centuries of Chinese, Japanese and European traders among the modest family restaurants along the historic Thu Bon River.

Adventurous diners are rewarded with dishes such as white rose, an incredibly light rice dumpling stuffed with shrimp, or cau lau, a rice noodle dish topped with slices of pork, bean sprouts, and assorted greens such as basil, lettuce, and mint. Visitors can also arrange to experiment with traditional cooking utensils and participate in cooking classes.

Details: Horizon & Co., a Canadian boutique travel agency, offers epicurean expeditions to exotic destinations. Pricing for trips to Laos, Vietnam and Cambodia begins at $4,650 per person/double occupancy, excluding airfare. Visit Horizon-co.com to find out more. The Viking Life, a venture of the people who make Viking cooking ranges, offers trips created by The Culinary Institute of America. Pricing for Vietnam is $5,295 U.S. per person/double occupancy, excluding airfare. For further details, visit TheVikingLife.com.

The other Spain

While Barcelona is already firmly established on the foodie trail thanks to Ferran Adrià, the superstar chef of El Bulli, and Madrid boasts a bounty of enticing tapas bars, a growing number of culinary pilgrims are heading to a new frontier: Spain’s Basque region. Where else do thousands of men gather weekly to shop, cook, eat, drink, swap recipes and sing? While these exclusive sociedades gastronomicas are off-limits to outsiders, food lovers can get a taste of traditional Basque fare such as cogote (hake’s head served with garlic-infused oil) and marmitako (a light summer fish casserole made with fresh tuna, potatoes and tomatoes) if they head to the region’s culinary hub, the city of San Sebastián.

This seaside resort boasts 250 gastronomic societies and reportedly has more Michelin starred restaurants per capita than any other city. Revered chefs such as Juan Maria Arzak and Pedro Subijana, credited with shaping modern Spanish cuisine, draw fans who want to experience seasonally inspired dishes based on ingredients such as wild autumn mushrooms foraged from the Basque hills or scallops, sole and mussels purchased straight from fishermen’s boats.

One favorite is Martín Berasategui’s restaurant, located in the village of Lasarte just outside San Sebastián. Treasured for its blend of modern techniques and local ingredients, it offers classic Basque fare served with Txakoli, a Basque white wine. Meals often conclude with Idiazabal, a local sheep’s milk cheese that originally drew its smoky flavor from shepherds’ night fires. Another favorite is Elkano, a fish house in nearby Guetaria that overlooks the sea. It is known for its deliciously simple treatment of char-grilled lobster, wild barnacles and fresh turbot.

Details: Book reservations online for Arzak (Arzak.es), located in a Spanish farmhouse outside San Sebastián, or Akelarre (Akelarre.net), a modern restaurant overlooking the sea. Prices range upwards from €110 for a set meal without wine, tax or tips.

French revolution

It’s easy to spend as much on a meal in a top-tier Parisian restaurant as on the plane ticket to get you there, but an upheaval in dining is underway. Several top chefs have opened casual restaurants that promise affordability and creative French cuisine in laid-back surroundings. Known as “gastro bistros,” these informal eating places are swiftly growing in popularity.

Food lovers are flocking to Benoit, the only Parisian bistro to boast a Michelin star. Although Benoit first opened its doors in 1912, the comfortable bistro was purchased by superchef Alain Ducasse in 1995. It now offers spectacular food for about a third of the cost of dinner at one of his lavish three-star establishments. You can accompany your meal with any of 400 carefully selected wines.

Another hot spot is Le Comptoir, where Chef Yves Camdeborde has developed a cult following. His inventive €42 prix fixe menu often features unexpected treats such as cream of celery soup with black truffles or green pea and mint soup with pieces of foie gras. If you want to dine here, book your table at the same time as you arrange your plane ticket.

Other bistros with buzz include Mon Vieil Ami, which was launched by threestar Michelin chef Antoine Westermann. The €39 menu can include luscious sweetbreads with wild mushrooms, herb risotto and a perfectly poached egg atop a white-bean salad with delicious slivers of smoked haddock.

Details: Meals at top Parisian restaurants can easily reach €400 per person while set meals at traditional bistros average €25. Expect to pay up to €50 at a gastro bistro, although ordering à la carte can easily double this. Good choices include Benoit, 20, rue St Martin, Paris, 42-72-25-76; Le Comptoir, 5, carrefour de l’Odéon, Paris, 44-27-07-97; Gaya, 44 rue du Bac, Paris, 45-44-73-73; Chez Michel, 10 rue de Belzunce, 10th Arr., Paris, 44-53-06-20 and L’Os à Moelle, 3 rue Vasco-de-Gama, Paris, 45-57-27-27.

One way I like to look for bargains is by examining a company’s book value. This is the historical value of all its assets minus its liabilities. The price-to-book-value ratio (P/B) that you see quoted on many financial websites compares this book value to the current price of the company’s shares. If you buy stocks with low P/Bs, you’re buying assets at a bargain price.

Investors who do so often enjoy good returns. In August 2004, I highlighted seven low-P/B darlings. Since then, three have been taken over by bigger firms, demonstrating just how attractive low P/B firms can be. (Another firm on my list, Sears Canada, is the target of a takeover struggle still in progress.) The three companies that were taken over generated an average 51% capital gain for investors.

Even without takeovers, low P/B firms often do well. In fact, my entire list of seven low P/B stocks gained an average 73% from Aug. 14, 2004 through to Jan. 1, 2007, beating the S&P/TSX Composite by about 15 percentage points.

Encouraged by these stellar results, I decided to go hunting again. Just like last time, I started with the large companies in the S&P/TSX Composite. I selected the stocks with the lowest P/B ratios, looking in particular for companies trading below book value. By the standards of today’s market, these are very cheap firms.

But I didn’t want to focus only on P/B ratios, since a low ratio may signal a firm is in lousy shape. I wanted to invest in profitable businesses. Hence, I subjected each of my low-P/B firms to a further test by examining their earnings yield — how much they earn per share, compared to their share price. Since core inflation is running at roughly 2.3% a year, I wanted stocks that could at least keep up with inflation, meaning an earnings yield of more than 2.3%. I further required that my stocks pay a dividend. After all, I like to be paid while waiting for better times.

In 2004 seven stocks that traded below book value passed all my tests, but only two managed the feat this year. So I decided to also include three other stocks with slightly higher P/B ratios. Here are this year’s low-P/B darlings.

West Fraser Timber (WFT) is our least expensive candidate. It trades at only 91% of book value. The company labors in the depressed forest products industry, but it has churned out a string of annual profits. Its stock trades at a price-to-earnings ratio (P/E) of 16 and pays a dividend yield of 1.4%.

Laurentian Bank (LB) is the sole survivor from my 2004 list. This Quebec-based bank is only slightly more expensive than last time at 97% of book value. It pays a hefty 3.8% dividend yield. For what it’s worth, I own a handful of Laurentian Bank shares.

Linamar (LNR) is the first of two auto-parts firms to make it into this year’s list. With GM and Ford on the ropes, autoparts companies have been put through the wringer. Linamar is a case in point, trading at only 124% of its book value. Earnings have been erratic over the last 10 years, but the company has maintained profitability and grown its book value. The company trades at a P/E of only 10 and pays a 1.7% dividend yield.

Magna International (MG.A) is perhaps best known as Frank Stronach’s firm. Stronach founded the auto-parts maker and maintains control through multiple voting shares. Not coincidentally, he also has a generous compensation package. Nonetheless, Stronach’s firm has been successful over the years. Magna trades at 127% of book value and at a P/E ratio of 15. It pays a 1.9% dividend yield.

Kingsway Financial Services (KFS) is the most expensive of our bargains, but this auto insurer remains relatively cheap at 135% of book value. Both its growth and value characteristics have earned it top marks for two years running in MoneySense’s Top 200 list. The stock trades for only 8.4 times earnings and pays a dividend yield of 1.2%.

I suggest that you explore the low price-to-book bargain basement only if you’re adventurous. Sometimes low price-to-book stocks spiral downward. Still, there is lots of opportunity here if you’re prepared to endure the downturns.

It’s RRSP season and that means you can’t turn on the TV without some talking head trying to bully you into making a fat contribution. But if you’re younger and still paying off your first house, you shouldn’t be saving a cent for retirement this year. That’s right — it would be more prudent to forget contributing to your RRSP altogether and pay down your mortgage instead.

The debate as to whether you should focus on your RRSP or your mortgage has raged on too long. Part of the problem is that the banks win twice if your RRSP takes precedence: they get fees from selling you mutual funds in your RRSP, and they keep you in your mortgage for longer. That’s why their traditional advice is to put as much money in your RRSP as possible and then use your tax refund to pay down your mortgage. This approach certainly won’t land you in the poorhouse, but it’s not the optimum way to go.

Both shelter you from tax

The biggest misunderstanding in this debate surrounds the tax implications of the two approaches, says Malcolm Hamilton, actuary extraordinaire at Mercer Human Resource Consulting in Toronto. Many people think that your RRSP payments are tax sheltered and your mortgage payments are not. No wonder: when you put money in your RRSP the tax man sends you a juicy tax refund, but when you make an extra mortgage payment, you get nada.

But Hamilton says that RRSP payments have no significant tax advantage over mortgage payments. That’s because every time you make an extra mortgage payment you reduce the principal amount that you’ve borrowed, which means that you will pay less interest in total over the life of your mortgage. All of those future interest payments that you no longer have to make would have been made with after-tax dollars, so in effect, you not only save the interest, but the tax on that interest too.

It’s hard to get your head around, but the net effect is that you get a tax-free return on the money you use to pay down your mortgage, just like the tax-free return you get inside an RRSP.

It comes down to risk

If neither approach has a tax advantage over the other, then the next logical thing to look at is the return. Do you get a better return on your money by paying down your mortgage, or by investing it in your RRSP?

Most comparisons will tell you that you get a better return from your RRSP, but those comparisons don’t play fair. Usually they’ll compare, say, a 6% mortgage rate to something like an 8% return on your RRSP. Paying down a 6% mortgage is like getting a 6% return on an investment, so they conclude that the 8% return you get on an RRSP is the better deal.

That seems reasonable, but it’s not a fair comparison at all. That’s because the 6% return you get on your mortgage is a sure thing, and the 8% return on your RRSP is not. The truth is, a guaranteed tax-free 6% return is almost unheard of right now. An investment product offering such a return would devastate the market for GICs, T-bills and bonds as investors stampeded to the higher guaranteed rate.

Not only that, but the comparisons usually forget that the average mutual fund in Canada charges over 2% in fees, so the actual return you could expect from an RRSP after fees is more like 6%. “And in order to get that 6%, you’re going to have to take on the full risk of being in the stock market,” says Hamilton. “I think that most investors will appreciate that if you’ve got a choice between a high-risk 6% return and a no-risk 6% return, you’re well-advised to take the latter.”

The dangers of success

Since paying down your mortgage offers you the best risk-adjusted return, anyone who’s buying their first house should concentrate on that task, even if it means neglecting your RRSP contributions for a while. However, there are some dangers.

The biggest pitfall is that you’ll be so successful at paying down your mortgage that you’ll think you can afford a bigger house than you really can. You also have to keep in mind that once your first house is paid off, you really do have to get going on those RRSP contributions. If instead you decide to turn around and buy a bigger house, you could run into trouble.

The most important thing to remember is that paying down your mortgage and building your RRSP are both worthy causes. In the end, if your biggest financial concern is which one you should put your money in, you’re probably going to be just fine either way.

Foerster is director of the prestigious MBA program at the Richard Ivey School of Business in London, Ont., and he’s not the kind of investor who consults Super Bowl games or the phase of the moon to time his buys. He says he has confidence in the presidential cycle because there’s a rational explanation for the effect. “Year one is a bit of a honeymoon period for the president,” he observes. “Year two is when the administration will take any bad medicine — so they can get the bad news out of the way while there’s still a lot of time before re-election. In year three, the administration works towards having the party re-elected, and actively manages the economy so that by the time the election rolls around, people are happy.”

The presidential cycle has become such an accepted indicator that the Canadian research department of the giant Swiss bank UBS has begun advising clients to tilt towards stocks — especially cyclical stocks such as metals, minerals, oil and gas — in year three of the cycle. A UBS report issued in November notes that on average, metals and minerals have surged by 24.3% in the third year of the presidential cycle, and concludes that “in 2007 market gains should be solid with cyclical sectors leading.”

Still, even valid indicators only work on average — you can’t depend on them to work each and every year. As well, the fact that Bush is not standing for re-election himself and the fact that his party no longer controls the U.S. House of Representatives and the Senate could dampen the effect this year. So will Foerster take the plunge and go heavy on stocks in 2007? “I’m still doing my assessment at this point,” he concedes. “I’m not sure.”